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As Filed with the Securities and Exchange Commission on September 13, 2000
Registration No.333-_______________
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FNB CORPORATION
(Exact name of registrant as specified in its charter)
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Virginia 6022 54-1791618
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation or organization) Classification Code Number)
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105 Arbor Drive
Christiansburg, Virginia 24068
(540) 382-4951
(Address, including Zip Code, and telephone number, including area code, of
registrant's principal executive offices)
Peter A. Seitz, Esquire
FNB Corporation
105 Arbor Drive
Christiansburg, VA 24068
(540) 382-4951
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With a copy to:
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Fred W. Palmore, III, Esquire Eugene E. Derryberry, Esquire
Scott M. J. Anderegg, Esquire Gentry, Locke, Rakes & Moore
Mays & Valentine, L.L.P. Suite 800
1111 E. Main Street, 23rd Floor 10 Franklin Road, SE
P. O. Box 1122 Roanoke, VA 24022-0013
Richmond, VA 23218-1122 (540) 983-9300
(804) 697-1396 (540) 983-9400 (Fax)
(804) 697-1339 (Fax)
</TABLE>
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this registration statement becomes
effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [_] If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement number for the
same offering. [_] If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
---------------
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Calculation of Registration Fee
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================================================================================================================================
Title of Each Class of Proposed Maximum Proposed Maximum Aggregate Offering Amount of
Securities to be Amount to be Offering Price Per Price (2) Registration Fee
Registered Registered (1) Share (2)
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Common Stock, $5.00 297,246 N/A $7,411,192 $978.28
par value
================================================================================================================================
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(1) Represents the estimated maximum number of shares that may be issued by the
Registrant in the merger described in this Registration Statement. Includes
shares issuable upon the exercise of outstanding stock options that are
exercisable prior to or subsequent to the closing of the merger. Pursuant
to Rule 416, this Registration Statement also covers an indeterminate
number of shares as may become issuable as a result of stock splits, stock
dividends, or similar transactions.
(2) Pursuant to 457(f)(1), the registration fee is based on the market value of
CNB Holdings, Inc. common stock, $5.00 par value, on September 8, 2000
($8.00). Pursuant to Rule 457(f)(3), the cash portion of the merger
consideration to be paid by the Registrant has been deducted from the value
of the securities to be received by the Registrant in the merger.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
<PAGE>
[CNB Letterhead]
[November 3], 2000
To: Shareholders of CNB Holdings, Inc.
Re: Proposed Merger - Your Vote is Very Important
---------------------------------------------
Dear Fellow Shareholders:
We cordially invite you to attend a special meeting of the shareholders of
CNB Holdings, Inc. (CNB) to be held at ____________________, on [December 5,]
2000, at ________.
The purpose of the meeting will be to consider and vote on the proposed
merger of CNB with FNB Corporation (FNB), a bank holding company headquartered
in Christiansburg, Virginia and the parent company of First National Bank.
As a result of the merger, you will have the option to receive either
$10.60 in cash or shares of FNB common stock with an aggregate market value of
$10.60, subject to a maximum of 0.642 shares and a minimum of 0.544 shares for
each share of CNB common stock which is converted into FNB common stock, subject
to the limitation that the cash portion of the merger consideration will be
equal to $4,909,915.00, or approximately 50% of the total consideration received
by CNB shareholders in the transaction. For those CNB shares which are converted
into FNB common stock, the number of shares of FNB common stock issued in
exchange for each CNB share will be determined by dividing 10.60 by the average
closing price of FNB common stock for the thirty trading days ending ten days
prior to the merger closing. Accordingly, the number of FNB shares you may
receive in the merger cannot be determined now, although for those CNB shares
which are converted into FNB shares, you will receive no less than 0.544 and no
more than 0.642 of an FNB share for each CNB share converted.
The merger cannot be completed unless holders of more than two-thirds of
CNB common stock approve it. If approved, we anticipate the merger will occur in
early January of 2001.
This proxy statement/prospectus provides you will detailed information
about the proposed merger. We encourage you to read this entire document
carefully.
Your board of directors has unanimously approved the merger and believes it
is in the best interest of CNB and you, our shareholders. Accordingly, the board
unanimously recommends that you vote "FOR" the merger.
We hope you can attend the special meeting. Whether or not you plan to
attend, please complete, sign and date the enclosed proxy card and return it
promptly in the enclosed envelope. If you do not return your card or vote in
person, the effect will be a vote against the approval of the merger. You can
revoke your proxy by writing to us at any time before the meeting or by
attending the meeting and voting in person.
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We look forward to seeing you at the meeting.
Sincerely yours,
_______________________________________________
President and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the securities to be issued under this
proxy statement/prospectus or determined if this proxy statement/prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this proxy statement/prospectus is [November 3], 2000 and is
being mailed to shareholders on or about [November 3], 2000.
This Proxy Statement/Prospectus incorporates by reference important
business and financial information about FNB and CNB that is not included herein
or delivered herewith. Such documents are available without charge upon request
from: FNB Corporation, 105 Arbor Drive, Christianburg, VA 24068-0600, (540) 382-
4951, Attention: Secretary, as to FNB documents; CNB Holdings, Inc., 900
Memorial Drive, Pulaski, VA 24301, (540) 994-0831, Attention: Secretary, as to
CNB documents. In order to ensure timely delivery of the documents, any request
should be made by November [15], 2000. The requested documents will be sent by
first class mail within one business day of the receipt of the request.
<PAGE>
[CNB Letterhead]
Notice Of Special Meeting Of Shareholders
To Be Held On [December 5], 2000
On [December 5], 2000, CNB Holdings, Inc. will hold a special meeting of
shareholders at ____________________________________________________________.
The meeting will begin at ______________ Local Time.
Only shareholders who owned stock at the close of business on [October 20,
2000] may vote at this meeting or any adjournments or postponements that may
take place. At the meeting we propose to:
. Approve and adopt the Agreement and Plan of Merger and related Plan of
Merger with FNB Corporation, copies of which are enclosed as Appendix A.
Shareholders are entitled to assert dissenters' rights under Article 15
of the Virginia Stock Corporation Act, a copy of which is enclosed as
Appendix E.
. Any other business properly brought before the special meeting or any
adjournments or postponements thereof.
YOUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL WHICH
IS DISCUSSED IN MORE DETAIL IN THE ATTACHED PROXY/PROSPECTUS.
The approximate date of mailing this proxy statement/prospectus and card is
[November 3], 2000.
Your attention is directed to the proxy statement/prospectus delivered with
this notice.
By order of the Board of Directors,
__________________________________________
Corporate Secretary
Pulaski, Virginia
[November 3], 2000
REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, YOU ARE
URGED TO VOTE PROMPTLY BY DATING, SIGNING AND RETURNING THE ENCLOSED PROXY CARD
IN THE ACCOMPANYING ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO ITS
EXERCISE IN THE MANNER DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
<PAGE>
Table Of Contents
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Page
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Available Information..................................................................................... 1
Incorporation of Certain Information By Reference......................................................... 2
Who Can Help Answer Your Questions........................................................................ 3
Proxy Statement/Prospectus Summary........................................................................ 4
Risk Factors..............................................................................................
Comparative Market Price Information......................................................................
Selected Historical Consolidated Financial Data...........................................................
Selected Unaudited Pro Forma Combined Financial Data......................................................
Comparative Per Share Data................................................................................
The Merger
Background of the Merger.............................................................................
Reasons of CNB for the Merger........................................................................
Accounting Treatment.................................................................................
Material Federal Income Tax Consequences of the Merger...............................................
Rights of Dissenting Shareholders....................................................................
Opinion of CNB's Financial Advisor
Transaction Summary..................................................................................
Analysis of Certain Other Publicly Traded Companies..................................................
Comparable Transactions Analysis.....................................................................
Discounted Dividend Analysis.........................................................................
Present Value Analysis...............................................................................
Contribution Analysis................................................................................
Interests of Certain Persons in the Merger................................................................
Indemnification......................................................................................
Management Following the Merger......................................................................
Change in Control Agreement..........................................................................
Employee Benefit Plan................................................................................
Differences in Rights of Shareholders.....................................................................
Terms of the Agreement and Plan of Merger
Conditions to the Merger.............................................................................
Regulatory Approvals.................................................................................
Waiver, Amendment and Termination....................................................................
Conduct of Business Pending the Merger...............................................................
Expenses.............................................................................................
Termination Fees.....................................................................................
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Resales of FNB Common Stock..........................................................................
Election and Allocation of Consideration.............................................................
Exchange of CNB Stock................................................................................
Exchange Procedures..................................................................................
Additional Acquisition....................................................................................
The Meeting...............................................................................................
General..............................................................................................
Record Date; Voting Power............................................................................
Vote Required........................................................................................
Recommendation of the Board of Directors of CNB......................................................
Solicitation and Revocation of Proxies...............................................................
Other Matters
The Companies
CNB..................................................................................................
FNB..................................................................................................
Description of FNB Capital Stock
Common Stock.........................................................................................
Dividends............................................................................................
Voting Rights........................................................................................
State Anti-Takeover Statutes.........................................................................
Listing of FNB Common Stock..........................................................................
Differences in the Rights of FNB Shareholders and CNB Shareholders
General..............................................................................................
Authorized Capital...................................................................................
Amendment of Articles of Incorporation and Bylaws....................................................
Mergers, Consolidations and Sales of Assets..........................................................
Size and Classification of Board of Directors........................................................
Vacancies and Removal of Directors...................................................................
Director Liability and Indemnification...............................................................
Special Meetings of Shareholders.....................................................................
Shareholder Nominations and Proposals................................................................
Regulation
General..............................................................................................
FDIC Regulations.....................................................................................
Regulatory Capital Requirements......................................................................
Deposit Insurance....................................................................................
Federal Reserve System...............................................................................
Experts...................................................................................................
Validity of FNB Common Stock..............................................................................
Other Matters.............................................................................................
Shareholders Proposals....................................................................................
</TABLE>
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Appendices
----------
A. Agreement and Plan of Merger and the Plan of Merger between CNB and FNB,
dated as of July 10, 2000.
B. CNB's Annual Report on Form 10-KSB for the Year Ended December 31, 1999.
C. CNB's Quarterly Report on Form 10-QSB for the Quarter Ended June 30, 2000.
D. Opinion of Davenport & Company, LLC.
E. Article 15 of the Virginia Code.
iii
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Available Information
FNB and CNB are each subject to the reporting and informational
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder, and, in accordance therewith, file reports and other
information with the Securities and Exchange Commission. Such reports and other
information filed by FNB and CNB with the Commission may be inspected and copied
at the principal office of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and may be inspected at the
Commission's Regional Offices at 7 World Trade Center, New York, New York 10048,
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Certain of such reports, proxy statements and other
information are also available from the Commission over the Internet at
http://www.sec.gov. In addition, FNB's common stock is traded on the NASDAQ
National Market System. Reports, proxy statements and other information
concerning FNB may be inspected at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
This Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statement on Form S-4, of which this Proxy
Statement/Prospectus is a part, and exhibits thereto, which has been filed by
FNB with the Commission under the Securities Act of 1933, as amended, and the
rules and regulations thereunder, certain portions of which have been omitted
pursuant to the rules and regulations of the Commission and to which portions
reference is hereby made for further information. Statements contained in this
Proxy Statement/Prospectus concerning the provisions of certain documents filed
as exhibits to the Registration Statement are necessarily brief descriptions
thereof, and are not necessarily complete, and each such statement is qualified
in its entirety by reference to the full text of such document.
All information contained herein with respect to FNB and its subsidiaries
have been supplied by FNB, and all information with respect to CNB and its
subsidiaries has been supplied by CNB.
No person has been authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Prospectus
and, if given or made, such information or representation should not be relied
upon as having been authorized by FNB or CNB. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of the securities to which this
Proxy Statement/Prospectus relates shall, under any circumstances, create any
implication that there has been no change in the affairs of FNB, CNB, or any of
their respective subsidiaries since the date hereof or that the information
contained herein is correct as of any time subsequent to its date. This Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation of
an offer to purchase, any securities other than the securities to which it
relates or an offer to sell or a solicitation of an offer to purchase the
securities offered by this Proxy Statement/Prospectus in any jurisdiction in
which such an offer or solicitation is not lawful.
1
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Incorporation Of Certain Information By Reference
The following documents filed by FNB with the Commission (File No.
000-24141) under Section 13(a) or 15(d) of the Exchange Act are hereby
incorporated by reference in this Proxy Statement/Prospectus: FNB's Annual
Report on Form 10-K as of and for the year ended December 31, 1999; the portions
of FNB's Proxy Statement for the Annual Meeting of shareholders held on May 9,
2000 that have been incorporated by reference in the 1999 FNB 10-K; FNB's
Quarterly Reports on Form 10-Q for the three months ended March 31, 2000, the
six months ended June 30, 2000 and nine months ended September 30, 2000; the
description of FNB Common Stock set forth in FNB's Registration Statement on
Form S-4, Registration No. 333-02524, and any amendment or report filed for the
purpose of updating any such description; and FNB's Current Reports on Form 8-K,
dated July 13, 2000 and August 7, 2000.
The following documents filed by CNB with the Commission (File No. 000-
25934) under Section 13(a) or 15(d) of the Exchange Act are hereby incorporated
by reference in this Proxy Statement/Prospectus: CNB's Annual Report on Form 10-
KSB as of and for the year ended December 31, 1999; the portions of CNB's Proxy
Statement for the Annual Meeting of shareholders held on April 13, 2000 that
have been incorporated by reference in the 1999 CNB 10-KSB; CNB's Quarterly
Reports on Form 10-QSB for the three months ended March 31, 2000, the six months
ended June 30, 2000 and nine months ended September 30, 2000; the description of
CNB Common Stock set forth in CNB's Registration Statement on Form SB-2,
Registration No. 333-38727, and any amendment or report filed for the purpose of
updating any such description.
All documents filed by FNB and CNB pursuant to Section 13(a), 13(c), 14 or
15 of the Exchange Act subsequent to the date of this Proxy Statement/Prospectus
and prior to the Special Meeting are hereby incorporated by reference in this
Proxy Statement/Prospectus and shall be deemed a part hereof from the date of
filing of such document.
Any statement contained herein, in any supplement hereto or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of the Registration Statement and this
Proxy Statement/Prospectus to the extent that a statement contained herein, in
any supplement hereto or in any other subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of the Registration
Statement, this Proxy Statement/Prospectus, or any supplement hereto.
This Proxy Statement/Prospectus contains or incorporates by reference
certain forward looking statements with respect to the financial condition,
results of operations and business of FNB and, assuming the consummation of the
merger, the proposed merger with SWVA Bancshares, Inc., a combined FNB/CNB,
including statements relating to: (a) the cost savings and accretion to cash
earnings and reported earnings that will be realized from the merger; and (b)
the impact of the mergers on revenues. These forward-looking statements involve
certain risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward looking statements include,
among others, the following possibilities: (1) expected cost savings from the
mergers cannot be fully realized or realized within the expected time frame; (2)
costs or difficulties related to the integration of the businesses of CNB and
SWVA Bancshares, Inc. with FNB, are greater than expected; (3) revenues
following the mergers are lower than expected; (4) competitive pressure among
depository institutions increases significantly; (5) changes in the interest
rate environment reduce interest margins; (6) general economic conditions,
either nationally or in Virginia in which the
2
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combined company will be doing business, are less favorable than expected; or
(7) legislation or regulatory changes adversely affect the businesses in which
the combined company would be engaged.
Who Can Help Answer Your Questions
If you want additional copies of this document, of if want to ask any questions
about the merger, you should contact Phillip M. Baker, President and Chief
Executive Officer, Community National Bank, 900 Memorial Drive, Pulaski,
Virginia 24301, (540) 994-0831.
3
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Proxy Statement/Prospectus Summary
This summary highlights selected information from this proxy
statement/prospectus. It may not contain all of the information that is
important to you. To better understand the merger of FNB Corporation and CNB
Holdings, Inc., and for a more complete description of the merger and related
transactions, we urge you to read this entire document carefully, including the
appendices. Each item in this summary includes a page reference directing you to
a more complete description of the item.
The Merger (page ___)
The Boards of FNB and CNB have unanimously agreed to a merger of their two
bank holding companies. CNB will be merged into FNB and FNB will survive. The
officers and employees of Community National Bank will not change as a result of
the merger. After the merger is completed, Community National Bank will
continue to serve you as before as a wholly owned subsidiary of FNB.
CNB shareholders must approve the merger as a condition to the merger
becoming effective.
What Shareholders of CNB Will Receive in the Merger (page _____)
In the merger, shareholders of CNB will have the option to elect to receive
either cash or FNB common stock in return for each of their CNB shares, subject
to certain limitations discussed below. Shareholders of CNB may elect to
exchange some of their shares for cash and some for stock.
Following the merger, current FNB shareholders will own approximately 93.3%
of the combined company and current CNB shareholders will own approximately 6.7%
of the combined company. If the FNB and SWVA merger occurs and the proposed
merger of SWVA Bancshares, Inc. into FNB as described in "Additional
Acquisition" on page ___ also occurs, current FNB shareholders will own
approximately 85.6% of the combined company and current CNB shareholders will
own approximately 6.2% of the combined company.
In exchange for each share of CNB common stock held, CNB shareholders will
be given the option to receive either $10.60 in cash or shares of FNB common
stock, whose aggregate market value equals $10.60, provided that in no event
will FNB issue more than 0.642 shares or less than 0.544 shares for each
outstanding share of CNB common stock. The ratio of shares of FNB's common
stock that will be exchanged for each outstanding share of CNB common stock is
the exchange ratio. In either case, this option is subject to the limitation
that the aggregate amount of cash to be distributed to CNB shareholders in the
merger shall be equal to $4,909,915.00 (plus any cash paid for fractional
shares). FNB has the right to change this amount to more closely follow the
actual elections of CNB shareholders as long as the change in the cash
consideration does not affect the desired tax treatment of the merger.
The exchange ratio will vary depending on the average market price of
FNB common stock over a 30 trading day period shortly before the closing of the
merger. For a discussion of the effect of the timing of the calculation of the
exchange ratio on what shareholders will receive, see Risk Factors on page ___.
Allocations of Cash and Stock Consideration (page __)
As a result of the limitation on the aggregate amount of cash consideration
described above and the tax treatment provisions described under "Election and
Allocation of Consideration," beginning on page ___, the amount of cash and
stock received by shareholders may differ from their actual elections. If FNB
common stock is over-subscribed by the shareholders of CNB, a shareholder that
elected FNB
4
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common stock may receive part of his consideration in cash. If cash is over-
subscribed by the shareholders of CNB, a shareholder that elected cash may
receive part of his consideration in the form of FNB common stock.
FNB may reduce the amount of cash delivered and increase the number of
shares issued pursuant to the merger as long as the changes do not jeopardize
the desired tax treatment of the merger.
Fractional Shares (page ____)
Shareholders will receive cash in lieu of any fractional share of FNB
common stock to be received in the merger, based upon the market value of FNB
common stock on the date the merger is completed.
Shareholders should not send in their common stock certificates until they
receive further instructions.
The Companies (page _____)
FNB Corporation CNB Holdings, Inc.
105 Arbor Drive 900 Memorial Drive
Christianburg, Virginia 24068 Pulaski, Virginia 24301
(540) 382-6041 (540) 994-0831
FNB
FNB is a Virginia bank holding company formed in 1996 and through its
wholly owned subsidiary, First National Bank, offers a full array of banking
services through twelve retail offices located in Montgomery, Pulaski and Wythe
counties and the town of Blacksburg and the city of Radford, Virginia. First
National Bank, which was organized in 1905, serves the commercial, business,
agricultural, and personal banking needs of its trade territory, commonly
referred to as the New River Valley.
CNB
CNB Holdings, Inc. headquartered in Pulaski, Virginia, is a Virginia bank
holding company organized in 1993, while its wholly owned subsidiary, Community
National Bank, began operations in 1994. The Bank has two retail offices through
which it operates by attracting deposits from the general public and using
deposit funds to make commercial, consumer, and residential construction and
permanent mortgage real estate loans.
The Meeting (page ____)
CNB will hold a special meeting of shareholders at _________ a.m., on
[December 5], 2000 at _____________________________________________________,
Virginia.
Shareholders of CNB will be asked to approve and adopt the merger
agreement.
Approval and adoption of the merger agreement will require the affirmative
vote of more than two-thirds of the outstanding shares of CNB common stock.
You will have one vote for each share of CNB common stock held on [October
20], 2000.
5
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Recommendations of the Board of Directors of CNB (page ____)
The CNB Board of Directors, by unanimous vote, has approved and adopted the
merger agreement, believes the merger is fair and in the best interests of CNB
and CNB shareholders and is advisable, and recommends that CNB shareholders vote
FOR, and approve and adopt the merger agreement. The CNB Board of Directors
approved and adopted the merger agreement after consideration of a number of
factors described later.
Dividends (page ___)
CNB has not paid dividends. FNB and before it, First National Bank, has
regularly paid cash dividends. The merger agreement does not restrict FNB's or
CNB's ability to declare or pay regular dividends with usual record and payment
dates.
The annual dividend for FNB was recently raised to $.18 per share.
Following the merger, FNB intends to maintain its annual dividend at this level.
The FNB board of directors, however, will use its discretion to decide whether
and when to declare dividends and in what amount, and it will consider all
relevant factors in doing so.
Management Following the Merger (page _____)
The directors, officers and employees of Community National Bank will not
change as a result of the merger except that Hiawatha Nicely, Jr. will be
appointed to the Board of Directors of FNB and J. Daniel Hardy, Jr., President
and Chief Executive Officer of FNB, shall be appointed to the Board of Directors
of Community National Bank. At the next annual meeting of shareholders of FNB,
and at the annual meeting of FNB in 2002, management of FNB has agreed to
recommend to its shareholders that Mr. Nicely be re-elected to the board of
directors of FNB.
Material Federal Income Tax Consequences of the Merger (page _____)
Neither FNB nor CNB will recognize gain or loss as a result of the merger.
Additionally, CNB shareholders will not recognize gain or loss by exchanging
their CNB shares for shares of FNB common stock. In general, however, CNB
shareholders will recognize taxable gain for any cash they receive in the merger
in exchange for shares of CNB stock or in lieu of fractional shares.
Background of the Merger (page _____)
For the past few years, both companies have considered a variety of
strategic alternatives to enable each of them to better compete in the financial
services industry. Beginning in late 1999, executive officers from both
companies met informally on several occasions to discuss a possible combination.
After conferring with their respective Boards of Directors and advisors in early
2000, the companies proceeded with merger negotiations that resulted in the
merger agreement.
Terms of the Agreement and Plan of Merger (page ____)
The merger agreement is attached as Appendix A to this proxy
statement/prospectus. You are encouraged you to read the merger agreement in its
entirety.
6
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Conditions to the Merger (page ____)
The completion of the merger is subject to a number of conditions that must
be completed or waived before the closing, including:
. approval by the shareholders of CNB;
. receipt by FNB and CNB of an opinion of counsel that the merger will
be treated as a reorganization under the Internal Revenue Code and
that no gain or loss will be recognized by shareholders of CNB to the
extent they receive FNB common stock;
. approval by the Federal Reserve Board and the Virginia State
Corporation Commission and any other regulatory authority whose
approval is required for consummation of the merger and such approvals
shall not have imposed any condition or requirement which would so
materially adversely impact the economic or business benefits of the
merger;
. each company's performance in all material respects of its obligations
under the merger agreement;
. each company's representations and warranties contained in the merger
agreement being, and continuing to be, true and correct in all
material respects;
. no injunction that prohibits the merger.
Termination of the Merger (page __)
The merger agreement allows for termination of the agreement for a number
of reasons, including:
. by mutual consent of FNB and CNB;
. by either company if the closing does not occur on or before January
10, 2001;
. by either company if the required CNB shareholder approval is not
obtained;
. by either company if other conditions to the merger have not been met
or waived;
. by either company based on an uncured material breach of the other; or
. by FNB due to the happening of a Termination Event (as described in
"Termination Fees" below).
Termination Fees (page ___)
If either FNB or CNB terminates the merger agreement because of a material
breach or failure to comply with obligations under the merger agreement, such
company will be required to reimburse the other for its costs and expenses. If
the shareholders of CNB fail to approve the merger, CNB shall pay FNB $10,000 to
help defray the costs of expenses of the transaction.
7
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CNB has agreed to pay FNB a termination fee of $500,000.00 in cash within
five (5) business days after written notice that FNB has terminated the merger
agreement because of any of the following "Termination Events:"
. CNB, without having received FNB's prior written consent, enters into
an agreement to be acquired by someone other than FNB or such other
person acquires from CNB securities representing ten percent (10%) or
more of the common stock of CNB; or
. another person acquires beneficial ownership or a right to acquire
beneficial ownership of twenty percent (20%) or more of the
outstanding common stock of CNB; or
. another person makes a bona fide proposal to CNB by public
announcement or written communication that becomes the subject of
public disclosure to acquire CNB by merger, share exchange or other
similar transactions and following such announcement the shareholders
of CNB vote not to approve the merger agreement with FNB.
Regulatory Approvals (page ____)
FNB and CNB must receive the approvals of certain federal and state
regulatory agencies before the merger can be completed. At the federal level,
the Board of Governors of the Federal Reserve System must approve the merger
and, at the state level, the Virginia State Corporation Commission must approve
the merger.
Interest of Certain Persons in the Merger (page ______)
Philip M. Baker, the president and chief executive officer of Community
National Bank, will be offered a "Change in Control" agreement pursuant to which
he will be compensated in the event that FNB merges with or is acquired by some
other company. The agreement is similar to agreements between FNB and other
similarly situated officers of FNB and First National Bank.
Under the merger agreement, all awards for officers and directors under
CNB's stock option plans to officers and directors of CNB will be treated as
follows: (1) 50% of the options held by a holder will be converted into and
become options to acquire FNB common stock and (2) with respect to the remaining
50% of such options, the amount by which $10.60 exceeds the exercise price for
such options, will be converted into cash or FNB stock in the merger in the same
manner as provided for the holders of CNB common stock in the merger.
Accounting Treatment (page _____)
The merger will be accounted for under the purchase method of accounting.
Listing of FNB Common Stock (page ____)
FNB common stock trades on the NASDAQ National Market System under the
symbol "FNBP".
Differences in the Rights of FNB Shareholders and CNB Shareholders (page _____)
Holders of CNB common stock who receive FNB common stock in the merger will
become holders of FNB common stock and will have rights as FNB shareholders.
8
<PAGE>
Resales of FNB Common Stock (page ____)
Generally, shares of FNB common stock received in the merger will be freely
transferable. However, resales of shares held by CNB "affiliates" under
applicable federal securities laws (generally directors, certain executive
officers and shareholders owning ten percent or more) will be restricted.
Opinions of Financial Advisor (page ____)
CNB's financial advisor, Davenport & Company, LLC, has given an opinion to
the CNB Board of Directors as of _________________, that, based on its analysis,
the consideration to be paid to the CNB shareholders was fair to CNB from a
financial point of view. The opinion is attached as Appendix D to this proxy
statement/prospectus.
Dissenter's Rights (page ____)
Each holder of CNB common stock who dissents from the merger is entitled to
the rights and remedies of dissenting shareholders provided in Article 15 of the
Code of Virginia, subject to compliance with the procedures set forth in the
article. A copy of Article 15 of the Code of Virginia is attached as Appendix E
to this proxy statement/prospectus.
Additional Acquisition (page ___)
On August 7, 2000, FNB entered into an agreement and plan of merger with
SWVA Bancshares, Inc., the parent of Southwest Virginia Savings Bank, F.S.B. in
Roanoke, Virginia. The boards of directors of both companies have each approved
the agreement. The merger is subject to the approval of the shareholders of SWVA
Bancshares, Inc. and appropriate regulatory agencies, and other standard
conditions for transactions of this nature and is expected to close in the first
quarter of 2001. If the merger with CNB occurs and the proposed merger with SWVA
Bancshares, Inc. also occurs, CNB shareholders will own approximately 6.2% of
the combined company.
Risk Factors
Shareholders of FNB and CNB should consider carefully all the information
contained in this proxy statement/prospectus, including the following:
Effects of Fluctuations in Trading Price of FNB Common Stock
The merger agreement provides that CNB shareholders will receive either
cash in the amount of $10.60 or FNB common stock equal to $10.60 based upon an
exchange ratio.
The exchange ratio relating to the CNB shareholders' stock election in the
merger will be determined using the average closing price of FNB common stock
over a 30 day trading period ending 10 business days before the closing of the
merger. Accordingly, it is possible that the value of the merger consideration
at the time the merger is effective for a CNB shareholder receiving FNB common
stock will be higher or lower than $10.60 per share of CNB common stock
depending on the direction of the price movement of FNB common stock after the
exchange ratio is calculated. There can be no assurance that following the
merger the price of FNB common stock will not decline from the market price used
in calculating the exchange ratio. Also, the merger agreement provides that FNB
will not issue more then 0.642 share or less than 0.544 share for each CNB
share.
9
<PAGE>
Cash and/or Stock Paid in the merger May be Different From What Shareholders
Elect
CNB shareholders making elections for cash or stock may not receive the
type of consideration they elect for the following reasons. The aggregate amount
of cash FNB will pay in exchange for CNB common stock in the merger is fixed.
If the FNB common stock election is over-subscribed by CNB shareholders, a
shareholder that elected FNB common stock may receive part of his or her
consideration in the form of cash. If the cash election is over-subscribed by
CNB shareholders, a shareholder that elected cash may receive part of his or her
consideration in the form of FNB common stock.
Although FNB may reallocate the amount of cash and shares of FNB common
stock to more closely follow the actual elections of shareholders, the
reallocation amounts may be insufficient to follow shareholders' actual
elections exactly. FNB may not reallocate the amount of cash or increase the
number of shares issued if such reallocation would prevent the desired tax
treatment of the merger.
Comparative Market Price Information
FNB
The FNB shares are listed for trading on the NASDAQ National Market System
under the symbol "FNBP". The following table sets forth, for the fiscal quarters
indicated, the dividends paid and the high and low sales prices of FNB shares as
reported under the NASDAQ Composite Transactions Reports in The Wall Street
Journal.
<TABLE>
<CAPTION>
FNB
-------------------------------------------------
High Low Dividend
---- --- --------
<S> <C> <C> <C>
1997
First Quarter................................ $18.390 16.530 ---
Second Quarter............................... 17.350 16.320 0.08
Third Quarter................................ 19.010 16.530 0.13
Fourth Quarter............................... 19.630 17.770 0.14
1998
First Quarter................................ 22.950 20.000 0.14
Second Quarter............................... 24.550 21.820 0.14
Third Quarter................................ 26.140 20.660 0.14
Fourth Quarter............................... 22.730 21.030 0.16
1999
First Quarter................................ 22.270 19.350 0.15
Second Quarter............................... 21.820 18.180 0.15
Third Quarter................................ 23.000 20.460 0.16
Fourth Quarter............................... 22.500 17.000 0.17
2000
First Quarter................................ 21.500 15.000 0.17
Second Quarter............................... 18.375 14.500 0.17
</TABLE>
Both the trading values and per share dividends above have been adjusted to
retroactively reflect the effects of a 10% stock dividend in both 1999 and 1998
and a 2 for 1 stock split effected in the form of a 100% stock dividend in 1997.
10
<PAGE>
CNB
The CNB shares are not traded on any exchange or system. The following
table sets forth, for the fiscal quarters indicated, the high and low sales
prices of CNB shares as reported to CNB. CNB has not paid cash dividends since
its organization.
<TABLE>
<CAPTION>
CNB
------------------------------------------------
High Low Dividend
---- --- --------
<S> <C> <C> <C>
1997
First Quarter................................ N/A N/A ---
Second Quarter............................... N/A N/A ---
Third Quarter................................ N/A N/A ---
Fourth Quarter............................... N/A N/A ---
1998
First Quarter................................ 9.250 9.000 ---
Second Quarter............................... 9.625 9.000 ---
Third Quarter................................ 9.250 9.000 ---
Fourth Quarter............................... 9.000 9.000 ---
1999
First Quarter................................ 9.250 8.875 ---
Second Quarter............................... --- --- ---
Third Quarter................................ 9.000 9.000 ---
Fourth Quarter............................... 8.000 8.000 ---
2000
First Quarter................................ 8.500 8.000 ---
Second Quarter............................... 8.000 8.000 ---
</TABLE>
The trading values above have been adjusted to retroactively reflect the effects
of a 25% stock dividend in 1997.
Following the consummation of the merger, CNB shares will cease to be
outstanding.
Selected Historical Consolidated Financial Data
FNB and CNB are providing the following financial information to aid you in
your analysis of the financial aspects of the merger. This information is only
a summary and you should read it in conjunction with the historical consolidated
financial statements of FNB and CNB and the related notes contained in Annual
Reports on Forms 10-K and 10-KSB and Quarterly Reports on Forms 10-Q and 10-QSB
that FNB and CNB have previously filed with the Securities and Exchange
Commission. See "Available Information" on page 1.
The Selected Historical Consolidated Financial Data as of and for the six
months ended June 30, 2000 and 1999 have not been audited, but in the opinion of
management contain all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the financial condition and
results of operations for such periods.
The results of operations for the six month period ended June 30, 2000 are
not necessarily indicative of the results to be expected for the remainder of
the year or any other period.
11
<PAGE>
Selected Historical Consolidated Financial Data for FNB
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
--------------------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- --------- --------- --------- --------- --------- ---------
(Unaudited) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS SUMMARY:
Interest income $ 20,378 18,011 37,563 34,931 32,402 29,935 27,884
Interest expense 9,681 8,482 17,610 17,249 16,764 15,016 14,081
Noninterest income 1,706 1,920 3,729 3,436 2,707 2,460 2,315
Noninterest expense 7,324 6,786 13,964 12,395 11,306 10,089 9,695
Net income 3,326 3,125 6,327 5,931 5,165 5,204 4,674
SHARE DATA:
Weighted average common
shares outstanding:
Basic 3,999,714 3,976,371 3,982,147 3,959,084 3,917,654 3,878,209 3,827,075
Fully diluted 3,999,976 3,976,371 3,982,147 3,959,084 3,917,654 3,878,209 3,827,075
Net income per common
share:
Basic $ 0.83 0.79 1.59 1.50 1.32 1.34 1.23
Fully Diluted 0.83 0.79 1.59 1.50 1.32 1.34 1.23
Cash dividends per common
share 0.34 0.31 .63 .57 .35 .50 .45
BALANCE SHEET SUMMARY:
Loans, net $ 393,327 358,951 377,099 323,959 286,767 269,145 248,305
Total assets 520,783 501,870 516,906 461,916 428,174 395,324 360,533
Total deposits 421,702 397,834 398,871 386,257 352,545 335,402 315,777
Total stockholders' equity 49,900 45,850 47,579 44,401 40,213 35,828 32,191
PERFORMANCE RATIOS:
Return on average assets (1) 1.30 1.33 1.30 1.34 1.26 1.41 1.38
Return on average
stockholders' equity (1) 13.71 13.81 13.75 14.00 13.59 15.20 15.64
Dividend payout ratio 40.89 39.33 39.89 38.44 26.08 36.99 37.27
Average equity to average
assets 9.47 9.60 9.44 9.60 9.31 9.26 8.82
</TABLE>
(1) Data provided for the six months ended June 30, 2000 and 1999 shown on an
annualized basis.
NOTES: (A) All share and per share data have been adjusted retroactively
to reflect a 2 for 1 stock split effected in the form of a 100% stock
dividend in 1997 and 10% stock dividends in 1998 and 1999.
(B) Certain historical amounts have been reclassified to conform to the
presentation applicable to the most current periods.
12
<PAGE>
Selected Historical Consolidated Financial Data for CNB
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
-------------------- ------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- -----
(Unaudited) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS SUMMARY:
Interest income $ 1,837 1,825 3,648 3,341 2,454 1,575 811
Interest expense 919 941 1,831 1,814 1,371 854 346
Noninterest income 181 145 265 275 153 127 60
Noninterest expense 816 941 1,879 1,612 1,297 929 789
Net income (loss) 254 63 29 24 (247) (186) (332)
SHARE DATA:
Weighted average common
shares outstanding:
Basic 926,399 926,399 926,399 892,786 546,453 546,531 546,303
Fully diluted 948,676 948,676 948,676 917,105 546,453 546,531 546,303
Net income (loss) per common
share:
Basic $ 0.27 0.07 0.03 0.03 (0.45) (0.34) (0.61)
Fully Diluted 0.27 0.07 0.03 0.03 (0.45) (0.34) (0.61)
Cash dividends per common
share -- -- -- -- -- -- --
BALANCE SHEET SUMMARY:
Loans, net $ 31,547 32,274 31,571 31,108 22,395 12,723 6,690
Total assets 54,318 53,786 51,778 53,429 39,783 27,417 15,601
Total deposits 47,989 47,540 45,770 46,117 36,594 24,041 11,937
Total stockholders' equity 6,032 6,019 5,793 6,240 3,111 3,324 3,623
PERFORMANCE RATIOS:
Return on average assets (1) .96 .24 .06 .05 (.71) (.81) (2.87)
Return on average
stockholders' equity (1) 8.59 2.09 .48 .40 (7.74) (5.90) (9.45)
Dividend payout ratio -- -- -- -- -- -- --
Average equity to average
assets 11.15 11.44 11.52 12.42 9.20 13.71 30.39
</TABLE>
(1) Data provided for the six months ended June 30, 2000 and 1999 shown on an
annualized basis.
NOTE: All share and per share data have been adjusted retroactively to
reflect the 25% stock dividend in 1997.
13
<PAGE>
Selected Unaudited Pro Forma Combined Financial Data
The following selected unaudited pro forma combined financial data gives
effect to the merger as though the merger had occurred on June 30, 2000 in the
case of balance sheet related data and on January 1, 1999 in the case of income
statement related data. The pro forma adjustments are based upon available
information and assumptions that management believes are reasonable. The
selected unaudited pro forma combined financial data are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial condition of the combined company that would have occurred
had the mergers occurred at the beginning of the periods presented, nor are the
selected unaudited pro forma combined financial data necessarily indicative of
future operating results or financial position of the combined company.
The unaudited pro forma data in the tables assumes that the merger is
accounted for using the purchase method of accounting (see "Accounting
Treatment"). The data do not take into consideration any operating efficiencies
that may be realized as a result of the merger.
The selected unaudited pro forma combined financial data should be read in
conjunction with the consolidated financial statements of FNB and CNB
incorporated by reference in this proxy statement/prospectus. The information
presented herein is based on, and is qualified in its entirety by, the
historical financial statements, including the notes thereto, of FNB and CNB
incorporated by reference herein, and should be read in conjunction therewith.
See "Available Information," and "Incorporation of Certain Information by
Reference."
<TABLE>
<CAPTION>
As of
SELECTED PRO FORMA COMBINED June 30, 2000
BALANCE SHEET DATA --------------------
(in thousands)
<S> <C> <C>
Total assets $ 580,048
Loans, net of allowance for loan losses 424,532
Total deposits 470,102
Stockholders' equity 55,164
Year Ended Six Months
SELECTED PRO FORMA COMBINED December 31, Ended
STATEMENT OF INCOME DATA 1999 June 30, 2000
-------------- -------------------
(in thousands except share data)
Interest income $ 41,209 $ 22,211
Interest expense 19,367 10,725
Noninterest income 3,994 1,887
Noninterest expense 16,066 8,251
Net income 6,339 3,407
Weighted average common shares outstanding for:
Basic earnings per share 4,270,966 4,288,533
Fully diluted earnings per share 4,288,285 4,306,114
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Year Ended Six Months
PRO FORMA COMBINED PER December 31, Ended
COMMON SHARE DATA (1) 1999 June 30, 2000
-------------------- ----------------------
<S> <C> <C>
Basic earnings per common share $ 1.48 $ 0.79
Fully diluted earnings per common share $ 1.48 $ 0.79
Cash dividends declared $ 0.63 $ 0.34
Book value at June 30, 2000 $12.85
SELECTED PRO FORMA COMBINED FINANCIAL RATIOS (1)
Return on average assets (June 30, 2000 annualized) 1.16% 1.19%
Return on average stockholders' equity (June 30, 2000
annualized) 12.37% 12.69%
Average stockholders' equity to
average total assets at June 30, 2000 9.40%
</TABLE>
(1) Per Common Share Data and Selected Financial Ratios are presented for the
year and six months ended December 31, 1999 and June 30, 2000, respectively, for
information related to pro forma combined income statement data. Such
information is presented only as of June 30, 2000 to the extent related to the
pro forma combined balance sheet data.
Comparative Per Share Data
The following table sets forth certain historical, pro forma and pro forma
equivalent per share financial information for the common stock of FNB and CNB.
The pro forma and pro forma equivalent per share information gives effect to the
merger as if the merger had been effective on the dates presented, in the case
of the book value data, and as if the merger had become effective January 1,
1999, in the case of the net income and dividends declared data presented. The
pro forma data in the tables assumes that the merger is accounted for using the
purchase method of accounting. See "Accounting Treatment" on page ____. The
information presented herein is based on, and is qualified in its entirety by,
the historical financial statements, including the notes thereto, of FNB and CNB
incorporated by reference herein, and should be read in conjunction therewith.
See "Available Information," and "Incorporation of Certain Information by
Reference." The pro forma and equivalent pro forma per share data in the
following table is presented for comparative purposes only and are not
necessarily indicative of what the combined financial position or results of
operations would have been had the merger been consummated during the periods or
as of the date for which such pro forma information is presented.
15
<PAGE>
<TABLE>
<CAPTION>
PER
FNB CNB PRO FORMA EQUIVALENT
HISTORICAL HISTORICAL COMBINED CNB SHARE
(1)
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
NET INCOME FOR THE YEAR ENDED
DECEMBER 31, 1999
Basic $ 1.59 $ 0.03 $ 1.48 (2) $ 0.92
Fully diluted 1.59 0.03 1.48 (2) 0.92
NET INCOME FOR THE SIX
MONTHS ENDED JUNE 30, 2000
Basic 0.83 0.27 0.79 (2) 0.49
Fully diluted 0.83 0.27 0.79 (2) 0.49
CASH DIVIDENDS DECLARED PER SHARE
For the year ended December 31, 1999: 0.63 -- 0.63 (3) 0.39
For the six months ended June 30, 2000: 0.34 -- 0.34 (3) 0.21
BOOK VALUE PER SHARE
As of December 31, 1999 11.93 6.25 -- --
As of June 30, 2000
12.47 6.51 12.85 (4) 8.02
</TABLE>
(1) Per equivalent CNB share amounts are calculated by multiplying the pro
forma combined amounts by the Exchange Ratio of 0.624.
(2) The pro forma net income per share amounts are calculated by totaling the
historical net income of FNB and CNB, adjusting the result to give effect
to the merger as though it had occurred on January 1, 1999, and dividing it
by pro forma average basic and fully diluted shares. To arrive at pro
forma shares, FNB's historical average shares outstanding were added to the
incremental shares that would be issued, assuming a 0.624 Exchange Ratio,
in exchange for 50% of the historical CNB shares outstanding. The number
of actual CNB shares outstanding did not change from January 1, 1999 to
June 30, 2000. The pro forma net income per share amounts do not take into
consideration any operating efficiencies that may be realized as a result
of the merger.
(3) Pro forma cash dividends represents the FNB historical amounts.
(4) Pro forma book value per share amounts are calculated by dividing pro forma
combined stockholders' equity by pro forma common shares outstanding at the
end of the period. Pro forma stockholders' equity gives effect to the
merger as though it had occurred on June 30, 2000. To arrive at pro forma
shares outstanding, FNB's historical shares outstanding at June 30, 2000
were added to the incremental shares that would be issued assuming the
merger occurred at June 30, 2000, assuming a 0.624 Exchange Ratio, in
exchange for 50% of the historical CNB shares outstanding at that date.
Pro forma shares outstanding do not include unearned shares held by FNB's
Employee Stock Ownership Plan.
16
<PAGE>
The Merger
The following information describes information pertaining to the merger.
This description does not purport to be complete and is qualified in its
entirety by reference to the appendices hereto, including the Agreement and Plan
of Merger, which is attached as Appendix A and is incorporated herein by
reference. All shareholders are urged to read the appendices in their entirety.
Background of the Merger
During the fall of 1999, CNB was contacted by a number of regional
community banks. These contacts were made primarily to determine if there were
opportunities to develop strategic alliances that, in the future, could provide
economies of scale through savings in operation costs and enhance the financial
strength and market presence of CNB and its partner.
Following these initial contacts, the board of directors of CNB concluded
that if they were to consider such an alliance, CNB should explore fully all
available partners in the community banking field. Davenport & Company LLC was
retained to serve as CNB's financial advisor in this undertaking. A significant
amount of effort on the part of Davenport & Company LLC resulted in three
proposals for affiliation with other community banks or bank holding companies.
The board of directors of CNB met on several occasions to evaluate and discuss
these proposals, and consulted with its financial advisor, accountants and
counsel regarding the merits of the proposals. These deliberations and
subsequent negotiations led to an agreement in principle with FNB, followed by
the drafting and execution of the Agreement.
Reasons of CNB for the Merger
In determining to approve the merger agreement and the transactions
contemplated therein and to recommend its approval to the CNB shareholders, the
CNB Board reviewed and considered a number of factors, including, without
limitation, the following:
. the financial condition, results of operations, cash flow, business
and prospects of CNB and FNB;
. the operating environment for CNB, including, but not limited to, the
continued consolidation and increasing competition in the banking and
financial services industries and the prospect for further changes in
the industry;
. CNB's ability to achieve greater operational scale and increase its
financial resources to enable substantial investments in technology
and increase CNB's return on equity, which are necessary to remain
competitive in the long-term;
. the CNB Board's belief that the terms of the merger agreement are
attractive in that the merger agreement allows CNB shareholders to
become shareholders of a large, more diversified institution;
. while no assurances can be given, the anticipated cost savings,
operating efficiencies and enhanced revenue opportunities available to
the combined company from the merger, including, without limitation,
revenue enhancements driven by a broader array of products and
repricing initiatives;
17
<PAGE>
. that FNB has consistently paid dividends to its shareholders;
. the CNB Board's assessment that the combined company resulting from
the merger would better serve the convenience and needs of its
customers and the communities it serves as a result of being
affiliated with a larger bank holding company (as compared to CNB
remaining independent), thereby affording access to greater financial,
managerial and technological resources and an ability to offer an
expanded range of products and services;
. the CNB Board's assessment that FNB's stock is more liquid as it
is traded on the NASDAQ National Market System, while CNB's stock is
not traded on an exchange or system;
. the financial presentation and opinion of Davenport & Company, LLC
rendered to the CNB Board as to the fairness, from a financial point
of view, of the exchange ratio to holders of CNB Common Stock (see
"-- Opinion of CNB's Financial Adviser").
In reaching its determination to approve and recommend the merger, the
CNB Board did not assign any relative or specific weights to the various factors
considered by it, and individual directors may have given differing weights to
different factors. The foregoing discussion of the information and factors
considered by the CNB Board is not intended to be exhaustive but is believed to
include all material factors considered by the CNB Board.
Based on the foregoing, the CNB Board believes that the merger is in the
best interests of CNB and its shareholders and unanimously recommends that CNB
shareholders vote "for" approval of the merger agreement.
Accounting Treatment
The merger will be accounted for by FNB under the purchase method of
accounting for financial reporting purposes in accordance with Accounting
Principles Board Opinion No. 16, "Business Combinations," as amended. Under
this method of accounting, the purchase price will be allocated to assets
acquired and liabilities assumed based on their fair values at the date of the
acquisition. Any excess of purchase price over the net fair values of assets
acquired and liabilities assumed will be recorded as goodwill. The income
statement of the combined company will not include the operations of CNB prior
to the effective date of the merger.
Material Federal Income Tax Consequences of the Merger
The following is a discussion of certain material federal income tax
consequences of the merger under the Internal Revenue Code of 1986, as amended.
CNB Shareholders Who Receive Solely FNB Common Stock. CNB shareholders who
exchange their stock solely for shares of FNB common stock in the merger will
not recognize any gain or loss on that exchange, except to the extent cash in
lieu of fractional shares is received which should be treated as proceeds from
the sale of fractional shares. The aggregate adjusted tax basis of FNB common
stock received will equal the shareholder's aggregate adjusted tax basis in the
CNB common stock surrendered. The holding period of the FNB common stock
received pursuant to the merger will include the holding period of the shares of
CNB common stock surrendered therefor.
18
<PAGE>
CNB Shareholders Who Receive Solely Cash. CNB's shareholders who exchange
their stock solely for cash consideration in the merger will generally recognize
capital gain or loss in an amount equal to the difference between the amount of
cash consideration received and the shareholder's adjusted tax basis in the
shares of CNB common stock surrendered therefor. The capital gain or loss
recognized would be long-term capital gain or loss if the shareholder's holding
period for the shares of CNB common stock so surrendered exceeds one year, and,
with respect to certain non-corporate shareholders, will be eligible for a
maximum U.S. federal income tax rate of 20%.
CNB Shareholders Who Receive Cash and FNB Common Stock. A shareholder of
CNB common stock who exchanges that stock for both cash consideration (other
than any cash received in lieu of a fractional share of FNB common stock) and
FNB common stock in the merger will generally realize gain or loss in an amount
equal to the difference between the sum of the cash and the fair market value of
the FNB common stock received and the shareholder's adjusted tax basis in the
CNB common stock surrendered. The shareholder's gain, if any, will be
recognized, however, only to the extent of the amount of cash consideration
received by the shareholder. Any loss will not be recognized. Complicated rules
apply for purposes of determining the character of any gain recognized.
However, any gain recognized by a shareholder that receives both cash and FNB
common stock will, under most circumstances, be treated as capital gain.
A shareholder who receives cash in lieu of fractional shares of FNB common
stock will be treated as if he or she had received such fractional share and
sold it for such cash.
The aggregate adjusted tax basis of the FNB common stock received will
equal the shareholder's adjusted tax basis in the CNB common stock surrendered,
decreased by the amount of cash received by the shareholder and increased by the
amount of gain, if any, recognized by the shareholder. The holding period of the
FNB common stock received in the merger will include the holding period of the
CNB common stock surrendered therefor.
This discussion does not deal with all aspects of federal taxation that may
be relevant to particular CNB shareholders. The tax consequences of the merger
may vary depending upon the particular circumstances of each CNB shareholder and
other factors. You are urged to consult with your tax advisor to determine the
particular tax consequences of the merger to you.
This summary is based on current law. The advice in this summary is based
on, among other things, the customary assumptions and representations relating
to the facts and circumstances of, and the intentions of the parties to the
merger. Neither FNB nor CNB has requested a ruling from the Internal Revenue
Service in connection with the merger. To meet a condition to consummation of
the merger, FNB and CNB will receive from Mays & Valentine, L.L.P. an opinion as
to the federal income tax consequences of the merger. Such opinion is not
binding on the Internal Revenue Service.
Rights of Dissenting Shareholders
A shareholder of CNB who objects to the merger and who complies with
provisions of Article 15 of Title 13.1 of the Virginia Code may demand the right
to receive a cash payment, if the merger is consummated, for the fair value of
his or her stock immediately before the effective date of the merger, exclusive
of any appreciation or depreciation in anticipation of the merger unless such
exclusion would be inequitable. In order to receive payment, a Dissenting
Shareholder must deliver to CNB prior to the special meeting a written notice of
intent to demand payment for his or her shares if the merger is consummated and
must not vote his or her shares in favor of the merger. The Intent to Demand
Payment should be addressed to Phillip M. Baker, President and Chief Executive
Officer, Community National Bank, 900 Memorial Drive, Pulaski, Virginia 24301,
(540) 994-0831. A Vote Against the Merger Will
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Not Itself Constitute Such Written Notice and a Failure To Vote Will Not
Constitute a Timely Written Notice of Intent to Demand Payment.
A CNB shareholder of record may assert dissenters' rights as to fewer
than all the shares registered in his name only if the shareholder dissents with
respect to all shares beneficially owned by any one person and notifies CNB in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of such a partial dissenter are determined as if
the shares to which he dissents and his other shares were registered in the
names of different shareholders. A beneficial shareholder may assert
dissenters' rights as to shares held on his behalf by a shareholder of record
only if (i) he submits to CNB, the record shareholder's written consent to the
dissent not later than the time when the beneficial shareholder asserts
dissenters' rights, and (ii) he dissents with respect to all shares of which he
is the beneficial shareholder or over which he has power to direct the vote.
Within 10 days after the effective date of the merger, CNB is required to
deliver a notice in writing to each dissenting shareholder who has filed an
intent to demand payment and who has not voted such shares in favor of the
merger. The dissenter's notice shall (i) state where the demand for payment
shall be sent and where and when stock certificates shall be deposited; (ii)
supply a form for demanding payment; (iii) set a date by which CNB must receive
the payment demand; and (iv) be accompanied by a copy of Article 15. A
dissenting shareholder who is sent a dissenter's notice must submit the payment
demand and deposit his or her stock certificates in accordance with the terms
of, and within the time frames set forth in, the dissenter's notice. As a part
of the payment demand, the dissenting shareholder must certify whether he or she
acquired beneficial ownership of the shares before or after the date of the
first public announcement of the terms of the proposed merger, which was July
11, 2000. CNB will specify the announcement date in the dissenter's notice.
Except with respect to shares acquired after the announcement date, CNB
shall pay a dissenting shareholder the amount CNB estimates to be the fair value
of his or her shares, plus accrued interest. Such payment shall be made within
30 days of receipt of the dissenting shareholder's payment demand. As to shares
acquired after the announcement date, CNB is only obligated to estimate the fair
market value of the shares, plus accrued interest, and to offer to pay this
amount to the dissenting shareholder conditioned upon the dissenting
shareholder's agreement to accept it in full satisfaction of his or her claim.
If a dissenting shareholder believes that the amount paid or offered by
CNB is less than the fair value of his or her shares, or that the interest due
is incorrectly calculated, that dissenting shareholder may notify CNB of his or
her own estimate of the fair value of his shares and amount of interest due and
demand payment of such estimate (less any amount already received by the
dissenting shareholder). The dissenting shareholder must notify CNB of the
estimate and demand within 30 days after the date CNB makes or offers to make
payment to the dissenting shareholder.
Within 60 days after receiving the estimate and demand, CNB must either
commence a proceeding in the appropriate circuit court to determine the fair
value of the dissenting shareholder's shares and accrued interest, or CNB must
pay each dissenting shareholder whose demand remains unsettled the amount
demanded. If a proceeding is commenced, the court must determine all costs of
the proceeding and must assess those costs against CNB, except that the court
may assess costs against all or some of the dissenting shareholders to the
extent the court finds that the dissenting shareholders did not act in good
faith in demanding payment of the dissenting shareholder's estimates.
The foregoing discussion is a summary of the material provisions of
Article 15. Shareholders are strongly encouraged to review carefully the full
text of Article 15, which is included as Appendix E to this proxy
statement/prospectus. The provisions of Article 15 are technical and complex,
and a
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shareholder failing to comply strictly with them may forfeit his dissenting
shareholder's rights. Any shareholder who intends to dissent from the merger
should review the text of those provisions carefully and also should consult
with his attorney. No further notice of the events giving rise to dissenters'
rights or any steps associated therewith will be furnished to CNB shareholders,
except as indicated above or otherwise required by law.
Any dissenting shareholder who perfects his right to be paid the fair value
of his shares will recognize gain or loss, if any, for federal income tax
purposes upon the receipt of cash for his shares. The amount of gain or loss and
its character as ordinary or capital gain or loss will be determined in
accordance with applicable provisions of the Internal Revenue Code.
Opinion of CNB's Financial Advisor
On October 25, 1999, CNB retained Davenport & Company LLC ("Davenport") to
act as its financial advisor in connection with its evaluation of potential
merger partners. Davenport was also retained to render a written opinion to the
Company's Board of Directors as to the fairness, from a financial point of view,
of the consideration to be paid to the Company's shareholders in accordance with
the Agreement and Plan of Merger. In requesting Davenport's advice and opinion,
no restrictions or limitations were imposed by CNB upon Davenport with respect
to the investigations made or the procedures followed by Davenport in rendering
its opinion. On July 10, 2000, Davenport delivered its opinion (the "Davenport
Opinion") to the effect that as of the date of such opinion, and based upon and
subject to the assumptions, limitations and qualifications set forth in such
opinion, the consideration to be paid to the CNB shareholders pursuant to the
Agreement and Plan of Merger was fair to the shareholders of CNB from a
financial point of view. Davenport subsequently updated its opinion to the date
of this Proxy Statement.
The full text of the Davenport Opinion, which describes, among other
things, the assumptions made, matters considered, and the limitations on the
review undertaken, is attached to this document as Appendix D and is
incorporated in this document by reference. The description of the Davenport
Opinion set forth below is qualified in its entirety by reference to the full
text of the Davenport Opinion in Appendix D. CNB shareholders are urged to read
the Davenport Opinion carefully and in its entirety.
The Davenport Opinion is directed only to the fairness of the merger
consideration, from a financial point of view, to be paid to the CNB
shareholders and does not constitute a recommendation to any CNB shareholder as
to how such shareholder should vote at the Special Meeting. Davenport was not
retained as an advisor or agent to CNB shareholders or any other person, other
than as an advisor to the CNB Board.
Davenport is a regional investment banking firm. As part of its investment
banking business, Davenport is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Davenport was selected by
CNB to act as its financial advisor because of Davenport's expertise in valuing
and advising financial institutions in merger and acquisition transactions and
because Davenport was familiar with CNB and its business.
In arriving at its opinion, Davenport, among other things:
. Reviewed the Agreement and Plan of Merger;
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. Reviewed this proxy statement/prospectus;
. Reviewed certain publicly available financial statements and
other information of CNB and FNB;
. Reviewed certain internal financial statements and other
information and operating data of CNB provided by its management;
. Reviewed certain publicly available forward looking information
for FNB;
. Reviewed the reported prices and trading activity for CNB common
stock and FNB common stock;
. Held discussions with members of CNB's management regarding past
and current business operations, financial condition, results of
regulatory examinations, the merger and the business and future
prospects of CNB;
. Compared the results of operations and market value of CNB and
FNB with similar information for certain other publicly traded
companies which it deemed to be relevant;
. Compared the financial terms of the merger with the financial
terms of certain other mergers and acquisitions of financial
institutions in recent years;
. Took into account its assessment of general economic, market and
financial conditions and its experience in other transactions, as
well as its experience in securities valuations and knowledge of
the commercial banking industry generally; and
. Conducted such other studies, analyses and investigations and
considered such other information as it deemed appropriate.
In rendering its opinion, Davenport assumed and relied upon the accuracy,
completeness and fairness of all of the financial and other information that was
available to it from public sources, that was provided to it by CNB or their
representatives, FNB or their representatives, or that was otherwise reviewed by
it. Davenport did not independently verify any of the information reviewed by
it. Davenport is not an expert in the evaluation of loan portfolios for the
purpose of assessing the adequacy of the allowance for losses, and assumed that
such allowances, for each of the companies, are in the aggregate, adequate to
cover such losses. Davenport did not review any individual credit files nor
make any independent evaluation, appraisal or physical inspection of the assets
or individual properties of CNB or FNB, nor was Davenport furnished with such
evaluation or appraisal. The Davenport Opinion is necessarily based on
economic, market, financial and other conditions as they existed on, and on the
information made available to Davenport as of, the date of the Davenport
Opinion.
The Davenport Opinion is just one of the many factors taken into
consideration by the Company's Board of Directors in determining to approve the
Agreement and Plan of Merger. See " - Reasons of CNB for the Merger." The
Davenport Opinion does not address the relative merits of the Merger as compared
to any alternative business strategies that might exist for CNB, nor does it
address the effect of any other business combination in which CNB might
engage.
In connection with rendering its opinion, Davenport performed a variety of
financial analyses. The following is a summary of the material analyses
presented to the CNB board of directors at its July 10, 2000 meeting.
Transaction Summary. Davenport reviewed the terms of the proposed merger
-------------------
including the aggregate transaction value. As is more specifically set forth in
the Agreement and Plan of Merger, upon consummation of the merger, each
outstanding share of the common stock of CNB, except for any dissenting shares,
will be entitled to receive consideration of $10.60 per share of CNB common
stock, in the form of cash, stock of FNB or a combination of cash and stock, at
each shareholder's election. Davenport further understands that in no event
shall cash be more than 50% of the total consideration paid to all CNB
shareholders. See " - The Exchange and Allocation." This per share value
resulted in an implied total transaction value of approximately $9.8 million.
Based on the implied total transaction
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value Davenport calculated the premium over CNB's closing price as of July 10,
2000 to be 32.5%, the price to last twelve months earnings per share to be
54.2x, the price to book value to be 1.65x, the price to deposits to be 22.0%
and the price to assets to be 19.2%..
Analysis of Certain Other Publicly Traded Companies. To provide contextual
---------------------------------------------------
data and comparative market information, Davenport compared selected financial
information for CNB to the corresponding information of certain other Virginia
community banks whose securities are publicly traded (collectively, the
"Comparable Companies"). The Comparable Companies were chosen because they
possess general business, operating and financial characteristics representative
of companies in the region and the industry in which CNB and FNB operate. The
Comparable Companies were: American National Bankshares, Inc., Benchmark
Bankshares, Inc., Cardinal Bankshares, Inc., Central Virginia Bankshares, Inc.,
Chesapeake Financial Shares, Inc., National Bankshares, Inc., Salem Bank &
Trust, N.A., Shore Financial Corporation and Valley Financial Corporation. Such
data and ratios included each company's most recent Stock Price, Asset Size,
Book Value, Price to Book Value, 1999 Earnings per Share, Last Twelve Months
Earnings per Share, Price to Earnings ratios and Dividend Yield.
Market information used in the ratios provided below is as of July 7, 2000.
"LTM" is the Last Twelve Months ended March 31, 2000. The following table
summarizes the relevant data items.
<TABLE>
<CAPTION>
Comparable Companies
---------------------------------------------------------
CNB Low High Median
--- --- ---- ------
<S> <C> <C> <C> <C>
Asset Size (millions) $ 51 $ 131 $ 504 $ 193
Price to Book Value 1.25x 0.92x 1.80x 1.13x
Price to 1999 Earnings 266.7x 8.3x 18.6x 9.9x
Price to LTM Earnings 40.0x 8.2x 15.3x 9.1x
Dividend Yield 0.0% 0.0% 4.8% 3.5%
</TABLE>
Comparable Transaction Analysis. Davenport analyzed the transaction
-------------------------------
details of 15 community bank acquisition transactions announced from February,
1999 to June, 2000 in Virginia, Maryland, North Carolina and Tennessee with less
than $300 million in assets (the "Comparable Transactions"). The deal sizes of
the Comparable Transactions ranged from $8.5 million to $65.9 million. The data
available from the Comparable Transactions provided a range of multiples and
ratios including Price to LTM Earnings, Price to Book Value, Price to Assets and
Premium to Market Price. The CNB market price is as of July 7, 2000. These
multiples for the Comparable Transactions and the implied multiples for CNB
based on the proposed merger are summarized in the table below.
<TABLE>
<CAPTION>
Comparable Transactions
---------------------------------------------------------
CNB Low High Median
--- --- ---- ------
<S> <C> <C> <C> <C>
Price to LTM EPS 54.2x 14.6x 31.3x 23.0x
Price to Book Value 1.65x 1.01x 3.53x 2.24x
Price to Assets 19.2% 11.7% 35.8% 22.9%
Premium to Market Price 32.5% 2.9% 69.8% 23.6%
</TABLE>
Discounted Dividend Analysis. Davenport performed a discounted dividend
-----------------------------
analysis to estimate a range of present values per share of CNB stock assuming
CNB continued to operate as a stand-alone entity. This range was determined by
adding (1) the present value of the estimated future dividend stream that CNB
could generate and (2) the present value of the "terminal value" of CNB stock at
December 31, 2004.
In conducting this analysis, Davenport used CNB's financial projections for
2000 and, in conjunction with CNB, generated financial projections for 2001
through 2004. The primary assumptions
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<PAGE>
used in the projections were: total assets growing 5.0% in 2000 and 7.0% per
year in 2001 through 2004; a net interest margin of 4.05% in 2000 growing 15
basis points each year to 4.65% in 2004; and an efficiency ratio of 76.0% in
2000, 72.0% in 2001 and 70% in 2002 through 2004. Dividends were assumed to be
zero in 2000 and 2001 and 30% of net income in 2002 through 2004. Davenport
calculated a terminal value at the end of the forecast period by applying price
to earnings multiples ranging from 10.0x to 14.0x to the 2004 projected net
income. To convert the projected dividends and terminal value to a current
value, Davenport used discount rates ranging from 10.0% to 14.0%. Based upon the
above assumptions, the stand-alone value of CNB common stock ranged from $3.57
to $5.82 per share, as shown in the following table.
Discount Terminal P/E Multiple
----------------------------------------------------------------
Rate 10.0x 11.0x 12.0x 13.0x 14.0x
---- ----- ----- ----- ----- -----
10% $4.26 $4.65 $5.04 $5.43 $5.82
11% $4.07 $4.45 $4.82 $5.19 $5.57
12% $3.90 $4.25 $4.61 $4.97 $5.32
13% $3.73 $4.07 $4.41 $4.75 $5.10
14% $3.57 $3.90 $4.23 $4.55 $4.88
Present Value Analysis. Davenport performed a present value analysis on
-----------------------
the per share stock price of CNB by making assumptions about the Company's
future growth, profitability and stock price and discounting the future stock
prices at the end of five years to the present. Davenport used a range of asset
growth rates and future profitability ratios in excess of those used in the
financial projection prepared in conjunction with the discounted dividend
analysis in order evaluate the impact on the present value of the stock price
should the Company's performance exceed the financial projection. The key
assumptions used in the present value matrix were: an average asset growth rate
ranging from 8.0% to 12.0%; a return on average assets ranging from 0.8% to
1.2%; a terminal P/E multiple ranging from 10.0x to 14.0x; and a discount rate
ranging from 10.0% to 14.0%. The analysis provided a range of per share values
for the stock from a low of $3.38 to a high of $10.17.
Asset Growth Rate 8.0% 9.0% 10.0% 11.0% 12.0%
Average Assets - Year 5 $76,717 $80,335 $84,088 $87,980 $92,105
ROAA - Year 5 0.8% 0.9% 1.0% 1.1% 1.2%
P/E Multiple - Year 5 10.0x 11.0x 12.0x 13.0x 14.0x
Discount Rate 14.0% 13.0% 12.0% 11.0% 10.0%
Present Value $ 3.38 $ 4.57 $ 6.07 $ 7.91 $ 10.17
Contribution Analysis. Davenport reviewed the relative contributions to be
----------------------
made by CNB and FNB to the combined institution based on data at and for the
twelve months ended March 31, 2000. The market value data is as of July 7,
2000. Davenport compared such contributions to the ownership stake that CNB
shareholders would have in the combined institution, assuming that the
consideration to be received by CNB shareholders was all stock. This
information is presented in the following table.
CNB FNB
--- ---
LTM Net Income:
As Reported 3% 97%
Fully Taxed 2% 98%
Calendar 2000 Net Income:
As Reported 6% 94%
Fully Taxed 4% 96%
Book Value 11% 89%
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Loans, net 8% 92%
Deposits 10% 90%
Total Assets 9% 91%
Market Value 10% 90%
Post-Merger Ownership 12% 88%
The summary set forth above does not purport to be a complete description
of the analyses performed by Davenport, but describes, in summary form, the
principal elements of the presentation made by Davenport to the CNB board of
directors on July 10, 2000. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Each of the analyses conducted by Davenport was carried out
in order to provide a different perspective on the transaction and add to the
total mix of information available. Davenport did not form a conclusion as to
whether any individual analysis, considered in isolation, supported or failed to
support an opinion as to fairness from a financial point of view. Rather, in
reaching its conclusion, Davenport considered the results of the analyses in
light of each other and ultimately reached its opinion based on the results of
all analyses taken as a whole. Davenport did not place particular reliance or
weight on any individual analysis, but instead concluded that its analyses,
taken as a whole, supported its determination. Accordingly, notwithstanding the
separate factors summarized above, Davenport believes that its analyses must be
considered as a whole and that selecting portions of its analysis and the
factors considered by it, without considering all analyses and factors, could
create an incomplete or misleading view of the evaluation process underlying its
opinion. In performing its analyses, Davenport made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters. The analyses performed by Davenport are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses.
Pursuant to the terms of an engagement letter dated October 25, 1999
between CNB and Davenport, CNB paid Davenport a fee of $10,000 upon the
execution of the engagement letter and is obligated to pay an additional fee of
approximately $150,000 upon consummation of the Merger. CNB has also agreed to
indemnify Davenport and certain related persons against certain liabilities in
connection with its engagement, including liabilities under the federal
securities laws. The terms of the fee arrangement with Davenport, which
Davenport and CNB believe are customary in transactions of this nature, were
negotiated at arm's length between CNB and Davenport and the CNB Board was aware
of such arrangement, including the fact that a significant portion of the
aggregate fee payable to Davenport is contingent upon consummation of the
Merger. In the past, Davenport has provided investment banking services to CNB
for which services Davenport received customary fees.
Interests of Certain Persons in the Merger
Certain members of CNB's management have interests in the merger in
addition to their interests as shareholders of CNB. These interests are
described below. In each case, the CNB board of directors was aware of these
potential interests, and considered them, among other matters, in approving the
Agreement and Plan of Merger and the transactions contemplated thereby.
Indemnification
FNB has generally agreed to indemnify the officers and directors of CNB
after the merger to the same extent and on the same conditions, as they are
entitled to from CNB before the merger. FNB also
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has agreed to provide directors' and officers' liability insurance for the
present officers and directors of CNB comparable to the coverage currently
provided by CNB before the merger for a period of five years.
Management Following the Merger
CNB will be merged into FNB. As a consequence, the directors and officers
of CNB will no longer serve after the effective date of the merger. The officers
and employees of Community National Bank will not change as a result of the
merger. J. Daniel Hardy, Jr. will be appointed to the Board of Directors of
Community National Bank.
Also on the effective date of the merger, the number of Directors of FNB
shall be increased by one member in Class III whose terms expire at the 2002
annual meeting of shareholders and Hiawatha Nicely, Jr. shall be appointed to
fill the vacancy so created. At the next annual meeting of shareholders of FNB
and at the annual meeting of FNB in 2002, management of FNB will recommend to
shareholders that Mr. Nicely be elected as a member of Class III of directors
whose terms expire at the 2002 and 2005, respectively, annual meeting of
shareholders, provided that he has not resigned, died or otherwise been removed
from office.
In addition, under the merger agreement, all awards under CNB's stock
option plans to officers and directors of CNB will be treated as follows: (1)
50% of the options held by a holder will be converted into and become options to
acquire FNB common stock and (2) with respect to the remaining 50% of such
options, the amount by which $10.60 exceeds the exercise price for such options,
will be converted into cash or FNB stock in the merger in the same manner as
provided for the holders of CNB common stock in the merger.
Change in Control Agreement
On the effective date of the merger, FNB and Community National Bank will
enter into change of control agreement with Phillip Baker, President and Chief
Executive Officer of Community National Bank. The agreement provides for twelve
months of pay and benefits upon a change of control of FNB. The agreement is
similar to agreements between FNB and other similarly situated officers of FNB
and First National Bank.
Employee Benefit Plan
Upon consummation of the merger, FNB may either make available
participation in its employee benefit plans and programs to CNB's employees or
continue the plans and programs of CNB that it currently provides. If CNB's
employees become eligible to participate in FNB's employee benefit plans and
programs, they will do so on substantially the same basis as FNB's employees.
Subject to restrictions and limitations that applicable law may impose, FNB will
treat the service of a CNB employee with CNB as service with FNB for purposes of
all employee benefit plans and programs (other than for benefit accrual, except
where a CNB plan is continued). FNB will also honor CNB's obligations for all
accrued and unused vacation, sick leave and personal leave and all deferred
compensation contracts and agreements that CNB has previously disclosed to FNB.
Differences In Rights of Shareholders
Both FNB and CNB are corporations subject to the provisions of the Virginia
Stock Corporation Act. CNB's articles of incorporation and bylaws presently
govern CNB's shareholder's rights. Upon
26
<PAGE>
consummation of the merger and for those CNB's shareholders who become
shareholders of FNB, the articles of incorporation and bylaws of FNB will govern
your shareholder's rights.
There are a few material differences between the rights of a CNB
shareholder under CNB's articles of incorporation and bylaws, on the one hand,
and the rights of a FNB shareholder under the articles of incorporation and
bylaws of FNB, on the other hand, which are disclosed in the section
"Differences in the Rights of FNB Shareholders and CNB Shareholders" on
page ___.
Terms of the Agreement and Plan of Merger
Conditions to the Merger
The obligations of CNB and FNB to consummate the merger are subject to the
satisfaction or written waiver of the following conditions:
. approval of the Agreement and Plan of Merger by the requisite
shareholder vote of the CNB shareholders;
. receipt of all necessary regulatory approvals not conditioned or
restricted in a manner that, in the judgment of the boards of directors
of FNB or CNB, materially adversely affects the economic or business
benefits of the merger so as to render inadvisable or unduly burdensome
consummation of the merger;
. the absence of actual or threatened proceedings before a court or other
governmental body relating to the merger;
. the receipt of an opinion of counsel as to the federal income tax
consequences of the merger;
. the Registration Statement of which this proxy statement/prospectus is a
part shall have been declared effective by the SEC;
. performance by the other company of its obligations under the Agreement
and Plan of Merger;
. the accuracy, in all material respects, of the representations and
warranties of the other company contained in the Agreement and Plan of
Merger; and
. the receipt of opinions and certificates from the other company.
Regulatory Approvals
Federal Reserve Board
The merger is subject to prior approval by the Board of Governors of the
Federal Reserve System under Section 3 of the Bank Holding Company Act and prior
notice to the Federal Reserve Board under Section 4 of the BHC Act. The BHC Act
requires the Federal Reserve Board, when considering a transaction such as the
merger, to take into consideration the financial and managerial resources
(including the competence, experience and integrity of the officers, directors
and principal shareholders)
27
<PAGE>
and future prospects of the institutions and the convenience and needs of the
communities to be served. In addition, under the Community Reinvestment Act of
1977, as amended, the Federal Reserve Board must take into account the record of
performance of the acquiring institution in meeting the credit needs of the
entire community, including low- and moderate-income neighborhoods, served by
such institution. FNB filed its application and notice regarding the merger with
the Federal Reserve Board on September 13, 2000.
The BHC Act also prohibits the Federal Reserve Board from approving a
merger if it would result in a monopoly or be in furtherance of any combination
or conspiracy to monopolize or to attempt to monopolize the business of banking
in any part of the United States, or if its effect in any section of the country
would be substantially to lessen competition or to tend to create a monopoly, or
if it would in any other manner result in a restraint of trade, unless the
Federal Reserve Board finds that the anticompetitive effects of the merger are
clearly outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the communities to be
served.
The Federal Reserve Board will furnish notice and a copy of the application
for approval of the merger to the Office of Comptroller of the Currency. The OCC
has 30 days to submit its views and recommendations to the Federal Reserve
Board. The Federal Reserve Board is required to hold a public hearing in the
event it receives a written recommendation of disapproval of the application
from the OCC within such 30-day period. Furthermore, applicable Federal law
provides for the publication of notice and opportunity for public comment on
applications filed with the Federal Reserve Board and authorizes such agency to
permit interested parties to participate in the proceedings. If an interested
party is permitted to participate, such participation could delay the regulatory
approvals required for consummation of the merger.
Under Section 4 of the BHC Act and related regulations, the Federal Reserve
Board must consider whether the performance of FNB's and CNB's nonbanking
activities on a combined basis can reasonably be expected to produce benefits to
the public (such as greater convenience, increased competition and gains in
efficiency) that outweigh possible adverse effects (such as undue concentration
of resources, decreased or unfair competition, conflicts of interest and unsound
banking practices). This consideration includes an evaluation of the financial
and managerial resources of FNB and CNB and the effect of the proposed
transaction on those resources.
Assuming Federal Reserve Board approval, the merger may not be consummated
until 30 days after such approval, during which time the United States
Department of Justice may challenge the merger on antitrust grounds. The
commencement of an antitrust action would stay the effectiveness of the Federal
Reserve Board's approval unless a court specifically ordered otherwise. With the
approval of the Federal Reserve Board and the concurrence of the Department of
Justice, the waiting period may be reduced to no less than 15 days. FNB and CNB
believe that they will be able to obtain all requisite regulatory approvals on a
timely basis without the imposition of any condition that would have a material
adverse effect on FNB.
State Authorities
Consummation of the merger is subject to the prior approval of the State
Corporation Commission of Virginia. The Virginia Commission will consider: the
safety and soundness of CNB and Community National Bank; the qualification and
experience of FNB and its directors and officers; whether the merger would be
prejudicial to depositors, creditors, beneficiaries of fiduciary accounts or
shareholders of FNB, CNB or their banking subsidiaries; and whether the merger
would be in the public interest. The merger may also be subject to the approval
of, or notice to, other state authorities under various state bank, insurance
and securities regulatory statutes.
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Status of Regulatory Approvals and Other Information
FNB and CNB have filed (or will promptly file) all applications and notices
and have taken (or will promptly take) other appropriate action with respect to
any other requisite approvals or other action of any governmental authority. The
merger agreement provides that the obligation of each of FNB and CNB to
consummate the merger is conditioned upon, among other things, (i) the receipt
of all requisite regulatory approvals, including the approvals of the Federal
Reserve Board and the Virginia Commission, (ii) the termination or expiration of
all statutory or regulatory waiting periods in respect thereof and (iii) no such
approvals containing conditions, restrictions or requirements which the FNB
Board reasonably determines in good faith would, after the effective date of the
merger, have a material adverse effect on FNB and its subsidiaries taken as a
whole or reduce the benefits of the transactions contemplated in the merger
agreement to such a degree that FNB would not have entered into the merger
agreement had such been known at the date of the merger agreement.
The merger cannot proceed in the absence of the requisite regulatory
approvals. There can be no assurances that all such regulatory approvals will be
obtained or as to the dates of such approvals. There can also be no assurance
that such approvals will not contain a condition, restriction or requirement
that causes such approvals to fail to satisfy the conditions set forth in the
merger agreement.
Waiver, Amendment and Termination
At any time on or before the effective date of the merger, any term or
condition of the merger may be waived by the party which is entitled to the
benefits thereof and without shareholder approval. The Agreement and Plan of
Merger may be amended at any time before the merger by agreement of the parties
whether before or after the shareholder meetings. However, any material change
in a material term of the Agreement and Plan of Merger would require a
resolicitation of the CNB shareholders. Such a material change would include,
but not be limited to, a change in the exchange ratio or a change in the tax
consequences to the CNB shareholders.
The Agreement and Plan of Merger may be terminated by FNB or CNB, whether
before or after the approval of the merger by the shareholders of CNB:
. by mutual consent of FNB and CNB;
. by either company if the closing does not occur on or before January 10,
2001;
. by either company if the required CNB shareholder vote is not obtained;
. by either company if other conditions to the merger have not been met or
waived;
. by either company based on an uncured material breach of the other; or
. by FNB due to the happening of a Termination Event (as described in
"Termination Fees" below).
Conduct Of Business Pending the Merger
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CNB and FNB have agreed in the merger agreement, unless the prior written
consent of the other party is obtained and except as otherwise contemplated by
the merger agreement, not to, directly or through any subsidiaries:
. make any change in its authorized capital stock, or issue or sell any
additional shares;
. make any changes in the composition, level of compensation or title of
its officers, directors or other key management personnel, except in the
ordinary course of business;
. enter into any bonus, incentive compensation, stock option, deferred
compensation or other benefit plan or employment or consulting
agreement, except in the ordinary course of business;
. knowingly waive any right to substantial value;
. amend its bylaws or articles of incorporation;
. change its lending, investment or other material policies; or
. incur any obligation or liability except in the ordinary course of its
business.
Expenses
The merger agreement provides that each party shall be responsible for all
expenses incurred by it in connection with the negotiation and consummation of
the transactions contemplated by the merger agreement.
Termination Fees
CNB has agreed to pay FNB a termination fee of $500,000.00 in cash within
five (5) business days after written notice that FNB has terminated the merger
agreement because:
. CNB, without having received FNB's prior written consent, enters into an
agreement with any person to be acquired through a merger, or purchase
or similar transaction by someone other than FNB or such other person
acquires from CNB securities representing ten percent (10%) or more of
the common stock of CNB; or
. another person acquires beneficial ownership or a right to acquire
beneficial ownership of twenty percent (20%) or more of the outstanding
common stock of CNB after July 10, 2000; or
. another person makes a bona fide proposal to CNB by public announcement
or written communication that becomes the subject of public disclosure
to acquire CNB by merger, share exchange, purchase of all or
substantially all of its assets or other similar transactions and
following such a bona fide proposal the shareholders of CNB vote not to
approve the merger agreement.
However, CNB shall not be required to pay FNB the termination fee if the
Boards of Directors of FNB and CNB mutually consent to terminate or if either
party terminates the merger agreement because a condition of the merger can not
be met or if the transaction does not close by January 10, 2001; so long as
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the failure to meet a condition of the merger or to close by January 10, 2001
was not due to one of the events listed above.
In addition, if either FNB or CNB terminates the merger agreement because
of a material breach or failure to comply with obligations under the merger
agreement, such company will be required to reimburse the other for its costs
and expenses. Finally, if the shareholders of CNB fail to approve the merger,
CNB shall pay FNB $10,000 to help defray the costs of expenses of the
transaction.
Resales of FNB Common Stock
The shares of FNB Common Stock issued in connection with the merger will be
freely transferable under the Securities Act, except for shares issued to any
shareholder who may be deemed to be an "affiliate" (generally including, without
limitation, directors, some executive officers, and beneficial owners of 10% or
more of any class of capital stock) of CNB for purposes of Rule 145 under the
Securities Act as of the date of the Special Meeting. Such affiliates may not
sell their shares of FNB Common Stock acquired in connection with the merger
except pursuant to an effective registration statement under the Securities Act
or other applicable exemption from the registration requirements of the
Securities Act.
Election and Allocation of Consideration
Election
Holders of shares of CNB common stock issued and outstanding immediately
prior to the election deadline will be entitled to choose one of the
consideration options listed below on their form of election:
. to receive cash consideration for each share;
. to receive FNB common stock for each share;
. to exchange some of their shares for cash and some for FNB common stock;
or
. to indicate no preference as to type of consideration.
In the case of shareholders who do not indicate a preference for cash or
FNB common stock or who do not make an election, FNB will determine whether to
distribute cash or FNB common stock or a combination of cash and FNB common
stock.
A form of election and complete instructions for properly making an
election to receive cash, FNB common stock or a combination of cash and FNB
common stock will be mailed to shareholders not more than 60 days nor less than
30 days before the anticipated day of the closing of the merger.
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Limits on Cash and Stock Consideration
Under the merger agreement, a fixed amount of cash consideration will be
paid to shareholders of CNB common stock in the merger. The cash amount is equal
to $4,909,915.00, or approximately 50% of the total consideration received by
CNB shareholders in the transaction. The number of common shares of CNB to be
converted into the right to receive cash consideration under the merger
agreement will be equal to $4,909,915.00 divided by $10.60 (the number of cash
shares). The number of common shares of CNB to be converted into the right to
receive FNB common stock shall equal the number of CNB shares eligible to
receive consideration minus the number of CNB shares converted into cash.
Allocation
If the aggregate number of shares of CNB common stock for which cash is
elected exceeds the number of cash shares, then:
. those shares with respect to which stock elections or no elections were
made will be exchanged for FNB common stock except that cash, without
interest, will be paid in place of fractional shares of FNB common
stock; and
. with respect to those shares for which cash elections were made, cash
consideration will be prorated, by multiplying the number of shares each
CNB shareholder has elected to exchange for cash by a fraction, the
numerator of which is the number of cash shares and the denominator of
which is the aggregate number of shares of CNB common stock for which a
cash election has been made; and
. All shares not converted into cash above will be converted into shares
of FNB common stock, except that cash, without interest, will be paid in
place of any fractional shares of FNB common stock.
If the aggregate number of shares of CNB common stock for which stock
consideration is elected exceeds 50% of the total consideration for the
transaction, then:
. all shares with respect to which a cash election or no election was made
will be exchanged for cash;
. with respect to those shares for which stock elections were made, cash
will be prorated, by multiplying the number of shares each CNB
shareholder has elected to exchange for stock by a fraction, the
numerator of which is the number of cash shares, less the number of
shares exchanged for cash above and the denominator of which is the
aggregate number of shares of CNB common stock for which a stock
election has been made; and
. all shares for which stock was elected that are not exchanged for cash
above will be converted into the right to receive shares of FNB common
stock, except that cash, without interest, will be paid in place of
fractional shares of FNB common stock.
If the aggregate number of shares of CNB common stock for which cash was
elected does not exceed the number of cash shares, and the number of shares of
CNB common stock for which stock consideration was elected does not exceed the
50% of the total consideration for the transaction, then:
. all shares for which a cash election was made will be exchanged for
cash;
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. all shares for which a stock election was made will be exchanged for
shares of FNB common stock;
. all shares for which no election was made will receive cash or shares of
FNB common stock, as determined by FNB; and
. cash, without interest, will be paid in lieu of fractional shares of FNB
common stock.
As a result of the limitations described above, the amount of cash and
shares of FNB common stock received by shareholders may differ from their actual
elections. If the stock election is over-subscribed by the CNB shareholders, a
shareholder who elected FNB common stock may receive part of his consideration
in the form of cash. If the cash election is over-subscribed by the
shareholders, a shareholder who elected cash may receive part of his
consideration in the form of shares of FNB common stock.
Exchange of CNB Stock
Exchange Agent
FNB will act as exchange agent in connection with the merger.
Exchange Procedures
At least 30 and no more than 60 days before the anticipated day of the
closing of the merger, the exchange agent will mail a form of election to each
shareholder of record of CNB common stock. The exchange agent will use its best
efforts to make a form of election available to all persons who become
shareholders of CNB during the period between the voting record date and the
closing of the merger. To be effective, a form of election must be:
. properly completed and signed by the shareholder of record; and
. delivered to the exchange agent by no later than 5:00 p.m. on the fifth
business day immediately preceding the closing of the merger.
Holders may revoke their elections by filing a written revocation with the
exchange agent before the deadline for submitting elections. All elections will
be automatically revoked if the exchange agent receives written notice from FNB
and CNB that the merger has been abandoned. FNB, and, at FNB's option, the
exchange agent, will have the discretion to determine whether forms of election
have been properly completed, signed and submitted or revoked, and to disregard
immaterial defects in the forms of election.
Promptly after the closing of the merger, the exchange agent will mail the
following materials to each shareholder of record of CNB shares as of the
closing of the merger:
. a letter of transmittal for use in submitting such shares to the
exchange agent for exchange; and
. instructions explaining what the shareholder must do to effect the
surrender of CNB certificates in exchange for consideration to be issued
in the merger.
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Shareholders should complete and sign the letter of transmittal and return
it to the exchange agent together with his or her certificates in accordance
with the instructions.
Lost, Stolen or Destroyed Certificates
If certificates for any CNB common stock have been lost, stolen or
destroyed, the shareholder must submit an affidavit to that effect to the
exchange agent. FNB may also require the shareholder to deliver a bond to the
exchange agent in an amount reasonably required to indemnify the exchange agent
against claims with respect to lost certificates.
Transfer of Ownership
The exchange agent will issue a certificate for shares of FNB common stock
in a name other than that in which the CNB certificate surrendered in exchange
therefor was registered only if the certificate surrendered is properly endorsed
and otherwise in proper form for transfer. The person requesting the exchange
must also have paid any required transfer or other taxes or established to the
satisfaction of FNB or CNB that no tax is payable.
Payments Following Surrender
Until they have surrendered their certificate, holders of certificates
entitled to receive FNB common stock will not receive:
. dividends and other distributions with respect to FNB common stock that
they are entitled to receive from the merger and that are declared or
made with a record date after the closing of the merger; or
. cash, without interest, payment in place of fractional shares of FNB
common stock.
At the time of surrender, shareholders will receive any cash due to them,
including cash in lieu of fractional shares, dividends or other distributions
paid with respect to whole FNB shares, if such distributions had a record date
after the closing of the merger. Such shareholders will also be paid on the
appropriate payment date the amount of dividends or other distributions with a
record date after the closing of the merger, but prior to surrender, and a
payment date subsequent to surrender.
Shareholders should not forward their certificates to the exchange agent,
FNB or CNB until they have received a letter of transmittal. Shareholders should
not return certificates with the enclosed proxy. A form of election and complete
instructions for properly making an election to receive cash, FNB common stock
or a combination of cash and stock will be mailed to shareholders under separate
cover not more than 60 days nor less than 30 days before the anticipated date of
the closing of the merger.
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Additional Acquisition
Merger with SWVA Bancshares, Inc.
On August 7, 2000, FNB entered into a merger agreement with SWVA Bancshares,
Inc. (SWVA), the parent of Southwest Virginia Savings Bank, F.S.B., pursuant to
which SWVA will be merged with and into FNB.
Under the terms of the merger agreement with SWVA, shareholders of SWVA will
receive consideration valued at $20.25 for each share of SWVA common stock, in
the form of cash, FNB common stock or a combination of cash and stock at each
SWVA shareholders' election. The cash portion of the consideration, however,
will be limited to 20% of the total consideration paid. For those shares of SWVA
common stock which are converted into FNB common stock, the number of FNB shares
issued will be determined by dividing $20.25 by the average closing price of FNB
shares for the 30 trading days ending 10 days prior to the closing of the SWVA
merger, but in no case will FNB be required to issue more than 1.324 shares or
will SWVA be required to accept less than 1.083 shares for each share of SWVA
common stock. The SWVA merger will be structured as a tax-free reorganization to
the extent of the SWVA common stock exchanged for FNB common stock.
Assuming the SWVA transaction closes and 80% of the shares are exchanged for
FNB stock (and assuming no CNB dissenting stockholders), the percentage of FNB
shares owned by former CNB stockholders would decrease from 6.7% to 6.2%.
Both First National Bank and Southwest Virginia Savings Bank, FSB will
continue operating under their respective managements with their current names
as wholly-owned subsidiaries of FNB. Each bank will be managed by its own board
of directors and each bank's customers will see no change in day to day
operations.
The SWVA merger is expected to be accounted for by the purchase-accounting
method. The SWVA merger is subject to the approval of the shareholders of SWVA
and appropriate regulatory agencies and other standard conditions for
transactions of this nature and is expected to close in the first quarter of
2000.
Additional information concerning the SWVA merger and financial information
relating to SWVA are contained in FNB's Current Report on Form 8-K dated August
15, 2000, which is incorporated by reference herein. See "Available
Information" and "Incorporation of Certain Information by Reference."
The Meeting
General
We are furnishing this proxy statement/prospectus in connection with the
solicitation of proxies by the board of directors of CNB for use at the special
meeting of CNB shareholders including any adjournments or postponements thereof,
to be held at _______ _.m. on [December 5], 2000, located at the
__________________________________, ___________, Virginia.
The purpose of the special meeting is to consider and vote upon the Agreement
and Plan of Merger, dated July 10, 2000, by and between CNB and FNB and a
related Plan of Merger. Copies are attached to this proxy statement/prospectus
as Appendix A. For a description of the Agreement and Plan of Merger, see
"Terms of the Agreement and Plan of Merger" on page __.
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The Agreement and Plan of Merger provides that CNB will merge into FNB with
Community National Bank thereby becoming a wholly owned subsidiary of FNB. In
the merger in exchange for each share of CNB common stock held, CNB shareholders
will be given the option to receive either $10.60 in cash or shares of FNB
common stock, whose aggregate market value equals $10.60, provided that in no
event will FNB issue more than 0.642 shares or less than 0.544 shares for each
outstanding share of CNB common stock. The ratio of shares of FNB's common
stock that will be exchanged for each outstanding share of CNB common stock is
the exchange ratio. In either case, this option is subject to the limitation
that the aggregate amount of cash to be distributed to CNB shareholders in the
merger shall be equal to $4,909,915.00 (plus any cash paid for fractional
shares). FNB has the right to change this amount to more closely follow the
actual elections of CNB shareholders as long as the change in the cash
consideration does not affect the desired tax treatment of the merger.
Record Date; Voting Power
Only holders of record of shares of CNB common stock at the close of business
on [October 20], 2000 are entitled to notice of and to vote at the special
meeting. As of such date, there were ___________ issued and outstanding shares
of CNB common stock held by approximately ____ holders of record. Holders of
record of CNB common stock on [October 20], 2000 are entitled to one vote per
share on any matter that may properly come before the special meeting. Brokers
who hold shares of CNB common stock as nominees will not have discretionary
authority to vote such shares in the absence of instructions from the beneficial
owners thereof. Any such shares of CNB common stock for which a broker has
submitted an executed proxy but for which the beneficial owner thereof has not
given instructions on voting to such broker are referred to as "broker non-
votes."
Vote Required
The presence in person or by proxy of the holders of a majority of the shares
of CNB common stock outstanding on the CNB record date will constitute a quorum
for the transaction of business at the special meeting. Abstentions and broker
non-votes will be counted for purposes of establishing the presence of a quorum
at the special meeting. The approval of the proposal to approve the Agreement
and Plan of Merger requires the affirmative vote of holders of two-thirds of the
shares of CNB common stock outstanding on [October 20], 2000. Broker non-votes
and abstentions will be counted and will have the effect of a vote against the
proposal to approve the Agreement and Plan of Merger.
On September 8, 2000, the executive officers and directors of CNB, including
their affiliates, had voting power with respect to an aggregate of 404,613
shares of CNB common stock or approximately 43.68% of the shares of CNB common
stock then outstanding. CNB currently expects that such directors and officers
will vote all of such shares in favor of the proposal to approve the Agreement
and Plan of Merger. In addition, on September 8, 2000, the directors and
executive officers of FNB did not beneficially own any shares of CNB common
stock.
Recommendation of the Board of Directors of CNB
The CNB board has unanimously approved and adopted the Agreement and Plan of
Merger. The CNB board believes that the merger is fair to and in the best
interests of CNB and the CNB shareholders and recommends that the CNB
shareholders vote "FOR" approval of the Agreement and Plan of Merger and the
transactions contemplated thereby. See "The Merger - Reasons of CNB for the
Merger" on page ___.
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Solicitation and Revocation of Proxies
A form of proxy is enclosed with this document. All shares of CNB common stock
represented by properly executed proxies (whether or not through the return of
the enclosed proxy card) will, unless such proxies have been previously revoked,
be voted in accordance with the instructions indicated on such proxies. If no
instructions are indicated, such shares will be voted FOR approval of the
Agreement and Plan of Merger and in the discretion of the proxy holder as to any
other matter, which may properly come before the special meeting.
You are requested to vote by completing, dating and signing the accompanying
proxy card and returning it promptly to CNB in the enclosed, postage-paid
envelope. You should not send stock certificates with your proxy card.
Any CNB shareholder that has previously delivered a properly executed proxy
may revoke such proxy at any time before its exercise. A proxy may be revoked
either by (i) filing with the Secretary of CNB prior to the special meeting, at
CNB's principal executive offices, either a written revocation of such proxy or
a duly executed proxy bearing a later date or (ii) attending the special meeting
and voting in person. Presence at the special meeting will not revoke a
shareholder's proxy unless such shareholder votes in person.
The cost of soliciting proxies will be borne by CNB. Proxies may be solicited
by personal interview, mail or telephone. In addition, CNB may reimburse
brokerage firms and other persons representing beneficial owners of shares of
CNB common stock for their expenses in forwarding solicitation materials to
beneficial owners. Proxies may also be solicited by some of CNB's executive
officers, directors and regular employees, without additional compensation,
personally or by telephone or facsimile transmission.
Other Matters
CNB is unaware of any matter to be presented at the CNB meeting other than the
proposal to approve the Agreement and Plan of Merger. If other matters are
properly presented at the special meeting, the persons named in the enclosed
form of proxy will have authority to vote all properly executed proxies in
accordance with their judgment on any such matter, including, without
limitation, any proposal to adjourn or postpone the special meeting, provided
that no proxy that has been designated to vote against approval of the Agreement
and Plan of Merger will be voted in favor of any proposal to adjourn or postpone
the special meeting for the purpose of soliciting additional proxies to approve
the Agreement and Plan of Merger.
The Companies
CNB
General
CNB was incorporated as a Virginia stock corporation on April 29, 1993,
primarily to own and control all of the capital stock of Community National
Bank. CNB presently engages in no business other than owning and managing the
Bank. The Bank is a national banking association which engages in a commercial
banking business from its main office in Pulaski, Virginia. The Bank's deposits
are insured by the Federal Deposit Insurance Corporation, and it is a member of
the Federal Reserve System.
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In July 1994, CNB completed its initial public offering of 437,225 shares of
its common stock, $5.00 par value per share, at a price of $10.00 per share,
pursuant to its Prospectus dated November 16, 1993. CNB received final approval
of its application to charter the Bank from the Office of Comptroller of the
Currency and final approval of its application for deposit insurance for the
bank from the Federal Deposit Insurance Corporation on August 29, 1994. On
August 29, 1994, the Bank opened for business.
Location and Service Area
The Bank's primary service area is Pulaski County and includes portions of
Giles, Montgomery, Bland, and Wythe Counties and the City of Radford, Virginia.
The Bank conducts a general commercial banking business in its service area,
emphasizing the banking needs of small-to-medium sized businesses, professional
concerns and individuals. The Bank operates from its main office at 900
Memorial Drive, Pulaski, Virginia, which is at the corner of Memorial Drive and
Lee Highway (U.S. Route 11). The Bank draws most of its customer deposits and
conducts most of its lending transactions from within its primary service area.
The Bank is the only locally owned and operated commercial bank in Pulaski
County.
Pulaski County is located in the New River Valley area of Southwest Virginia.
Pulaski, the county seat, is approximately 53 miles southwest of Roanoke, 90
miles northeast of the Tri-Cities, Tennessee (Johnson City, Kingsport and
Bristol), and 150 miles north of Charlotte, North Carolina. Pulaski County had
a population of 34,500 in 1994 and a median family income of $28,057 in 1989.
Virginia Polytechnic Institute and State University, a four-year, comprehensive
land grant university with over 25,000 students, is located approximately 15
miles from Pulaski County.
The principal components of the economy of Pulaski County are manufacturing
(which accounts for the largest share of all economic activity), agriculture,
and tourism. Manufacturing employment is concentrated in the automotive,
furniture and textile industries. The largest industrial employers in the
county include Volvo-GM Heavy Trucks (3,500 employees), Pulaski Furniture (1,500
employees), Renfro Corporation (a textile manufacturer with 1,000 employees) and
Jefferson Mills, Inc. (350 employees). Agricultural production, consisting
primarily of beef cattle and dairy farming contributes over $12 million per year
to the county's economy. Claytor Lake State Park, located in the county,
attracts over 800,000 visitors each year, offering swimming, boating, fishing,
hiking and other outdoor sports.
Banking Services
The Bank offers a full range of deposit services that are typically available
in most banks and savings and loan associations, including checking accounts,
NOW accounts, savings accounts and other time deposits of various types, ranging
from daily money market accounts to longer-term certificates of deposit. The
transaction accounts and time certificates are tailored to the Bank's principal
market area at rates competitive to those offered in the area. In addition, the
Bank offers certain retirement account services, such as Individual Retirement
Accounts. All deposits accounts are insured by the FDIC up to the maximum
amount allowed by law (generally, $100,000 per depositor subject to aggregation
rules). The Bank solicits these accounts from individuals, businesses,
associations, organizations, and governmental entities.
The Bank also offers a full range of short-to-medium term commercial and
personal loans. Commercial loans include both secured and unsecured loans for
working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans for
financing automobiles, home improvements, education and personal investments.
The Bank also makes real estate construction and acquisition loans and
originates and holds fixed and variable rate mortgage loans. The
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Bank's lending activities are subject to a variety of lending limits imposed by
federal law. While differing limits apply in certain circumstances based on the
type of loan or the nature of the borrower (including borrowers' relationship to
the Bank), in general the Bank is subject to a loan-to-one borrower limit of an
amount equal to 15% of the Bank's unimpaired capital and surplus, or 25% of the
unimpaired capital and surplus if the excess over 15% is approved by the board
of directors of the Bank and is fully secured by readily marketable collateral.
Other bank services include mortgage loan origination, cash management
services, travelers checks, direct deposit of payroll and social security
checks, and automated drafts for various accounts. The Bank is associated with
Most Plus & VISA shared networks of automated teller machines and debit card
retail locations that Bank customers may use throughout Virginia and other
regions. The Bank also offers VISA credit card services.
The banking business is highly competitive. The Bank competes as a financial
intermediary with other commercial banks, savings and loan associations, credit
unions and money market funds operating in Pulaski County and elsewhere, most of
which are larger and have greater resources than the Bank. As of March 20,
2000, there were six commercial banks operating a total of eleven offices in
Pulaski County, Virginia. The Bank is the only one of these institutions that
is locally owned and operated. First Virginia Bank is an in-state bank with
three offices in Pulaski County, but is headquartered in Northern Virginia.
SunTrust Bank with one office in the county, is a regional bank based in
Atlanta. First Union Bank, a Charlotte, North Carolina based regional bank
operates one branch in the county. Bank of America, with two offices in Pulaski
County, is an affiliate bank of southeast regional bank holding company also
headquartered in Charlotte, North Carolina. First Citizens Bank, a regional
bank with offices in North Carolina and Virginia, headquartered in Raleigh,
operates one branch in Pulaski County. First National Bank of Christiansburg, a
community bank which is headquartered in nearby Montgomery County and owned by
FNB, operates a branch in Pulaski County.
In addition to the commercial banks described above, First American Bank, a
federally chartered savings association, operates two branches in Pulaski
County. Two credit unions also operate in the county. In addition, the Bank is
subject to aggressive competition from a wide variety of financial service
companies offering an expansive array of financial products and services.
The Company believes that the community focus of the Bank, with its emphasis
on service to small businesses, individuals, and professional concerns, gives it
an advantage in some segments of this market.
FNB
General
Subsequent to December 31, 1995, the Board of Directors of First National Bank
approved a reorganization whereby a bank holding company (FNB Corporation) was
incorporated under the laws of the Commonwealth of Virginia. On June 11, 1996,
the shareholders of the Bank approved a plan for the holding company to exchange
one share of its stock for each share of stock of the Bank. A registration
statement was filed with the SEC to register the stock of the holding company,
and such registration statement was subsequently declared effective by the SEC.
On July 11, 1996, the OCC approved the plan, and the exchange was subsequently
consummated. As a result, the Bank became a wholly owned subsidiary of the
holding company during the third quarter of 1996, and the holding company began
filing periodic reports under the Securities Exchange Act of 1934. Prior to the
consummation of the exchange, the Bank filed periodic reports with the OCC.
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First National Bank, which was organized in 1905, does a general banking
business, serving the commercial, agricultural, and personal banking needs of
its trade territory, commonly referred to as the New River Valley, which
consists of Montgomery County, Virginia and portions of surrounding counties.
The Bank engages in and offers a full range of banking services, including trust
services; demand, savings, and time deposits used to fund the loan demand in our
trade area; commercial, farm, consumer installment, mortgage, credit card, FHA
and SBA guaranteed loans.
Under national banking law, nontraditional activities of a bank must be
operated through a corporate subsidiary of the bank. During 1992, FNB formed a
wholly-owned subsidiary in order to expand its business operations. FNB
Financial Services, Inc. is a member of the Virginia Title Center, L.L.C. and
acts as an agent in the issuance of title insurance policies. Additionally,
this subsidiary has been licensed by the Commonwealth of Virginia to offer
annuity products through First National's Trust Department.
The local economy is tied primarily to the areas' three largest employers -
Virginia Polytechnic Institute and State University, with a student population
in excess of 25,000; Radford University, with a student population in excess of
8,000; and the Radford Arsenal, a large munitions plant operated under contract
to the U.S. Army by the Hercules Corporation. Other industries include a wide
variety of manufacturing concerns and agriculture-related enterprises. The
Bank's main office is located in Christiansburg, the County Seat, with offices
strategically located to take advantage of its trade area's population mix. Of
the Bank's twelve full service offices, nine are located in Montgomery County,
one in the City of Radford, one in the Town of Dublin and one in Wythe County.
One paying and receiving office is located in Montgomery County.
Competition
FNB is the largest bank in the area, with approximately 60% of those deposits
held by independent banks. It is estimated that the Corporation holds 36% of
total deposits in its primary trade area including the offices of those state-
wide and multi-state bank holding companies located in our trade area.
Competition in the trade area consists of state-wide and multi-state bank
holding companies, independent banks, and credit unions.
Loan Commitments
The portfolio is not concentrated within any single industry or group of
related industries, nor is there any material risk other than that which is
expected in the normal course of business of a bank in this location. FNB
policy establishes lending limits for each officer. Loan requests for amounts
exceeding loan officer lending authority are referred to the officer loan
committee which can approve loans up to 80% of the bank's legal lending limit.
Loan requests exceeding this limit are referred to the Executive Committee of
the Board of Directors.
Description of FNB Capital Stock
The descriptive information below outlines some provisions of FNB's articles
of incorporation and bylaws and the Virginia Business Corporation Act. The
information does not purport to be complete and is qualified in all respects by
reference to the provisions of FNB's articles of incorporation and bylaws, which
are incorporated by reference as exhibits to the registration statement, and the
Virginia Stock Corporation Act. See "Available Information."
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<PAGE>
Common Stock
FNB's articles of incorporation authorized the issuance of up to ten million
shares of common stock, par value $5.00 per share.
Dividends
The holders of FNB common stock are entitled to share ratably in dividends
when and if declared by the FNB Board from funds legally available therefor.
Voting Rights
Each holder of FNB Common Stock has one vote for each share held on matters
presented for consideration by the shareholders.
Classification of Board of Directors
The FNB Board is divided into three classes, each serving three-year terms, so
that approximately one-third of the directors of FNB are elected at each annual
meeting of the shareholders of FNB. Classification of the FNB Board has the
effect of decreasing the number of directors that could be elected in a single
year by any person who seeks to elect its designees to a majority of the seats
on the FNB Board and thereby could impede a change in control of FNB.
Preemptive Rights
The holders of FNB common stock have no preemptive rights to acquire any
additional shares of FNB Common Stock.
Issuance of Stock
FNB's articles of incorporation authorize the FNB Board to issue authorized
shares of FNB common stock without shareholder approval. However, FNB Common
Stock is listed on the NASDAQ National Market System, which requires shareholder
approval of the issuance of additional shares of FNB common stock under some
circumstances.
Liquidation Rights
In the event of liquidation, dissolution or winding-up of FNB, whether
voluntary or involuntary, the holders of FNB common stock will be entitled to
share ratably in any of its assets or funds that are available for distribution
to its shareholders after the satisfaction of its liabilities (or after adequate
provision is made therefor).
Control Acquisitions
The Federal Change in Bank Control Act of 1978, as amended, prohibits a
person or group of persons from acquiring "control" of a bank holding company
unless the Federal Reserve Board has been given 60 days' prior written notice of
such proposed acquisition and within that time period the Federal Reserve Board
has not issued a notice disapproving the proposed acquisition or extending for
up to another 30 days the period during which such a disapproval may be issued.
An acquisition may be made prior to the expiration of the disapproval period if
the Federal Reserve Board issues written notice of its intent not to disapprove
the action. Under a rebuttable presumption established by the Federal Reserve
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<PAGE>
Board, the acquisition of more than 10% of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act would, under the circumstances set forth in the presumption,
constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Federal Reserve Board under the BHC Act before acquiring 25% (5% in the case of
an acquirer that is a bank holding company) or more of the outstanding shares of
FNB common stock, or such lesser number of shares as constitute control over
FNB.
State Anti-Takeover Statutes
The Virginia Stock Corporation Act restricts transactions between a
corporation and its affiliates and potential acquirors. The summary below is
necessarily general and is not intended to be a complete description of all the
features and consequences of those provisions, and is qualified in its entirety
by reference to the statutory provisions contained in the Virginia Stock
Corporation Act. Because both CNB and FNB are Virginia corporations, the
provisions of the Virginia Stock Corporation Act described below apply to CNB
and FNB and will continue to apply to CNB after the merger.
Affiliated Transactions. The Virginia Stock Corporation Act contains
provisions governing "Affiliated Transactions," found at Sections 13.1-725 -
727.1 of the Virginia Stock Corporation Act. Affiliated Transactions include
certain affiliations and share exchanges, certain material dispositions of
corporate assets not in the ordinary course of business, any dissolution of a
corporation proposed by or on behalf of an Interested Shareholder (as defined
below), and reclassifications, including reverse stock splits, recapitalizations
or affiliations of a corporation with its subsidiaries, or distributions or
other transactions which have the effect of increasing the percentage of voting
shares beneficially owned by an Interested Shareholder by more than 5%. For
purposes of the Virginia Stock Corporation Act, an "Interested Shareholder" is
defined as any beneficial owner of more than 10% of any class of the voting
securities of a Virginia corporation.
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, any Affiliated
Transaction must be approved by the affirmative vote of holders of two-thirds of
the outstanding shares of the corporation entitled to vote, other than the
shares beneficially owned by the Interested Shareholder, and by a majority (but
not less than two) of the Disinterested Directors (as defined below). A
"Disinterested Director" is defined in the Virginia Stock Corporation Act as a
member of a corporation's board of directors who (i) was a member before the
later of January 1, 1988 or the date on which an Interested Shareholder became
an Interested Shareholder and (ii) was recommended for election by, or was
elected to fill a vacancy and received the affirmative vote of, a majority of
the Disinterested Directors then on the corporation's board of directors. At
the expiration of the three year period after a shareholder becomes an
Interested Shareholder, these provisions require approval of the Affiliated
Transaction by the affirmative vote of the holders of two-thirds of the
outstanding shares of the corporation entitled to vote, other than those
beneficially owned by the Interested Shareholder.
The principal exceptions to the special voting requirement apply to Affiliated
Transactions occurring after the three year period has expired and require
either that the transaction be approved by a majority of the corporation's
Disinterested Directors or that the transaction satisfy certain fair price
requirements of the statute. In general, the fair price requirements provide
that the shareholders must receive the higher of: the highest per share price
for their shares as was paid by the Interested Shareholder for his or its
shares, or the fair market value of the shares. The fair price requirements
also require that, during the three years preceding the announcement of the
proposed Affiliated Transaction, all required
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<PAGE>
dividends have been paid and no special financial accommodations have been
accorded the interested Shareholder, unless approved by a majority of the
Disinterested Directors.
None of the foregoing limitations and special voting requirements applies
to a transaction with an Interested Shareholder who has been an Interested
Shareholder continuously since the effective date of the statute (January 26,
1988) or who became an Interested Shareholder by gift or inheritance from such a
person or whose acquisition of shares making such person an Interested
Shareholder was approved by a majority of the Disinterested Directors of the
corporation.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the Virginia Stock Corporation Act provides that by
affirmative vote of a majority of the voting shares other than shares owned by
any Interested Shareholder, a corporation may adopt by meeting certain voting
requirements, an amendment to its articles of incorporation or bylaws providing
that the Affiliated Transactions provisions shall not apply to the corporation.
Neither CNB nor FNB has adopted such an amendment. Currently, no shareholder of
CNB owns or controls 10% or more of CNB common stock, and there are no
Interested Shareholders of CNB or FNB as defined by the Virginia Stock
Corporation Act.
Control Share Acquisitions. The Virginia Control Share Acquisitions
statute, found at Sections 13.1-728 - 728.8 of the Virginia Stock Corporation
Act, also is designed to afford shareholders of a public company incorporated in
Virginia protection against certain types of non-negotiated acquisitions in
which a person, entity or group ("Acquiring Person") seeks to gain voting
control of that corporation. With certain enumerated exceptions, the statute
applies to acquisitions of shares of a corporation which would result in an
Acquiring Person's ownership of the corporation's shares entitled to vote in the
election of directors falling within any one of the following ranges: 20% to 33-
13%, 33-13% to 50% or 50% or more (a "Control Share Acquisition"). Shares that
are the subject of a Control Share Acquisition ("Control Shares") will not be
entitled to voting rights unless the holders of a majority of the "Disinterested
Shares" vote at an annual or special meeting of shareholders of the corporation
to accord the Control Shares with voting rights. Disinterested Shares do not
include shares owned by the Acquiring Person or by officers and inside directors
of the target company. Under certain circumstances, the statute permits an
Acquiring Person to call a special shareholders' meeting for the purpose of
considering granting voting rights to the holders of the Control Shares. As a
condition to having this matter considered at either an annual or special
meeting, the Acquiring Person must provide shareholders with detailed
disclosures about his identity, the method and financing of the Control Share
Acquisition and any plans to engage in certain transactions with, or to make
fundamental changes to, the corporation, its management or business. Under
certain circumstances, the statute grants dissenters' rights to shareholders who
vote against granting voting rights to the Control Shares. The Virginia Control
Share Acquisitions Statute also enables a corporation to make provisions for
redemption of Control Shares with no voting rights. Among the acquisitions
specifically excluded from the statute are acquisitions which are a part of
certain negotiated transactions to which the corporation is a party and which,
in the case of mergers or share exchanges, have been approved by the
corporation's shareholders under other provisions of the Virginia Stock
Corporation Act.
Listing of FNB Common Stock
The FNB common stock is traded on the NASDAQ National Market System under
the symbol "FNBP." FNB will obtain approval from NASDAQ for listing of
additional shares of FNB common stock to be issued as a result of the merger.
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<PAGE>
Differences in the Rights of FNB
Shareholders and CNB Shareholders
General
At the effective time, CNB shareholders automatically will become
shareholders of FNB, and their rights as shareholders will be determined by the
Articles, Bylaws of FNB and the Virginia Stock Corporation Act, instead of by
the articles of incorporation and bylaws of CNB. The following summarizes the
material differences in the rights of shareholders of FNB and CNB. This summary
is necessarily general and does not purport to be a complete discussion of, and
is qualified in its entirety by reference to, the Virginia Stock Corporation Act
and the articles of incorporation and bylaws of each corporation.
Authorized Capital
<TABLE>
<CAPTION>
FNB CNB
<S> <C>
Ten million (10,000,000) shares of common Ten million (10,000,000) shares of common stock,
stock, par value five dollars ($5.00) per par value five dollars ($5.00) per share and one
share. As of September 6, 2000, there were million (1,000,000) shares of special class of
4,086,987 shares of common stock issued and stock, par value one dollar ($1.00) per share.
outstanding.
</TABLE>
Amendment of Articles of Incorporation and Bylaws
<TABLE>
<CAPTION>
FNB CNB
<S> <C>
Approval of an amendment to the articles Approval of an amendment to the articles requires a
requires a vote in favor by a majority of vote in favor by a majority of shareholders, except
shareholders, provided that the amendment has for an amendment to the articles concerning a
been approved and recommended by two-thirds of staggered board, terms of office and removal of
the directors. If the amendment was not so directors which require a two-thirds vote. The
approved and recommended, a 80% vote of bylaws may be amended by either the Board or
shareholders is needed to amend. The bylaws shareholders.
may be amended by either the Board or
shareholders.
</TABLE>
Mergers, Consolidations and Sale of Assets
<TABLE>
<CAPTION>
FNB CNB
<S> <C>
Approval of a merger, consolidation and No provisions.
sale of assets requires a vote in favor by a
majority of shareholders, provided that the
transaction has been approved and recommended
by two-thirds of the Directors of FNB. If the
transaction was not so approved and
recommended, a 80% vote of shareholders is
required to approve the transaction.
</TABLE>
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<PAGE>
Size and Classification of Board of Directors
FNB CNB
For both FNB and CNB, the Board consists of not less than three and no more
than fifteen. Directors are divided into three classes. Each class serves a
three year term and the classes are as nearly equal in size as possible
Vacancies and Removal of Directors
<TABLE>
<CAPTION>
FNB CNB
<S> <C>
A director may be removed for cause by a A director may be removed for cause by a majority
two-thirds vote of shareholders. Vacancies of shareholders at a shareholder's meeting called
are filled by the majority of the Board. for that purpose. Vacancies are filled by the majority
of the Board.
</TABLE>
Director Liability and Indemnifications
FNB CNB
Except for liability arising from willful misconduct or a knowing violation
of criminal law, directors are indemnified to fullest extent permitted under the
Virginia Stock Corporation Act.
Special Meetings of Shareholders
<TABLE>
<CAPTION>
FNB CNB
<S> <C>
A special meeting of shareholders may only be A special meeting will be called if shareholders
called by the Chairman of the Board, a representing 35% of all votes eligible to vote sign
majority of the Board of Directors, and those and date a demand for a special meeting. The
permitted by the Virginia Stock Corporation Chairman of the Board, a majority of the Board of
Act. Directors and the President may also call a special
meeting.
</TABLE>
45
<PAGE>
Shareholder Nominations and Proposals
<TABLE>
<CAPTION>
FNB CNB
<S> <C>
Shareholders may nominate directors at any Shareholders may nominate directors at any annual
annual meeting. In order to do so, a meeting. In order to do so, a shareholder must (1)
shareholder must (1) be a shareholder entitled provide notice to the President 35 days prior to
to vote for election of directors, (2) provide the meeting, (2) state the name, age and address of
notice to company not less than 14 days and no the nominee, (3) state the nominee's business or
more than 50 days prior to the meeting and (3) occupation, (4) state any affiliation or material
provide in the notice the nominee's name, interest of nominee to CNB, (5) state the name,
address, occupation and number of shares held address and number of shares owned by the
by the nominee. shareholder giving the notice, and (6) provide a
sworn or certified statement that the shareholder
is entitled to vote for the nominee at the
meeting, that the nominee consents to being
nominated, will stand for election and will serve
if elected.
</TABLE>
Regulation
Set forth below is a brief description of some laws and regulations that
relate to the regulation of FNB and CNB. The description of these laws and
regulations, as well as descriptions of laws and regulations contained elsewhere
herein, does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
General
FNB and CNB are both bank holding companies within the meaning of the Bank
Holding Company Act of 1956. As such, FNB and CNB are supervised by the Board of
Governors of the Federal Reserve System and are required to file reports with
the Federal Reserve and provide such additional information as the Federal
Reserve may require. Community National Bank and First National Bank, the
banking subsidiaries of CNB and FNB, respectively, are national banking
associations and as such they are regulated by the Office of the Comptroller of
the Currency. The OCC conducts regular examinations of national banks, reviewing
such matters as the adequacy of loan loss reserves, quality of loans and
investments, management practices, compliance with laws, and other aspects of
their operations. In addition to these regular examinations, national banks must
furnish the OCC with periodic reports containing a full, accurate statement of
their affairs. Supervision, regulation and examination of national banks by the
OCC are intended primarily for the protection of depositors rather than
shareholders. The various laws and regulations administered by the regulatory
agencies affect corporate practices, expansion of business, and provisions of
services. Also, monetary and fiscal policies of the United States directly
affect bank loans and deposits and thus may affect FNB's and CNB's earnings. The
future impact of these policies and of the continuing regulatory changes in the
financial services industry cannot be predicted.
The BHC Act further provides that the Federal Reserve may not approve any
acquisition, merger or consolidation that would result in a monopoly or would be
in furtherance of any combination or conspiracy to monopolize or attempt to
monopolize the business of banking in any part of the United States, or the
effect of which may be substantially to lessen competition or to tend to create
a monopoly in any section of the country, or that in any other manner would be
in restraint of trade, unless it finds the
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<PAGE>
anti-competitive effects of the proposed transaction are clearly outweighed in
the public interest by the probable effect of the transaction in meeting the
convenience and needs of the community to be served. The Federal Reserve is also
required to consider the financial and managerial resources and future prospects
of the bank holding companies and banks concerned and the convenience and needs
of the community to be served. Consideration of financial resources generally
focuses on capital adequacy, which is discussed below.
The BHC Act, as amended by the interstate banking provisions of the Riegle-
Neal Interstate Banking and Branching Efficiency Act of 1995, which became
effective on September 29, 1996, repealed the prior statutory restrictions on
interstate acquisitions of banks by bank holding companies. As a result, FNB and
any other bank holding company located in Virginia may now acquire a bank
located in any other state, and any bank holding company located outside
Virginia may lawfully acquire any Virginia-based bank, regardless of state law
to the contrary, in either case subject to some deposit-percentage limitations,
aging requirements, and other restrictions. The Act also generally provides
that, after June 1, 1998, national and state-chartered banks may branch
interstate through acquisitions of banks in other states. By adopting
legislation prior to that date, a state had the ability either to "opt in" and
accelerate the date after which interstate branching is permissible or "opt out"
and prohibit interstate branching altogether. The State of Virginia enacted "opt
in" legislation that permitted interstate branching in Virginia on a reciprocal
basis through June 1, 1998, and on an unlimited basis thereafter. Accordingly,
the banking subsidiaries of FNB and CNB are currently able to establish and
operate branches in other states that have also enacted "opt in" legislation.
Subject to certain amendments made by the recently enacted Gramm-Leach-
Bliley Act of 1999 described below, the BHC Act generally prohibits FNB and CNB
from engaging in activities other than banking or managing or controlling banks,
savings banks or other permissible subsidiaries and from acquiring or retaining
direct or indirect control of any company engaged in any activities other than
those activities determined by the Federal Reserve to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
determining whether a particular activity is permissible, the Federal Reserve
must consider whether the performance of such an activity reasonably can be
expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.
For example, factoring accounts receivable, acquiring or servicing loans,
leasing personal property, conducting discount securities brokerage activities,
performing some data processing services, acting as agent or broker in selling
credit life insurance and other types of insurance in connection with credit
transactions, and performing some insurance underwriting activities all have
been determined by the Federal Reserve to be permissible activities of bank
holding companies. Despite prior approval, the Federal Reserve has the power to
order a holding company or its subsidiaries to terminate any activity or to
terminate its ownership or control of any subsidiary when it has reasonable
cause to believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company and is inconsistent with sound
banking principles.
The Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 was enacted on November 12, 1999. The
Act draws new lines between the types of activities that are permitted for
banking organizations as financial in nature and those that are not permitted
because they are commercial in nature. The Act imposes Community Reinvestment
Act requirements on financial service organizations that seek to qualify for the
expanded
47
<PAGE>
powers to engage in broader financial activities and affiliations with financial
companies that the Act permits.
The Act creates a new form of financial organization called a financial
holding company that may own and control banks, insurance companies and
securities firms. A financial holding company is authorized to engage in any
activity that is financial in nature or incidental to an activity that is
financial in nature or is a complementary activity. These activities include
insurance, securities transactions, and traditional banking related activities.
The Act establishes a consultative and cooperative procedure between the Federal
Reserve Board and the Secretary of the Treasury for the designation of new
activities that are financial in nature within the scope of the activities
permitted by the Act for a financial holding company. A financial holding
company must satisfy special criteria to qualify for the expanded financial
powers authorized by the Act. Among those criteria are requirements that all of
the depository institutions owned by the financial holding company be rated as
well capitalized and well-managed and that all of its insured depository
institutions have received a satisfactory rating for Community Reinvestment Act
compliance during their last examination. A bank holding company that does not
qualify as a financial holding company under the Act is generally limited in the
types of activities in which it may engage to those that the Federal Reserve
Board has recognized as permissible for bank holding companies prior to the date
of enactment of the Act. These activities are described under the "General"
heading found above. The Act also authorizes a state bank to have a financial
subsidiary that engages as a principal in the same activities that are permitted
for a financial subsidiary of a national bank if the state bank meets
eligibility criteria and special conditions for maintaining the financial
subsidiary.
The Act repeals the prohibition in the Glass-Steagal Act on bank
affiliations with companies that are engaged primarily in securities
underwriting activities. The Act authorizes a financial holding company to
engage in a wide range of securities activities, including underwriting,
broker/dealer activities and investment company and investment advisory
activities.
Support of Subsidiary Banks
Under Federal Reserve policy, FNB and CNB are expected to act as a source
of financial strength for, and to commit resources to support its subsidiary
banks. This support may be required at times when, absent such Federal Reserve
policy, FNB 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.
Restrictions on Repurchase of Stock
The BHC Act permits a bank holding company such as FNB and CNB to purchase
shares of its capital stock in an amount up to 10% of its consolidated net worth
within a twelve month period without prior approval from the Federal Reserve
Board, provided, however, that purchases over 10% must receive prior Federal
Reserve Board approval unless the bank holding company qualifies for an
exception. The exception provides that a bank holding company is not required to
obtain prior Federal Reserve Board approval for its repurchase if the following
three conditions are met: (1) both before and immediately after the redemption,
the bank holding company is well capitalized; (2) the bank holding company is
well managed; and (3) the bank holding company is not the subject of any
unresolved supervisory issues. The Federal Reserve Board construes the first
test as requiring the holding company to have a consolidated total risk based
capital ratio of 10% or greater, a consolidated tier-1 risk based capital ratio
of 6% or more, and the holding company must not be subject to any written
regulatory agreement regarding capital.
48
<PAGE>
At the present time, FNB would qualify for the exemption described above, and
would continue to do so after the proposed merger.
FDIC Regulations
The Federal Deposit Insurance Corporation Act of 1991, which became law in
December 1991, requires each federal banking agency to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of non-
traditional activities. In addition, pursuant to FDICIA, each federal banking
agency has promulgated regulations, specifying the levels at which a financial
institution would be considered "well capitalized", "adequately capitalized",
"under capitalized", "significantly under capitalized", or "critically under
capitalized", and to take certain mandatory and discretionary supervisory
actions based on the capital level of the institution.
Under the regulations implementing the prompt corrective action provisions,
an institution shall be deemed to be (1) "well capitalized" if it has total
risk-based capital of 10% or more, has a Tier I risk-based capital ratio of 6%
or more , has a leverage capital ratio of 5% or more and is not subject to any
order or final capital directive to meet and maintain a specific capital level
for any capital measure, (2) "adequately capitalized" if it has a total risk-
based capital ratio of 8% or more, a Tier I risk-based ratio of 4% or more and a
leverage capital ratio of 4% or more (3% under certain circumstances) and does
not meet the definition of "well capitalized", (3) "undercapitalized" if it has
a total risk-based capital ratio that is less than 8%, a Tier I risk-based
capital ratio that is less than 4% or a leverage capital ratio that is less than
4% (3% in certain circumstances), (4) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6%, a Tier I risk-based
capital ratio that is less than 3% or a leverage capital ratio that is less than
3% and (5) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2%. In addition, under certain
circumstances, a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized). Immediately upon becoming undercapitalized, or upon failing
to submit or implement a capital plan as required, an institution shall become
subject to various regulatory restrictions.
FDICIA also contained the Truth in Savings Act, which requires disclosures
to be made in connection with deposit accounts offered to consumers. The
regulations have been adopted implementing the provisions of the Truth in
Savings Act.
In addition, significant provisions of FDICIA required federal banking
regulators to draft standards in a number of other important areas to assure
bank safety and soundness, including internal controls, information systems and
internal audit systems, credit underwriting, asset growth, compensation, loan
documentation and interest rate exposure. FDICIA also required the regulators to
establish maximum ratios of classified assets to capital, and minimum earnings
sufficient to absorb losses without impairing capital. The legislation also
contained other provisions which restricted the activities of state-chartered
banks, amended various consumer banking laws, limited the ability of "under
capitalized" banks to borrow from the Federal Reserve's discount window, and
required federal banking regulators to perform annual onsite bank examinations
and set standards for real estate lending.
Regulatory Capital Requirement
All depository institutions are required to maintain minimum levels of
regulatory capital. The federal bank regulatory agencies have established
substantially similar risked based and leverage capital
49
<PAGE>
standards for financial institutions that they regulate. These regulatory
agencies also may impose capital requirements in excess of these standards on a
case-by-case basis for various reasons, including financial condition or actual
or anticipated growth. Under the risk-based capital requirements of these
regulatory agencies, the bank subsidiaries of FNB and CNB are each required to
maintain a minimum ratio of total capital to risk-weighted assets of at least
8%. At least half of the total capital is required to be "Tier 1 capital," which
consists principally of common and some qualifying preferred shareholders'
equity, less certain intangibles and other adjustments. The remainder ("Tier 2
capital") consists of a limited amount of subordinated and other qualifying debt
(including certain hybrid capital instruments) and a limited amount of the
general loan loss allowance. Based upon the applicable regulations, First
National Bank and Community National Bank are "well capitalized."
In addition, the federal regulatory agencies have established a minimum
leverage capital ratio (Tier 1 capital to tangible assets). These guidelines
provide for a minimum leverage capital ratio of 3% for banks and their
respective holding companies that meet certain specified criteria, including
that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
that minimum. The guidelines also provide that banking organizations
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.
Deposit Insurance
The deposits of Community National Bank and First National Bank are
currently insured to a maximum of $100,000 per depositor, subject to certain
aggregation rules. The FDIC has implemented a risk-related assessment system for
deposit insurance premiums. All depository institutions have been assigned to
one of nine risk assessment classifications based on certain capital and
supervisory measures. All deposits in FNB's and CNB's subsidiary banks are
subject to the rates of the Bank Insurance Fund.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
reserves against their transaction accounts (primarily NOW and Super NOW
checking accounts) and non-personal time deposits. Because required reserves
must be maintained in the form of vault cash or a noninterest-bearing account at
a Federal Reserve Bank, the effect of this reserve requirement is to reduce the
earning assets of FNB's and CNB's subsidiary banks.
Experts
The consolidated financial statements of FNB as of December 31, 1999 and
1998 and for each of the years in the three-year period ended December 31, 1999
included in FNB's 1999 Annual Report on Form 10-K have been incorporated by
reference herein in reliance upon the report of McLeod & Company, independent
certified public accountants, which has been given upon the authority of that
firm as experts in accounting and auditing. McLeod & Company's report is
included in FNB's Annual Report on Form 10-K, which is incorporated by reference
herein.
The consolidated financial statements of CNB incorporated by reference from
CNB's Annual Report (Form 10-KSB) for the year ended December 31, 1999, have
been audited by Larrowe & Company, PLC, independent auditors, as set forth in
their report thereon incorporated by reference therein and incorporated herein
by reference in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
50
<PAGE>
Validity of FNB Common Stock
The validity of the shares of FNB Common Stock being offered hereby will be
passed upon for FNB by Mays & Valentine, L.L.P.
Other Matters
As of the date of this Proxy Statement/Prospectus, the CNB Board knows of
no matters that will be presented for consideration at the Special Meeting other
than as described in this Proxy Statement/Prospectus. However, if any other
matter shall come before the Special Meeting or any adjournments or
postponements thereof and shall be voted upon, the proposed proxy will be deemed
to confer authority to the individuals named as authorized therein to vote the
shares represented by such proxy as to any such matters that fall within the
purposes set forth in the Notice of Special Meeting, provided, however, that no
proxy which is voted against the proposal to approve the merger agreement will
be voted in favor of any adjournment or postponement.
Shareholder Proposals
If the merger is not consummated, CNB expects to hold its next annual
meeting of shareholders during May, 2001. In the event that such a meeting is
held, any proposals of shareholders intended to be presented at such meeting
must be received at CNB's principal executive offices at 900 Memorial Drive,
Pulaski, Virginia 24301, Attn: Secretary, not less than 120 days prior to April
13, 2001 in order for such proposals to be included in CNB's proxy statement and
form of proxy related to such meeting. A shareholder's notice to the Secretary
shall set forth as to each matter the shareholder proposes to bring before the
annual meeting (a) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (b) the name and address, as they appear on CNB's books, of the
shareholder proposing such business, (c) the class and number of shares of
common stock of CNB that are beneficially owned by the shareholder, and (d) any
material interest of the shareholder in such business.
51
<PAGE>
Appendix A
AGREEMENT AND PLAN OF MERGER
BETWEEN
CNB HOLDINGS, INC.
AND
FNB CORPORATION
__________
July 10, 2000
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
The Merger and Related Matters
<TABLE>
<CAPTION>
Page
<S> <C>
1.1 Definitions.......................................... 2
1.2 The Merger........................................... 2
1.3 Name and Continuing Operations....................... 2
1.4 Management of Surviving Corporation.................. 3
1.5 The Closing and Effective Date....................... 3
ARTICLE 2
Basis and Manner of Conversion
2.5 Allocation of Stock Election Shares.................. 5
2.2 Allocation........................................... 4
2.3 Election............................................. 4
2.4 Allocation of Cash Election Shares................... 4
2.5 Allocation of Stock Election Shares.................. 5
2.6 No Allocation........................................ 5
2.7 Computations......................................... 6
2.8 Cancellation of Shares............................... 6
2.9 Outstanding Options for CNB Common Stock............. 6
ARTICLE 3
Manner of Exchange
3.1 Exchange Procedures.................................. 6
3.2 Distribution with Respect to Unexchanged Shares...... 7
3.3 No Fractional Securities............................. 8
3.4 Certain Adjustments.................................. 8
3.5 Rights of Dissenting Shareholders.................... 8
ARTICLE 4
Representations and Warranties
4.1 Representations and Warranties of CNB................ 8
(a) Organization, Standing and Power.............. 8
(b) Authority..................................... 9
(c) Capital Structure............................. 9
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(d) Ownership Capital Structure and
Organization of Community National............ 10
(e) Financial Statements.......................... 11
(f) Absence of Undisclosed Liabilities............ 11
(g) Legal Proceedings; Compliance with Laws....... 11
(h) Regulatory Approvals.......................... 12
(i) Labor Relations............................... 12
(j) Tax Matters................................... 12
(k) Property...................................... 12
(l) Reports....................................... 12
(m) Employee Benefit Plans........................ 13
(n) Investment Securities......................... 13
(o) Certain Contacts.............................. 13
(p) Insurance..................................... 14
(q) Loans, OREO and Allowance for Loan Losses..... 14
(r) Absence of Material Changes and Events........ 15
(s) Statements True and Correct................... 16
(t) Brokers and Finders........................... 16
(u) Repurchase Agreements......................... 16
(v) Trust Accounts................................ 16
(w) Environmental Matters......................... 16
4.2 Representations and Warranties of FNB................ 18
(a) Organization, Standing and Power.............. 18
(b) Authority..................................... 18
(c) Capital Structure............................. 19
(d) Ownership of the FNB Subsidiaries; Capital
Structure of the FNB Subsidiaries; and
Organization of the FNB Subsidiaries.......... 19
(e) Financial Statements.......................... 20
(f) Absence of Undisclosed Liabilities............ 20
(g) Legal Proceedings; Compliance with Laws....... 20
(h) Regulatory Approvals.......................... 21
(i) Labor Relations............................... 21
(j) Tax Matters................................... 21
(k) Property...................................... 22
(l) Reports....................................... 22
(m) Employee Benefit Plans........................ 22
(n) Investment Securities......................... 23
(o) Certain Contacts.............................. 23
(p) Insurance..................................... 23
(q) Loans, OREO, and Allowance for Loan Losses.... 24
(r) Absence of Material Changes and Events........ 25
(s) Statements True and Correct................... 25
(t) Brokers and Finders........................... 25
(u) Repurchase Agreements......................... 26
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(v) Administration of Trust Accounts.............. 26
(w) Environmental Matters......................... 26
ARTICLE 5
Conduct Prior to the Effective Date
5.1 Access to Records and Properties...................... 27
5.2 Confidentiality....................................... 28
5.3 Registration Statement, Proxy Statement and
Shareholder Approval................................. 28
5.4 Operation of the Business of FNB and CNB.............. 29
5.5 Dividends............................................. 30
5.6 No Solicitation....................................... 30
5.7 Regulatory Filings.................................... 30
5.8 Public Announcements.................................. 30
5.9 Notice of Breach...................................... 31
5.10 Accounting Treatment.................................. 31
5.11 Merger Consummation................................... 31
5.12 FNB Acquisition Transaction........................... 31
ARTICLE 6
Additional Agreements
6.1 Conversion of Stock Options........................... 31
6.2 Benefit Plans......................................... 32
6.3 Indemnification....................................... 33
ARTICLE 7
Conditions to the Merger
7.1 Conditions to Each Party's Obligations to Effect the
Merger 33
-----------------
(a) Shareholder Approval........................... 33
(b) Regulatory Approvals........................... 33
(c) Registration Statement......................... 34
(d) Tax Opinion.................................... 34
(e) Opinions of Counsel............................ 34
(f) Legal Proceedings.............................. 34
7.2 Conditions to Obligations of FNB...................... 34
(a) Representations and Warranties................. 34
(b) Performance of Obligations..................... 34
(c) Affiliate Letters.............................. 35
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(d) Investment Banking Letter........................... 35
7.3 Conditions to Obligations of CNB........................... 35
(a) Representations and Warranties...................... 35
(b) Performance of Obligations.......................... 35
(c) Investment Banking Letter........................... 35
ARTICLE 8
Termination
8.1 Termination................................................ 36
8.2 Effect of Termination...................................... 36
8.3 Non-Survival of Representations, Warranties and Covenants.. 36
8.4 Expenses................................................... 37
ARTICLE 9
General Provisions
9.1 Entire Agreement........................................... 38
9.2 Waiver and Amendment....................................... 38
9.3 Descriptive Headings....................................... 38
9.4 Governing Law.............................................. 38
9.5 Notices.................................................... 39
9.6 Counterparts............................................... 40
9.7 Severability............................................... 40
9.8 Subsidiaries............................................... 40
</TABLE>
Exhibit A - Plan of Merger between CNB Holdings, Inc. and
FNB Corporation
Exhibit B - Employment Contract with Phillip Baker
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and
entered into as of July 10, 2000 by and between FNB Corporation, a Virginia
--
corporation with its principal office located in Christiansburg, Virginia
("FNB"), and CNB Holdings, Inc., a Virginia corporation with its principal
office located in Pulaski, Virginia ("CNB").
WITNESSETH:
WHEREAS, FNB and CNB (the "Companies") desire to affiliate, so that
First National Bank ("First National") and Community National Bank ("Community
National") (together, the "Banks") will be under common control; and
WHEREAS, FNB and CNB have agreed to the affiliation of their two
companies through a merger under Virginia law, as a result of which CNB would
merge with and into FNB and the shareholders of CNB would become shareholders of
FNB Corporation, all as more specifically provided in this Agreement and the
Plan of Merger in the form attached hereto as Exhibit A (the "Plan"); and
WHEREAS, the Boards of Directors of FNB and CNB each believe it is in
the best interests of their respective corporations and their shareholders to
affiliate as provided herein and not in a transaction structured as an
acquisition of one by the other, and that the respective shareholder values of
FNB and CNB can be maximized over time through this affiliation; and
WHEREAS, the Boards of Directors of the Companies each believe that
the transaction contemplated in this Agreement is in the best interests of the
communities they serve and of their respective employees; and
WHEREAS, the Boards of Directors of FNB and CNB each believe that
after the affiliation the holding company structure should provide management
and technical assistance and support for recruitment, training and retention of
skilled officers and employees to the Banks in order to enable the combined
organization to operate more efficiently; and
WHEREAS, the respective Boards of Directors of FNB and CNB have
resolved that the transactions described herein are in the best interests of the
parties and their respective shareholders and have authorized and approved the
execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
1
<PAGE>
ARTICLE 1
The Merger and Related Matters
1.1 Definitions. Any term defined anywhere in this Agreement shall
have the meaning ascribed to it for all purposes of this Agreement (unless
expressly noted to the contrary). In addition:
(a) the term "knowledge" when used with respect to a party shall
mean the knowledge, after due inquiry, of any "Executive Officer" of such party,
as such term is defined in Regulation O, (12 C.F.R. 215);
(b) the term "Material Adverse Effect", when applied to a party,
shall mean an event, occurrence or circumstance (including without limitation
(i) the making of any provisions for possible loan and lease losses, write-downs
or other real estate and taxes and (ii) any breach of a representation or
warranty by such party) which (a) has or is reasonably likely to have a material
adverse effect on the financial position, results of operations or business of
the party and its subsidiaries, taken as a whole, or (b) would materially impair
the party's ability to perform its obligations under this Agreement or the
consummation of the Merger and the other transactions contemplated by this
Agreement; provided, however, that solely for purposes of measuring whether an
event, occurrence or circumstance has a material adverse effect on such party's
results of operations, the term "results of operations" shall mean net interest
income plus non-interest income (less securities gains) less gross expenses
(excluding provisions for possible loan and lease losses, write-downs of other
real estate and taxes); and provided further, that material adverse effect and
material impairment shall not be deemed to include the impact of (i) changes in
banking and similar laws of general applicability or interpretations thereof by
courts or governmental authorities, (ii) changes in generally accepted
accounting principles or regulatory accounting requirements applicable to banks
and bank holding companies generally, and (iii) the Merger on the operating
performance of the parties to this Agreement; and
(c) the term "Previously Disclosed" by a party shall mean
information set forth in a written disclosure letter that is delivered by that
party to the other party prior to or contemporaneously with the execution of
this Agreement and specifically designated as information "Previously Disclosed"
pursuant to this Agreement.
1.2 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Date as defined in Section 1.5 hereof, CNB will be
merged with and into FNB (the "Merger"). At the Effective Date, the Merger
shall have the effect as provided in Section 13.1-721 of the Virginia Stock
Corporation Act.
1.3 Name and Continuing Operations. The respective names and banking
offices of the Banks will not change as a result of the Merger. After the
Effective Date, the surviving corporation shall be headquartered in
Christiansburg, Virginia.
1.4 Management of Surviving Corporation. The directors, officers and
employees of the Banks will not change as a result of the Merger except that
Hiawatha Nicely, Jr. shall resign from the Board of Directors of Community
National Bank and Julian D. Hardy, Jr. shall
2
<PAGE>
be appointed to fill the vacancy so created. FNB's Board of Directors presently
has nine (9) members. On the Effective Date, the number of Directors of FNB
shall be increased by one member in Class III whose terms expire at the 2002
annual meeting of shareholders and Hiawatha Nicely, Jr. shall be appointed to
fill the vacancy so created. At the next annual meeting of shareholders of FNB
and at the annual meeting in 2002, management of FNB will recommend to
shareholders that Mr. Nicely be elected as a member of Class III of directors
whose terms expire at the 2002 and 2005, respectively, annual meetings of
shareholders, provided that he has not resigned, died or otherwise been removed
from office. In addition, on the Effective Date, FNB agrees to enter into a
change of control agreement with Phillip Baker, President and Chief Executive
Officer of Community National, in the form attached hereto as Exhibit B.
1.5 The Closing and Effective Date. The closing of the transactions
contemplated by this Agreement and the Plan of Merger shall take place at the
offices of FNB in Christiansburg, Virginia or at such other place as may be
mutually agreed upon by the parties. The Merger shall become effective on the
date shown on the Certificate of Merger issued by the State Corporation
Commission of Virginia effecting the Merger (the "Effective Date"). Unless
otherwise agreed upon in writing by the chief executive officers of FNB and CNB,
subject to the conditions to the obligations of the parties to effect the Merger
as set forth in Article 6, the parties shall use their best efforts to cause the
Effective Date to occur on the first day of the month following the month in
which the conditions set forth in Sections 6.1(a) and 6.1(b) are satisfied. All
documents required by the terms of this Agreement to be delivered at or prior to
consummation of the Merger will be exchanged by the parties at the closing of
the Merger (the "Merger Closing"), which shall be held on or before the
Effective Date. FNB and CNB shall execute and deliver to the Virginia State
Corporation Commission Articles of Merger containing a Plan of Merger in
substantially the form of Exhibit A hereto.
ARTICLE 2
Basis and Manner of Conversion
2.1 Conversion of CNB Stock and Stock Options. At the Effective Date,
by virtue of the Merger, each share of the common stock, par value $5.00 per
share, of CNB ("CNB Common Stock") issued and outstanding immediately prior to
the Effective Date will be converted into either (i) $10.60 in cash ("Cash
Consideration") or (ii) shares of common stock, par value $5.00 per share, of
FNB ("FNB Common Stock") whose aggregate market value equals $10.60 ("Stock
Consideration"), provided that in no event shall FNB issue more than 0.642
shares or less than 0.544 shares for each outstanding share of CNB Common Stock,
which Stock Consideration together with the Cash Consideration (the "Merger
Consideration"), in each case as the holder thereof shall have elected or be
deemed to have elected in accordance with Section 2.3. The market value of FNB
Common Stock will be the average of the closing sales prices per share of FNB
Common Stock as reported on the NASDAQ Exchange Composite Transactions Tape (as
reported in The Wall Street Journal, or, if not reported thereby, another
-----------------------
authoritative source as chosen by FNB) for the thirty consecutive full trading
days on such exchange (even if FNB Common Stock does not trade in each such day)
ending at the close of trading on the tenth day before the Effective Date (the
"Market Value"). The ratio of shares of FNB's common stock that will be
exchanged for each outstanding share of CNB Common Stock
3
<PAGE>
shall be referred to herein as the "Exchange Ratio" and shall be rounded to the
nearest third decimal point.
2.2 Allocation. Notwithstanding anything in this Agreement to the
contrary, the aggregate amount of cash to be issued to shareholders of CNB in
the Merger shall be equal to $4,909,915 (the "Cash Amount"); provided that the
Cash Amount may be changed by FNB to accommodate the exercise by FNB of its
option to change the Cash Number and the Stock Number pursuant to the last
sentence of this Section 2.2. As used in this Agreement, the Cash Number shall
mean the aggregate number of shares of CNB Common Stock to be converted into the
right to receive the Cash Consideration in the Merger, which shall be equal to
the Cash Amount divided by $10.60. The number of shares of CNB Common Stock to
be converted into the right to receive Stock Consideration (the "Stock Number")
will be equal to (i) the number of shares of CNB Common Stock issued and
outstanding immediately prior to the Effective Date of the Merger less (ii) the
sum of (A) the Cash Number and (B) the aggregate number of shares of CNB Common
Stock to be exchanged for cash pursuant to Section 3.3. FNB shall have the
option to change the Cash Number and the Stock Number to more closely follow the
actual elections of CNB shareholders pursuant to this Article 2, so long as such
modification to the Cash Number and the Stock Number does not prevent the
condition set forth in Section 7.1(d) from being satisfied.
2.3 Election. Subject to allocation in accordance with the provisions of
this Article, each record holder of shares of CNB Common Stock issued and
outstanding immediately prior to the Election Deadline (as defined in Section
3.1(i)) will be entitled, in accordance with Section 3.1, (i) to elect to
receive in respect of each such share (A) Cash Consideration (a "Cash Election")
or (B) Stock Consideration (a "Stock Election") or (ii) to indicate that such
record holder has no preference as to the receipt of Cash Consideration or Stock
Consideration for all such shares held by such holder (a "Non-Election"). Shares
of CNB Common Stock in respect of which a Non-Election is made or as to which no
election is made (collectively, "Non-Election Shares") shall be deemed by FNB to
be shares in respect of which Cash Elections or Stock Elections have been made,
as FNB shall determine.
2.4 Allocation of Cash Election Shares. In the event that the aggregate
number of shares in respect of which Cash Elections have been made (the "Cash
Election Shares") exceeds the Cash Number, all shares of CNB Common Stock in
respect of which Stock Elections have been made (the "Stock Election Shares")
and all Non-Election Shares will be converted into the right to receive Stock
Consideration (and cash in lieu of fractional interests in accordance with
Section 3.3), and Cash Election Shares will be converted into the right to
receive Cash Consideration or Stock Consideration in the following manner:
(i) the number of Cash Election Shares covered by each Form of
Election (as defined in Section 3.1(i)) to be converted into Cash
Consideration will be determined by multiplying the number of Cash
Election Shares covered by such Form of Election by a fraction, (A)
the numerator of which is the Cash Number and (B) the denominator of
which is the aggregate number of Cash Election Shares rounded down to
the nearest whole number; and
4
<PAGE>
(ii) all Cash Election Shares not converted into Cash Consideration in
accordance with Section 2.4(i) will be converted into the right to
receive Stock Consideration (and cash in lieu of fractional interests
in accordance with Section 3.3).
2.5 Allocation of Stock Election Shares. In the event that the aggregate
number of Stock Election Shares exceeds the Stock Number, all Cash Election
Shares and all Non-Election Shares (together, the "Cash Shares") will be
converted into the right to receive Cash Consideration, and all Stock Election
Shares will be converted into the right to receive Cash Consideration or Stock
Consideration in the following manner:
(i) the number of Stock Election Shares covered by each Form of
Election to be converted into Cash Consideration will be determined by
multiplying the number of Stock Election Shares covered by such Form
of Election by a fraction, (A) the numerator of which is the Cash
Number less the number of Cash Shares and (B) the denominator of which
is the aggregate number of Stock Election Shares, rounded down to the
nearest whole number; and
(ii) all Stock Election Shares not converted into Cash Consideration
in accordance with Section 2.5(i) will be converted into the right to
receive Stock Consideration (and cash in lieu of fractional interests
in accordance with Section 3.3).
2.6 No Allocation. In the event that neither Section 2.4 nor Section 2.5
is applicable, all Cash Election Shares will be converted into the right to
receive Cash Consideration, all Stock Election Shares will be converted into the
right to receive Stock Consideration (and cash in lieu of fractional interests
in accordance with Section 3.3) and Non-Election Shares will be converted into
the right to receive Cash Consideration or Stock Consideration (and cash in lieu
of fractional interests in accordance with Section 3.3) as FNB shall determine.
2.7 Computations. The Exchange Agent (as defined in Section 3.1(i)) will
make all computations to give effect to this Article 2.
2.8 Cancellation of Shares. As of the Effective Date of the Merger, all
such shares of CNB Common Stock will no longer be outstanding and automatically
be cancelled and retired and will cease to exist and each holder of a
certificate formerly representing any such shares of CNB Common Stock (a "CNB
Certificate") will cease to have any rights with respect thereto, except the
right to receive Merger Consideration and any additional cash in lieu of
fractional shares of FNB Common Stock to be issued or paid in consideration
therefor upon surrender of such CNB Certificate in accordance with Article 3,
without interest.
2.9 Outstanding Options for CNB Common Stock. At the Effective Date, all
rights with respect to CNB Common Stock pursuant to stock options ("CNB
Options") granted by CNB under a CNB stock option plan which are outstanding on
the Effective Date shall be treated as follows: (i) fifty percent (50%) of the
CNB Options held by a holder thereof shall be converted into and become rights
with respect to FNB Common Stock as provided in Section 6.1 and (ii) with
respect to the remaining fifty percent (50%) of such CNB Options held by such
holder, the amount by which $10.60 exceeds the exercise price for such options
will be
5
<PAGE>
converted into Cash Consideration or Stock Consideration as provided in Sections
2.1 through 2.8 of this Article 2 so long as such conversion does not prevent
the condition set forth in Section 7.1(d) from being satisfied.
ARTICLE 3
Manner of Exchange
3.1 Exchange Procedures.
(i) Not more than 60 days nor fewer than 30 days prior to the
Effective Date, FNB, acting as the exchange agent ("Exchange Agent"),
will mail a form of election (the "Form of Election") to each
shareholder of record of CNB as of a record date as close as
practicable to the date of mailing and mutually agreed to by CNB and
FNB. In addition, the Exchange Agent will use its best efforts to make
the Form of Election available to the persons who become shareholders
of CNB during the period between such record date and the Effective
Date. Any election to receive Merger Consideration will have been
properly made only if the Exchange Agent shall have received on the
fifth business day immediately preceding the Effective Date (the
"Election Deadline"), a Form of Election properly completed and
accompanied by a CNB Certificate ("Certificate(s)") for the shares to
which such Form of Election relates, acceptable for transfer on the
books of CNB (or an appropriate guarantee of delivery), as set forth
in such Form of Election. An election may be revoked only by written
notice received by the Exchange Agent prior to 5:00 p.m. on the
Election Deadline. If an election is so revoked, the Certificate(s)
(or guarantee of delivery, as appropriate) to which such election
relates will be promptly returned to the person submitting the same to
the Exchange Agent.
(ii) As soon as reasonably practicable after the Effective Date, the
Exchange Agent will mail to each holder of record of a Certificate,
whose shares of CNB Common Stock were converted into the right to
receive Merger Consideration and those who failed to return a properly
completed Form of Election, (i) a letter of transmittal (which will
specify that delivery will be effected, and risk of loss and title to
the Certificates will pass, only upon delivery of the Certificates to
the Exchange Agent and will be in such form and have such other
provisions as the Exchange Agent may specify consistent with this
Agreement) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for the Merger Consideration.
(iii) With respect to properly made elections in accordance with
Section 3.1(i), and upon surrender in accordance with Section 3.1(ii)
of a Certificate for cancellation to the Exchange Agent, together with
such letter of transmittal, duly executed, and such other documents as
may reasonably be required by the Exchange Agent, the holder of such
Certificate will be entitled to receive in exchange therefor the
Merger Consideration that such holder has the right to receive
pursuant to the provisions of Article 2, and the Certificate so
surrendered will forthwith be canceled. In the event of a transfer of
ownership of Shares that
6
<PAGE>
are not registered in the transfer records of CNB, as the case may be,
payment may be issued to a person other than the person in whose name
the Certificate so surrendered is registered if such Certificate is
properly endorsed or otherwise in proper form for transfer and the
person requesting such issuance pays any transfer or other taxes
required by reason of such payment to a person other than the
registered holder of such Certificate or establishes to the
satisfaction of FNB that such tax has been paid or is not applicable.
Until surrendered as contemplated by this Section 3.1, each
Certificate will be deemed at any time after the Effective Date to
represent only the right to receive upon such surrender the Merger
Consideration that the holder thereof has the right to receive in
respect of such Certificate pursuant to the provisions of Article 2.
No interest will be paid or will accrue on any cash payable to holders
of Certificates pursuant to the provisions of Article 2.
3.2 Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to the shares of CNB Common Stock with a record
date after the Effective Date shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of CNB Common Stock represented thereby,
and no cash payment in lieu of any fractional shares shall be paid to any such
holder pursuant to Section 3.3. Subject to the effect of unclaimed property,
escheat and other applicable laws, following surrender of any such Certificate,
there shall be paid to the holder of the Certificate representing whole shares
of CNB Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of any cash payable in lieu of a fractional
share of CNB Common Stock to which such holder is entitled pursuant to Section
3.3, and (ii) the amount of dividends or other distributions, if any, with a
record date after the Effective Date.
3.3 No Fractional Securities. No FNB Certificates or scrip representing
fractional shares of FNB Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional shares shall not entitle the owner
thereof to vote or to any other rights of a holder of FNB Common Stock. A holder
of Shares converted in the Merger who would otherwise have been entitled to a
fractional share of FNB Common Stock shall be entitled to receive a cash payment
(without interest) in lieu of such fractional share in an amount determined by
multiplying (i) the fractional share interest to which such holder would
otherwise be entitled by (ii) the Market Value of FNB Common Stock.
3.4 Certain Adjustments. If, after the date hereof and on or prior to the
Closing Date, the outstanding shares of CNB Common Stock shall be changed into a
different number of shares by reason of any reclassification, recapitalization,
split-up, combination or exchange of shares, or any dividend payable in stock or
other securities is declared thereon with a record date within such period, or
any similar event shall occur, the Merger Consideration will be adjusted
accordingly to provide to the holders of CNB Common Stock, respectively, the
same economic effect as contemplated by this Agreement prior to such
reclassification, recapitalization, split-up, combination, exchange or dividend
or similar event.
3.5 Rights of Dissenting Shareholders. Shareholders of CNB who
object to the Merger will be entitled to the rights and remedies set forth in
sections 13.1-729 through 13.1-741 of the Virginia Stock Corporation Act.
7
<PAGE>
ARTICLE 4
Representation and Warranties
4.1 Representations and Warranties of CNB. CNB represents and warrants
to FNB as follows:
(a) Organization, Standing and Power. (1) CNB is a corporation duly
organized, validly existing and in good standing under the laws of Virginia. It
has all requisite corporate power and authority to carry on its business as now
being conducted and to own and operate its assets, properties and business, and
CNB has the corporate power and authority to execute and deliver this Agreement
and perform the respective terms of this Agreement and Plan of Merger. CNB is
duly registered as a bank holding company under the Bank Holding Company Act of
1956. Community National Bank is the only subsidiary of CNB and is wholly-owned
by it, and is a national banking association, duly organized, validly existing
and in good standing under the laws of the United States, is in compliance in
all material respects with all rules and regulations promulgated by any relevant
regulatory authority, has all requisite corporate power and authority to carry
on its business as now being conducted and to own and operate its assets,
properties and business, is an "insured bank" as defined in the Federal Deposit
Insurance Act and applicable regulations thereunder, and its deposits are
insured to the fullest extent allowed by law by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation.
(2) Neither CNB nor Community National (collectively with CNB,
the "CNB Companies") owns any equity securities of any other corporation or
entity.
(b) Authority. (1) The execution and delivery of this Agreement and
the Plan of Merger and the consummation of the Merger have been duly and validly
authorized by all necessary corporate action on the part of CNB, except the
approval of shareholders. The Agreement represents the legal, valid, and binding
obligation of CNB, enforceable against CNB in accordance with its terms (except
in all such cases as enforceability may be limited by applicable bankruptcy,
insolvency, merger, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought).
(2) Neither the execution and delivery of the Agreement, the
consummation of the transactions contemplated therein, nor the compliance by CNB
with any of the provisions thereof will (i) conflict with or result in a breach
of any provision of the Articles of Incorporation or Bylaws of CNB, (ii) except
as Previously Disclosed, constitute or result in the breach of any term,
condition or provision of, or constitute default under, or give rise to any
right of termination, cancellation or acceleration with respect to, or result in
the creation of any lien, charge or encumbrance upon, any property or assets of
the CNB Companies pursuant to (A) any note, bond, mortgage, indenture, or (B)
any material license, agreement, lease or other instrument or obligation, to
which any of the CNB Companies is a party or by which any of them or any of
their properties or assets may be bound, or (iii) subject to the receipt of the
requisite
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approvals referred to in Section 4.7, violate any order, writ, injunction,
decree, statute, rule or regulation applicable to any of the CNB Companies or
any of their properties or assets.
(c) Capital Structure. The authorized capital stock of CNB consists
of 10,000,000 shares of common stock, par value $5.00 per share ("CNB Common
Stock), of which 926,399 shares are issued and outstanding, fully paid and
nonassessable, not subject to shareholder preemptive rights, and not issued in
violation of any agreement to which CNB is a party or otherwise bound, or of any
registration or qualification provisions of any federal or state securities laws
and outstanding options to purchase 231,833 shares of CNB Common Stock;
1,000,000 shares of preferred stock, par value $1.00 per share ("CNB Preferred
Stock"), none of which shares are issued and outstanding. Except as Previously
Disclosed, there are no outstanding understandings or commitments of any
character pursuant to which CNB and any of the CNB Companies could be required
or expected to issue shares of capital stock.
(d) Ownership, Capital Structure, and Organization of Community
National. (1) CNB does not own, directly or indirectly, 5% or more of the
outstanding capital stock or other voting securities of any corporation, bank or
other organization actively engaged in business except Community National. The
outstanding shares of capital stock of Community National have been duly
authorized and are validly issued, and are fully paid and nonassessable and all
such shares are owned by CNB free and clear of all liens, claims and
encumbrances and were not issued in violation of any agreement or of any
regulation or qualification provisions of federal or state securities laws. No
rights are authorized, issued or outstanding with respect to the capital stock
of Community National and there are no agreements, understandings or commitments
relating to the right of CNB to vote or to dispose of said shares. None of the
shares of capital stock of Community National has been issued in violation of
the preemptive rights of any person.
(2) Community National is a duly organized association, validly
existing and in good standing under applicable laws. Community National (i) has
full corporate power and authority to own, lease and operate its properties and
to carry on its business as now conducted except where the absence of such power
or authority would not have a material adverse effect on the financial
condition, results of operations or business of CNB on a consolidated basis, and
(ii) is duly qualified to do business in the states of the United States and
foreign jurisdictions where its ownership or leasing of property or the conduct
of its business requires such qualification and where failure to do qualify
would have a material adverse effect on the financial condition, results of
operations or business of CNB on a consolidated basis. Community National has
all federal, state, local and foreign governmental authorizations and licenses
necessary for it to own or lease its properties and assets and to carry on its
business as it is now being conducted, except where failure to obtain such
authorization or license would not have a material adverse effect on its
business.
(e) Financial Statements. CNB's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, and all other documents filed or to be
filed subsequent to December 31, 1999 under Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended (together with the rules and
regulations thereunder, the "Exchange Act"), in the form filed with the SEC (in
each such case, the "CNB Financial Statements") did not and will
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not contain any untrue statement of a material fact or omit to state a material
face required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading; and each of the balance sheets in or incorporated by reference into
the CNB Financial Statements (including the related notes and schedules thereto)
fairly presents and will fairly present the financial position of the entity or
entities to which it relates as of its date and each of the statements of income
and changes in stockholders' equity and cash flows or equivalent statements in
the CNB Financial Statements (including any related notes and schedules thereto)
fairly presents and will fairly present the results of operations, changes in
stockholders' equity and changes in cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein, in
each case in accordance with generally accepted accounting principles
consistently applied to banks and bank holding companies during the periods
involved, except as may be noted therein, subject to normal and recurring year-
end audit adjustments in the case of unaudited statements.
(f) Absence of Undisclosed Liabilities. At December 31, 1999, and at
any subsequent date reflected in such Financial Statements, none of the CNB
Companies had any obligation or liability (contingent or otherwise) of any
nature which were not reflected in the CNB Financial Statements, except for
those which in the aggregate are immaterial or have been Previously Disclosed.
(g) Legal Proceedings; Compliance with Laws. Except as Previously
Disclosed, there are no actions, suits or proceedings instituted or pending or,
to the best knowledge of CNB's management, threatened or probable of assertion
against any of the CNB Companies, or against any property, asset, interest or
right of any of them, that are reasonably expected to have, either individually
or in the aggregate, a material adverse effect on the financial condition of CNB
on a consolidated basis or that are reasonably expected to threaten or impede
the consummation of the transactions contemplated by this Agreement. None of the
CNB Companies is a party to any agreement or instrument or subject to any
judgment, order, writ, injunction, decree or rule that might reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise), business or prospects of CNB on a consolidated basis. Except as
Previously Disclosed, as of the date of this Agreement, none of the CNB
Companies nor any of their properties is a party to or is subject to any order,
decree, agreement, memorandum of understanding or similar arrangement with, or a
commitment letter or similar submission to, any federal or state governmental
agency or authority charged with the supervision or regulation of depository
institutions or mortgage lenders or engaged in the insurance of deposits which
restricts or purports to restrict in any material respect the conduct of the
business of it or any of its subsidiaries or properties, or in any manner
relates to the capital, liquidity, credit policies or management of it; and
except as Previously Disclosed, none of the CNB Companies has been advised by
any such regulatory authority that such authority is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, decree, agreement, memorandum of understanding, commitment letter or
similar submission. To the best knowledge of CNB, the CNB Companies have
complied in all material respects with all laws, ordinances, requirements,
regulations or orders applicable to its business (including environmental laws,
ordinances, requirements, regulations or orders).
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(h) Regulatory Approvals. CNB knows of no reason why the regulatory
approvals referred to in Section 7.1(b) should not be obtained without the
imposition of any condition of the type referred to in Section 7.1(b).
(i) Labor Relations. None of the CNB Companies is a party to, or is
bound by any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor is it the subject of
a proceeding asserting that is has committed an unfair labor practice (within
the meaning of the National Labor Relations Act) or seeking to compel it to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike or other labor dispute involving it, pending or, to the
best of its knowledge, threatened, nor is it aware of any activity involving its
employees seeking to certify a collective bargaining unit or engaging in any
other organizational activity.
(j) Tax Matters. The CNB Companies have filed all federal, state, and
local tax returns and reports required to be filed, and all taxes shown by such
returns to be due and payable have been paid or are reflected as a liability in
the CNB Financial Statements or are being contested in good faith and have been
Previously Disclosed. Except to the extent that liabilities therefor are
specifically reflected in the CNB Financial Statements, there are no federal,
state or local tax liabilities of the CNB Companies other than liabilities that
have arisen since December 31, 1999, all of which have been properly accrued or
otherwise provided for on the books and records of the CNB Companies. Except as
Previously Disclosed, no tax return or report of any of the CNB Companies is
under examination by any taxing authority or the subject of any administrative
or judicial proceeding, and no unpaid tax deficiency has been asserted against
any of the CNB Companies by any taxing authority.
(k) Property. Except as disclosed or reserved against in the CNB
Financial Statements, all of the CNB Companies have good and marketable title
free and clear of all material liens, encumbrances, charges, defaults or
equities of whatever character to all of the material properties and assets,
tangible or intangible, reflected in the CNB Financial Statements as being owned
by the CNB Companies as of the dates thereof. To the best knowledge of CNB, all
buildings, and all fixtures, equipment, and other property and assets which are
material to its business on a consolidated basis, held under leases or subleases
by the CNB Companies are held under valid instruments enforceable in accordance
with their respective terms, subject to bankruptcy, insolvency, merger,
moratorium and similar laws. The buildings, structures, and appurtenances
owned, leased, or occupied by the CNB Companies are, to the best knowledge of
CNB, in good operating condition, in a state of good maintenance and repair and
(i) comply with applicable zoning and other municipal laws and regulations, and
(ii) there are no defects therein.
(l) Reports. Since January 1, 1998, the CNB Companies have filed all
reports and statements, together with any amendments required to be made with
respect thereto, that were required to be filed with the SEC, the Federal
Reserve, the SCC, and any other governmental or regulatory authority or agency
having jurisdiction over their operations.
(m) Employee Benefit Plans. (1) CNB will deliver for FNB's review, as
soon as practicable, true and complete copies of all material pension,
retirement, profit-sharing, deferred compensation, stock option, bonus, vacation
or other material incentive plans or
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agreements, all material medical, dental or other health plans, all cafeteria or
flexible benefits plans, all life insurance plans and all other material
employee benefit plans or fringe benefit plans and any related trust or other
funding instrument, including, without limitation, all "employee benefit plans"
as that term is defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), currently adopted, maintained by,
sponsored in whole or in part by, or contributed to by CNB or Community National
for the benefit of current or former employees, retirees or other beneficiaries
eligible to participate (collectively, the "CNB Benefit Plans"). No CNB Benefit
Plan is an "employee pension benefit plan," as that term is defined in Section
3(2) of ERISA. No CNB Benefit Plan is or has been a multi-employer plan within
the meaning of Section 3(37) of ERISA or a plan subject to the minimum funding
standards of Section 302 of ERISA or Section 412 of the Internal Revenue Code of
1986, as amended (the "IRC").
(2) Except as Previously Disclosed, all CNB Benefit Plans are in
compliance with the applicable terms of ERISA, the IRC and any other applicable
laws, rules and regulations the breach or violation of which could result in a
material liability to CNB on a consolidated basis. In the case of any plan
intended to be qualified under IRC Section 401, compliance with such
qualification requirements shall mean the receipt of a current, favorable
determination letter from the Internal Revenue Service based on laws changes
effective through 1994 and operation of the plan in accordance with its terms or
in accordance with any subsequently enacted law for which the remedial amendment
period has not yet ended.
(n) Investment Securities. Except as Previously Disclosed and except
for pledges to secure public and trust deposits and obligations under agreements
pursuant to which any of the CNB Companies has sold securities subject to an
obligation to repurchase, none of the investment securities reflected in the CNB
Financial Statements is subject to any restriction, contractual, statutory, or
otherwise, which would impair materially the ability of the holder of such
investment to dispose freely of any such investment at any time.
(o) Certain Contracts. (1) Except as Previously Disclosed, neither
CNB nor any CNB subsidiary is a party to, or is bound by, (i) any material
agreement, arrangement or commitment, (ii) any agreement, indenture or other
instrument relating to the borrowing of money by CNB or Community National or
the guarantee by CNB or Community National of any such obligation, (iii) any
agreement, arrangement or commitment relating to the employment of a consultant
or the employment, election, retention in office or severance of any present or
former director or officer, (iv) any agreement to make loans or for the
provision, purchase or sale of goods, services or property between CNB or
Community National and any director or officer of CNB or Community National, or
any member of the immediate family or affiliate of any of the foregoing, or (v)
any agreement between CNB or Community National and any 5% or more shareholder
of CNB; in each case other than agreements entered into in the ordinary course
of the banking business of CNB or Community National consistent with past
practice.
(2) Neither CNB or Community National, nor to the knowledge of
CNB, the other party thereto, is in default under any material agreement,
commitment, arrangement, lease, insurance policy or other instrument whether
entered into in the ordinary course of business or otherwise, nor has there
occurred any event that, with the lapse of time or
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giving of notice or both, would constitute such a default, other than defaults
of loan agreements by borrowers from CNB or Community National in the ordinary
course of its business.
(p) Insurance. A complete list of all policies or binders of fire,
liability, product liability, workmen's compensation, vehicular and other
insurance held by or on behalf of the CNB Companies has previously been
furnished to FNB and all such policies or binders are valid and enforceable in
accordance with their terms, are in full force and effect, and insure against
risks and liabilities to the extent and in the manner customary for the industry
and are deemed appropriate and sufficient by CNB. The CNB Companies are not in
default with respect to any provision contained in any such policy or binder and
have not failed to give any notice or present any claim under any such policy or
binder in due and timely fashion. None of the CNB Companies has received notice
of cancellation or non-renewal of any such policy or binder. None of the CNB
Companies has knowledge of any inaccuracy in any application for such policies
or binders, any failure to pay premiums when due or any similar state of facts
or the occurrence of any event that is reasonably likely to form the basis for
any material claim against it not fully covered (except to the extent of any
applicable deductible) by the policies or binders referred to above. None of
the CNB Companies has received notice from any of its insurance carriers that
any insurance premiums will be increased materially in the future or that any
such insurance coverage will not be available in the future on substantially the
same terms as now in effect.
(q) Loans, OREO, and Allowance for Loan Losses. (1) Except as
Previously Disclosed, and except for matters which individually or in the
aggregate, do not materially adversely affect the Merger or the financial
condition of CNB, to CNB's best knowledge each loan reflected as an asset in the
CNB Financial Statements or the financial statements of Community National (i)
is evidenced by notes, agreements, or other evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been perfected, and
(iii) is the legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms, subject to bankruptcy, insolvency, and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles. All loans and extensions of credit which are
subject to regulation of the Federal Reserve which have been made by CNB and
Community National comply therewith.
(2) The classification on the books and records of CNB and
Community National of loans and/or non-performing assets as nonaccrual, troubled
debt restructuring, OREO or other similar classification, complies in all
material respects with generally accepted accounting principles and applicable
regulatory accounting principles.
(3) Except for liens, security interests, claims, charges, or such
other encumbrances as have been appropriately reserved for in the CNB Financial
Statements or are not material, title to the OREO is good and marketable, and
there are no adverse claims or encumbrances on the OREO. All title, hazard and
other insurance claims and mortgage guaranty claims with respect to the OREO
have been timely filed and neither CNB nor Community National has been received
any notice of denial of any such claim.
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(4) CNB and Community National are in possession of all of the
OREO or, if any of the OREO remains occupied by the mortgagor, eviction or
summary proceedings have been commenced or rental arrangements providing for
market rental rates have been agreed upon and CNB and/or Community National are
diligently pursuing such eviction of summary proceedings or such rental
arrangements. Except as Previously Disclosed, no legal proceeding or quasi-legal
proceeding is pending or, to the knowledge of CNB and Community National,
threatened concerning any OREO or any servicing activity or omission to provide
a servicing activity with respect to any of the OREO.
(5) Except as Previously Disclosed, all loans made by any of the
CNB Companies to facilitate the disposition of OREO are performing in accordance
with their terms.
(6) The allowance for possible loan losses shown on the CNB
Financial Statements was, and the allowance for possible loan losses shown on
the financial statements of CNB as of dates subsequent to the execution of this
Agreement will be, in each case as of the dates thereof, adequate in all
material respects to provide for possible losses, net of recoveries relating to
loans previously charged off, on loans outstanding (including accrued interest
receivable) of the CNB Companies and other extensions of credit (including
letters of credit and commitments to make loans or extend credit) by CNB.
(r) Absence of Material Changes and Events. Since December 31, 1999,
there has not been any material adverse change in the condition (financial or
otherwise), aggregate assets or liabilities, cash flow, earnings or business or
CNB, and CNB has conducted its business only in the ordinary course consistent
with past practice.
(s) Statements True and Correct. None of the information supplied or
to be supplied by CNB for inclusion in the Registration Statement, the Proxy
Statement/Prospectus or any other document to be filed with the SEC or any other
regulatory authority in connection with the transactions contemplated hereby,
will, at the respective time such documents are filed, and, in the case of the
Registration Statement, when it becomes effective and with respect to the Proxy
Statement/Prospectus, when first mailed to CNB shareholders, be false or
misleading with respect to any material fact or omit to state any material fact
necessary in order to make the statements therein not misleading, or, in the
case of the Proxy Statement/Prospectus or any supplement thereto, at the time of
the CNB Shareholders' Meeting, be false or misleading with respect to any
material fact or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the CNB Shareholders' Meeting. All documents that CNB is responsible
for filing with the SEC or any other regulatory authority in connection with the
transactions contemplated hereby will comply as to form in all material respects
with the provisions of applicable law, including applicable provisions of
federal and state securities law.
(t) Brokers and Finders. Neither CNB nor Community National, nor
any of their respective officers, directors or employees, has employed any
broker, finder or financial advisor or incurred any liability for any fees or
commissions in connection with the transactions contemplated herein, except for
Davenport & Company, LLC.
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(u) Repurchase Agreements. With respect to all agreements pursuant
to which CNB or Community National has purchased securities subject to an
agreement to resell, if any, CNB or Community National, as the case may be, has
a valid, perfected first lien or security interest in the government securities
or other collateral securing the repurchase agreement, and the value of such
collateral equals or exceeds the amount of the debt secured thereby.
(v) Trust Accounts. Community National does not provide trust
services.
(w) Environmental Matters. (1) Except as Previously Disclosed, to
the best of CNB's knowledge, neither CNB nor Community National owns or leases
any properties affected by toxic waste, radon gas or other hazardous conditions
or constructed in part with the use of asbestos. Each of CNB and Community
National is in substantial compliance with all Environmental Laws applicable to
real or personal properties in which it has a direct fee ownership or, with
respect to a direct interest as lessee, applicable to the leasehold premises or,
to the best knowledge of CNB and Community National, the premises on which the
leasehold is situated. Neither CNB nor Community National has received any
Communication alleging that CNB or Community National is not in such compliance
and, to the best knowledge of CNB and Community National, there are no present
circumstances (including Environmental Laws that have been adopted but are not
yet effective) that would prevent or interfere with the continuation of such
compliance.
(2) There are no legal, administrative, arbitral or other
claims, causes of action or governmental investigations of any nature, seeking
to impose, or that could result in the imposition, on CNB and Community National
of any liability arising under any Environmental Laws pending or, to the best
knowledge of CNB and Community National, threatened against (A) CNB or Community
National, (B) any person or entity whose liability for any Environmental Claim,
CNB or Community National has or may have retained or assumed either
contractually or by operation of law, or (C)any real or personal property which
CNB or Community National owns or leases, or has been or is judged to have
managed or to have supervised or participated in the management of, which
liability might have a material adverse effect on the business, financial
condition or results of operations of CNB. CNB and Community National are not
subject to any agreement, order, judgment, decree or memorandum by or with any
court, governmental authority, regulatory agency or third party imposing any
such liability.
(3) To the best knowledge of CNB and Community National, there
are no legal, administrative, arbitral or other proceedings, or Environmental
Claims or other claims, causes of action or governmental investigations of any
nature, seeking to impose, or that could result in the imposition, on CNB or
Community National of any liability arising under any Environmental Laws pending
or threatened against any real or personal property in which CNB or Community
National holds a security interest in connection with a loan or a loan
participation which liability might have a material adverse effect on the
business, financial condition or results of operations of CNB. CNB and Community
National are not subject to any agreement, order, judgment, decree or memorandum
by or with any court, governmental authority, regulatory agency or third party
imposing any such liability.
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(4) With respect to all real and personal property owned or leased
by CNB or Community National, other than OREO, CNB has made available to FNB
copies of any environmental audits, analyses and surveys that have been prepared
relating to such properties. With respect to all OREO held by CNB or Community
National and all real or personal property which CNB or Community National has
been or is judged to have managed or to have supervised or participated in the
management of, CNB has made available to FNB the information relating to such
OREO available to CNB. CNB and Community National are in compliance in all
material respects with all recommendations contained in any environmental
audits, analyses and surveys relating to any of the properties, real or
personal, described in this subsection (4).
(5) There are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without limitation,
the release, emission, discharge or disposal of any Materials of Environmental
Concern, that could reasonably form the basis of any Environmental Claim or
other claim or action or governmental investigation that could result in the
imposition of any liability arising under any Environmental Laws currently in
effect or adopted but not yet effective against CNB or Community National or
against any person or entity whose liability for any Environmental Claim CNB or
Community National has or may have retained or assumed either contractually or
by operation of law.
4.2 Representations and Warranties of FNB. FNB represents and warrants to
CNB as follows:
(a) Organization, Standing and Power. (1) FNB is a corporation duly
organized, validly existing and in good standing under the laws of Virginia. It
has all requisite corporate power and authority to carry on its business as now
being conducted and to own and operate its assets, properties and business, and
FNB has the corporate power and authority to execute and deliver this Agreement
and perform the respective terms of this Agreement and Plan of Merger. FNB is
duly registered as a bank holding company under the Bank Holding Company Act of
1956. First National Bank, a wholly owned subsidiary of FNB, is a national
banking association, duly organized, validly existing and in good standing under
the laws of the United States, is in compliance in all material respects with
all rules and regulations promulgated by any relevant regulatory authority, it
has all requisite corporate power and authority to carry on its business as now
being conducted and to own and operate its assets, properties and business, is
an "insured bank" as defined in the Federal Deposit Insurance Act and applicable
regulations thereunder and its deposits are insured to the fullest extent
allowed by law by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation.
(2) FNB has Previously Disclosed its subsidiary corporations (and
the subsidiaries thereof) (the "FNB Subsidiaries" and, collectively with FNB,
the "FNB Companies"). Except as Previously Disclosed, none of the FNB Companies
owns any equity securities of any other corporation or entity.
(b) Authority. (1) The execution and delivery of this Agreement and
the Plan of Merger and the consummation of the Merger have been duly and validly
authorized by all necessary corporate action on the part of FNB, except the
approval of shareholders. The
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Agreement represents the legal, valid, and binding obligation of FNB,
enforceable against FNB in accordance with its terms (except in all such cases
as enforceability may be limited by applicable bankruptcy, insolvency, merger,
moratorium or similar laws affecting the enforcement of creditors' rights
generally and except that the availability of the equitable remedy of specific
performance or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought).
(2) Neither the execution and delivery of the Agreement, the
consummation of the transactions contemplated therein, nor the compliance by FNB
with any of the provisions thereof will (i) conflict with or result in a breach
of any provision of the Articles of Incorporation or Bylaws of FNB, (ii) except
as Previously Disclosed, constitute or result in the breach of any term,
condition or provision of, or constitute default under, or give rise to any
right of termination, cancellation or acceleration with respect to, or result in
the creation of any lien, charge or encumbrance upon, any property or assets of
the FNB Companies pursuant to (A) any note, bond, mortgage, indenture, or (B)
any material license, agreement, lease or other instrument or obligation, to
which any of the FNB Companies is a party or by which any of them or any of
their properties or assets may be bound, or (iii) subject to the receipt of the
requisite approvals referred to in Section 4.7, violate any order, writ,
injunction, decree, statute, rule or regulation applicable to any of the FNB
Companies or any of their properties or assets.
(c) Capital Structure. The authorized capital stock of FNB consists of:
10,000,000 shares of common stock, par value $5.00 per share ("FNB Common
Stock), of which 4,097,266 shares are issued and outstanding, fully paid and
nonassessable, not subject to shareholder preemptive rights, and not issued in
violation of any agreement to which FNB is a party or otherwise bound, or of any
registration or qualification provisions of any federal or state securities
laws. The shares of FNB Common Stock to be issued in exchange for shares of CNB
Common Stock upon consummation of the Merger will have been duly authorized and,
when issued in accordance with the terms of this Agreement, will be validly
issued, fully paid and nonassessable and subject to no preemptive rights. Except
as Previously Disclosed, there are no outstanding understandings or commitments
of any character pursuant to which FNB and any of the FNB Companies could be
required or expected to issue shares of capital stock.
(d) Ownership of the FNB Subsidiaries; Capital Structure of FNB
Subsidiaries; and Organization of the FNB Subsidiaries. (1) FNB does not own,
directly or indirectly, 5% or more of the outstanding capital stock or other
voting securities of any corporation, bank or other organization actively
engaged in business except as Previously Disclosed. The outstanding shares of
capital stock of each FNB Subsidiary have been duly authorized and are validly
issued, and are fully paid and nonassessable and all such shares are owned by
FNB or an FNB Subsidiary free and clear of all liens, claims and encumbrances
and were not issued in violation of any agreement or of any regulation or
qualification provisions of federal or state securities laws. No rights are
authorized, issued or outstanding with respect to the capital stock of any FNB
Subsidiary and there are no agreements, understandings or commitments relating
to the right of FNB to vote or to dispose of said shares. None of the shares of
capital stock of any FNB Subsidiary has been issued in violation of the
preemptive rights of any person.
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(2) Each FNB Subsidiary is a duly organized corporation or
association, validly existing and in good standing under applicable laws. Each
FNB Subsidiary (i) has full corporate power and authority to own, lease and
operate its properties and to carry on its business as now conducted except
where the absence of such power or authority would not have a material adverse
effect on the financial condition, results of operations or business of FNB on a
consolidated basis, and (ii) is duly qualified to do business in the states of
the United States and foreign jurisdictions where its ownership or leasing of
property or the conduct of its business requires such qualification and where
failure to do qualify would have a material adverse effect on the financial
condition, results of operations or business of FNB on a consolidated basis.
Each FNB Subsidiary has all federal, state, local and foreign governmental
authorizations and licenses necessary for it to own or lease its properties and
assets and to carry on its business as it is now being conducted, except where
failure to obtain such authorization or license would not have a material
adverse effect on the business of such FNB Subsidiary.
(e) Financial Statements. FNB's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, and all other documents filed or to be
filed subsequent to December 31, 1999 under Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended (together with the rules and
regulations thereunder, the "Exchange Act"), in the form filed with the SEC (in
each such case, the "FNB Financial Statements") did not and will not contain any
untrue statement of a material fact or omit to state a material face required to
be stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading; and each of the
balance sheets in or incorporated by reference into the FNB Financial Statements
(including the related notes and schedules thereto) fairly presents and will
fairly present the financial position of the entity or entities to which it
relates as of its date and each of the statements of income and changes in
stockholders' equity and cash flows or equivalent statements in the FNB
Financial Statements (including any related notes and schedules thereto) fairly
presents and will fairly present the results of operations, changes in
stockholders' equity and changes in cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein, in
each case in accordance with generally accepted accounting principles
consistently applied to banks and bank holding companies during the periods
involved, except as may be noted therein, subject to normal and recurring year-
end audit adjustments in the case of unaudited statements.
(f) Absence of Undisclosed Liabilities. At December 31, 1999, and at
any subsequent date reflected in such Financial Statements, none of the FNB
Companies had any obligation or liability (contingent or otherwise) of any
nature which were not reflected in the FNB Financial Statements, except for
those which in the aggregate are immaterial or have been Previously Disclosed.
(g) Legal Proceedings; Compliance with Laws. Except as Previously
Disclosed, there are no actions, suits or proceedings instituted or pending or,
to the best knowledge of FNB's management, threatened or probable of assertion
against any of the FNB Companies, or against any property, asset, interest or
right of any of them, that are reasonably expected to have, either individually
or in the aggregate, a material adverse effect on the financial condition of FNB
on a consolidated basis or that are reasonably expected to threaten or impede
the consummation of the transactions contemplated by this Agreement. None of the
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FNB Companies is a party to any agreement or instrument or subject to any
judgment, order, writ, injunction, decree or rule that might reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise), business or prospects of FNB on a consolidated basis. Except as
Previously Disclosed, as of the date of this Agreement, none of the FNB
Companies nor any of their properties is a party to or is subject to any order,
decree, agreement, memorandum of understanding or similar arrangement with, or a
commitment letter or similar submission to, any federal or state governmental
agency or authority charged with the supervision or regulation of depository
institutions or mortgage lenders or engaged in the insurance of deposits which
restricts or purports to restrict in any material respect the conduct of the
business of it or any of its subsidiaries or properties, or in any manner
relates to the capital, liquidity, credit policies or management of it; and
except as Previously Disclosed, none of the FNB Companies has been advised by
any such regulatory authority that such authority is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, decree, agreement, memorandum of understanding, commitment letter or
similar submission. To the best knowledge of FNB, the FNB Companies have
complied in all material respects with all laws, ordinances, requirements,
regulations or orders applicable to its business (including environmental laws,
ordinances, requirements, regulations or orders).
(h) Regulatory Approvals. FNB knows of no reason why the regulatory
approvals referred to in Section 7.1(b) should not be obtained without the
imposition of any condition of the type referred to in Section 7.1(b).
(i) Labor Relations. None of the FNB Companies is a party to, or is
bound by any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor is it the subject of
a proceeding asserting that is has committed an unfair labor practice (within
the meaning of the National Labor Relations Act) or seeking to compel it to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike or other labor dispute involving it, pending or, to the
best of its knowledge, threatened, nor is it aware of any activity involving its
employees seeking to certify a collective bargaining unit or engaging in any
other organizational activity.
(j) Tax Matters. The FNB Companies have filed all federal, state, and
local tax returns and reports required to be filed, and all taxes shown by such
returns to be due and payable have been paid or are reflected as a liability in
the FNB Financial Statements or are being contested in good faith and have been
Previously Disclosed. Except to the extent that liabilities therefor are
specifically reflected in the FNB Financial Statements, there are no federal,
state or local tax liabilities of the FNB Companies other than liabilities that
have arisen since December 31, 1999, all of which have been properly accrued or
otherwise provided for on the books and records of the FNB Companies. Except as
Previously Disclosed, no tax return or report of any of the FNB Companies is
under examination by any taxing authority or the subject of any administrative
or judicial proceeding, and no unpaid tax deficiency has been asserted against
any of the FNB Companies by any taxing authority.
(k) Property. Except as disclosed or reserved against in the FNB
Financial Statements, all of the FNB Companies have good and marketable title
free and clear of all material liens, encumbrances, charges, defaults or
equities of whatever character to all of the
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material properties and assets, tangible or intangible, reflected in the FNB
Financial Statements as being owned by the FNB Companies as of the dates
thereof. To the best knowledge of FNB, all buildings, and all fixtures,
equipment, and other property and assets which are material to its business on a
consolidated basis, held under leases or subleases by the FNB Companies are held
under valid instruments enforceable in accordance with their respective terms,
subject to bankruptcy, insolvency, merger, moratorium and similar laws. The
buildings, structures, and appurtenances owned, leased, or occupied by the FNB
Companies are, to the best knowledge of FNB, in good operating condition, in a
state of good maintenance and repair and (i) comply with applicable zoning and
other municipal laws and regulations, and (ii) there are no latent defects
therein.
(l) Reports. Since January 1, 1998, the FNB Companies have filed all
reports and statements, together with any amendments required to be made with
respect thereto, that were required to be filed with the SEC, the Federal
Reserve, the SCC, and any other governmental or regulatory authority or agency
having jurisdiction over their operations.
(m) Employee Benefit Plans. (1) FNB will deliver for CNB's review, as
soon as practicable, true and complete copies of all material pension,
retirement, profit-sharing, deferred compensation, stock option, bonus, vacation
or other material incentive plans or agreements, all material medical, dental or
other health plans, all cafeteria or flexible benefits plans, all life insurance
plans and all other material employee benefit plans or fringe benefit plans and
any related trust or other funding instrument, including, without limitation,
all "employee benefit plans" as that term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), currently
adopted, maintained by, sponsored in whole or in part by, or contributed to by
FNB or any FNB Subsidiary for the benefit of current or former employees,
retirees or other beneficiaries eligible to participate (collectively, the "FNB
Benefit Plans"). Any of the FNB Benefit Plans which is an "employee pension
benefit plan," as that term is defined in Section 3(2) of ERISA, is referred to
herein as a "FNB ERISA Plan." No FNB Benefit Plan is or has been a multi-
employer plan within the meaning of Section 3(37) of ERISA.
(2) Except as Previously Disclosed, all FNB Benefit Plans are in
compliance with the applicable terms of ERISA and the Internal Revenue Code of
1986, as amended (the "IRC") and any other applicable laws, rules and
regulations the breach or violation of which could result in a material
liability to FNB on a consolidated basis. In the case of any plan intended to
be qualified under IRC Section 401, compliance with such qualification
requirements shall mean the receipt of a current, favorable determination letter
from the Internal Revenue Service based on laws changes effective through 1994
and operation of the plan in accordance with its terms or in accordance with any
subsequently enacted law for which the remedial amendment period has not yet
ended.
(3) No FNB ERISA Plan which is a defined benefit pension plan has
any "unfunded current liability," as that term is defined in Section
302(d)(8)(A) of ERISA, and the present fair market value of the assets of any
such plan exceeds the plan's "benefit liabilities," as that term is defined in
Section 4001(a)(16) of ERISA, when determined under
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actuarial factors that would apply if the plan was terminated in accordance with
all applicable legal requirements.
(n) Investment Securities. Except for pledges to secure public and
trust deposits and obligations under agreements pursuant to which any of the FNB
Companies has sold securities subject to an obligation to repurchase, none of
the investment securities reflected in the FNB Financial Statements is subject
to any restriction, contractual, statutory, or otherwise, which would impair
materially the ability of the holder of such investment to dispose freely of any
such investment at any time.
(o) Certain Contracts. (1) Except as Previously Disclosed, neither
FNB nor any FNB subsidiary is a party to, or is bound by, (i) any material
agreement, arrangement or commitment, (ii) any agreement, indenture or other
instrument relating to the borrowing of money by FNB or any FNB Subsidiary or
the guarantee by FNB or any FNB Subsidiary of any such obligation, (iii) any
agreement, arrangement or commitment relating to the employment of a consultant
or the employment, election, retention in office or severance of any present or
former director or officer, (iv) any agreement to make loans or for the
provision, purchase or sale of goods, services or property between FNB or any
FNB Subsidiary and any director or officer of FNB or any FNB Subsidiary, or any
member of the immediate family or affiliate of any of the foregoing, or (v) any
agreement between FNB or any FNB Subsidiary and any 5% or more shareholder of
FNB; in each case other than agreements entered into in the ordinary course of
the banking business of FNB or a FNB Subsidiary consistent with past practice.
(2) Neither FNB or any FNB Subsidiary, nor to the knowledge of
FNB, the other party thereto, is in default under any material agreement,
commitment, arrangement, lease, insurance policy or other instrument whether
entered into in the ordinary course of business or otherwise, nor has there
occurred any event that, with the lapse of time or giving of notice or both,
would constitute such a default, other than defaults of loan agreements by
borrowers from FNB or a FNB Subsidiary in the ordinary course of its business.
(p) Insurance. A complete list of all policies or binders of fire,
liability, product liability, workmen's compensation, vehicular and other
insurance held by or on behalf of the FNB Companies has previously been
furnished to CNB and all such policies or binders are valid and enforceable in
accordance with their terms, are in full force and effect, and insure against
risks and liabilities to the extent and in the manner customary for the industry
and are deemed appropriate and sufficient by FNB. The FNB Companies are not in
default with respect to any provision contained in any such policy or binder and
have not failed to give any notice or present any claim under any such policy or
binder in due and timely fashion. None of the FNB Companies has received notice
of cancellation or non-renewal of any such policy or binder. None of the FNB
Companies has knowledge of any inaccuracy in any application for such policies
or binders, any failure to pay premiums when due or any similar state of facts
or the occurrence of any event that is reasonably likely to form the basis for
any material claim against it not fully covered (except to the extent of any
applicable deductible) by the policies or binders referred to above. None of
the FNB Companies has received notice from any of its insurance carriers that
any insurance premiums will be increased materially in the future or that any
such
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insurance coverage will not be available in the future on substantially the same
terms as now in effect.
(q) Loans, OREO, and Allowance for Loan Losses. (1) Except as
Previously Disclosed, and except for matters which individually or in the
aggregate, do not materially adversely affect the Merger or the financial
condition of FNB, to FNB's best knowledge each loan reflected as an asset in the
FNB Financial Statements or the financial statements of any FNB Subsidiary (i)
is evidenced by notes, agreements, or other evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been perfected, and
(iii) is the legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
and other laws of general applicability relating to or affecting creditors'
rights and to general equity principles. All loans and extensions of credit
which are subject to regulation of the Federal Reserve which have been made by
FNB and the FNB Subsidiaries comply therewith.
(2) The classification on the books and records of FNB and each
FNB Subsidiary of loans and/or non-performing assets as nonaccrual, troubled
debt restructuring, OREO or other similar classification, complies in all
material respects with generally accepted accounting principles and applicable
regulatory accounting principles.
(3) Except for liens, security interests, claims, charges, or such
other encumbrances as have been appropriately reserved for in the FNB Financial
Statements or are not material, title to the OREO is good and marketable, and
there are no adverse claims or encumbrances on the OREO. All title, hazard and
other insurance claims and mortgage guaranty claims with respect to the OREO
have been timely filed and neither FNB nor any FNB Subsidiary has been received
any notice of denial of any such claim.
(4) FNB and each FNB Subsidiary are in possession of all of the
OREO or, if any of the OREO remains occupied by the mortgagor, eviction or
summary proceedings have been commenced or rental arrangements providing for
market rental rates have been agreed upon and FNB and/or each FNB Subsidiary are
diligently pursuing such eviction of summary proceedings or such rental
arrangements. Except as Previously Disclosed, no legal proceeding or quasi-legal
proceeding is pending or, to the knowledge of FNB and each FNB Subsidiary,
threatened concerning any OREO or any servicing activity or omission to provide
a servicing activity with respect to any of the OREO.
(5) Except as Previously Disclosed, all loans made by any of the
FNB Companies to facilitate the disposition of OREO are performing in accordance
with their terms.
(6) The allowance for possible loan losses shown on the FNB
Financial Statements was, and the allowance for possible loan losses shown on
the financial statements of FNB as of dates subsequent to the execution of this
Agreement will be, in each case as of the dates thereof, adequate in all
material respects to provide for possible losses, net of recoveries relating to
loans previously charged off, on loans outstanding (including accrued
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interest receivable) of the FNB Companies and other extensions of credit
(including letters of credit and commitments to make loans or extend credit) by
FNB.
(r) Absence of Material Changes and Events. Since December 31, 1999,
there has not been any material adverse change in the condition (financial or
otherwise), aggregate assets or liabilities, cash flow, earnings or business or
FNB, and FNB has conducted its business only in the ordinary course consistent
with past practice.
(s) Statements True and Correct. None of the information supplied or
to be supplied by FNB for inclusion in the Registration Statement, the Proxy
Statement/Prospectus or any other document to be filed with the SEC or any other
regulatory authority in connection with the transactions contemplated hereby,
will, at the respective time such documents are filed, and, in the case of the
Registration Statement, when it becomes effective and with respect to the Proxy
Statement/Prospectus, when first mailed to CNB shareholders, be false or
misleading with respect to any material fact or omit to state any material fact
necessary in order to make the statements therein not misleading, or, in the
case of the Proxy Statement/Prospectus or any supplement thereto, at the time of
the CNB Shareholders' Meeting, be false or misleading with respect to any
material fact or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the CNB Shareholders' Meeting. All documents that FNB is responsible
for filing with the SEC or any other regulatory authority in connection with the
transactions contemplated hereby will comply as to form in all material respects
with the provisions of applicable law, including applicable provisions of
federal and state securities law.
(t) Brokers and Finders. Neither FNB nor any FNB Subsidiary, nor any
of their respective officers, directors or employees, has employed any broker,
finder or financial advisor or incurred any liability for any fees or
commissions in connection with the transactions contemplated herein, except for
The Carson Medlin Company.
(u) Repurchase Agreements. With respect to all agreements pursuant to
which FNB or any FNB Subsidiary has purchased securities subject to an agreement
to resell, if any, FNB or such FNB Subsidiary, as the case may be, has a valid,
perfected first lien or security interest in the government securities or other
collateral securing the repurchase agreement, and the value of such collateral
equals or exceeds the amount of the debt secured thereby.
(v) Administration of Trust Accounts. FNB and FNB Subsidiaries have
properly administered, in all respects material and which could reasonably be
expected to be material to the business, operations or financial condition of
FNB and FNB Subsidiaries, taken as a whole, all accounts for which they act as
fiduciaries including but not limited to accounts for which they serve as
trustees, agents, custodians, personal representatives, guardians, conservators
or investment advisors, in accordance with the terms of the governing documents
and applicable state and federal law and regulation and common law. Neither FNB
nor a FNB Subsidiary, nor any director, officer or employee of FNB or a FNB
Subsidiary has committed any breach of trust with respect to any such fiduciary
account which is material to or could reasonably be expected to be material to
the business, operations or financial condition of FNB, or a FNB Subsidiary,
taken as a whole, and the accountings for each such fiduciary account are
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true and correct in all material respects and accurately reflect the assets of
such fiduciary account in all material respects.
(w) Environmental Matters. (1) Except as Previously Disclosed, to the
best of FNB's knowledge, neither FNB nor any FNB Subsidiary owns or leases any
properties affected by toxic waste, radon gas or other hazardous conditions or
constructed in part with the use of asbestos. Each of FNB and the FNB
Subsidiaries is in substantial compliance with all Environmental Laws applicable
to real or personal properties in which it has a direct fee ownership or, with
respect to a direct interest as lessee, applicable to the leasehold premises or,
to the best knowledge of FNB and the FNB Subsidiaries, the premises on which the
leasehold is situated. Neither FNB nor any FNB Subsidiary has received any
Communication alleging that FNB or such FNB Subsidiary is not in such compliance
and, to the best knowledge of FNB and the FNB Subsidiaries, there are no present
circumstances (including Environmental Laws that have been adopted but are not
yet effective) that would prevent or interfere with the continuation of such
compliance.
(2) There are no legal, administrative, arbitral or other claims,
causes of action or governmental investigations of any nature, seeking to
impose, or that could result in the imposition, on FNB and the FNB Subsidiaries
of any liability arising under any Environmental Laws pending or, to the best
knowledge of FNB and the FNB Subsidiaries, threatened against (A) FNB or any FNB
Subsidiary, (B) any person or entity whose liability for any Environmental
Claim, FNB or any FNB Subsidiary has or may have retained or assumed either
contractually or by operation of law, or (C)any real or personal property which
FNB or any FNB Subsidiary owns or leases, or has been or is judged to have
managed or to have supervised or participated in the management of, which
liability might have a material adverse effect on the business, financial
condition or results of operations of FNB. FNB and the FNB Subsidiaries are not
subject to any agreement, order, judgment, decree or memorandum by or with any
court, governmental authority, regulatory agency or third party imposing any
such liability.
(3) To the best knowledge of FNB and the FNB Subsidiaries, there
are no legal, administrative, arbitral or other proceedings, or Environmental
Claims or other claims, causes of action or governmental investigations of any
nature, seeking to impose, or that could result in the imposition, on FNB or any
FNB Subsidiary of any liability arising under any Environmental Laws pending or
threatened against any real or personal property in which FNB or any FNB
Subsidiary holds a security interest in connection with a loan or a loan
participation which liability might have a material adverse effect on the
business, financial condition or results of operations of FNB. FNB and the FNB
Subsidiaries are not subject to any agreement, order, judgment, decree or
memorandum by or with any court, governmental authority, regulatory agency or
third party imposing any such liability.
(4) With respect to all real and personal property owned or leased
by FNB or any FNB Subsidiary, other than OREO, FNB has made available to CNB
copies of any environmental audits, analyses and surveys that have been prepared
relating to such properties. With respect to all OREO held by FNB or any FNB
Subsidiary and all real or personal property which FNB or any FNB Subsidiary has
been or is judged to have managed or to have supervised
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or participated in the management of, FNB has made available to CNB the
information relating to such OREO available to FNB. FNB and the FNB Subsidiaries
are in compliance in all material respects with all recommendations contained in
any environmental audits, analyses and surveys relating to any of the
properties, real or personal, described in this subsection (4).
(5) There are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the release,
emission, discharge or disposal of any Materials of Environmental Concern, that
could reasonably form the basis of any Environmental Claim or other claim or
action or governmental investigation that could result in the imposition of any
liability arising under any Environmental Laws currently in effect or adopted
but not yet effective against FNB or any FNB Subsidiary or against any person or
entity whose liability for any Environmental Claim FNB or any FNB Subsidiary has
or may have retained or assumed either contractually or by operation of law.
ARTICLE 5
Conduct Prior to the Effective Date
5.1 Access to Records and Properties. CNB will keep FNB, and FNB will
keep CNB advised of all material developments relevant to their respective
businesses prior to consummation of the Merger. Prior to the Effective Date,
FNB, on the one hand, and CNB on the other, agree to give to the other party
reasonable access to all the premises and books and records (including tax
returns filed and those in preparation) of it and its subsidiaries and to cause
its officers to furnish the other with such financial and operating data and
other information with respect to the business and properties as the other shall
from time to time request for the purposes of verifying the warranties and
representations set forth herein; provided, however, that any such investigation
shall be conducted in such manner as not to interfere unreasonably with the
operation of the respective business of the other.
5.2 Confidentiality. Between the date of this Agreement and the
Effective Date, FNB and CNB each will maintain in confidence, and cause its
directors, officers, employees, agents and advisors to maintain in confidence,
and not use to the detriment of the other party, any written, oral or other
information obtained in confidence from the other party or a third party in
connection with this Agreement or the transactions contemplated hereby unless
such information is already known to such party or to others not bound by a duty
of confidentiality or unless such information becomes publicly available through
no fault of such party, unless use of such information is necessary or
appropriate in making any filing or obtaining any consent or approval required
for the consummation of the transactions contemplated hereby or unless the
furnishing or use of such information is required by or necessary or appropriate
in connection with legal proceedings. If the Merger is not consummated, each
party will return or destroy as much of such written information as may
reasonably be requested.
5.3 Registration Statement, Proxy Statement and Shareholder Approval.
The Board of Directors of CNB will duly call and will hold a meeting of its
shareholders as soon as practicable for the purpose of approving the Merger (the
"CNB Shareholders' Meeting") and, subject to the fiduciary duties of the Board
of Directors of CNB (as advised in writing by its counsel), CNB shall use its
best efforts to solicit and obtain votes of the holders of its Common
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Stock in favor of the Merger and will comply with the provisions in its Articles
of Incorporation and Bylaws relating to the call and holding of a meeting of
shareholders for such purpose; each member of the Board of Directors of CNB
shall vote all shares of CNB Common Stock under his or her control (and not held
in a fiduciary capacity) in favor of the Merger; and CNB shall, at FNB's
request, recess or adjourn the meeting if such recess or adjournment is deemed
by the other to be necessary or desirable. FNB and CNB will jointly prepare the
proxy statement/prospectus to be used in connection with the CNB Shareholders'
Meeting (the "Proxy Statement"). FNB and CNB will jointly prepare and file with
the SEC the Registration Statement, of which such Proxy Statement shall be a
part and will use its best efforts to have the Registration Statement declared
effective as promptly as possible. When the Registration Statement or any post-
effective amendment or supplement thereto shall become effective, and at all
times subsequent to such effectiveness, up to and including the date of the CNB
Shareholders' Meeting, such Registration Statement and all amendments or
supplements thereto, with respect to all information set forth therein furnished
or to be furnished by CNB relating to the CNB Companies and by FNB relating to
the FNB Companies, (i) will comply in all material respects with the provisions
of the Securities Act of 1933 and any other applicable statutory or regulatory
requirements, including applicable state blue-sky and securities laws, and (ii)
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein not misleading; provided, however, in no event shall any party
hereto be liable for any untrue statement of a material fact or omission to
state a material fact in the Registration Statement made in reliance upon, and
in conformity with, written information concerning another party furnished by
such other party specifically for use in the Registration Statement.
5.4 Operation of the Business of FNB and CNB. From the date hereof
to the Effective Date, FNB and CNB will operate their respective businesses
substantially as presently operated and only in the ordinary course, and,
consistent with such operation, they will use their best efforts to preserve
intact their relationships with persons having business dealings with them.
Without limiting the generality of the foregoing, and except as provided in
Section 5.12, neither FNB nor CNB will, without the prior written consent of the
other:
(a) Make any change in its authorized capital stock, or issue or
sell any additional shares of, securities convertible into or exchangeable for,
or options (excluding those options provided for in the 2000 FNB Corporation
Incentive Stock Compensation Plan, but the number of such options to be issued
shall not exceed 50,000), warrants or rights to purchase, its capital stock, nor
shall it purchase, redeem or otherwise acquire any of its outstanding shares of
capital stock, provided that FNB or CNB may issue shares of common stock
pursuant to options granted or issued prior to the date hereof:
(b) Voluntarily make any changes in the composition of its
officers, directors or other key management personnel;
(c) Make any change in the compensation or title of any officer,
director or key management employee or make any change in the compensation or
title of any other employee, other than permitted by current employment policies
in the ordinary course of business, any of which changes shall be reported
promptly to the other party;
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(d) Enter into any bonus, incentive compensation, stock option,
deferred compensation, profit sharing, thrift, retirement, pension, group
insurance or other benefit plan or any employment or consulting agreement;
(e) Incur any obligation or liability (whether absolute or
contingent, excluding suits instituted against it), make any pledge, or encumber
any of its assets, nor dispose of any of its assets in any other manner, except
in the ordinary course of its business and for adequate value, or as otherwise
specifically permitted in this Agreement;
(f) Except as permitted by Section 5.4(a) hereof, issue or
contract to issue any shares of its Common Stock, options for shares of its
Common Stock, or securities exchangeable for or convertible into such shares;
(g) Knowingly waive any right to substantial value:
(h) Enter into material transactions otherwise than in the
ordinary course of its business;
(i) Alter, amend or repeal its Bylaws or Articles of
Incorporation; or
(j) Propose or take any other action which would make any
representation or warranty in Section 4.1 or Section 4.2 hereof untrue.
5.5 Dividends. FNB and CNB may declare and pay only regular periodic
cash dividends in the ordinary course of business and consistent with past
practice from the date of this Agreement through the Effective Date. Any
dividend increase by CNB or FNB in excess of $.01 per share must be approved by
the other.
5.6 No Solicitation. Without the prior written consent of FNB, CNB
shall not, and shall cause its officers, directors, agents, advisors and
affiliates not to, solicit or encourage inquires or proposals with respect to,
furnish any information relating to, or participate in any negotiations or
discussions concerning, an Acquisition Transaction (as hereinafter defined);
provided, however, that nothing contained in this Section 5.6 shall prohibit the
Board of Directors of CNB from furnishing information to, or entering into
discussions or negotiations with, any person or entity that makes an
unsolicited, written bona fide proposal regarding an Acquisition Transaction if,
and only to the extent that (A) the Board of Directors of CNB concludes in good
faith, after consultation with and consideration of the written advice of
outside counsel, that the failure to furnish such information or enter into such
discussions or negotiations would constitute a breach of its fiduciary duties to
shareholders under applicable law, (B) prior to taking such action, CNB receives
from such person or entity an executed confidentiality agreement, and (C) the
Board of Directors of CNB concludes in good faith that the proposal regarding
the Acquisition Transaction contains an offer of consideration that is superior
to the consideration set forth herein. CNB shall immediately notify FNB orally
and in writing of its receipt of any such proposal or inquiry, of the material
terms and conditions thereof, and of the identity of the person making such
proposal or inquiry. For purposes of this Agreement,
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"Acquisition Transaction" means any merger, consolidation, share exchange, joint
venture, business combination or similar transaction or any purchase of all or
any material portion of the assets of an entity.
5.7 Regulatory Filings. FNB and CNB shall prepare jointly all regulatory
filings required to consummate the transactions contemplated by the Agreement
and the Plan of Merger and submit the filings for approval with the Federal
Reserve Board and the SCC, and any other governing regulatory authority, as soon
as practicable after the date hereof. FNB and CNB shall use their best efforts
to obtain approvals of such filings.
5.8 Public Announcements. Each party will consult with the other before
issuing any press release or otherwise making any public statements with respect
to the Merger and shall not issue any such press release or make any such public
statement prior to such consultations except as may be required by law.
5.9 Notice of Breach. FNB and CNB will give written notice to the other
promptly upon becoming aware of the impending or threatened occurrence of any
event which would cause or constitute a breach of any of the representations,
warranties or covenants made to the other party in this Agreement and will use
its best efforts to prevent or promptly remedy the same.
5.10 Accounting Treatment. FNB and CNB acknowledge that the Merger shall be
accounted for as a purchase under generally accepted accounting principles.
5.11 Merger Consummation. Subject to the terms and conditions of
this Agreement, each party shall use its best efforts in good faith to take, or
cause to be taken, all actions, and to do or cause to be done all things
necessary, proper or desirable, or advisable under applicable laws, as promptly
as practicable so as to permit consummation of the Merger at the earliest
possible date, consistent with Section 1.3 herein, and to otherwise enable
consummation of the transactions contemplated hereby and shall cooperate fully
with the other parties hereto to that end, and each of FNB and CNB shall use,
and shall cause each of their respective subsidiaries to use, its best efforts
to obtain all consents (governmental or other) necessary or desirable for the
consummation of the transactions contemplated by this Agreement.
5.12 FNB Acquisition Transaction. Nothing contained in this Agreement shall
prevent FNB from entering into an Acquisition Transaction with a third party so
long as (i) FNB is the "acquiring" and surviving entity and (ii) FNB complies
with the terms of the Merger with CNB.
ARTICLE 6
Additional Agreements
6.1 Conversion of Stock Options. (a) On the Effective Date, all CNB
Options governed by Section 2.9(i), whether or not they are exercisable, shall
be converted into and become rights with respect to FNB Common Stock, and FNB
shall assume each CNB Option in accordance with the terms of the stock option
plan under which it was issued and the stock
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option agreement by which it is evidenced. From the Effective Date forward, (i)
each CNB Option assumed by FNB may be excised solely for shares of FNB Common
Stock, (ii) the number of shares of FNB Common Stock subject to each CNB Option
shall be equal to the number of shares of CNB Common Stock subject to such
option immediately prior to the Effective Date multiplied by the Exchange Ratio
and (iii) the per share exercise price under each such CNB Option shall be
adjusted by dividing the per share exercise price under each such option by the
Exchange Ratio and rounding down to the nearest cent; provided, however, that
the terms of each CNB Option shall, in accordance with its terms, be subject to
further adjustment as appropriate to reflect any stock split, stock dividend,
recapitalization or other similar transaction after the Effective Date. It is
intended that the foregoing assumption shall be undertaken in a manner that will
not constitute a "modification" as defined in Section 425 of the Code, as to any
stock option which is an "incentive stock option."
6.2 Benefit Plans.
(a) After consummation of the Merger, at the option of FNB (which may
be applied on a plan or program by plan or program basis) and subject to FNB's
best efforts, employees of CNB and Community National shall be entitled to
participate either (x) in one or more combined plans or programs of FNB and CNB
on substantially the same basis as similarly situated employees (taking into
account all applicable factors, including but not limited to position,
employment classification, age, length of service, pay, part time or full time
status, and the like, as well as changes made in such plans and programs in the
future), or (y) in plans and programs which, subject to changes required by
applicable laws or by limitations imposed by insurance companies providing plan
benefits, are comparable to (or a continuation of), and provide for
participation on substantially the same basis, as CNB's employee benefit plans
and programs currently in effect. If and to the extent option (x) is
effectuated:
(1) (A) Coverage under FNB's plans and programs shall be
available to each employee of CNB and Community National and his or her
dependents without regard to any waiting period, evidence or requirement of
insurability, actively at work requirement or preexisting condition exclusion or
limitation (except to the extent and in the manner any such waiting period,
evidence or requirement of insurability, actively at work requirement or
exclusion or limitation applies immediately prior to the effectuation of option
(x)) and (B) amounts paid or payable by employees for health care expenses for
the portion of the annual benefit period prior to the date as of which option
(x) becomes effective shall be credited in satisfaction of any deductible
requirement and any out-of-pocket limit for the balance of the annual benefit
period which includes such date.
(2) FNB's welfare plans and programs (including cafeteria plans)
generally shall offer coverage options and costs to employees not less favorable
in the aggregate (but including reasonable cost sharing for premium or other
cost changes due to experience or other factors) than the most favorable welfare
benefits package provided to employees of either CNB or FNB immediately before
the consummation of the Merger.
(3) FNB shall treat service with CNB and Community National
before the consummation of the Merger as service with FNB for purposes of
eligibility to begin
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participation and vesting (but not benefit accruals, except in the case of a
continuation of any plan maintained by CNB or Community National) for purposes
of all employee benefit and seniority based plans and programs, including but
not limited to annual, sick and personal leave accruing following the
consummation of the Merger.
(b) Except to extent individually negotiated replacement contracts or
settlement agreements are entered into, FNB shall honor all employment
severance, consulting and other compensation contracts and agreements Previously
Disclosed and executed in writing by CNB on the one hand and any individual
current or former director, officer or employee thereof on the other hand,
copies of which have been previously delivered by CNB to FNB.
6.3 Indemnification. Following the Effective Date, FNB shall indemnify and
hold harmless any person who has rights to indemnification from CNB, to the same
extent and on the same conditions as such person is entitled to indemnification
pursuant to Virginia law and CNB's Articles of Incorporation or Bylaws, as in
effect on the date of this Agreement, to the extent legally permitted to do so,
with respect to matters occurring on or prior to the Effective Date. FNB further
agrees that any such person who has rights to indemnification pursuant to this
Section 5.4 is expressly made a third party beneficiary of this Section 5.4 and
may directly, in such person's personal capacity, enforce such rights through an
action at law or in equity or through any other manner or means of redress
allowable under Virginia law to the same extent as if such person were a party
hereto. Without limiting the foregoing, in any case in which corporate approval
may be required to effectuate any indemnification, FNB shall direct, at the
election of the party to be indemnified, that the determination of
permissibility of indemnification shall be made by independent counsel mutually
agreed upon between FNB and the indemnified party. FNB shall use its reasonable
best efforts to maintain CNB's existing directors' and officers' liability
policy, or some other policy, including FNB's existing policy, providing at
least comparable coverage, covering persons who are currently covered by such
insurance of CNB for a period of five years after the Effective Date on terms no
less favorable than those in effect on the date hereof.
ARTICLE 7
Conditions to the Merger
7.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligations of each of FNB and CNB to effect the Merger and the other
transactions contemplated by this Agreement shall be subject to the fulfillment
or waiver at or prior to the Effective Date of the following conditions:
(a) Shareholder Approval. Shareholders of CNB shall have approved all
matters relating to this Agreement and the Merger required to be approved by
such shareholders in accordance with Virginia law.
(b) Regulatory Approvals. This Agreement and the Plan of Merger shall
have been approved by the Federal Reserve, the SCC, and any other regulatory
authority whose approval is required for consummation of the transactions
contemplated hereby, and such approvals shall not have imposed any condition or
requirement which would so materially
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adversely impact the economic or business benefits of the transactions
contemplated by this Agreement as to render inadvisable the consummation of the
Merger in the reasonable opinion of the Board of Directors of FNB or CNB.
(c) Registration Statement. The Registration Statement shall have been
declared effective and shall not be subject to a stop order or any threatened
stop order.
(d) Tax Opinion. FNB and CNB shall have received an opinion of Mays &
Valentine, L.L.P., or other counsel reasonably satisfactory to FNB and CNB, to
the effect that the Merger will constitute a merger within the meaning of
Section 368 of the Internal Revenue Code and that no gain or loss will be
recognized by the shareholders of CNB to the extent they receive FNB Common
Stock solely in exchange for their CNB Common Stock in the Merger.
(e) Opinions of Counsel. CNB shall have delivered to FNB and FNB shall
have delivered to CNB opinions of counsel, dated as of the Effective Date, as to
such matters as they may each reasonably request with respect to the
transactions contemplated by this Agreement and in a form reasonably acceptable
to each of them.
(f) Legal Proceedings. Neither FNB nor CNB shall be subject to any
order, decree or injunction of a court or agency of competent jurisdiction which
enjoins or prohibits the consummation of the Merger.
7.2 Conditions to Obligations of FNB. The obligations of FNB to effect the
Merger shall be subject to the fulfillment or waiver at or prior to the
Effective Date of the following additional conditions:
(a) Representations and Warranties. Each of the representations and
warranties contained herein of CNB shall be true and correct as of the date of
this Agreement and upon the Effective Date with the same effect as though all
such representations and warranties had been made on the Effective Date, except
(i) for any such representations and warranties made as of a specified date,
which shall be true and correct as of such date, (ii) as expressly contemplated
by this Agreement, or (iii) for representations and warranties the inaccuracies
of which relate to matters that, individually or in the aggregate, do not
materially adversely affect the Merger and the other transactions contemplated
by this Agreement and FNB shall have received a certificate or certificates
signed by the Chief Executive Officer and Chief Financial Officer of CNB dated
the Effective Date, to such effect.
(b) Performance of Obligations. CNB shall have performed in all
material respects all obligations required to be performed by it under this
Agreement prior to the Effective Date, and FNB shall have received a certificate
signed by the Chief Executive Officer of CNB to that effect.
(c) Affiliate Letters. Each director and shareholder of CNB who may be
deemed by counsel for FNB to be an "affiliate" of CNB within the meaning of Rule
145 under the Securities Act of 1933 shall have executed and delivered a
commitment and undertaking to the effect that (1) such shareholder will dispose
of the shares of FNB Common Stock received by
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him in connection with the Merger only in accordance with the provisions of
paragraph (d) of Rule 145; (2) such shareholders will not dispose of any such
shares until FNB has received an opinion of counsel acceptable to it that such
proposed disposition will not violate the provisions of any applicable security
laws; and (3) the certificates representing said shares may bear a conspicuous
legend referring to the forgoing restrictions.
(d) Investment Banking Letter. FNB shall have received a written
opinion in form and substance satisfactory to FNB from The Carson Medlin Company
addressed to FNB and dated the date the Proxy Statement/Prospectus is mailed to
shareholders of CNB, to the effect that the terms of the Merger, including the
Exchange Ratio, are fair, from a financial point of view, to FNB.
7.3 Conditions to Obligations of CNB. The obligations of CNB to effect the
Merger shall be subject to the fulfillment or waiver at or prior to the
Effective Date of the following additional conditions:
(a) Representations and Warranties. Each of the representations and
warranties contained herein of FNB shall be true and correct as of the date of
this Agreement and upon the Effective Date with the same effect as though all
such representations and warranties had been made on the Effective date, except
(i) for any such representations and warranties made as of a specified date,
which shall be true and correct as of such date, (ii) as expressly contemplated
by this Agreement, or (iii) for representations and warranties the inaccuracies
of which relate to matters that, individually or in the aggregate, do not
materially adversely affect the Merger and the other transactions contemplated
by this Agreement and CNB shall have received a certificate or certificates
signed by the Chief Executive Officer and Chief Financial Officer of FNB dated
the Effective Date, to such effect.
(b) Performance of Obligations. FNB shall have performed in all
material respects all obligations required to be performed by it under this
Agreement prior to the Effective Date, and CNB shall have received a certificate
signed by Chief Executive Officer of FNB to that effect.
(c) Investment Banking Letter. CNB shall have received a written
opinion in form and substance satisfactory to CNB from Davenport & Company LLC
addressed to CNB and dated the date the Proxy Statement/Prospectus is mailed to
shareholders of CNB, to the effect that the terms of the Merger, including the
Exchange Ratio, are fair, from a financial point of view, to CNB.
ARTICLE 8
Termination
8.1 Termination. Notwithstanding any other provision of this Agreement,
and notwithstanding the approval of this Agreement and the Plan of Merger by the
shareholders of CNB, this Agreement may be terminated and the Merger abandoned
at any time prior to the Effective Date:
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(a) By the mutual consent of the Board of Directors of each of FNB and
CNB;
(b) By the respective Boards of Directors of FNB or CNB if the
conditions set forth in Section 7.1 have not been met or waived by FNB and CNB;
(c) By the Board of Directors of FNB if the conditions set forth in
Section 7.2 have not been met or waived by FNB;
(d) By the Board of Directors of CNB if the conditions set forth in
Section 7.3 have not been met or waived by CNB;
(e) By the respective Boards of Directors FNB or CNB if the Merger is
not consummated by January 10, 2001.
(f) By the Board of Directors of FNB if the Board of Directors of CNB
receives a subsequent offer to acquire CNB and does not within fourteen (14)
days after receipt of such subsequent offer confirm in writing to FNB that each
member of the Board of Directors of CNB supports the Merger, will vote his
shares of CNB Common Stock in favor of the Merger, and will recommend to the
shareholders of CNB that they approve the Merger.
8.2 Effect of Termination. In the event of the termination and abandonment
of this agreement and the Merger pursuant to Section 8.1, this Agreement shall
become void and have no effect, except that (i) the last sentence of Section 5.2
and all of Sections 5.8 and 8.4 shall survive any such termination and
abandonment and (ii) no party shall be relieved or released from any liability
arising out of an intentional breach of any provision of this Agreement.
8.3 Non-Survival of Representations, Warranties and Covenants. Except for
Sections 1.2, 1.4, 2.1, 2.2, 2.3, 2.4, 6.2, 6.3 and 8.4 of this Agreement, none
of the respective representations and warranties, obligations, covenants and
agreements of the parties shall survive the Effective Date, provided that no
such representations, warranties, obligations, covenants and agreements shall be
deemed to be terminated or extinguished so as to deprive FNB or CNB (or any
director, officer, or controlling person thereof) of any defense in law or
equity which otherwise would be available against the claims of any person,
including without limitation any shareholder or former shareholder of either FNB
or CNB.
8.4 Expenses. The parties provide for the payment of expenses as follows:
(a) Except as provided below, each of the parties shall bear and pay
all costs and expenses incurred by it in connection with the transactions
contemplated herein, including fees and expenses of its own financial
consultants, accountants and counsel, except that printing expenses shall be
shared equally between FNB and CNB.
(b) In the event FNB terminates this Agreement based on the occurrence
of a Termination Event (as defined below), CNB shall pay to FNB a termination
fee of Five Hundred Thousand Dollars ($500,000.00) in cash within five business
days after written notice of such
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termination. For the purposes of this Agreement, a "Termination Event" shall
mean any of the following events or transactions occurring after the date
hereof:
(i) CNB, without having received FNB's prior written consent,
shall have entered into an agreement with any person to (A) acquire,
merger or consolidate, or enter into any similar transaction, with
CNB, (B) purchase, lease or otherwise acquire all or substantially all
of the assets of CNB, or (C) purchase or otherwise acquire directly
from CNB securities representing 10% or more of the voting power of
CNB;
(ii) any person shall have acquired beneficial ownership or the
right to acquire beneficial ownership of 20% or more of the
outstanding shares of CNB Common Stock after the date hereof (the term
"beneficial ownership" for purposes of this Agreement having the
meaning assigned thereto in Section 13(d) of the Exchange Act, and the
regulations promulgated thereunder); or
(iii) any person shall have made a bona fide proposal to CNB by
public announcement or written communication that is or becomes the
subject of public disclosure to acquire CNB by merger, shares
exchange, consolidation, purchase of all or substantially all of its
assets or any other similar transaction, and following such bona fide
proposal the shareholders of CNB vote not to approve the Agreement.
Notwithstanding the foregoing, CNB shall not be obligated to pay to FNB the
termination fee described in this Section 8.4(b) in the event that at or prior
to such time as such fee becomes payable (i) FNB and CNB validly terminate this
Agreement pursuant to Section 8.1(a), (ii) FNB or CNB validly terminates this
Agreement pursuant to Sections 8.1(b) [other than as a result of such
Termination Event], 8.1(c) [other than as a result of such Termination Event],
8.1(d) [other than as a result of such Termination Event] or 8.1(e) [other than
as a result of such Termination Event]. Upon payment of the termination fee and
any other amounts that may be due by CNB to FNB hereunder, this Agreement shall
terminated as provided in Section 8.2.
(c) Notwithstanding the provisions of Section 8.4(a) hereof, if for
any reason the Merger is not approved by the shareholders of CNB as required,
CNB shall bear and pay 50% of the costs and expenses incurred by FNB with
respect to the fees and expenses of accountants, counsel, printers and persons
involved in the transactions contemplated by this Agreement, including the
preparation of the Registration Statement and the Proxy Statement not to exceed
$10,000.
(d) If this Agreement is terminated by FNB or CNB because of a willful
and material breach by the other of any representation, warranty, covenant,
undertaking or restriction set forth herein, and provided that the terminating
party shall not have been in breach (in any material respect) of any
representation and warranty, covenant, undertaking or restriction contained
herein, then the breaching party shall bear and pay all such costs and expenses
of the other party, including fees and expenses of consultants, investment
bankers, accountants, counsel, printers, and persons involved in the
transactions contemplated by this Agreement, including the preparation of the
Registration Statement and the Joint Proxy Statement.
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(e) Final settlement with respect to the payment of such fees and
expenses by the parties shall be made within thirty (30) days after the
termination of this Agreement.
ARTICLE 9
General Provisions
9.1 Entire Agreement. This Agreement contains the entire agreement
among FNB and CNB with respect to the Merger and the related transactions and
supersedes all prior arrangements or understandings with respect thereto.
9.2 Waiver and Amendment. Any term or provision of this Agreement may
be waived in writing at any time by the party which is, or whose shareholders
are, entitled to the benefits thereof, and this Agreement may be amended or
supplemented by written instructions duly executed by the parties hereto at any
time, whether before or after the meetings of CNB shareholders referred to in
Section 7.1(a) hereof, except statutory requirements and requisite approvals of
shareholders and regulatory authorities.
9.3 Descriptive Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning and construction of any
provisions of this Agreement.
9.4 Governing Law. Except as required otherwise or otherwise
indicated herein, this Agreement shall be construed and enforced according to
the laws of the Commonwealth of Virginia.
9.5 Notices. All notices or other communications which are required
or permitted hereunder shall be in writing and sufficient if delivered
personally, telecopied or sent by recognized overnight courier service or
registered or certified mail, postage prepaid, addressed as follows:
If to FNB:
J. Daniel Hardy, Jr., President
FNB Corporation
105 Arbor Drive
P.O.Box 600
Christiansburg, Virginia 24068
(Tel. 540-382-6041)
(Fax: 540-381-6768)
Copies to:
Peter A. Seitz, Esquire
First National Bank
P.O.Box 600
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Christiansburg, Virginia 24073
(Tel. 540-382-4951)
(Fax: 540-381-6768)
Fred W. Palmore, III, Esquire
Mays & Valentine, L.L.P.
1111 East Main Street, 23rd Floor (23219)
P.O.Box 1122
Richmond, Virginia 23218-1122
(Tel. 804-697-1396)
(Fax: 804-697-1339)
If to CNB:
Hiawatha Nicely, Jr.
CNB Holdings, Inc.
900 Memorial Drive
P.O.Box 1060
Pulaski, Virginia 24301
(Tel. 540-994-0831)
(Fax: 540-994-0847)
Copy to:
Eugene E. Derryberry
Gentry Locke Rakes & Moore
800 SunTrust Plaza
P.O.Box 40013
Roanoke, Virginia 24022
(Tel. 540-983-9310)
(Fax: 540-983-9400)
9.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts together
shall constitute one and the same agreement.
9.7 Severability. In the event any provisions of this Agreement shall be
held invalid or unenforceable by any court of competent jurisdiction, such
holding shall not invalidate or render unenforceable any other provisions
hereof. Any provision of this Agreement held invalid or unenforceable only in
part or degree shall remain in full force and effect to the extent not held
invalid or unenforceable. Further, the parties agree that a court of competent
jurisdiction may reform any provision of this Agreement held invalid or
unenforceable so as to reflect the intended agreement of the parties hereto.
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9.8 Subsidiaries. All representations, warranties, and covenants herein,
where pertinent, include and shall apply to the Subsidiaries of the party making
such representations, warranties, and covenants.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seals to be affixed hereto, all as of the dates first written above.
FNB Corporation
By: /s/ J. Daniel Hardy, Jr.
----------------------------
J. Daniel Hardy, Jr.
President and Chief Executive Officer
ATTEST:
/s/ Peter Seitz
---------------
Secretary
CNB Holdings, Inc.
By: /s/ Hiawatha Nicely, Jr.
----------------------------
____________________________
____________________________
ATTEST:
/s/
-------------------------
Secretary
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CNB HOLDINGS, INC.
BOARD OF DIRECTORS
Each of the undersigned members of the Board of Directors of CNB Holdings,
Inc. agrees to be bound by his personal obligations as provided in Section 5.3
and 5.6 of this Agreement.
/s/ Nathaniel R. Tuck /s/ Randolph V. Chrisley
----------------------------- ----------------------------
/s/ Sybil S. Atkinson /s/ Jackson M. Bruce
----------------------------- ----------------------------
/s/ A. Carole Pratt
----------------------------- ____________________________
/s/ Jack W. Bowling /s/ Hiawatha Nicely, Jr.
----------------------------- ----------------------------
/s/ David W. Ratcliff, Jr.
-----------------------------
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EXHIBIT A
to the
Agreement and Plan
of Merger
PLAN OF MERGER
BETWEEN
CNB HOLDINGS, INC.
AND
FNB CORPORATION
Pursuant to this Plan of Merger ("Plan of Merger"), CNB Holdings, Inc.
("CNB"), a Virginia corporation, shall merge with and into FNB Corporation
("FNB"), a Virginia corporation in a merger under Section 13.1-716 of the
Virginia Stock Corporation Act.
ARTICLE 1
Terms of the Merger
1.1 The Merger. Subject to the terms and conditions of the Agreement and
Plan of Merger, dated as of July 10, 2000 between FNB and CNB, at the Effective
Date, CNB shall merge with and into FNB , which shall be the surviving
corporation. Each outstanding share of common stock of CNB shall be converted
into and exchanged for shares of the common stock of FNB and/or cash in
accordance with Article 2 of this Plan of Merger pursuant to a merger under
Section 13.1-716 of the Virginia Stock Corporation Act (the "Merger"). At the
Effective Date, the Merger shall have the effect as provided in Section 13.1-721
of the Virginia Stock Corporation Act.
1.2 Articles of Incorporation and Bylaws. The Articles of Incorporation of
FNB shall be the Articles of Incorporation of the surviving corporation
following the Effective Date until amended or repealed. The Bylaws of FNB shall
be the Bylaws of the surviving corporation following the Effective Date until
amended or repealed in accordance with the terms of such Bylaws.
1.3 Management of Surviving Corporation. On the Effective Date, the number
of Directors of FNB shall be increased by one member in Class III whose terms
expire at the 2002 annual meeting of shareholders and Hiawatha Nicely, Jr. shall
be appointed to fill the vacancy so created. At the next annual meeting of
shareholders of FNB and at the annual meeting in 2002, management of FNB will
recommend to shareholders that Mr. Nicely be elected as a member of Class III of
directors whose terms expire at the 2002 and 2005, respectively, annual meetings
of shareholders, provided that he has not resigned, died or otherwise been
removed from office. In addition, on the Effective Date, FNB agrees to enter
into a change of control agreement with
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Phillip Baker, President and Chief Executive Officer of Community National, in
the form attached as Exhibit B to the Agreement and Plan of Merger.
ARTICLE 2
Manner of Converting Shares
2.1 Conversion of CNB Stock and Stock Options. At the Effective Date, by
virtue of the Merger, each share of the common stock, par value $5.00 per share,
of CNB ("CNB Common Stock") issued and outstanding immediately prior to the
Effective Date will be converted into either (i) $10.60 in cash ("Cash
Consideration") or (ii) shares of common stock, par value $5.00 per share, of
FNB ("FNB Common Stock") whose aggregate market value equals $10.60 ("Stock
Consideration"), provided that in no event shall FNB issue more than 0.642
shares or less than 0.544 shares for each outstanding share of CNB Common Stock,
which Stock Consideration together with the Cash Consideration (the "Merger
Consideration"), in each case as the holder thereof shall have elected or be
deemed to have elected in accordance with Section 2.3. The market value of FNB
Common Stock will be the average of the closing sales prices per share of FNB
Common Stock as reported on the NASDAQ Exchange Composite Transactions Tape (as
reported in The Wall Street Journal, or, if not reported thereby, another
-----------------------
authoritative source as chosen by FNB) for the thirty consecutive full trading
days on such exchange (even if FNB Common Stock does not trade in each such day)
ending at the close of trading on the tenth day before the Effective Date (the
"Market Value"). The ratio of shares of FNB's common stock that will be
exchanged for each outstanding share of CNB Common Stock shall be referred to
herein as the "Exchange Ratio" and shall be rounded to the nearest third decimal
point.
2.2 Allocation. Notwithstanding anything in this Agreement to the
contrary, the aggregate amount of cash to be issued to shareholders of CNB in
the Merger shall be equal to $4,909,915 (the "Cash Amount"); provided that the
Cash Amount may be changed by FNB to accommodate the exercise by FNB of its
option to change the Cash Number and the Stock Number pursuant to the last
sentence of this Section 2.2. As used in this Agreement, the Cash Number shall
mean the aggregate number of shares of CNB Common Stock to be converted into the
right to receive the Cash Consideration in the Merger, which shall be equal to
the Cash Amount divided by $10.60. The number of shares of CNB Common Stock to
be converted into the right to receive Stock Consideration (the "Stock Number")
will be equal to (i) the number of shares of CNB Common Stock issued and
outstanding immediately prior to the Effective Date of the Merger less (ii) the
sum of (A) the Cash Number and (B) the aggregate number of shares of CNB Common
Stock to be exchanged for cash pursuant to Section 3.3. FNB shall have the
option to change the Cash Number and the Stock Number to more closely follow the
actual elections of CNB shareholders pursuant to this Article 2, so long as such
modification to the Cash Number and the Stock Number does not prevent the
condition set forth in Section 7.1(d) of the Agreement and Plan of Merger from
being satisfied.
2.3 Election. Subject to allocation in accordance with the provisions of
this Article, each record holder of shares of CNB Common Stock issued and
outstanding immediately prior to
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the Election Deadline (as defined in Section 3.1(i)) will be entitled, in
accordance with Section 3.1, (i) to elect to receive in respect of each such
share (A) Cash Consideration (a "Cash Election") or (B) Stock Consideration (a
"Stock Election") or (ii) to indicate that such record holder has no preference
as to the receipt of Cash Consideration or Stock Consideration for all such
shares held by such holder (a "Non-Election"). Shares of CNB Common Stock in
respect of which a Non-Election is made or as to which no election is made
(collectively, "Non-Election Shares") shall be deemed by FNB to be shares in
respect of which Cash Elections or Stock Elections have been made, as FNB shall
determine.
2.4 Allocation of Cash Election Shares. In the event that the aggregate
number of shares in respect of which Cash Elections have been made (the "Cash
Election Shares") exceeds the Cash Number, all shares of CNB Common Stock in
respect of which Stock Elections have been made (the "Stock Election Shares")
and all Non-Election Shares will be converted into the right to receive Stock
Consideration (and cash in lieu of fractional interests in accordance with
Section 3.3), and Cash Election Shares will be converted into the right to
receive Cash Consideration or Stock Consideration in the following manner:
(i) the number of Cash Election Shares covered by each Form of
Election (as defined in Section 3.1(i)) to be converted into Cash
Consideration will be determined by multiplying the number of Cash Election
Shares covered by such Form of Election by a fraction, (A) the numerator of
which is the Cash Number and (B) the denominator of which is the aggregate
number of Cash Election Shares rounded down to the nearest whole number;
and
(ii) all Cash Election Shares not converted into Cash Consideration in
accordance with Section 2.4(i) will be converted into the right to receive
Stock Consideration (and cash in lieu of fractional interests in accordance
with Section 3.3).
2.5 Allocation of Stock Election Shares. In the event that the aggregate
number of Stock Election Shares exceeds the Stock Number, all Cash Election
Shares and all Non-Election Shares (together, the " Cash Shares") will be
converted into the right to receive Cash Consideration, and all Stock Election
Shares will be converted into the right to receive Cash Consideration or Stock
Consideration in the following manner:
(i) the number of Stock Election Shares covered by each Form of
Election to be converted into Cash Consideration will be determined by
multiplying the number of Stock Election Shares covered by such Form of
Election by a fraction, (A) the numerator of which is the Cash Number less
the number of Cash Shares and (B) the denominator of which is the aggregate
number of Stock Election Shares, rounded down to the nearest whole number;
and
(ii) all Stock Election Shares not converted into Cash Consideration
in accordance with Section 2.5(i) will be converted into the right to
receive Stock Consideration (and cash in lieu of fractional interests in
accordance with Section 3.3).
2.6 No Allocation. In the event that neither Section 2.4 nor Section 2.5
is applicable, all Cash Election Shares will be converted into the right to
receive Cash Consideration, all
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Stock Election Shares will be converted into the right to receive Stock
Consideration (and cash in lieu of fractional interests in accordance with
Section 3.3) and Non-Election Shares will be converted into the right to receive
Cash Consideration or Stock Consideration (and cash in lieu of fractional
interests in accordance with Section 3.3) as FNB shall determine.
2.7 Computations. The Exchange Agent (as defined in Section 3.1(i)) will
make all computations to give effect to this Article 2.
2.8 Cancellation of Shares. As of the Effective Date of the Merger, all
such shares of CNB Common Stock will no longer be outstanding and automatically
be cancelled and retired and will cease to exist and each holder of a
certificate formerly representing any such shares of CNB Common Stock (a "CNB
Certificate") will cease to have any rights with respect thereto, except the
right to receive Merger Consideration and any additional cash in lieu of
fractional shares of FNB Common Stock to be issued or paid in consideration
therefor upon surrender of such CNB Certificate in accordance with Article 3,
without interest.
2.9 Outstanding Options for CNB Common Stock. At the Effective Date, all
rights with respect to CNB Common Stock pursuant to stock options ("CNB
Options") granted by CNB under a CNB stock option plan which are outstanding on
the Effective Date shall be treated as follows: (i) fifty percent (50%) of the
CNB Options held by a holder thereof shall be converted into and become rights
with respect to FNB Common Stock as provided in Article 4 of this Plan of Merger
and (ii) with respect to the remaining fifty percent (50%) of such CNB Options
held by such holder, the amount by which $10.60 exceeds the exercise price for
such options will be converted into Cash Consideration or Stock Consideration as
provided in Sections 2.1 through 2.8 of this Article 2.
ARTICLE 3
Manner of Exchange
3.1 Exchange Procedures.
(i) Not more than 60 days nor fewer than 30 days prior to the
Effective Date, FNB, acting as the exchange agent ("Exchange Agent"), will
mail a form of election (the "Form of Election") to each shareholder of
record of CNB as of a record date as close as practicable to the date of
mailing and mutually agreed to by CNB and FNB. In addition, the Exchange
Agent will use its best efforts to make the Form of Election available to
the persons who become shareholders of CNB during the period between such
record date and the Effective Date. Any election to receive Merger
Consideration will have been properly made only if the Exchange Agent shall
have received on the fifth business day immediately preceding the Effective
Date (the "Election Deadline"), a Form of Election properly completed and
accompanied by a CNB Certificate ("Certificate(s)") for the shares to which
such Form of Election relates, acceptable for transfer on the books of CNB
(or an appropriate guarantee of delivery), as set forth in such Form of
Election. An election may be revoked only by written notice received by the
Exchange Agent prior to 5:00 p.m. on the Election Deadline. If an election
is so revoked, the Certificate(s) (or
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<PAGE>
guarantee of delivery, as appropriate) to which such election relates will
be promptly returned to the person submitting the same to the Exchange
Agent.
(ii) As soon as reasonably practicable after the Effective Date, the
Exchange Agent will mail to each holder of record of a Certificate, whose
shares of CNB Common Stock were converted into the right to receive Merger
Consideration and those who failed to return a properly completed Form of
Election, (i) a letter of transmittal (which will specify that delivery
will be effected, and risk of loss and title to the Certificates will pass,
only upon delivery of the Certificates to the Exchange Agent and will be in
such form and have such other provisions as the Exchange Agent may specify
consistent with this Agreement) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for the Merger Consideration.
(iii) With respect to properly made elections in accordance with
Section 3.1(i), and upon surrender in accordance with Section 3.1(ii) of a
Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such
Certificate will be entitled to receive in exchange therefor the Merger
Consideration that such holder has the right to receive pursuant to the
provisions of Article 2, and the Certificate so surrendered will forthwith
be canceled. In the event of a transfer of ownership of Shares that are not
registered in the transfer records of CNB, as the case may be, payment may
be issued to a person other than the person in whose name the Certificate
so surrendered is registered if such Certificate is properly endorsed or
otherwise in proper form for transfer and the person requesting such
issuance pays any transfer or other taxes required by reason of such
payment to a person other than the registered holder of such Certificate or
establishes to the satisfaction of FNB that such tax has been paid or is
not applicable. Until surrendered as contemplated by this Section 3.1, each
Certificate will be deemed at any time after the Effective Date to
represent only the right to receive upon such surrender the Merger
Consideration that the holder thereof has the right to receive in respect
of such Certificate pursuant to the provisions of Article 2. No interest
will be paid or will accrue on any cash payable to holders of Certificates
pursuant to the provisions of Article 2.
3.2 Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to the shares of CNB Common Stock with a record
date after the Effective Date shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of CNB Common Stock represented thereby,
and no cash payment in lieu of any fractional shares shall be paid to any such
holder pursuant to Section 3.3. Subject to the effect of unclaimed property,
escheat and other applicable laws, following surrender of any such Certificate,
there shall be paid to the holder of the Certificate representing whole shares
of CNB Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of any cash payable in lieu of a fractional
share of CNB Common Stock to which such holder is entitled pursuant to Section
3.3, and the amount of dividends or other distributions with a record date after
the Effective Date theretofore paid with respect to such whole shares of CNB
Common Stock
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3.3 No Fractional Securities. No FNB Certificates or scrip representing
fractional shares of FNB Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional shares shall not entitle the owner
thereof to vote or to any other rights of a holder of FNB Common Stock. A holder
of Shares converted in the Merger who would otherwise have been entitled to a
fractional share of FNB Common Stock shall be entitled to receive a cash payment
(without interest) in lieu of such fractional share in an amount determined by
multiplying (i) the fractional share interest to which such holder would
otherwise be entitled by (ii) the Marked Value of FNB Common Stock.
3.4 Certain Adjustments. If, after the date hereof and on or prior to the
Closing Date, the outstanding shares of CNB Common Stock shall be changed into a
different number of shares by reason of any reclassification, recapitalization,
split-up, combination or exchange of shares, or any dividend payable in stock or
other securities is declared thereon with a record date within such period, or
any similar event shall occur, the Merger Consideration will be adjusted
accordingly to provide to the holders of CNB Common Stock, respectively, the
same economic effect as contemplated by this Agreement prior to such
reclassification, recapitalization, split-up, combination, exchange or dividend
or similar event.
3.5 Rights of Dissenting Shareholders. Shareholders of CNB who object to
the Merger will be entitled to the rights and remedies set forth in sections
13.1-729 through 13.1-741 of the Virginia Stock Corporation Act.
ARTICLE 4
Treatment of Stock Options
4.1 Conversion of Stock Options. (a) On the Effective Date, all CNB
Options governed by Section 2.9(i) of this Plan of Merger, whether or not they
are exercisable, shall be converted into and become rights with respect to FNB
Common Stock, and FNB shall assume each CNB Option in accordance with the terms
of the stock option plan under which it was issued and the stock option
agreement by which it is evidenced. From the Effective Date forward, (i) each
CNB Option assumed by FNB may be excised solely for shares of FNB Common Stock,
(ii) the number of shares of FNB Common Stock subject to each CNB Option shall
be equal to the number of shares of CNB Common Stock subject to such option
immediately prior to the Effective Date multiplied by the Exchange Ratio and
(iii) the per share exercise price under each such CNB Option shall be adjusted
by dividing the per share exercise price under each such option by the Exchange
Ratio and rounding down to the nearest cent; provided, however, that the terms
of each CNB Option shall, in accordance with its terms, be subject to further
adjustment as appropriate to reflect any stock split, stock dividend,
recapitalization or other similar transaction after the Effective Date. It is
intended that the foregoing assumption shall be undertaken in a manner that will
not constitute a "modification" as defined in Section 425 of the Code, as to any
stock option which is an "incentive stock option."
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ARTICLE 5
Termination
5.1 Termination. This Plan of Merger may be amended or terminated prior to
the Effective Time as provided in the Merger Agreement, subject to the
provisions of the Virginia Stock Corporation Act.
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APPENDIX B
U.S. Securities And Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
X Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
---
1934 (Fee required) For the fiscal year ended December 31, 1999
or
___ Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required) For the transition period from ________
to _______
Commission file no. 33-69326
CNB HOLDINGS, INC.
--------------------------
(Name of small business issuer in its charter)
Virginia 54-1663340
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
900 Memorial Drive
Pulaski, Virginia 24301
----------------- -----
(Address of principal executive offices) (Zip Code)
(540) 994-0831
------------------------------
Issuer'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 $5.00 per share
--------------------------
Title of Class
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days. Yes __X__ No_____
Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B is not 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 issuer's revenues for its most recent fiscal year were $3,912,801.
The aggregate market value of the voting stock as of March 20, 2000, held by
non-affiliates of the registrant computed by reference to the price at which
the stock was sold, or the average bid and asked prices of such stock, as of a
specified date within the last 60 days was $7,411,192.
926,399 shares of the Issuer's common stock were issued and outstanding as of
March 20, 2000.
<PAGE>
Transitional Small Business Disclosure Format. (Check one): Yes___ No X
---
DOCUMENTS INCORPORATED BY REFERENCE
The annual report to security holders for fiscal year ended December 31, 1999 is
incorporated by reference into Form 10-KSB Part II, Items 7 and 8, and Part III,
Item 13. The issuer's Proxy Statement dated March 10, 2000 is incorporated by
reference into Form 10-KSB Part III, Items 9, 10, 11 and 12.
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
-------------------------------
GENERAL
CNB Holdings, Inc. (the "Company") was incorporated as a Virginia stock
corporation on April 29, 1993, primarily to own and control all of the capital
stock of Community National Bank (the "Bank"). The Company presently engages in
no business other than owning and managing the Bank. The Bank is a national
banking association which engages in a commercial banking business from its main
office in Pulaski, Virginia. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation (the "FDIC"), and it is a member of the Federal
Reserve System.
In July 1994, the Company completed its initial public offering of 437,225
shares of its common stock, $5.00 par value per share (the "Common Stock"), at a
price of $10.00 per share, pursuant to its Prospectus dated November 16, 1993.
The Company received final approval of its application to charter the Bank from
the Office of Comptroller of the Currency (the "OCC") and final approval of its
application for deposit insurance for the bank from the Federal Deposit
Insurance Corporation ("FDIC") on August 29, 1994. On August 29, 1994, the Bank
opened for business.
During 1997, the Board of Directors approved a 25% stock dividend for
shareholders of record as of May 1, 1997. Also during 1997, the Company filed
for and received approval from the SEC for a secondary stock offering of up to
380,000 shares of its common stock, $5.00 par value per share (the "Common
Stock"), at a price of $9.00 per share, pursuant to its Prospectus dated
December 11, 1997. All 380,000 shares were sold during the first quarter of
1998. Net proceeds were approximately $3.1 million and were used for general
banking purposes.
LOCATION AND SERVICE AREA
The Bank's primary service area is Pulaski County and includes portions of
Giles, Montgomery, Bland, and Wythe Counties and the City of Radford, Virginia.
The Bank conducts a general commercial banking business in its service area,
emphasizing the banking needs of small-to-medium sized businesses, professional
concerns and individuals. The Bank operates from its main office at 900 Memorial
Drive, Pulaski, Virginia, which is at the corner of Memorial Drive and Lee
Highway (U.S. Route 11). See "Item 2. Description of Property" below. The
Bank draws most of its customer deposits and conducts most of its lending
transactions from within its primary service area. The Bank is the only locally
owned and operated commercial bank in Pulaski County.
Pulaski County is located in the New River Valley area of Southwest Virginia.
Pulaski, the county seat, is approximately 53 miles southwest of Roanoke, 90
miles northeast of the Tri-Cities, Tennessee (Johnson City, Kingsport and
Bristol), and 150 miles north of Charlotte, North Carolina. Pulaski County
had a population of 34,500 in 1994 and a median family income of $28,057 in
1989. Virginia Polytechnic Institute and State University ("Virginia Tech"),
a four-year, comprehensive land grant university with over 22,000 students,
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is located approximately 15 miles from Pulaski County.
The principal components of the economy of Pulaski County are manufacturing
(which accounts for the largest share of all economic activity), agriculture,
and tourism. Manufacturing employment is concentrated in the automotive,
furniture and textile industries. The largest industrial employers in the county
include Volvo-GM Heavy Trucks (3,500 employees), Pulaski Furniture (1,500
employees), Renfro Corporation (a textile manufacturer with 1,000 employees) and
Jefferson Mills, Inc. (350 employees). Agricultural production, consisting
primarily of beef cattle and dairy farming contributes over $12 million per year
to the county's economy. Claytor Lake State Park, located in the county,
attracts over 800,000 visitors each year, offering swimming, boating, fishing,
hiking and other outdoor sports.
BANKING SERVICES
The Bank offers a full range of deposit services that are typically available in
most banks and savings and loan associations, including checking accounts, NOW
accounts, savings accounts and other time deposits of various types, ranging
from daily money market accounts to longer-term certificates of deposit. The
transaction accounts and time certificates are tailored to the Bank's principal
market area at rates competitive to those offered in the area. In addition, the
Bank offers certain retirement account services, such as Individual Retirement
Accounts (IRAs). All deposits accounts are insured by the FDIC up to the maximum
amount allowed by law (generally, $100,000 per depositor subject to aggregation
rules). The Bank solicits these accounts from individuals, businesses,
associations, organizations, and governmental entities.
The Bank also offers a full range of short-to-medium term commercial and
personal loans. Commercial loans include both secured and unsecured loans for
working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans for
financing automobiles, home improvements, education and personal investments.
The Bank also makes real estate construction and acquisition loans and
originates and holds fixed and variable rate mortgage loans. The Bank's lending
activities are subject to a variety of lending limits imposed by federal law.
While differing limits apply in certain circumstances based on the type of loan
or the nature of the borrower (including borrowers' relationship to the Bank),
in general the Bank is subject to a loan-to-one borrower limit of an amount
equal to 15% of the Bank's unimpaired capital and surplus, or 25% of the
unimpaired capital and surplus if the excess over 15% is approved by the board
of directors of the Bank and is fully secured by readily marketable collateral.
The Bank may not make loans to any director, officer, employee or 10%
shareholder of the Company or the Bank unless the loan is approved by the Board
of Directors of the Bank and is made on terms not more favorable than would be
available to a person not affiliated with the Bank.
Other bank services include mortgage loan origination, cash management services,
travelers checks, direct deposit of payroll and social security checks, and
automated drafts for various accounts. The Bank is associated with Most Plus &
VISA shared networks of automated teller machines and debit card retail
locations that Bank customers may use throughout Virginia and other regions. The
Bank also offers VISA credit card services.
The Bank does not plan to exercise trust powers during its initial years of
operation. The Bank may in the future offer a full-service trust department, but
cannot do so without the prior approval of the OCC.
COMPETITION
The banking business is highly competitive. The Bank competes as a financial
intermediary with other commercial banks, savings and loan associations,
credit unions and money market funds operating in Pulaski County and else-
where, most of which are larger and have greater resources than the Bank.
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<PAGE>
As of March 20, 2000, there were six commercial banks operating a total of
eleven offices in Pulaski County, Virginia. The Bank is the only one of these
institutions that is locally owned and operated. First Virginia Bank is an in-
state bank with three offices in Pulaski County, but is headquartered in
Northern Virginia. Crestar Bank with one office in the county, is a statewide
bank based in Richmond. First Union Bank, a Charlotte, North Carolina based
regional bank operates one branch in the county. Bank of America, with two
offices in Pulaski County, is an affiliate bank of southeast regional bank
holding company also headquartered in Charlotte, North Carolina. First Citizens
Bank, a regional bank with offices in North Carolina and Virginia, headquartered
in Raleigh, operates one branch in Pulaski County. First National Bank of
Christiansburg, a community bank which is headquartered in nearby Montgomery
County, operates a branch in Pulaski County.
In addition to the commercial banks described above, First American Bank, a
federally chartered savings association, operates two branches in Pulaski
County. Two credit unions also operate in the county. In addition, the Bank is
subject to aggressive competition from a wide variety of financial service
companies offering an expansive array of financial products and services.
The Company believes that the community focus of the Bank, with its emphasis on
service to small businesses, individuals, and professional concerns, gives it an
advantage in some segments of this market.
EMPLOYEES
The Bank presently has 21 full-time employees and 8 part-time employees for a
total of 25 full-time equivalents. The Company does not have any employees other
than its officers, none of whom receive any remuneration for their services to
the Company.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws and
regulations. These impose specific requirements and restrictions and provide for
general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and following with the Federal
Deposit Insurance Corporation Improvement Act ("FDICIA"), enacted in 1991,
numerous additional regulator requirements have been placed on the banking
industry in the past five years, and additional changes have been proposed. The
operations of the Company and the Bank may be affected by legislative changes
and the policies of various regulatory authorities. The Company is unable to
predict the nature or the extent of the effect on its business and earnings that
fiscal or monetary policies, economic control, or new federal or state
legislation may have in the future.
Federal Bank Holding Company Regulation
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956 (the "BHCA"), Under the BHCA, the Company is subject to
periodic examination by the Board of Governors of the Federal Reserve System
(the "Federal Reserve") and is required to file periodic reports of it
operations and such information as the Federal Reserve may require. Company and
Bank activities are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries, or engaging
in any other activity that the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
4
<PAGE>
Investments, Control, and Activities. With certain limited exceptions, the BHCA
requires every bank holding company to obtain the prior approval of the Federal
Reserve before (i) acquiring substantially all the assets of any bank, (ii)
acquiring direct or indirect ownership or control of any voting shares of any
bank if after such an acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company.
In addition, and subject to certain exceptions, the BHCA and the Change in Bank
Control Act, together with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring "control" of a bank holding company, such as the
Company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. In the case of the Company, under Federal Reserve regulations control
will be rebuttably presumed to exist if a person acquires at least 10% of the
outstanding shares of any class of voting securities once the Company's Common
Stock is registered under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company registered the Common Stock under the Exchange Act by April
30, 1995. The regulations provide a procedure for challenge of the rebuttable
control presumption.
Under the BHCA, the Company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in, nonbanking activities, unless the Federal Reserve, by order
or regulation, has found those activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
activities that the Federal Reserve has determined by regulation to be proper
incidents to the business of banking include making or servicing loans and
certain types of leases, engaging in certain insurance and discount brokerage
activities, performing certain data processing services, acting in certain
circumstances as a fiduciary or investment or financial advisor, owning savings
associations, and making investments in certain corporations or projects
designed primarily to promote community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve policy,
the Company is expected to act as a source of financial strength to the Bank and
to commit resources to support the Bank in circumstances in which the Company
might not otherwise do so. Under the BHCA, the Federal Reserve may require a
bank holding company to terminate any activity or relinquish control of a
nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness or stability of any subsidiary depository institution
of the bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or nonbank subsidiary if the agency determines that divestiture may aid the
depository institution's financial condition. The Bank may be required to
indemnify, or cross-guarantee, the FDIC against losses it incurs with respect to
any other bank which the Company controls, which in effect makes the Company's
equity investments in healthy bank subsidiaries available to the FDIC to assist
any failing or failed bank subsidiary of the Company.
Virginia Bank Holding Company Regulation
All Virginia bank holding companies must register with the Virginia State
Corporation Commission (the "Virginia Commission") under Title 6.1 of the Code
of Virginia (the "Virginia Act"). A registered bank holding company must provide
the Virginia Commission with information with respect to the financial
condition, operations, management, and intercompany relationships of the holding
company and its subsidiaries. The Virginia Commission may also require such
other information as is necessary to keep itself informed about whether the
provisions of Virginia law and the regulations and orders
5
<PAGE>
issued thereunder by the Virginia Commission have been complied with, and may
make examinations of any bank holding company and its subsidiaries.
Under the Virginia Act, it is unlawful without prior approval of the Virginia
Commission for any company to acquire 25% or more of the voting securities of
any bank and for any Virginia bank holding company to acquire direct to indirect
ownership or control of more than 5% of the voting securities of any bank or
other bank holding company. In addition, the Virginia Act allows regional
interstate banking by permitting banking organizations in certain Southeastern
states to acquire Virginia banking organizations if Virginia banking
associations are allowed to acquire banking organizations in their states and
the Virginia banking organization to be acquired has been in existence and
continuously operated as a bank for a period of two years. As a result of this
reciprocal banking provisions, banking organizations in other states, most
significantly North Carolina, have entered the Virginia market through
acquisitions of Virginia institutions. Those acquisitions are subject to federal
and Virginia approval. Recent legislation has broadened these statutes to permit
nationwide reciprocal bank acquisitions. See "The Bank-Branching" below.
THE BANK
General. The Company is the holding company for the bank, which is a national
banking association. Substantially all company revenues are earned through the
operations of the bank. The Office of Comptroller of the Currency (the "OCC") is
the primary regulator for the Bank. The OCC regulates or monitors all areas of
the Bank's operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securities, payment of dividends, interest rates payable
on deposits, interest rates or fees chargeable on loans, establishment of
branches, corporate reorganizations, maintenance of books and records, and
adequacy of staff training to carry on safe lending and deposit gathering
practices. The Bank must maintain certain capital ratios and is subject to
limitations on aggregate investments in real estate, bank premises, and
furniture and fixtures.
Under FDICIA, all insured institutions must undergo regular on-site examinations
by their appropriate banking agency. The cost of examinations of insured
depository institutions and any affiliates may be assessed by the appropriate
agency against each institution or affiliate as it deems necessary or
appropriate. Insured institutions are required to submit annual reports to the
Federal Deposit Insurance Corporation ("FDIC") and the appropriate agency (and
state supervisor when applicable). FDICIA also directs the FDIC to develop with
other appropriate agencies a method for insured depository institutions to
provide supplemental disclosure of the estimated fair market value of assets and
liabilities, to the extent feasible and practicable, in any balance sheet,
financial statement, report of condition or any other report of any insured
depository institution. FDICIA also requires the Federal banking regulatory
agencies to prescribe, by regulation, standards for all insured depository
institutions and depository institution holding companies relating, among other
things, to: (i) internal controls, information systems and audit systems; (ii)
loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure;
and (v) asset quality.
Transactions With Affiliates and Insiders. The Bank is subject to the provisions
on Section 23A of the Federal Reserve Act, which place limits on the amount of
loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. In addition, most
of these loans and certain other transactions must be secured in prescribed
amounts. The Bank is also subject to the provisions of Section 23B of the
Federal Reserve Act that, amoung other things, prohibit an institution from
engaging in certain transactions with certain affiliates unless the transactions
are on terms substantially the same, or at least as favorable to such
institution or its subsidiaries, as those prevailing at the time for comparable
transactions with non-affiliated companies. The Bank
6
<PAGE>
is subject to certain restrictions on extensions of credit to executive
officers, directors, certain principal shareholders and their related interests.
Such extensions of credit (i) must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with third parties and (ii) must not involve more than
the normal risk of repayment or present other unfavorable features.
Branching. The Bank is permitted to branch freely within the state of Virginia.
The Virginia Act permits statewide branching for Virginia state banks. As a
national bank located in Virginia, these state branch banking laws also apply to
the Bank. On September 29, 1994, the federal Interstate Banking Efficiency Act
(the "Interstate Act), which expands the ability of banks to compete interstate,
was enacted. The Interstate Act permits nation-wide interstate acquisitions of
banks by bank holding companies beginning September 29, 1995, and permits
nationwide interstate mergers of banks beginning June 1, 1997. States can
legislatively opt not to permit inter-state banks mergers or can legislatively
opt to permit interstate bank merges before the June 1, 1997, effective date.
The Virginia General Assembly has adopted legislation which opts to permit
nationwide inter-state bank mergers effective July 1, 1995.
Community Reinvestment Act. The Community Reinvestment Act (the "CRA") requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, the federal regulators of financial institutions to
evaluate the record of the financial institutions in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility. The Bank has not
yet received a CRA evaluation.
Other Regulations. Interest and certain other charges collected or contracted by
the Bank are subject to state usury laws and certain federal laws concerning
interest rates. The Bank's loan operations are also subject to certain federal
laws applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowed, the Home Mortgage
Disclosure Act of 1975 requiring financial institutions to provide information
to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the
community it serves, the Equal Credit Opportunity Act prohibiting discrimination
on the basis of race, creed, or other prohibited factors in extending credit,
the Fair Credit Reporting Act of 1978 governing the use and provision of
information to credit reporting agencies, the Fair Debt Collection Act governing
the manner in which consumer debts may be collected by collection agencies, and
the rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws. The deposit operations of the
Bank also are subject to Truth-In-Savings Act, which requires detailed
disclosure of the yield and terms of deposit products, the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoena of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve Board to implement that act, which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
Deposit Insurance
The deposits of the Bank are currently insured to a maximum of $100,000 per
depositor, subject to certain aggregation rules. The FDIC establishes rates
for the payment of premiums by federally insured banks and thrifts for
deposit insurance. Separate insurance funds (BIF and SAIF) are maintained
7
<PAGE>
for commercial banks and thrifts, with insurance premiums from the industry used
to offset losses from insurance payouts when banks and thrifts fail. Due to the
lower rate of failures in recent years, the fees Banks and thrifts pay BIF and
SAIF have decreased. The FDIC has adopted a risk-based deposit insurance premium
system for all insured depository institutions, including the Bank, which
requires that a depository institution pay to BIF or SAIF from $.00 to $.27 per
$100 of insured deposits depending on its capital levels and risk profile, as
determined by its primary federal regulator on a semiannual basis. The current
assessment rate per $100 of insured deposits of the Bank is $.00, or a minimum
of $2,000 annually.
Dividends
The principal source of the Company's cash revenues comes from dividends
received from the Bank. The amount of dividends that may be paid by the Bank to
the Company depends on the Bank's earnings and capital position and is limited
by federal law, regulations and policies. As a national bank, the Bank may not
pay dividends from its paid-in-capital. All dividends must be paid out of
undivided profits then on hand, after de-
ducting expenses, including reserves from losses and bad debts. In addition, a
national bank is prohibited from declaring a dividend on its shares of common
stock until its surplus equals its stated capital, unless there has been
transferred to surplus no less than one-tenth of the bank's net profits of the
preceding two consecutive half-year periods (in the case of an annual dividend).
The approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total if its net profits for that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus. Under FDICIA, the Bank may not pay a dividend
if, after paying the dividend, the Bank would be undercapitalized. See "Capital
Regulations" below.
Capital Regulations
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance sheet exposure,
and minimize disincentives for holding liquid assets. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums. The
current guidelines require all federally regulated banks and bank holding
companies to maintain a minimum risk-based total capital ratio equal to 8%, of
which at least 4% must be Tier 1 capital. Tier 1 capital includes common
shareholders' equity, qualifying perpetual preferred stock, and minority
interests in equity accounts of consolidated subsidiaries, but excludes goodwill
and most other intangibles and excludes the allowance for loan and lease losses.
Tier 2 capital includes the excess of any preferred stock not included in Tier 1
capital, mandatory convertible securities, hybrid capital instruments,
subordinated debt and intermediate term-preferred stock, and general reserves
for loan and lease losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are
assigned to the 100% risk category, except for first mortgage loans fully
secured by residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most investment
securities are assigned to the 20% category, except for municipal or state
8
<PAGE>
revenue bonds, which have a 50% rating, and direct obligations of or obligations
guaranteed by the United States Treasury of United States Government agencies,
which have a 0% rating.
The federal bank regulator authorities have also implemented a leverage ratio,
which is Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank or bank holding company may leverage its equity
capital base. The minimum required leverage ratio for top-rated institutions is
3%, but most institutions are required to maintain an additional cushion of at
least 100 to 200 basis points.
These guidelines apply on a consolidated basis to bank holding companies with
total consolidated assets of $150 million or more. For bank holding companies
with less than $150 million in total consolidated assets (such as the Company),
the guidelines will be applied on a bank only basis unless the bank holding
company is engaged in a nonbanking activity involving significant leverage or
has a significant amount of debt outstanding that is held by the general public.
FDICIA established a new capital-based regulatory scheme designed to promote
early intervention for troubled banks and requires the FDIC to choose the least
expensive resolution of bank failures. The new capital based regulatory
framework contains five categories of compliance with regulatory capital
requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as "well capitalized" institution, a bank must
have a leverage ratio of no less the 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 1996, the Bank
qualified as "well-capitalized." See "Item 6. Management's Discussion and
Analysis or Plan of Operation."
Under the FDICIA regulations, the applicable agency can treat an institution as
if it were in the next lower category of the agency determines (after notice and
an opportunity for hearing) that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The degree of
regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the other
three undercapitalized categories may be required to (i)submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict their growth,
deposit interest rates, and other activities;(iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.
These capital guidelines can affect the Company in several ways. Rapid growth,
poor loan portfolio performance, or poor earnings performance, or a combination
of these factors, could change the Company's capital position in a relatively
short period of time, making additional capital infusion necessary.
FDICIA requires the federal banking regulators to revise the risk-based capital
standards to provide for explicit consideration of interest-rate risk,
concentration of credit risk, and the risks of non-traditional activities. It is
uncertain what affect these regulations, when implemented, would have on the
Company and the Bank.
Recent Legislative Developments
From time to time, various bills are introduced in the United States Congress
9
<PAGE>
with respect to the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. The Company cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect the
Company.
YEAR 2000 READINESS
A detailed discussion of the Company's and Bank's year 2000 readiness and
compliance program in included in "Management's Discussion and Analysis", on
page 29 and is hereby incorporated by reference.
ITEM 2. DESCRIPTION OF PROPERTY.
Company and Bank main offices are located on a 4.9 acre plot at 900 Memorial
Drive in Pulaski. The Bank opened for business on August 29, 1994, in a
temporary modular building on the site and utilized the temporary facility for
16 months while the permanent Bank facility was constructed. The Bank began
construction on the permanent facility on March 28, 1995. Construction was
completed on December 1, 1995. The cost of the building was $933,000. The
furniture, fixtures and equipment for the facility cost $143,000. The permanent
facility is a two-story brick building and contains approximately 10,500 square
feet. It features five inside teller windows, three drive-up lanes, a drive-up
night depository and a drive up automated teller machine.
The main office site was purchased from a partnership 100% owned by Jack W.
Bowling, a director of the Company, and five members of his immediate family in
an exchange transaction for 25,000 shares of common stock. See "Item 12. Certain
Relationships and Related Transactions."
The second branch office of the Bank, which opened October 4, 1997, is located
at 202 N. Washington Ave, Pulaski, Virginia in CNB Center at the site of a
regional bank's former branch office. It is a full-service branch, with three
inside teller windows, a drive-up lane, a night depository, an automated teller
machine, and safety deposit boxes. The Bank also recently installed a stand-
alone automated teller machine on the campus of the New River Community College
in Dublin, Virginia.
CNB Center was purchased in 1997 from NationsBank for $187,000. This three story
building has approximately 20,000 square feet. In addition to the branch, the
building houses the Bank's operations department. The second and third floors
are leased to unrelated third parties and is available for future expansion.
In the normal course of business, the Bank invests in debt securities
collateralized by real estate mortgages on residential properties. The Bank's
policies regarding investment in mortgage-backed securities are subject to
change by the Board of Directors with out a vote of stockholders. The Bank also
originates and holds real estate mortgages. These are secured by first and
second deeds of trust on residential and commercial properties.
ITEM 3. LEGAL PRCEEDINGS.
Neither the Company nor the Bank is a party to, nor is any of their property the
subject of, any material pending legal proceedings incidental to the business of
the Company or the Bank.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
10
<PAGE>
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's articles of incorporation authorize it to issue up to 10,000,000
shares of common stock, par value $5.00 per share (the "Common Stock"), of which
926,399 were issued and outstanding as of March 20, 2000. There is no
established public trading market in the common stock, and one is not expected
to develop in the near future. The Company's common stock trades thinly,
primarily on the local market. However, three stock brokerage firms, Davenport &
Company, Scott & Stringfellow and Wheat First Securities, have been approved by
the Company as market makers. As of March 20, 2000, there are approximately 654
stockholders of record.
The Company has never paid a dividend. It is anticipated that earnings will be
retained for several years to expand the Bank's capital base to support deposit
growth and that no dividends will be paid on the Company's stock for the next
five years. Dividends might not be paid for several years thereafter even though
the Company has achieved profitable operations.
Moreover, the National Banking Act limits dividend payments by national banks,
such as the Bank, which in turn could limit the Company's ability to pay
dividends. The Bank may only pay dividends out of its net profits then on hand,
after deducting expenses, including losses and bad debts. In addition, the Bank
is prohibited from declaring a dividend on its shares of common stock until its
surplus equals its stated capital, unless there has been transferred to this
surplus no less than one-tenth of the Bank's net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). The approval
of the OCC will be required if the total of all dividends declared in any
calendar year by the Bank exceeds the Banks' net profits to date, as defined,
for that year combined with its retained net profits for the preceding two years
less any required transfers to surplus. At December 31, 1999, the Bank was not
yet cumulatively. The OCC also has the authority under federal law to enjoin a
national bank engaging in what in its opinion constitutes an unsafe or unsound
practice in conducing its business, including the payment of a dividend under
certain circumstances.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management's Discussion and Analysis is herein incorporated by reference to the
Company's 1999 Annual Report to Stockholders, pages 24 through 39.
ITEM 7. FINANCIAL STATEMENTS.
The following consolidated financial statements of the registrant and the
Independent Auditors' Report set forth on pages 3 through 23 of the Company's
1999 Annual Reports to Stockholders are incorporated herein by reference:
1. Independent Auditor's Report
2. Consolidated Balance Sheets as of December 31, 1999 and 1998
3. Consolidated Statements of Operations for the years
ended December 31, 1999, 1998, and 1997
4. Consolidated Statements of Stockholders' Equity for the years
and period ended December 31, 1999, 1998, and 1997
5. Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998, and 1997
6. Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in accountants during the year and there were no
disagreements on accounting and financial disclosure.
11
<PAGE>
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (a) OF EXCHANGE ACT.
Executive Officers of the Company as of December 31, 1999 are listed on page 5
of the Company's Proxy statement dated March 10, 2000 and is incorporated herein
by reference. Information with respect to the directors of the Company is set
out under the caption "Election of Directors" on page 2 of The Company's Proxy
statement dated March 10, 2000 which information is incorporated herein by
reference.
The disclosure required by item 405 of regulation S-K is set out under the
caption "Compliance with Section 16 of the Securities Exchange Act" on page 7 of
the Company's Proxy Statement dated March 10, 2000, which information is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information set forth under "Executive and Board Compensation" on pages 5
through 6 of the Company's Proxy Statement dated March 10, 2000, is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under "Voting" on page 1, "Security Ownership of
Certain Beneficial Owners and Management" on pages 2 and 3 and under "Election
of Directors" on pages 3 and 4 of the Company's Proxy Statement dated March 10,
2000, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under "Certain Relationships and Related Trans-
actions" on page 4 of the Company's Proxy statement dated March 10, 2000, is
incorporated herein by reference.
PART IV
-------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The following documents are filed as part of the report:
1. Financial Statements:
The following financial statements are incorporated in this report by
reference to the indicated pages of the 1998 Annual Report to Stockholder
1999 Annual Report to
Stockholders page number
------------------------
Independent Auditor's Report 2
Consolidated Balance Sheets-December 31, 1999 and 1998 3
Consolidated Statements of Operations - Years ended
December 31, 1999, 1998 and 1997 4
Consolidated Statements of Stockholders' Equity - Years
ended December 31, 1999, 1998 and 1997 5
Consolidated Statements of Cash Flows - Years ended
December 31, 1999, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-23
Management's Discussion and Analysis 24-39
2. Financial Statement Schedules
12
<PAGE>
All schedules are omitted as the required information is inapplicable or the
information is presented in the Consolidated Financial Statements or related
notes.
3. Exhibits:
The exhibits filed as part of this report and exhibits incorporated herein by
reference to other documents are listed in the Index to Exhibits to this Annual
Report on Form 10-K.
3.1 Amended and Restated Articles of Incorporation (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement No. 33-69326 on Form
S-1).
3.2 By-laws (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement No. 33-69326 on Form S-1).
4.1 Provisions in the Company's Articles of Incorporation and By-laws defining
the rights of holders of the Company's Common Stock
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement No. 33-69326 on Form S-1).
10.1 Employment Agreement dated June 21, 1993, by and between Wayne L. Carpenter
and the Company incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement No. 33-69326 on Form S-1).
10.2 Construction Agreement dated February 2, 1995, by and between the Bank and
Turn-Key Financial Builders, Inc. (incorporated by reference to Exhibit
10.2 to the Company's 1995 Form 10-KSB).
10.3 Security Equipment Purchase Agreement dated February 15, 1995, by and
between the Bank and Security Corporation (incorporated by reference to
Exhibit 10.3 to the Company's 1995 Form 10-KSB).
10.4 CNB Holdings, Inc. 1995 Stock Option Plan (incorporated by reference to
Exhibit 10.4 to the Company's 1995 Form 10-KSB).
12.1 1999 Report to Stockholders.
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 10.4 to
the Company's 1995 Form 10-KSB).
22.1 2000 Proxy Statement.
13
<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.
CNB HOLDINGS, INC.
Date: March 24, 2000 By: /s/ Hiawatha Nicely, Jr.
-----------------------------
Hiawatha Nicely, Jr.
Chief Executive Officer
In accordance with the Exchange Act, this report has to be signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Sybil S. Atkinson Director March 24, 2000
-------------------------
Sybil S. Atkinson
/s/ Jack W. Bowling Director March 24, 2000
-------------------------
Jack W. Bowling
/s/ Jackson M. Bruce Director March 24, 2000
-------------------------
Jackson M. Bruce
/s/ Randolph V. Chrisley Director March 24, 2000
-------------------------
Randolph V. Chrisley
Chairman,
President and
Chief Executive
/s/ Hiawatha Nicely, Jr. Officer March 24, 2000
-------------------------
Hiawatha Nicely, Jr.
/s/ A. Carole Pratt Director March 24, 2000
-------------------------
A. Carole Pratt
/s/ David W. Ratcliff, Jr. Director March 24, 2000
-------------------------
David W. Ratcliff, Jr.
/s/ Nathanial R. Tuck Director March 24, 2000
-------------------------
Nathaniel R. Tuck
/s/ J. David Wine Director March 24, 2000
-------------------------
J. David Wine
14
<PAGE>
INDEX TO EXHIBITS
-----------------
PAGE NO. IN
EXHIBIT NO. DESCRIPTION EQUENTIAL SYSTEM
----------- ----------- ----------------
3.1 Amended and Restated Articles of
Incorporation (incorporated by reference
to Exhibit 3.1 to the Company's Registration
Statement No. 33-69326 on Form S-1).
3.2 By-laws (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement No.
33-69326 on Form S-1).
4.1 Provisions in the Company's Articles of
Incorporation and By-laws defining the rights
of holders of the Company's Common Stock
(incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement No.
33-69326 on Form S-1).
10.1 Employment Agreement dated June 21, 1993, by
and between Wayne L. Carpenter and the Company
incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement No.
33-69326 on Form S-1).
10.2 Construction Agreement dated February 2, 1995,
by and between the Bank and Turn-Key Financial
Builders, Inc. (incorporated by reference to
Exhibit 10.2 to the Company's 1995 Form 10-KSB).
10.3 Security Equipment Purchase Agreement dated
February 15, 1995, by and between the Bank and
Security Corporation (incorporated by reference
to Exhibit 10.3 to the Company's 1995 Form 10-KSB).
10.4 CNB Holdings, Inc. 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the
Company's 1995 Form 10-KSB).
12.1 1999 Report to Stockholders.
21.1 Subsidiaries of the Company (incorporated by
reference to Exhibit 10.4 to the Company's 1995
Form 10-KSB).
22.1 2000 Proxy Statement.
15
<PAGE>
EX-12.1
ANNUAL REPORT
================================================================================
1999 Annual Report
--------------------------------------------------------------------------------
<TABLE>
Table of Contents
<S> <C>
Letter to Stockholders................................................. 1
Independent Auditor's Report........................................... 2
Consolidated Balance Sheets............................................ 3
Consolidated Statements of Operations.................................. 4
Consolidated Statements of Stockholders' Equity........................ 5
Consolidated Statements of Cash Flows.................................. 6
Notes to Consolidated Financial Statements............................. 7
Management's Discussion and Analysis................................... 24
Board of Directors and Officers........................................ 40
Stockholder Information................................................ 41
</TABLE>
16
<PAGE>
CNB HOLDINGS, INC. LOGO]
February 28, 2000
CNB Holdings, Inc.
Shareholders
Dear Shareholder:
You are cordially invited to attend the annual shareholders meeting of CNB
Holdings, Inc., to be held Thursday, April 13, 2000 at 10:00 a.m., local time at
Community National Bank's training facilities, 900 Memorial Drive, Pulaski,
Virginia. You will be asked to consider and vote on the nominees for election as
directors to serve until 2003. Additionally we will review the results of 1999
and the future growth plans for CNB Holdings, Inc., and Community National Bank
along with other business as may properly come before the meeting.
Community National Bank and CNB Holdings, Inc., successfully navigated the
issues of Y2K bringing the bank and its clients into the new millennium prepared
to increase owner equity and profitability.
Community National Bank, its management and board of directors are committed
to achieving the highest level of growth while maintaining profitability. The
company is positioned to move forward effectively in both of these areas.
The board of directors join me in thanking you for your continued support over
the years and we look forward to continued growth in the value of our
investment.
Hiawatha Nicely, Jr.
/s/ Hiawatha Nicely, Jr.
Chairman, President, and CEO
CNB
900 Memorial Drive o Post Office Box 1060 o Pulaski, Virginia 24301 o (540) 994-
0831
202 N. Washington Avenue o Pulaski, Virginia 24301
17
<PAGE>
Independent Auditor's Report
Board of Directors and Stockholders
CNB Holdings, Inc.
Pulaski, Virginia
We have audited the consolidated balance sheets of CNB Holdings, Inc. and
subsidiary (Community National Bank) as of December 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 CNB Holdings, 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.
Pulaski, Virginia
January 7, 2000
18
<PAGE>
================================================================================
Consolidated Balance Sheets
December 31, 1999 and 1998
--------------------------------------------------------------------------------
1999 1998
------------ ------------
Assets
Cash and due from banks $ 2,896,627 $ 2,925,106
Federal funds sold 760,000 495,000
Investment securities available for sale 14,188,398 16,427,685
Loans, net of allowance for loan losses
of $321,574 in 1999 and $372,574 in 1998 31,570,674 31,108,102
Property and equipment, net 1,994,281 1,952,346
Accrued income 307,451 425,640
Other assets 60,900 94,836
----------- -----------
Total assets $51,778,331 $53,428,715
=========== ===========
Liabilities
Demand deposits $ 6,300,356 $ 7,107,894
Interest-bearing demand deposits 13,130,924 10,723,459
Savings deposits 6,805,463 6,629,166
Large denomination time deposits 4,041,584 4,456,768
Other time deposits 15,491,406 17,200,180
----------- -----------
Total deposits 45,769,733 46,117,467
Federal funds purchased - 851,000
Other borrowed funds 126,570 132,590
Accrued interest payable 61,095 72,786
Other liabilities 27,954 15,140
----------- -----------
Total liabilities 45,985,352 47,188,983
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; 1,000,000 shares
authorized; none outstanding - -
Common stock, $5 par value; 10,000,000 shares
authorized; 926,399 shares outstanding
in 1999 and 1998 4,631,995 4,631,995
Surplus 2,803,782 2,803,782
Retained deficit (1,156,366) (1,185,804)
Unrealized depreciation on investment
securities available for sale (486,432) (10,241)
----------- -----------
Total stockholders' equity 5,792,979 6,239,732
----------- -----------
Total liabilities and stockholders' equity $51,778,331 $53,428,715
=========== ===========
See Notes to Consolidated Financial Statements
19
<PAGE>
================================================================================
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans and fees on loans $2,759,294 $2,322,271 $1,668,116
Federal funds sold 57,161 218,361 40,131
Taxable investment securities 831,176 800,268 745,596
---------- ---------- ----------
Total interest income 3,647,631 3,340,900 2,453,843
---------- ---------- ----------
Interest expense:
Deposits 1,812,721 1,809,944 1,353,521
Federal funds purchased 11,059 120 17,166
Other borrowed funds 7,363 3,467 -
---------- ---------- ----------
Total interest expense 1,831,143 1,813,531 1,370,687
---------- ---------- ----------
Net interest income 1,816,488 1,527,369 1,083,156
Provision for loan losses 173,292 165,551 185,943
---------- ---------- ----------
Net interest income after provision
for loan losses 1,643,196 1,361,818 897,213
---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts 172,063 169,108 112,405
Net realized gains (losses) on sales of securities (950) - 2,662
Other income 94,057 105,649 37,532
---------- ---------- ----------
Total noninterest income 265,170 274,757 152,599
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 793,405 748,068 584,633
Occupancy expense 139,366 120,536 79,983
Equipment expense 113,165 123,607 92,028
Other expense 832,992 620,195 540,418
---------- ---------- ----------
Total noninterest expense 1,878,928 1,612,406 1,297,062
---------- ---------- ----------
Net income (loss) $ 29,438 $ 24,169 $ (247,250)
========== ========== ==========
Basic earnings per share $ .03 $ .03 $ (.45)
========== ========== ==========
Diluted earnings per share $ .03 $ .03 $ (.45)
========== ========== ==========
Weighted average shares outstanding 926,399 892,786 546,453
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE>
================================================================================
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Retained Other
Common Stock Earnings Comprehensive
---------------------
Shares Amount Surplus (Deficit) Income (Loss) Total
-------- ----------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996 437,225 $2,186,125 $2,156,782 $ (962,723) $ (56,663) $3,323,521
Comprehensive income
Net loss - - - (247,250) - (247,250)
Net change in unrealized
depreciation on investment
securities available for sale - - - - 38,174 38,174
Reclassification adjustment (2,662) (2,662)
----------
Total comprehensive income (211,738)
Stock dividend 109,306 546,530 (546,530) - - -
Redemption of fractional
shares (132) (660) (504) - - (1,164)
------- ---------- ---------- ------------ ------------- ----------
December 31, 1997 546,399 2,731,995 1,609,748 (1,209,973) (21,151) 3,110,619
Comprehensive income
Net income - - - 24,169 - 24,169
Net change in unrealized
depreciation on investment
securities available for sale - - - - 10,910 10,910
----------
Total comprehensive income 35,079
Proceeds from sale of
common stock 380,000 1,900,000 1,520,000 - - 3,420,000
Costs related to sale of
common stock - - (325,966) - - (325,966)
------- ---------- ---------- ------------ ------------- ----------
December 31, 1998 926,399 4,631,995 2,803,782 (1,185,804) (10,241) 6,239,732
Comprehensive income
Net income - - - 29,438 - 29,438
Net change in unrealized
depreciation on investment
securities available for sale - - - - (476,191) (476,191)
----------
Total comprehensive income (446,753)
------- ---------- ---------- ------------ ------------- ----------
December 31, 1999 926,399 $4,631,995 $2,803,782 $(1,156,366) $(486,432) $5,792,979
======= ========== ========== ============ ============= ==========
</TABLE>
See Notes to Consolidated Financial Statements
================================================================================
21
<PAGE>
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss $ 29,438 $ 24,169 $ (247,250)
Adjustments to reconcile net income (loss)
to net cash used by operations:
Loss on disposal of equipment - 9,966 -
Depreciation and amortization 144,458 141,789 105,660
Provision for loan losses 173,292 165,551 185,943
Net realized (gains) losses on securities 950 - (2,662)
Accretion of discount on securities, net 29,146 20,964 (44,809)
Changes in assets and liabilities:
Accrued income 118,189 (184,322) 20,230
Other assets 15,218 51,904 (19,739)
Accrued interest payable (11,691) 17,338 18,836
Other liabilities 12,814 (7,971) 6,623
------------ ------------ ------------
Net cash flows from operating activities 511,814 239,388 22,832
------------ ------------ ------------
Cash flows from investing activities:
Net (increase) decrease in federal funds sold (265,000) 526,000 (619,000)
Purchases of investment securities (18,224,787) (29,693,672) (16,010,481)
Sales of available for sale securities 4,495,138 - 4,276,997
Maturities of investment securities 15,462,649 24,992,670 11,392,494
Net increase in loans (635,864) (8,878,426) (9,916,792)
Purchases of property and equipment (167,675) (220,365) (528,763)
------------ ------------ ------------
Net cash provided by (used in) investing activities 664,461 (13,273,793) (11,405,545)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand, NOW, and savings deposits 1,776,224 5,916,535 5,309,304
Net increase (decrease) in time deposits (2,123,958) 3,607,044 7,243,882
Net increase in federal funds purchased (851,000) 851,000 -
Proceeds from borrowed funds - 135,000 -
Repayment of borrowed funds (6,020) (2,410) -
Issuance of common stock - 3,420,000 -
Stock issuance costs - (258,498) (67,468)
Redemption of fractional shares - - (1,164)
------------ ------------ ------------
Net cash provided by (used in) financing activities (1,204,754) 13,668,671 12,484,554
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (28,479) 634,266 1,101,841
Cash and cash equivalents, beginning 2,925,106 2,290,840 1,188,999
------------ ------------ ------------
Cash and cash equivalents, ending $ 2,896,627 $ 2,925,106 $ 2,290,840
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 1,842,834 $ 1,796,193 $ 1,351,851
============ ============ ============
Income taxes paid $ - $ - $ -
============ ============ ============
Supplemental disclosure of noncash investing activities:
Other real estate acquired in settlement of loans $ - $ - $ 58,487
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
22
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies
Organization
CNB Holdings, Inc. (the Company) is a bank holding company incorporated under
the laws of Virginia on April 29, 1993. On August 29, 1994, the Company's
wholly owned subsidiary, Community National Bank (the Bank), was chartered under
the laws of the United States and the Bank opened for business in Pulaski,
Virginia. As an FDIC insured National Banking Association, the Bank operates
two banking offices and is subject to regulation by the Comptroller of the
Currency. The Company is regulated by the Federal Reserve.
The accounting and reporting policies of the Company and the Bank follow
generally accepted accounting principles and general practices within the
financial services industry. Following is a summary of the more significant
policies.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
the Bank. All significant intercompany transactions and balances have been
eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. In connection
with the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties.
Substantially all of the Bank's loan portfolio consists of loans in the New
River Valley area of Southwest Virginia. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio and the
recovery of a substantial portion of the carrying amount of foreclosed real
estate are susceptible to changes in local market conditions. The regional
economy is diverse, but influenced to an extent by the manufacturing segment.
While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as a
part of their routine examination process, periodically review the Bank's
allowances for loan and foreclosed real estate losses. Such agencies may require
the Bank to recognize additions to the allowances based on their judgments about
information available to them at the time of their examinations. Because of
these factors, it is reasonably possible that the allowances for loan and
foreclosed real estate losses may change materially in the near term.
Cash and cash equivalents
For purposes presenting in the consolidated statement of cash flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
caption "cash and due from banks".
Trading securities
23
<PAGE>
The Bank does not hold securities for short-term resale and therefore does not
maintain a trading securities portfolio.
Securities held to maturity
Bonds, notes and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates. Currently the Bank has no securities
held to maturity.
Securities available for sale
Available-for-sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held-to-maturity securities.
Unrealized holding gains and losses on available-for-sale securities are
reported as a net amount in a separate component of stockholders' equity.
Realized gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. Premiums and discounts are
recognized in interest income using the interest method over the period to
maturity or to call dates.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below cost that are other than temporary are reflected as write-downs
of the individual securities to fair value. Related write-downs are included in
earnings as realized losses.
Loans receivable and allowance for loan losses
Loans are reported at their outstanding balance principal reduced by an
allowance for loan losses and adjusted for net unamortized origination fees and
costs.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using methods
that approximate the interest method.
Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs, net of recoveries. Management's periodic evaluation of the adequacy
of the allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
Property and equipment
Land is carried at cost. Bank premises, furniture and equipment are carried at
cost, less accumulated depreciation computed by the straight-line method over
the following estimated useful lives:
Years
-----
Buildings and land improvements 20 to 40
Furniture and equipment 5 to 10
24
<PAGE>
Foreclosed properties
Real estate properties acquired through or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less anticipated cost to sell
at the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell. Revenue
and expenses from operations and changes in the valuation allowance are included
in loss on foreclosed real estate. The historical average holding period for
such properties is less than 12 months.
Stock-based compensation
The Company accounts for its stock-based compensation plans using the accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Company is not required to adopt the fair value based
recognition provisions prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation (issued in October 1995), but complies with the disclosure
requirements set forth in the Statement, which include disclosing pro forma net
income as if the fair value based method of accounting has been applied.
Income taxes
Provision for income tax is based on amounts reported in the statements of
operations (after exclusion for non-taxable income and non-deductible expenses)
and consists of taxes currently due plus deferred taxes on temporary differences
in the recognition of income and expense for tax and financial statement
purposes. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. Deferred tax
assets, net of a valuation allowance if deemed appropriate, are recognized for
operating losses that are available to offset future taxable income.
Earnings per share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period, after giving retroactive effect to stock splits and dividends.
The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if potential
dilutive common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common shares.
Business segments
The Company reports its activities as a single business segment. In determining
the appropriateness of segment definition, the Company considers components of
the business about which financial information is available and regularly
evaluated relative to resource allocation and performance assessment.
Comprehensive income
Annual comprehensive income reflects the change in the Company's equity during
the year arising from transactions and events other than investments by and
distributions to stockholders. It consists of net income plus certain other
changes in assets and liabilities that are reported as separate components of
stockholders' equity rather than as income or expense.
Financial instruments
Any derivative financial instruments held or issued by the Bank are held or
25
<PAGE>
issued for purposes other than trading.
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and commercial
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received. The Bank does not utilize interest-rate exchange agreements or
interest rate futures contracts.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Available-for-sale and held-to-maturity securities: Fair values for securities,
excluding restricted equity securities, are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying values of
restricted equity securities approximate fair values.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.
Short-term debt: The carrying amounts of short-term debt funds approximate
their fair values.
Long-term debt: The fair values of the Company's long-term debt are estimated
using discounted cash flow analysis based on the Company's current incremental
borrowing rates for similar types of borrowings.
Other liabilities: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates.
The carrying amount of other liabilities approximates fair value.
Impacts of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
26
<PAGE>
Accounting for Derivative Instruments and Hedging Activities. This Statement
(effective for fiscal quarters beginning after June 15, 2000) establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. While the Company has not
completed its analysis of all impacts of Statement No. 133, Management does not
believe that implementation of the Statement will be material to the financial
statements.
Reclassification
Certain reclassifications have been made to the prior years' financial
statements to place them on a comparable basis with the current presentation.
Net income (loss) and stockholders' equity previously reported were not affected
by these reclassifications.
Note 2. Restricted Cash
To comply with banking regulations, the Bank is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $323,000 and $416,000 for the periods including December 31, 1999
and 1998, respectively.
Note 3. Securities
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values (all available for sale) at December 31, follow:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1999
U. S. Treasury securities $ 97,666 $ - $ - $ 97,666
U. S. Government agency securities 11,931,756 - 417,843 11,513,913
State and local government securities 199,732 - 626 199,106
Mortgage-backed securities 2,127,226 696 68,659 2,059,263
Restricted equity securities 318,450 - - 318,450
----------- ---------- ---------- -----------
$14,674,830 $ 696 $ 487,128 $14,188,398
=========== ========== ========== ===========
1998
U. S. Treasury securities $ 696,433 $ 3,510 $ - $ 699,943
U. S. Government agency securities 14,061,220 28,654 36,294 14,053,580
State and local government securities 198,846 1,730 - 200,576
Mortgage-backed securities 1,320,977 - 7,841 1,313,136
Restricted equity securities 160,450 - - 160,450
----------- ---------- ---------- -----------
$16,437,926 $ 33,894 $ 44,135 $16,427,685
=========== ========== ========== ===========
</TABLE>
Investment securities with amortized costs of $7,740,746 and $1 3,004,764 and
market values of $7,405,204 and $13,004,862 at December 31, 1999 and 1998,
respectively, were pledged as collateral on public deposits or for other banking
purposes.
Gross realized gains and losses for the years ended December 31, 1999, 1998 and
1997 are as follows:
27
<PAGE>
1999 1998 1997
-------- -------- --------
Realized gains $ 490 $ - $ 8,593
Realized losses (1,440) - (5,931)
-------- -------- --------
(950) $ - $ 2,662
======== ======== ========
The amortized cost and approximate market value at December 31, 1999 of
investment securities by scheduled maturity are shown below.
Available for Sale
------------------------
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 4,952,724 $ 4,946,606
Due in one year through five years 1,002,855 982,263
Due after five years 8,400,801 7,941,079
Restricted equity securities 318,450 318,450
----------- -----------
$14,674,830 $14,188,398
=========== ===========
Note 4. Loans Receivable
The major components of loans in the consolidated balance sheets at December
31, 1999 and 1998 are as follows:
1999 1998
----------- -----------
Commercial $12,562,064 $13,557,653
Real estate:
Construction and land development 567,520 732,493
Farmland 76,300 50,974
Residential, 1-4 families 13,581,963 12,006,354
Residential, multifamily - -
Nonfarm, nonresidential 627,614 253,900
Agricultural 73,573 105,323
Consumer:
Credit cards and other revolving credit 458,225 458,541
Other consumer 3,969,530 4,229,703
States and political subdivisions 69,409 170,556
Other 5,340 3,707
----------- -----------
31,991,538 31,569,204
Net deferred loan fees (99,290) (88,528)
Allowance for loan losses (321,574) (372,574)
----------- -----------
$31,570,674 $31,108,102
=========== ===========
Nonperforming assets at December 31, 1999 and 1998 are detailed as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Nonaccrual loans $ 126,534 $ 330,048
Restructured loans - -
Loans past due 90 days or more - 86,122
--------- ---------
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
Total nonperforming loans 126,534 416,170
Foreclosed, repossessed and idled properties 23,580 1,335
--------- ---------
Total nonperforming assets $ 150,114 $ 417,505
========= =========
</TABLE>
Gross interest income that would have been recognized for each year if the
nonaccrual loans and restructured loans had been current in accordance with
their original terms and had been outstanding throughout the period or since
origination, or if held part of the period, is detailed below. Applicable
interest income that was actually collected and included in net income for each
year is summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Nonaccrual loans:
Interest income, original terms $14,815 $35,671 $ -
======= ======= ======
Interest income, recognized $ 320 $17,113 $ -
======= ======= ======
</TABLE>
The Bank has no restructured loans during the years ended December 31, 1999,
1998 or 1997.
An allowance determined in accordance with SFAS No. 114 and No. 118 is provided
for all impaired loans. The total recorded investment in impaired loans and the
related allowance for loan losses at December 31, the average annual recorded
investment in impaired loans and interest income recognized on impaired loans
for the year (all approximate) are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Recorded investment at December 31, $ 212,601 $ 642,035 $ -
========= ========= ========
Allowance for loan losses $ 43,500 $ 102,757 $ -
========= ========= =========
Average recorded investment for the year $ 234,231 $ 409,174 $ -
========= ========= =========
Interest income recognized for the year $ 8,602 $ 38,516 $ -
========= ========= =========
</TABLE>
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
Note 5. Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning $ 372,574 $270,000 $155,000
--------- -------- --------
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C> <C>
Loans charged off (224,292) (64,193) (82,476)
Recoveries - 1,216 11,533
--------- --------- ----------
Net loans charged off (224,292) (62,977) (70,943)
Provision for loan losses 173,292 165,551 185,943
--------- --------- ----------
Balance, ending $ 321,574 $ 372,574 $ 270,000
========= ========= ==========
</TABLE>
Note 6. Property and Equipment
Components of property and equipment and total accumulated depreciation at
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land $ 280,000 $ 280,000
Land improvements 51,492 51,492
Buildings 1,326,430 1,299,655
Furniture and equipment 749,281 608,382
---------- ----------
2,407,203 2,239,529
Less accumulated depreciation (412,922) (287,183)
---------- ----------
$1,994,281 $1,952,346
========== ==========
</TABLE>
The Company leased a branch office under an agreement accounted for as an
operating lease. This agreement expired during 1998. Rental expense relative to
this lease was approximately $11,500 and $8,477 in 1998 and 1997, respectively.
Note 7. Short-term Debt
Short-term debt consists of federal funds purchased, which generally mature
within one to four days from the transaction date, and other short-term
borrowings. Additional information at December 31, 1999 and 1998 and for the
years then ended is summarized below:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Outstanding balance at December 31 $ - $851,000
========== ========
Year-end weighted averaged rate - 5.123%
========== ========
Daily average outstanding during the year $ 146,179 $ 2,332
========== ========
Average rate for the year 6.46% 5.123%
========== ========
Maximum outstanding at any month-end during the year $1,115,000 $851,000
========== ========
</TABLE>
At December 31, 1999, the Bank had established lines of credit totaling
$2,000,000 with various correspondent banks to provide additional liquidity if,
and as needed. In addition, the company has the ability to borrow up to ten
percent of bank assets from the Federal House Loan Bank of Atlanta, subject to
the pledging of specific collateral. $851,000 was outstanding at December
31,1998 under these agreements. There were no amounts outstanding at December
31, 1999.
30
<PAGE>
Note 8. Other Borrowed Funds
Other borrowed funds consist of a mortgage note payable in monthly installments
of $1,115 including interest at 5.67%. This note is secured by certain real
estate. Annual requirements to repay this debt are as follows:
2000 $ 6,371
2001 6,741
2002 7,134
2003 7,549
2004 7,988
After 90,787
--------
$126,570
========
Note 9. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,897 $ 2,897 $ 2,925 $ 2,925
Federal funds sold 760 760 495 495
Securities, available-for-sale 14,188 14,188 16,428 16,428
Loans, net of allowance for loan losses 31,571 31,343 31,108 31,835
Financial liabilities
Deposits 45,777 46,188 46,117 46,650
Federal funds purchased - - 851 851
Other borrowed funds 127 114 133 126
Off-balance-sheet assets (liabilities)
Commitments to extend credit and
standby letters of credit - - - -
</TABLE>
Note 10. Earnings Per Share
The following table details the computation of basic and diluted earnings per
share for each year ended December 31.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Net income (loss) (income available
to common shareholders) $ 29,438 $ 24,169 $(247,250)
======== ======== =========
Weighted average common shares outstanding 926,399 892,786 546,453
Effect of diluted securities, options 22,277 24,319 -
-------- -------- ---------
Weighted average common shares
outstanding, diluted 948,676 917,105 546,453
======== ======== =========
Basic earnings per share $ .03 $ .03 $ (.45)
======== ======== =========
Diluted earning per share $ .03 $ .03 $ (.45)
======== ======== =========
</TABLE>
31
<PAGE>
At December 31, 1997, exercisable options were outstanding (see Note 12) with an
exercise price below the market value of the Bank's stock at that date. This
condition placed those options "in the money" at December 31, 1997. However,
exercise of those options is not assumed in computing diluted earnings per share
for 1997 because their exercise would reduce the annual reported diluted loss
per share for that year.
Note 11. Employee Benefit Plans
The Bank maintains a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees who have
completed one year of service. Participants may contribute a percentage of
compensation, subject to a maximum allowed under the Code. In addition, the Bank
may make additional contributions at the discretion of Board of Directors. The
Bank made no contributions during the years ended December 31, 1999, 1998 or
1997.
Note 12. Common Stock
During 1995 the Company adopted a stock option plan under which up to 344,375
shares of stock may be issued. Shares subject to the plan may be issued in any
combination of incentive stock options, non-incentive stock options, or
restricted stock, provided that the total number of shares issuable pursuant to
incentive stock options may not be more than 62,500 without shareholder
approval. Termination of restrictions on any restricted stock granted and
expiration of any non-incentive stock options granted are controlled by the
terms of each individual grant. Incentive stock options expire no more than 10
years from the date of grant. Exercise prices of all options are determined by
each individual grant except that incentive stock options may not be granted at
less than fair market value and non-incentive stock options may not be granted
at less than 80% of fair market value on each option's respective date of grant.
Vesting of options, if not immediately exercisable, is determined in accordance
with the terms of each option granted.
Activity under the plan during the years ended December 31, 1999, 1998 and 1997
is summarized below (adjusted for the May 30, 1997 five-for-four stock split):
<TABLE>
<CAPTION>
Granted and Outstanding
--------------------------------------------------
Available Incentive Non-incentive
for Stock Stock Restricted
Grant Options Options Stock
---------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Balance December 31, 1996 131,591 - 212,784 -
Granted (6,470) - 6,470 -
Exercised - - - -
-------- -------- --------- ----------
Balance December 31, 1997 125,121 - 219,254 -
-------- -------- --------- ----------
Granted (6,379) - 6,379 -
Exercised - - - -
-------- -------- --------- ----------
Balance December 31, 1998 118,742 - 225,633 -
-------- -------- --------- ----------
Granted (5,660) - 5,660 -
Exercised - - - -
-------- -------- --------- ----------
Balance December 31, 1999 113,082 - 231,293 -
======== ======== ========= ==========
</TABLE>
32
<PAGE>
Additional information relating to the plan is listed below (adjusted for the
May 30, 1997 five-for-four stock split):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Outstanding options at December 31:
Exercise price, beginning of the year/(1)/ $ 8.03 $ 8.00 $ 8.00
Exercise price, end of the year/(1)/ $ 8.06 $ 8.03 $ 8.00
Range of exercise prices:
From $ 8.00 $ 8.00 $ 8.00
To $ 9.13 $ 9.00 $ 8.00
Remaining contractual life in months/(1)/ 70 81 90
Exercisable options outstanding at December 31:
Number 213,293 225,633 219,254
Exercise price/(1)/ $ 8.06 $ 8.03 $ 8.00
Weighted average exercise price of options:
Granted during the year $ 9.13 $ 9.00 $ 8.00
Exercised during the year $ - $ - $ -
Forfeited during the year $ - $ - $ -
Expired during the year $ - $ - $ -
Significant assumptions used in determining fair value:
Risk-free interest rate 6.0% 6.00% 6.5%
Expected life in years 10 10 10
Expected dividends 0.0% 0.0% 0.0%
Expected volatility 5.0% 5.0% 7.6%
Grant-date fair value:
Options granted during the year $ 28,612 $ 31,787 $ 27,302
Restricted stock awards granted during the year $ - $ - $ -
Results of operations:
Compensation cost recognized in income for
all stock-based compensation awards $ - $ - $ -
======== ======== =========
Pro forma net income/(2)/ $ 826 $ (7,618) $(274,552)
======== ======== =========
Pro forma earnings per common share/(2)/ $ .00 $ (.01) $ (.50)
======== ======== =========
</TABLE>
_________________________
/(1)/ Weighted average
/(2)/ As if the fair value based method prescribed by SFAS No. 123 has been
applied.
Note 13. Income Taxes
Operating loss and carryforwards
The Company has loss carryforwards of approximately $1,105,000 for Federal
income tax purposes that may be used to offset future taxable income. If not
previously utilized, the Federal loss carryforwards will expire between 2008 and
2012.
Current and deferred income tax components
The components of income tax expense (all Federal) are as follows:
33
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ----------
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred 13,794 2,222 (82,364)
Deferred tax asset valuation allowance change (13,794) (2,222) 82,364
--------- -------- ---------
$ - $ - $ -
========= ======== =========
</TABLE>
Rate Reconciliation
A reconciliation of income tax expense (benefit) computed at the statutory
federal income tax rate expense included in the consolidated statement of
operations follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Tax at statutory federal rate $ 10,009 $ 8,217 $ (84,065)
Other 3,785 (5,995) 1,701
Deferred tax asset valuation allowance change (13,794) (2,222) 82,364
-------- -------- ---------
$ - $ - $ -
======== ======== =========
</TABLE>
Deferred tax analysis
The components of net deferred tax assets (all Federal) at December 31, 1999 and
1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Deferred tax assets $ 477,039 $ 473,294
Deferred tax liabilities (81,435) (63,896)
Deferred tax asset valuation allowance (395,604) (409,398)
---------- ---------
$ - $ -
========== =========
</TABLE>
Tax effects of each significant item creating deferred taxes are summarized
below:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Allowance for loan losses $ 65,508 $ 92,157
Pre-operating expenses - 10,542
Net operating losses 375,647 338,862
Deferred fee income 33,762 30,133
Contributions 2,122 1,600
Accretion of discount on investment securities (1,598) (1,116)
Depreciation (79,837) (62,780)
-------- --------
$395,604 $409,398
======== ========
</TABLE>
Note 14. Commitments and Contingencies
Financial instruments with off-balance-sheet risk
34
<PAGE>
The Bank is 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. These instruments involve, to varying degrees, credit risk in excess
of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance 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 for on-balance-sheet instruments.
A summary of the Bank's commitments at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Commitments to extend credit $4,137,705 $6,340,116
Standby letters of credit - -
---------- ----------
$4,137,705 $6,340,116
========== ==========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to 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 of the party. Collateral held varies, but may include
accounts receivable, inventory, property and equipment, residential real estate
and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending other loan facilities to customers. Collateral held
varies as specified above and is required in instances which the Bank deems
necessary.
Concentrations of credit risk
Substantially all of the Bank's loans, commitments to extend credit and standby
letters of credit have been granted to customers in the Bank's market area and
such customers are generally depositors of the Bank. The concentrations of
credit by type of loan are set forth in Note 4. The distribution of commitments
to extend credit approximates the distribution of loans outstanding. Standby
letters of credit were granted primarily to commercial borrowers. The Bank's
primary focus is toward consumer oriented and small business transactions, and
accordingly, it does not have a significant number of credits to any single
borrower or group of related borrowers in excess of $500,000. The Bank has cash
and cash equivalents on deposit with financial institutions which exceed
federally-insured limits.
Note 15. Regulatory Restrictions
Capital requirements
35
<PAGE>
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in regulations.
Management believes, as of December 31, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Comptroller of
the Currency 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 I risk-based, and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
Dividends
The Company's dividend payments (when available) will be made primarily from
dividends received from the Bank. Under applicable federal law, the Comptroller
of the Currency restricts national bank total dividend payments in any calendar
year to net profits of that year, as defined, combined with retained net profits
for the two preceding years. At December 31, 1999, there were no retained net
profits free of such restriction. The Comptroller also has authority under the
Financial Institutions Supervisory Act to prohibit a national bank from engaging
in an unsafe or unsound practice in conducting its business. It is possible,
under certain circumstances, the Comptroller could assert that dividends or
other payments would be an unsafe or unsound practice.
Note 15. Regulatory Restrictions, continued
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
December 31, 1999
Total Capital
(to Risk-Weighted Assets) $4,274,766 14.1% * $2,426,843 * 8.0% * $3,033,553 * 10.0%
Tier I Capital
(to Risk-Weighted Assets) $3,960,766 13.1% * $1,213,421 * 4.0% * $1,820,132 * 6.0%
Tier I Capital
(to Average Assets) $3,960,766 7.9% * $2,008,367 * 4.0% * $2,510,458 * 5.0%
December 31, 1998
Total Capital
(to Risk-Weighted Assets) $3,545,948 11.3% * $2,512,294 * 8.0% * $3,140,367 * 10.0%
Tier I Capital
(to Risk-Weighted Assets) $3,180,948 10.1% * $1,256,147 * 4.0% * $1,844,220 * 6.0%
Tier I Capital
(to Average Assets) $3,180,948 6.2% * $2,066,828 * 4.0% * $2,583,535 * 5.0%
</TABLE>
36
<PAGE>
* greater than or equal to
Intercompany transactions
Legal lending limits on loans by the Bank to the Company are governed by Federal
Reserve Act 23A, and differ from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
loan amount do not apply. Under this definition, the legal lending limit for
the Bank on loans to the Company was approximately $397,000 at December 31,
1999. One 23A transaction existed between the Bank and the Company during the
year ended December 31, 1998.
On October 31, 1997, the Company acquired a future banking site at public
auction. The Company borrowed $158,179 from the Bank to complete the purchase.
This loan was repaid to the bank on July 7, 1998.
Note 16. Transactions with Related Parties
The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.
Aggregate loan transactions with related parties were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Balance, beginning $1,534,518 $1,424,644
Change in relationship (346,815) -
New loans and advances 1,143,300 486,879
Repayments (658,562) (377,005)
---------- ----------
Balance, ending $1,672,441 $1,534,518
========== ==========
</TABLE>
During 1997 and part of 1998 the Company leased office space which was used as a
branch location under the terms of an agreement accounted for as an operating
lease. The lessor is a partnership in which one of the Company's former
directors is a partner. Rent expense recognized under this lease in 1998 and
1997 was $11,500 and $8,477, respectively.
Note 17. Parent Company Financial Information
Condensed financial information of CNB Holdings, Inc. is presented as follows:
37
<PAGE>
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,730,122 $ 2,308,786
Loans, net of allowance of $7,574 569,661 749,818
Investment in subsidiary bank at equity 3,486,719 3,170,595
Other assets 6,477 18,533
----------- -----------
Total assets $ 5,792,979 $ 6,247,732
=========== ===========
Liabilities
Accounts payable and other liabilities - 8,000
----------- -----------
Stockholders' equity:
Common stock 4,631,995 4,631,995
Surplus 2,803,782 2,803,782
Retained deficit (1,156,366) (1,185,804)
Unrealized depreciation on subsidiary's investment
securities available for sale (486,432) (10,241)
----------- -----------
Total stockholders' equity 5,792,979 6,239,732
----------- -----------
Total liabilities and stockholders' equity $ 5,792,979 $ 6,247,732
=========== ===========
</TABLE>
Statements of Operations
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ----------
<S> <C> <C> <C>
Income:
Interest on loans $56,501 $ 16,928 $ -
Interest on deposits with banks - - 6,118
Other income - 5,544 110
------- -------- ---------
56,501 22,472 6,228
------- -------- ---------
Expenses:
Professional fees 19,006 20,715 44,199
Interest - 6,723 -
Other expenses 43,373 45,136 14,783
------- -------- ---------
Total expenses 62,379 72,574 58,982
------- -------- ---------
Loss before tax benefit and equity in undistributed
income of subsidiary (5,878) (50,102) (52,754)
Federal income tax benefit - - -
------- -------- ---------
Loss before equity in undistributed income of
subsidiary (5,878) (50,102) (52,754)
Equity in undistributed income (loss) of subsidiary 35,316 74,271 (194,496)
------- -------- ---------
Net income (loss) $29,438 $ 24,169 $(247,250)
======= ======== =========
</TABLE>
38
<PAGE>
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 29,438 $ 24,169 $(247,250)
Adjustments:
Loan loss provision - 7,574 -
Depreciation and amortization 10,299 18,249 7,724
Increase in equity in undistributed loss of subsidiary (35,316) (74,271) 194,496
Increase in other assets 1,757 (8,024) 467
Increase (decrease) in other liabilities (8,000) 3,104 (6,769)
---------- ---------- ---------
Net cash provided (used) by operating activities (1,822) (29,199) (51,332)
---------- ---------- ---------
Cash flows from investing activities:
Investment in subsidiary (757,000) - -
Purchase of property and equipment - (94,961) (190,420)
Net (increase) decrease in loans 180,158 (757,392) -
---------- ---------- ---------
Net cash provided (used) by investing activities 576,842 (852,353) (190,420)
---------- ---------- ---------
Cash flows from financing activities:
Issuance of common stock - 3,420,000 -
Net intercompany borrowings - - 158,178
Stock issuance costs - (258,498) (67,468)
Redemption of fractional shares - - (1,164)
---------- ---------- ---------
Net cash provided by financing activities - 3,161,502 89,546
---------- ---------- ---------
Increase (decrease) in cash and due from banks (578,664) 2,279,950 (152,206)
Cash and cash equivalents, beginning 2,308,786 28,836 181,042
---------- ---------- ---------
Cash and cash equivalents, ending $1,730,122 $2,308,786 $ 28,836
========== ========== =========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of the Company as of the dates and
for the periods indicated. This discussion should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto.
The Consolidated Financial Statements include the financial information of the
Company and the Bank. As the Bank represents substantially all of the Company's
activities, comparative discussions of consolidated versus non-consolidated
financial statements are unnecessary.
The Company is not aware of any current recommendations by regulatory
authorities which, if implemented, would have a material effect on its
liquidity, capital resources or results of operations. There are no agreements
between the Company and either the OCC or the Federal Reserve Board, nor has
either regulatory agency made any recommendations concerning the operations of
the Company that could have a material effect on its liquidity, capital
resources or results of operations.
Overview
The Company commenced operations on March 8, 1993, while the Bank began
operations on August 29, 1994. The Company's sole subsidiary, the Bank,
operates by attracting deposits from the general public and using such deposit
funds to make commercial, consumer, and residential construction and permanent
mortgage real estate loans. Revenues are derived principally from interest on
loans and investments. Changes in the volume and mix of these assets and
39
<PAGE>
liabilities, as well as changes in the yields earned and rates paid, determine
changes in net interest income.
The size of the Company remained relatively constant in 1999 as assets decreased
3%. The Company's assets increased over 34% in 1998 and over 45% in 1997.
Total assets decreased to $51.8 million as compared to $53.4 million at December
31, 1998. Total deposits were $45.7 million at December 31, 1999 compared to
$46.1 million at December 31, 1998. The Bank's net loans remained constant in
1999. Loans increased over 39% in 1998, and over 75% in 1997.
During 1997 the Company filed for, and received approval from the SEC for a
secondary stock offering of up to 380,000 shares of common stock at a price of
$9 per share. The stock sale was closed February 10, 1998 after the sale of
380,000 shares for net proceeds of approximately $3.1 million. Other significant
events that occurred during 1997 were the opening of Community National Bank's
first branch in downtown Pulaski in October and the purchase of a building for a
future site to house the branch and to provide for anticipated growth.
During 1998 the Company dedicated CNB Center, a 19,000 square foot, three story
building in downtown Pulaski. CNB Center contains a full service branch and the
operations center for the Bank. Excess space on the second and third floors is
currently leased and will provide the Company with an option for future
expansion without a significant amount of capital expenditures.
--------------------------------------------------------------------------------
Net Interest Income and Average Balances (thousands)/(1)/
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------
1999 1998 1997
------------------------ --------------------------- ---------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
---------------- ------ -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities $13,515 $ 831 6.15% $13,563 $ 800 5.90% $12,242 $ 746 6.09%
Federal funds sold 1,080 57 5.28 4,112 218 5.30 691 40 5.79
Loans, net 31,950 2,760 8.64 25,454 2,323 9.13 17,652 1,668 9.45
------- ------ ------- -------- ------- ------- -------- ------- ----
Total 46,545 3,648 43,129 3,341 30,585 2,454
-------- -------
Yield on average
interest-earning assets 7.83% 7.75% 8.02%
======= ======= ====
Noninterest-earning assets:
Cash and due from banks 3,294 2,447 2,106
Premises and equipment 1,957 1,897 1,556
Interest receivable and other 416 431 430
------- -------- --------
Total
noninterest-earning assets 5,667 4,775 4,092
------- -------- --------
Total assets $52,212 $ 47,904 $34,677
======= ======== ========
Interest-bearing liabilities:
Demand deposits $11,052 465 4.21% $12,890 506 3.93% $ 8,094 327 4.04%
Savings deposits 7,414 239 3.22 5,818 209 3.59 3,501 123 3.51
Time deposits 21,370 1,109 5.20 19,887 1,095 5.51 16,553 904 5.46
Federal funds purchased 146 11 7.53 - - - - - -
Other borrowed funds 129 7 5.43 74 4 5.41 308 17 5.52
------- ------ ------- -------- ------- ------- -------- ------- ----
Total interest-bearing liabilities 40,111 1,831 38,669 1,814 28,456 1,371
------- ------ -------- ------- -------- -------
Cost of average
interest-bearing liabilities 4.56% 4.69% 4.82%
======= ======= ====
Noninterest-bearing liabilities:
Demand deposits 5,711 3,117 2,909
Interest payable and other 374 167 122
------- -------- --------
Total
noninterest-bearing
liabilities 6,085 3,284 3,031
------- ------- --------
Total liabilities 46,196 41,953 31,487
Stockholders' equity 6,016 5,951 3,190
------- -------- --------
Total liabilities and
stockholders' equity $52,212 $47,904 $34,677
======= ======== ========
Net interest income $1,817 $1,527 $1,083
====== ======= =======
Net yield on
interest-earning assets 3.90% 3.54% 3.54%
======= ======= ====
</TABLE>
40
<PAGE>
________________
(1) Income and yields are computed on a tax equivalent basis.
Net Interest Income
Net interest income, the principal source of income for the Company and the
Bank, is the amount of income generated by earning assets (primarily loans and
investment securities) less the interest expense incurred on interest-bearing
liabilities (primarily deposits used to fund earning assets). Changes in the
volume and mix of interest-earning assets and interest-bearing liabilities, as
well as their respective yields and rates, have a significant impact on the
level of net interest income. The preceding table presents the average balances
of total interest-earning assets and total interest-bearing liabilities for the
periods indicated, showing the average distribution of assets, liabilities and
stockholders' equity, and the related income, expense, and corresponding
weighted average yields and costs. The average balances used for the purposes of
this table and other statistical disclosures were calculated by using the daily
average balances.
During 1999 interest income increased $306,000, or 9.2% over 1998. Interest
income for 1998 increased to $3.3 million, a 36.1% increase over the 1997 amount
of $2.5 million. The increases in interest income during 1999, 1998 and 1997 are
due to increases in average interest-earning assets in both years while yields
on these assets remained relatively constant. Average earning assets were $46.5
million during 1999. This was an increase of 7.9%. Average earning assets were
$43.1 million during 1998, an increase of $12.5 million over the 1997 average of
$30.6 million. Yields on interest-earning assets during 1999, 1998 and 1997 were
within a range of 27 basis points. Those yields were 7.83%, 7.75% and 8.02%,
respectively.
Interest rates charged on loans vary with the degree of risk, maturity and
amount of the loan. Competitive pressures, money market rates, availability of
funds, and government regulation also influence interest rates. On average,
loans yielded 8.64% in 1999 compared to 9.13% in 1998 compared to 9.45% in 1997,
reflecting an increase in 1-4 family residential mortgage loans as a percentage
of the overall loan portfolio.
Interest expense was $1.8 million in 1999, unchanged from 1998. Interest
expense increased by 32.3% in 1998 to $1.8 million from $1.4 million in 1997.
Interest expense increased by $517,000 in 1997 to $1.4 million. These increases
were due to increases in average interest-bearing liabilities during 1999, 1998
and 1997. During 1999 the average rate paid on interest-bearing liabilities was
4.56%. The rate paid on interest-bearing liabilities decreased 13 basis points
during 1998 to 4.69%. This decrease was due in part to the Bank utilizing
Federal funds to provide short-term liquidity to a lesser extent in 1999 and
1998. The rate paid on interest-bearing liabilities increased 15 basis points
during 1997, as the bank paid higher rates on large demand deposit accounts.
Net interest income increased $290,000 to $1.8 million in 1999. Net interest
income increased 41% in 1998 and over 50% in 1997. Net interest income was
$1.5 million and $1.1 million in 1998 and 1997 respectively. These increases
were due to increases in the volume of net average earning assets in all three
years. Net interest margin increased to 3.90% in 1999 from 3.63% in 1998 and
1997. Net interest margin declined in 1997 and held constant in 1998 even though
net interest income increased. This is because of increases in the percentage
of average interest-bearing liabilities to average interest-earning assets. The
effects of changes in volumes and rates on net interest income for various
periods are shown in the following table.
41
<PAGE>
================================================================================
Management's Discussion and Analysis
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Rate/Volume Variance Analysis (thousands)
1999 Compared to 1998 1998 Compared to 1997
-------------------------------------- --------------------------------------
Interest Interest
Income/ Variance Attributable To Income/ Variance Attributable To
Expense -------------------------- Expense --------------------------
Variance Rate Volume Variance Rate Volume
-------- ---- ------ -------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Taxable investment securities $ 31 $ 34 $ (3) $ 54 $ (26) $ 80
Federal funds sold (161) - (161) 178 (20) 198
Loans 437 (156) 593 655 (82) 737
-------- ----- ------ ---- ----- ------
Total 307 (122) 429 887 (128) 1,015
-------- ----- ------ ---- ----- ------
Interest-bearing liabilities:
Demand deposits (41) 31 (72) 179 (15) 194
Savings deposits 30 (27) 57 86 5 81
Time deposits 14 (68) 82 191 9 182
Short-term borrowings 14 3 11 (13) - (13)
-------- ----- ------ ---- ----- ------
Total 17 (61) 78 443 (1) 444
-------- ----- ------ ---- ----- ------
Net interest income $ 290 $ (61) $ 351 $444 $(127) $ 571
======== ===== ====== ==== ===== ======
</TABLE>
<TABLE>
<CAPTION>
1997 Compared to 1996
------------------------------------
Interest
Income/ Variance Attributable To
Expense -------------------------
Variance Rate Volume
-------- ------------ -----------
<S> <C> <C> <C>
Interest-earning assets:
Taxable investment securities $168 $ (44) $212
Federal funds sold (31) (2) (29)
Loans 742 (18) 760
---- ----- ----
Total 879 (64) 943
==== ===== ====
Interest-bearing liabilities:
Demand deposits 136 36 100
Savings deposits 35 (13) 48
Time deposits 329 17 312
Short-term borrowings 17 17 -
---- ----- ----
Total 517 57 460
Net interest income $362 $(121) $483
==== ===== ====
</TABLE>
Provision for Loan Losses
The provision for loan losses is charged to income in an amount necessary to
maintain an allowance for loan losses adequate to provide for expected losses in
the Bank's loan portfolio. The level of the allowance for loan losses is
determined by management's assessment of a variety of factors, including the
collectibility of past due loans, volume of new loans, composition of the loan
portfolio, and general economic outlook. Loan losses and recoveries are charged
42
<PAGE>
or credited directly to the allowance for loan losses.
Management increased the provision for loan losses to $173,000 in 1999 from
$166,000 in 1998. The provision was and $186,000 in 1997. The increase in the
loan loss provision was made because of increased charge-offs in the loan
portfolio during 1999. The Bank's allowance for loan losses as a percentage of
gross loans was 1.0% at the end of 1999 and 1.2% at the end of 1998 and 1997.
Additional information regarding loan loss provisions is discussed in
"Nonperforming and Problem Assets."
Noninterest Income
Noninterest income consists of revenues generated from a variety of financial
services and activities. The majority of noninterest income is a result of
service charges on deposit accounts including charges for insufficient funds,
checks and fees charged for non-deposit services. Noninterest income also
includes fees charged for various bank services such as safe deposit box rental
fees and letter of credit fees and secondary market mortgage loan origination
fees. A portion of noninterest income is gains on the sale of investment
securities. Although the Bank generally follows a buy and hold philosophy with
respect to investment securities, occasionally the need to sell some investment
securities is created by changes in market rate conditions or by efforts to
restructure the portfolio to improve the Bank's liquidity or interest rate risk
positions.
Noninterest income decreased 3.6% to $265,000 during 1999. Noninterest income
totaled $275,000 in 1998, a increase of 80.1% from the $153,000 recorded in
1997. Noninterest income in 1997 increased 20.5%. The majority of the increase
in noninterest income in 1998 and 1999 was due to increased service charges on
deposit accounts because of the increased number of accounts and new products.
Also, in 1998 the bank began originating home mortgages for placement in the
secondary market and received $28,000 and $27,000 in fee income in 1999 and
1998, respectively.
The Bank's fee structure is reviewed annually to determine if adjustments to
fees are warranted. The last fee adjustment was made in the fourth quarter of
1999. Management believes that the current fee structure is competitive in the
Bank's market.
The sources of noninterest income for the past three years are summarized in the
table below.
Sources of Noninterest Income (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Service charges in deposit accounts $ 167 $ 169 $ 112
Gain on sale of investment securities (1) - 3
Mortgage loan origination fees 28 27 -
Administration fees 13 13 -
Other 58 66 38
----- ----- -----
Total noninterest income $ 265 $ 275 $ 153
===== ===== =====
</TABLE>
Noninterest Expense
Noninterest expense increased $267,000, or 16.6% to $1.9 million in 1999.
Noninterest expense for 1998 rose 315,000 or 24.3% to $1.6 million. Noninterest
expense in 1997 was $1.3 million. The overhead ratio of noninterest expense to
adjusted total revenues (net interest income plus noninterest income excluding
securities transactions) was 90% in 1999 and 1998 and 105% in 1997.
Total personnel expenses, the largest component of noninterest expense,
increased 45,000 or 6.0% during 1999. During 1998 personnel expenses increased
$163,000 to $748,000. Personnel expenses for 1997 were $585,000, These increases
were attributable to the increased number of full time equivalent employees
43
<PAGE>
required due to the high growth rate the Bank has experienced in 1998 and 1997.
Total full time equivalent employees were 25, 30 and 25 at December 31, 1999,
1998 and 1997. Management expects the number of full-time equivalent employees
to remain constant through 2000.
Combined occupancy and furniture and equipment expense remained relatively
constant at $252,000 during 1999 and increased $72,000 or 42.0% to $244,000 in
1998. Those expenses increased $33,000 in 1997. The increase in 1998 was due
primarily to the opening of CNB Center, a 19,900 square foot facility that is
used as a branch and office space that is leased to various unrelated entities.
The reason for the increase in 1997 was the completion of the second floor of
the main Bank building to provide additional operations space.
Professional services expense, fees paid to attorneys, independent auditors,
consultants and bank examiners increased to $80,000 during 1999. During 1998
these expenses decreased to $39,000 or 55.2% under the 1997 amount. The increase
in 1999 is due to the decision to outsource certain functions that were
performed in-house in 1998 and increased bank examiner's fees. The increase in
1997 is due primarily to the loss of the Company's senior vice president of
operations late in 1996, forcing the Company to outsource portions of the
responsibilities formerly performed by that position in 1997.
Data processing services consisting primarily of account processing, credit card
processing fees, and product licensing fees increased $44,000 or 27.3% during
1999 due to the addition of new products. These expenses increased $13,000 or
8.8% during 1998 to $161,000. These expenses increased $49,000 to $148,000 in
1997. These fees relate directly to the number of accounts serviced and
transactions processed. Management expects these expenses to continue to
increase as the Bank grows.
Noninterest expense has increased over the past two years and will most likely
continue to increase as the Bank grows. However, as the Bank becomes more
mature, growth in net interest income will outpace growth in noninterest
expense. Accordingly, management believes the Bank's overhead ratio will
continue to improve. The primary elements of noninterest expense for the past
three years are as summarized in the following table.
Sources of Noninterest Expense (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998 1997
---------------------------
<S> <C> <C> <C>
Salaries and wages $ 686 $ 652 $ 515
Employee benefits 107 96 70
------ ------- ----
Total personnel expense 793 748 585
Occupancy expense 139 121 80
Furniture and equipment 113 124 92
Printing and supplies 132 95 72
Professional services 80 39 87
Postage 44 41 31
Telephone 23 22 15
Dues and subscriptions 12 19 18
Education and seminars 17 21 13
Advertising and public relations 46 56 40
Insurance expense 78 31 26
Bank franchise tax 6 9 13
Data processing 205 161 148
Stock transfer agent fees 7 8 9
Amortization of organizational cost 18 29 22
Year 2000 testing 28 23 -
Other operating expense 138 65 46
------ ------- ------
Total other expenses $1,879 $1,612 $1,297
====== ====== ======
</TABLE>
44
<PAGE>
Year 2000 Compliance
Like most financial service providers, the Company and the operations of the
Bank had the potential to be significantly affected by the Y2K issue due to its
dependence on technology and sensitive data. Computer software, hardware and
other equipment, both within and outside the Bank's direct control, and third
parties with whom the Bank electronically or operationally interfaces (including
without limitation its customers and third party vendors) were likely to be
affected. If computer systems were not modified in order to be able to identify
the year 2000, many computer applications could have failed or could adversely
affect the viability of the Bank's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Y2K
issue could have resulted in a significant adverse impact of the Bank's
operations and, in turn, the financial condition and results of operations of
the Company.
Management formulated a Y2K Team, a significant part of the team's efforts were
monitoring the Bank's data processor's Y2K project closely. The data processor
had substantially completed renovating and testing its mission-critical
mainframe and PC-based applications by year-end 1998. The Bank actively
participated in testing the significant loan and deposit systems.
Y2K related expense was $28,000 in 1999 and $23,000 in 1998. Management believes
that future Y2K expenses will not be material to operations in the future.
Income Taxes
Income tax expense is based on amounts reported in the statements of income
(after adjustments for non-taxable income and non-deductible expenses) and
consists of taxes currently due plus deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement purposes.
The deferred tax assets and liabilities represent the future Federal income tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
The Company's deferred income tax benefits and liabilities are the result of
temporary differences in loss carryforwards, provisions for loan losses,
valuation reserves, depreciation, deferred income, and investment security
discount accretion.
Net deferred income tax assets of $395,000, $409,000 and $411,000 at December
31, 1999, 1998, and 1997, respectively, are offset by a valuation allowance.
Accordingly, no income tax expense or benefit was reported during 1999, 1998 or
1997.
Earning Assets
Average earning assets were $46.5 million during 1999, an increase of 7.9% over
1998. Average earning assets increased $12.5 million, or 41.0%, during 1998 to
$43.1 million. Average earning assets increased $10.8 million to $30.6 million
during 1997. Total average earning assets represented 89.2% of total average
assets in 1999. This decreased from 90.0% of total average assets in 1998. The
mix of average earning assets changed during 1999, 1998 and 1997 with a larger
portion of the Bank's funds being invested in higher yielding loans. For 1999,
average net loans represented 61.2% of average assets. This is a significant
increase from 53.1% in 1998. Average investment securities decreased to 25.9%
of total average assets during 1999. This number was down from 28.3% in 1998
and 35.3% in 1997. Average noninterest earning assets increased to $5.7 million
from $4.8 million in 1998 and $4.1 million in 1997.
A summary of average assets is shown in the following table.
45
<PAGE>
Average Asset Mix (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Average Average Average
Balance Percent Balance Percent Balance Percent
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Earnings assets:
Loans, net $31,950 61.19% $25,454 53.14% $17,652 50.90%
Investment securities 13,515 25.88 13,563 28.31 12,242 35.30
Federal funds sold 1,080 2.08 4,112 8.58 691 1.99
------- ------ ------- ----- ------- ------
Total earning assets 46,545 89.15 43,129 90.03 30,585 88.19
------- ------ ------- ----- ------- ------
Nonearning assets:
Cash and due from banks 3,294 6.31 2,447 5.11 2,106 6.07
Premises and equipment 1,957 3.75 1,897 3.96 1,556 4.49
Other assets 416 .79 431 .90 430 1.25
------- ------ ------- ----- ------- ------
Total nonearning assets 5,667 10.85 4,775 9.97 4,092 11.81
------- ------ ------- ----- ------- ------
Total assets $52,212 100.00% $47,904 100.00% $34,677 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
Loans
The Bank makes both consumer and commercial loans to borrowers in all
neighborhoods within its market area, including the low- and moderate-income
areas. The Bank's market area is generally defined to be all or portions of the
Pulaski, Giles, Wythe, Montgomery and Bland Counties of Virginia and the City of
Radford, Virginia. The Bank emphasizes consumer based installment loans,
commercial loans to small and medium sized businesses and real estate loans.
Net loans consist of total loans less unearned income and the allowance for loan
losses. Average net loans increased 25.5% to $32.0 million in 1999 and 44.2% to
$25.5 million during 1998. This was the fifth consecutive year of loan growth.
Average net loans increased to $17.7 million during 1997. The increase in
average net loans outstanding during the past years is due to the efforts of the
Bank's management, increases in loan demand and to the Bank's growing reputation
in the community.
A significant portion of the loan portfolio, $14.9 million or 46.3%, is made up
of loans secured by various types of real estate. Total loans secured by one to
four family residential properties represented 42.5% and 38.0% of total loans at
the end of 1999 and 1998, respectively. During 1999, the Bank experienced a
decline in loans for commercial and business purposes. These loans decreased
7.3% during 1999 to a total of $12.6 million, or 39.2% of total loans
outstanding compared to a total of $13.6 million or 43.0% at the end of 1998.
The amounts of loans outstanding by type at December 31, 1999 and 1998 are shown
in the following table.
Loan Portfolio Summary (thousands)
<TABLE>
<CAPTION>
December 31,
1999 December 31, 1998
----------- --------------------------
Amount % Amount %
---------- ------- -------- -------
<S> <C> <C> <C> <C>
Construction and
development $ 567 1.77% $ 732 2.32%
Farmland 76 .25 51 .16
1-4 family residential 13,582 42.45 12,006 38.03
Multifamily residential - -
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Nonfarm, nonresidential 628 1.96 254 .80
------- ------ ------- -----
Total real estate 14,853 46.43 13,043 41.31
Agricultural 74 .23 105 .33
Commercial and industrial 12,562 39.27 13,558 42.92
Credit cards and other revolving credit 458 1.43 459 1.45
Other consumer 3,970 12.41 4,230 13.40
State and political subdivisions 69 .21 170 .54
Other 6 .02 4 .02
------- ------ ------- ------
Total $31,992 100.00% $31,569 100.00%
======= ====== ======= ======
</TABLE>
================================================================================
Management's Discussion and Analysis
--------------------------------------------------------------------------------
The maturity distribution of variable and fixed rate loans as of December 31,
1999 are set forth in the following table.
Maturity Schedule of Loans (thousands)
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------
Commercial
Financial and Real Total
------------- ------- -------
Agriculture Estate Others Amount %
------------- ------- --------------- -------
<S> <C> <C> <C> <C> <C>
Fixed rate loans:
Three months or less $ 395 $ 59 $ 274 $ 728 2.27%
Over three months to twelve months 584 726 674 1,984 6.20
Over one year to five years 1,612 1,075 3,074 5,761 18.01
Over five years 337 126 323 786 2.46
------- ------- ------ ------- ------
Total fixed rate loans 2,928 1,986 4,345 9,259 28.94
------- ------- ------ ------- ------
Variable rate loans:
Three months or less 2,765 813 78 3,656 11.43
Over three months to twelve months 382 675 70 1,127 3.52
Over one year to five years 6,561 11,379 10 17,950 56.11
Over five years - - - - -
------- ------- ------ ------- ------
Total variable rate loans 9,708 12,867 158 22,733 71.06
------- ------- ------ ------- ------
Total loans:
Three months or less 3,160 872 352 4,384 13.70
Over three months to twelve months 966 1,401 744 3,111 9.72
Over one to five years 8,173 12,454 3,084 23,711 74.12
Over five years 337 126 323 786 2.46
------- ------- ------ ------- ------
Total loans $12,636 $14,853 $4,503 $31,992 100.00%
======= ======= ====== ======= ======
</TABLE>
Investment Securities
The Bank uses its investment portfolio to provide liquidity for unexpected
deposit decreases, to fund loans, to meet the Bank's interest rate sensitivity
goals, and to generate income.
Securities are classified as securities held to maturity when management has the
intent and the Company has the ability at the time of purchase to hold the
securities to maturity. Securities held to maturity are carried at cost
adjusted for amortization or premiums and accretion of discounts. Securities to
be held for indefinite periods of time are classified as securities available
47
<PAGE>
for sale. Unrealized gains and losses on securities available for sale are
recognized as direct increases or decreases in shareholders' equity. Securities
available for sale include securities that may be sold in response to changes in
market interest rates, changes in the security's prepayment risk, increases in
loan demand, general liquidity needs and other similar factors. The entire
securities portfolio is classified as available for sale.
Management of the investment portfolio has always been conservative with
virtually all investments taking the form of purchases of U.S. Treasury, U.S.
Government agency and State and local bond issues. Management views the
investment portfolio as a source of income, and purchases securities with that
in mind. However, adjustments are necessary in the portfolio to provide an
adequate source of liquidity which can be used to meet funding requirements for
loan demand and deposit fluctuations and to control interest rate risk.
Therefore, management may sell certain securities prior to their maturity.
The table on the following page presents the investment portfolio at December
31, 1999 by major types of investments and maturity ranges. Maturities may
differ from scheduled maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid prior to the
scheduled maturity date. Maturities on all other securities are based on the
contractual maturity.
Investment Securities (thousands)
December 31, 1999
--------------------------------------------
Management's Discussion and Analysis
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amortized Cost Due
--------------------------------------
After One After Five After
In One Yr. Through Through Ten Equity Fair
or Less Five Yrs. Ten Yrs. Years Securities Total Value
---------- --------- --------- ----- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 98 $ - $ - $ - $ - $ 98 $ 98
U. S. Government agencies 4,655 1,003 6,274 - - 11,932 11,514
State and political subdivisions 200 - - - - 200 199
Mortgage-backed securities - - 993 1,134 - 2,127 2,059
Equity securities - - - - 318 318 318
------ --------- ------ ------ -------- ------- -------
Total $4,953 $ 1,003 $7,267 $1,134 $ 318 $14,675 $14,188
====== ========= ====== ====== ======== ======= =======
Weighted average yields:
U.S. Treasury 5.28% -% -% -% 5.28%
U.S. Government agencies 5.70 5.89 5.90 - 5.83
State and political subdivisions 6.38 - - - 6.38
Mortgage-backed - - 6.28 6.01 6.14
------ --------- ------ ------ ------
Consolidated 5.72% 5.89% 5.95% 6.01% 5.88%
====== ========= ====== ====== ======
</TABLE>
The rising interest rate environment in 1999 caused the average yield on the
investment portfolio to increase to 6.2% from 5.9% in 1998. At December 31,
1999, the market value of the investment portfolio was $14.2 million,
representing depreciation of $486,000 below amortized cost. This compared to a
market value of $16.4 million and a depreciation of $10,000 below amortized cost
a year earlier.
Federal Funds Sold
48
<PAGE>
Federal funds represent the most liquid portion of the Bank's invested funds and
generally the lowest yielding portion of earning assets. Management has made an
effort to maintain Federal funds at the lowest level possible consistent with
prudent interest rate risk management strategies and liquidity needs.
Average Federal funds sold were $1.1 million in 1999, a decrease of $3.0 million
or 73.7% from 1998. Average Federal funds sold were $4.1 million in 1998, an
increase of $3.4 million over the 1997 average. Average Federal funds sold
totaled $691,000 in 1997. Average Federal funds sold were 2.1%, 5.3% and 2.0%
of total average interest-earning assets in 1999, 1998 and 1997, respectively.
Deposits
The Bank relies on deposits generated in its market area to provide the majority
of funds needed to support lending activities and for investments in liquid
assets. More specifically, core deposits (total deposits less time deposits in
denominations of $100,000 or more) are the primary funding source.
The Bank's balance sheet growth is largely determined by the availability of
deposits in its markets, the cost of attracting the deposits, and the prospects
of profitably utilizing the available deposits by increasing the loan or
investment portfolios. Market conditions have resulted in depositors shopping
for better deposit rates more than in the past. An increased customer awareness
of interest rates adds to the importance of rate management. The Bank's
management must continuously monitor market pricing, competitor's rates, and
internal interest rate spreads to maintain the Bank's growth and profitability.
The Bank attempts to structure rates so as to promote deposit and asset growth
while at the same time increasing the overall profitability of the Bank.
Average total deposits were $45.6 million in 1999 which represents an increase
of 9.2% over 1998. Average total deposits were $41.7 million during 1998, an
increase of 34.3% over 1997. Average total deposits for the year ended December
31, 1997 amounted to $31.1 million which was an increase of $11.3 million, or
56.9%. Average core deposits totaled $41.3 million in 1999 and $37.2 million in
1998, an increase of $4.1 million, or 11.0%. The percentage of the Bank's
average deposits that are interest-bearing decreased to 87.5% from 92.5% in
1998. Average demand deposits which earn no interest increased $2.6 million to
$5.7 million in 1999 as compared to 1998.
The average certificates of deposit issued in denominations of $100,000 or more
decreased to $4.2 million in 1999 from $4.5 million in 1998. Average
certificates of deposit issued in denominations of $100,000 or more as a
percentage of total average deposits were 9.3%, 10.8% and 18.5% for the years
ended December 31, 1999, 1998 and 1997, respectively.
Large municipal deposits from local governments were $13.4 million and $12.5
million at December 31, 1999 and 1998, respectively. Management believes that
the Bank is paying market rates for these deposits. Management's strategy has
been to support loan and investment growth with core deposits and not to
aggressively solicit the more volatile, large denomination certificates of
deposit. Large denomination certificates of deposit and large municipal
deposits are particularly sensitive to changes in interest rates. Management
considers these deposits to be volatile and invests these funds in order to
minimize liquidity and interest rate risks.
Average deposits for the three years ended December 31, 1999, 1998 and 1997 are
summarized in the following table.
49
<PAGE>
Deposit Mix (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
Average Average Average
Balance Percent Balance Percent Balance Percent
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Now accounts $11,052 24.27% $12,890 30.90% $ 8,094 26.06%
Money market 4,543 9.97 3,393 8.13 1,805 5.81
Savings 2,871 6.30 2,425 5.81 1,696 5.46
Small denomination certificates 17,140 37.63 15,379 36.88 10,817 34.83
Large denomination certificates 4,230 9.29 4,508 10.81 5,736 18.47
------- ------ ------- ------ ------- ------
Total interest bearing deposits 39,836 87.46 38,595 92.53 28,148 90.63
Noninterest bearing deposits:
Demand deposits 5,711 12.54 3,117 7.47 2,909 9.37
------- ------ ------- ------ ------- ------
Total deposits $45,547 100.00% $41,712 100.00% $31,057 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table provides maturity information relating to time deposits of
$100,000 or more at December 31, 1999 and 1998.
Large Time Deposit Maturities, (thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Remaining maturity of three months or less $1,821 $2,054
Remaining maturity over three through twelve months 1,017 1,241
Remaining maturity over twelve months 1,203 1,788
------ ------
Total time deposits of $100,000 or more $4,041 $5,083
====== ======
</TABLE>
Other Borrowed Funds
Other borrowed funds consist of a mortgage loan of $127,000 and $133,000 at
December 31, 1999 and 1998, respectively. The average balance for 1999 was
$129,000. Interest expense was $7,000 for a cost of funds of 5.4% in both
years.
The Bank had no short-term debt at December 31, 1999. The average balance of
Federal funds purchased was $146,000 in 1999. There were no Federal funds
purchased in 1998. The related interest expense on these borrowings was $11,000
for a cost of funds of 6.5% in 1999.
Capital Adequacy
Regulatory guidelines relating to capital adequacy provide minimum risk-based
ratios which assess capital adequacy while encompassing all credit risks,
including those related to off-balance sheet activities. Capital ratios under
these guidelines are computed by weighing the relative risk of each asset
category to derive risk-adjusted assets. The risk-based capital guidelines
require minimum ratios of core (Tier I) capital (common stockholders' equity and
qualifying preferred stockholders' equity, less intangible assets) to risk-
weighted assets of 4.0% and total regulatory capital (core capital plus
allowance for loan losses up to 1.25% of risk-weighted assets and qualifying
subordinated debt) to risk-weighted assets of 8.0%. See "Supervision and
Regulation."
50
<PAGE>
In addition, a minimum leverage ratio of average Tier I capital to average total
assets for the previous quarter, ranging from 3% to 5%, is required by federal
bank regulators subject to the regulator's evaluation of the Bank's overall
safety and soundness. As of December 31, 1999, the Bank had a ratio of year-end
Tier I capital to average total assets for the fourth quarter of 7.9%. The Bank
exceeds all required regulatory capital ratios and is considered well
capitalized.
Shareholders' equity was $5.8 million at year-end 1999 which was a decrease of
$447,000 from 1998. This decrease was due to a decline in the market value of
investment securities. Equity was $6.2 million at December 31, 1998, a 100%
increase from the 1997 year-end total of $3.1 million. The increase in 1998 was
a result of the sale of 380,000 shares of common stock at $9 per share. Average
shareholders' equity as a percentage of average total assets was 11.5% in 1999
and 12.4% in 1998.
At December 31, 1999 the Bank had a ratio of Tier I capital to risk-weighted
assets of 13.1% and a ratio of total regulatory capital to risk-weighted assets
of 14.1%, well above the regulatory minimum of 4.0% and 8.0%, respectively.
The Bank's analysis of capital for the quarters December 31, 1999 and 1998 is
presented in the following table.
Risk-Based Capital, (thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Tier I capital $ 3,961 $ 3,181
Qualifying allowance for loan losses/1/ 314 365
------- -------
Total regulatory capital $ 4,275 $ 3,546
======= =======
Total risk-weighted assets $30,336 $31,404
======= =======
Tier I as a percent of risk-weighted assets 13.06% 10.13%
Total Tier II capital as a percent of risk-weighted assets 14.09% 11.29%
Leverage ratio/2/ 7.89% 6.14%
</TABLE>
_____________________
/1/ Limited to 1.25% of risk-weighted assets.
/2/ Period end Tier I capital to adjusted average assets per quarter.
===============================================================================
Management's Discussion and Analysis
-------------------------------------------------------------------------------
Common Stock Outstanding
At December 31, 1997 the Company had 546,399 shares of common stock outstanding.
During 1997 the Company filed for, and received approval from the SEC for a
secondary stock offering of common stock at a price of $9 per share. The stock
sale began on December 10, 1997 and closed February 10, 1998 after the sale of
380,000 shares for net proceeds of approximately $3.1 million. Management used
the proceeds for general purposes and to finance growth. There were 926,399
common shares outstanding at December 31, 1999 and 1998. These shares are held
by approximately 1,000 shareholders of record.
Nonperforming and Problem Assets
51
<PAGE>
Certain credit risks are inherent in making loans, particularly commercial and
consumer loans. Management prudently assesses these risks and attempts to
manage them effectively. The Bank also attempts to reduce repayment risks by
adhering to internal credit policies and procedures. These policies and
procedures include officer and customer limits, periodic loan documentation
review and follow up on exceptions to credit policies.
The allowance for loan losses is maintained at a level adequate to absorb
probable losses. Some of the factors which management considers in determining
the appropriate level of the allowance for credit losses are: past loss
experience, an evaluation of the current loan portfolio, identified loan
problems, the loan volume outstanding, the present and expected economic
conditions in general, regulatory policies, and in particular, how such
conditions relate to the market areas that the Bank serves. Bank regulators
also periodically review the Bank's loans and other assets to assess their
quality. Loans deemed uncollectible are charged to the allowance. Provisions
for loan losses and recoveries on loans previously charged off are added to the
allowance.
The accrual of interest on loans is discontinued on a loan when, in the opinion
of management, there is an indication that the borrower may be unable to meet
payments as they become due. Upon such discontinuance, all unpaid accrued
interest is reversed.
The provision for loan losses, net charge-offs and the activity in the allowance
for loan losses is detailed in the following table.
Allowance for Loan Losses (thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Allowance for loan losses, beginning $ 373 $ 270 $ 155
Provision for loan losses, added 173 166 186
----- ----- -----
546 436 341
Loans charged off (224) (64) (83)
Recoveries of loans previously charged off - 1 12
----- ----- -----
Net charge-offs (224) (63) (71)
----- ----- -----
Allowance for loan losses, ending $ 322 $ 373 $ 270
===== ===== =====
</TABLE>
The loan portfolio also included loans to various borrowers (watch loans) at
period-end for which management had concerns about the ability of the borrowers
to continue to comply with present loan repayment terms, and which could result
in some or all of these loans being uncollectible. Management monitors these
loans carefully and has provided for these loans in the allowance for loan
losses.
Management realizes that general economic trends greatly affect loan losses and
no assurances can be made about future losses. Management does, however,
consider the allowance for loan losses to be adequate at December 31, 1999 and
1998. The allocation of the reserve for loan losses is shown in the following
table.
Allocation of the Allowance for Loan Losses (thousands)
52
<PAGE>
===============================================================================
Management's Discussion and Analysis
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1999 1998 1997
------ ------ ------------------
Balance at end of period applicable to: Amount Percent/1/ Amount Percent/1/ Amount Percent/1/
-------------------------------------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 168 $ 39.50% $ 222 43.28% $ 80 37.43
Real estate, construction - 1.77 - 2.32 - 2.79
Real estate, mortgage 71 44.66 63 38.03 103 36.87
Installment loans to individuals, other 83 14.07 88 16.37 87 22.91
----- ------- ----- ------ ---- ------
Total $ 322 $100.00% $ 373 100.00% $270 100.00%
===== ======= ===== ====== ==== ======
</TABLE>
________________
1 Percent of loans in each category to total loans.
Nonperforming Assets at December 31, 1999 and 1998 are analyzed in the table
below.
Nonperforming Assets (thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Nonaccrual loans $127 $330 $ -
Restructured loans - - -
Foreclosed and in-substance foreclosed properties 24 1 36
---- ---- -----
$151 $331 $ 36
==== ==== =====
</TABLE>
Nonperforming assets were .5% and 1.1% of gross loans outstanding at year-end
1999 and 1998, respectively. In addition to the nonperforming assets, loans
which were past due 90 days or more amounted to $86,000 at December 31, 1998.
There were no loans past due 90 days or more at December 31, 1999 or 1997. Net
loan charge-offs as a percentage of average loans were .7%, .2%, and .4% in
1999, 1998 and 1997, respectively. The allowance for loan losses was $322,000,
$373,000 and $270,000 at December 31, 1999, 1998 and 1997, respectively, or 1.0%
of gross loans at December 31, 1999 and 1.2% for December 31, 1998 and 1997.
Liquidity and Sensitivity
The principal goals of the Bank's asset and liability management strategy are
the maintenance of adequate liquidity and the management of interest rate risk.
Liquidity is the ability to convert assets to cash in order to fund depositors'
withdrawals or borrowers' loans without significant loss. Interest rate risk
management balances the effects of interest rate changes on assets that earn
interest against liabilities on which interest is paid, to protect the Bank
from wide fluctuations in its net interest income which could result from
interest rate changes.
Management must insure that adequate funds are available at all times to meet
the needs of its customers. On the asset side of the balance sheet, maturing
investments, loan payments, maturing loans, federal funds sold, and unpledged
investment securities are principal sources of liquidity. On the liability side
of the balance sheet, liquidity sources include core deposits, the ability to
53
<PAGE>
increase large denomination certificates, Federal funds lines from correspondent
banks, borrowings from the Federal Reserve Bank, as well as the ability to
generate funds through the issuance of long-term debt and equity.
================================================================================
Managements's Discussion and Analysis
--------------------------------------------------------------------------------
Interest rate risk is the effect that changes in interest rates would have on
interest income and interest expense as interest-sensitive assets and interest-
sensitive liabilities either reprice or mature. Management attempts to maintain
the portfolios of earning assets and interest-bearing liabilities with
maturities or repricing opportunities at levels that will afford protection from
erosion of net interest margin, to the extent practical, from changes in
interest rates.
The table below shows the sensitivity of the Bank's balance sheet at the dates
indicated, but is not necessarily indicative of the position on other dates.
<TABLE>
<CAPTION>
Interest Rate Sensitivity
December 31, 1999
Maturities/Repricing
-------------------------------------------------
1-3 4-12 13-60 Over 60
Months Months Months Months Total
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earning assets:
Loans $ 4,384 $ 3,111 $23,711 $ 786 $31,992
Investments 4,722 549 1,003 8,401 14,675
Federal Funds Sold 760 - - - 760
-------- -------- ------- ------- -------
Total 9,866 3,660 24,714 9,187 47,427
-------- -------- ------- ------- -------
Interest-bearing liabilities:
Now accounts 13,131 - - - 19,533
Money market 6,805 - - - 6,805
Certificates of deposit 4,973 7,807 6,753 - 19,533
Other borrowed funds 2 4 30 91 127
-------- -------- ------- ------- -------
Total 24,911 7,811 6,783 91 39,596
-------- -------- ------- ------- -------
Interest rate gap $(15,045) $ (4,151) $17,931 $ 9,096 $ 7,831
======== ======== ======= ======= =======
Cumulative interest sensitivity gap $(15,045) $(19,196) $(1,265) $ 7,831
Ratio of sensitivity gap to total
earnings assets (31.72)% (8.75)% 37.81% 19.18% 16.51%
Cumulative ratio of sensitivity gap
to total earnings assets (31.72)% (40.47)% (2.66)% 16.51%
</TABLE>
At December 31, 1999, the Company was cumulatively asset-sensitive (earning
assets subject to interest rate changes exceeded interest-bearing liabilities
subject to changes in interest rates). NOW, savings and money market account
repricing within three months were $19.9 million, which historically have not
been as interest-sensitive as other types of interest-bearing deposits. Removing
the impact of NOW and money market accounts, the Bank is asset sensitive in the
three month or less time period, with the four to twelve months time period
being liability-sensitive, the thirteen to sixty months time period being asset-
sensitive and the over sixty months time period being asset-sensitive.
Certificates of deposit in denominations of $100,000 or more and large municipal
54
<PAGE>
deposits are especially susceptible to interest rate changes. These deposits are
matched with short-term investments. Matching sensitive positions alone does not
ensure that the Bank has no interest rate risk. The repricing characteristics of
assets are different from the repricing characteristics of funding sources.
Thus, net interest income can be impacted by changes in interest rates even if
the repricing opportunities of assets and liabilities are perfectly matched.
================================================================================
Managements's Discussion and Analysis
--------------------------------------------------------------------------------
Effects of Inflation
Interest rates are affected by inflation, but the timing and magnitude of the
changes may not coincide with changes in the consumer price index. Management
actively monitors the Bank's interest rate sensitivity in order to minimize the
effects of inflationary trends on the Bank's operations. Other areas of non-
interest expenses may be more directly affected by inflation.
Selected Financial Data
The following table summarizes selected financial data considered to be
significant indicators of the Bank's operating results and financial condition
for the periods indicated.
<TABLE>
<CAPTION>
Selected Financial Data
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Summary of Operations
Interest income $ 3,648 $ 3,341 $ 2,454
Interest expense 1,831 1,813 1,371
------- ------- -------
Net interest income 1,817 1,528 1,083
Provision for credit losses 173 166 186
Other income 265 275 153
Other expense 1,880 1,613 1,297
Income taxes - - -
------- ------- -------
Net income $ 29 $ 24 $ (247)
======= ======= =======
Per Share Data
Basic earnings per share $ .03 $ .03 $ (.45)
Diluted earnings per share .03 .03 (.45)
Book value 6.25 6.74 5.69
Average Balance Sheet Summary
Loans, net $31,950 $25,454 $17,652
Securities 13,515 13,563 12,242
Total assets 52,212 47,904 34,677
Deposits 45,547 41,712 31,057
Shareholders' equity 6,016 5,951 3,190
Selected Ratios
Average equity to average assets 11.52% 12.42% 9.20%
Return on average assets .06% .06% (.71)%
Return on average equity .48% .40% (7.75)%
</TABLE>
55
<PAGE>
================================================================================
Board of Directors and Officers
--------------------------------------------------------------------------------
Board of Directors
------------------
Sybil S. Atkinson................................ Mediaid of America, Inc.
Jack W. Bowling.................................. H.T. Bowling, Incorporated
Jackson M. Bruce................................. Gilmer, Sadler, Ingram,
Sutherland & Hutton
Randolph V. Chrisley............................. Pulaski Furniture
Corporation
Hiawatha Nicely, Jr.............................. New Century Consultants, Inc.
A. Carole Pratt.................................. Pratt & Mansell, DDS
David W. Ratcliff, Jr............................ Alliant TechSystems, Inc.
Nathaniel R. Tuck................................ Tuck Clinic of Chiropractic,
P.C.
J. David Wine.................................... Advanced Health Services,
Inc.
Officers
--------
Phillip M. Baker................................. Acting President & CEO
Deborah Boyd..................................... Loan Officer
Layne E. Burcham................................. Loan Officer
Michael D. Ware.................................. Loan/Compliance Officer
Jackie Reichner.................................. Chief Operating Officer
================================================================================
Stockholder Information
Annual Meeting
--------------
The annual meeting of stockholders will be held at 10:00 a.m. on April 13, 2000
in the Training Room at Community National Bank, 900 Memorial Drive, Pulaski,
Virginia.
______________________
Requests for Information
------------------------
56
<PAGE>
Requests for information should be directed to Phillip Baker, Acting President &
CEO, at Community National Bank, Post Office Box 1060, Pulaski, Virginia, 24301;
Telephone (540) 994-0831. A copy of the Company's Form 10-KSB for 1999 will be
furnished, without charge, after March 31, 2000 upon written request and is
available on the internet at http://www.sec.gov.
______________________
Common Stock Market Information Stock Transfer Agent
------------------------------- --------------------
Davenport & Company, LLC First Citizens Bank & Trust
101 South Jefferson Street Post Office Box 29522
Roanoke, Virginia 24011 Raleigh, North Carolina 27626
______________________
Independent Auditors Legal Counsel
-------------------- -------------
Larrowe & Company, PLC Mays & Valentine
Certified Public Accountants and Consultants NationsBank Center
Post Office Box 2108 Post Office Box 1122
Galax, Virginia 24333 Richmond, Virginia
23208-1122
_______________________
Main Office Downtown Office ATM
----------- --------------- ---
900 Memorial Drive 202 N. Washington Ave. New River Community College
Pulaski, Virginia Pulaski, Virginia Martin Hall
Dublin, Virginia
Pulaski Community Hospital
Pulaski, Virginia
57
<PAGE>
EX-22.1
2000 PROXY STATEMENT
CNB HOLDINGS, INC.
P.O. Box 1060
900 Memorial Drive
Pulaski, Virginia 24301
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Annual
Meeting") of CNB Holdings, Inc., (the "Company") will be held on Thursday, April
13, 2000, at 10:00 a.m., local time in the Training Room at Community National
Bank, 900 Memorial Drive, Pulaski, Virginia, for the purpose of considering and
voting upon:
1. The election of three directors of the Company to serve until the 2003
Annual Meeting of Shareholders.
2. Such other matters as may properly come before the Annual Meeting or
any adjournment thereof.
Only shareholders of record at the close of business on Monday, February
28, 2000, are entitled to notice of and to vote at the meeting or any
adjournment thereof.
A Proxy Statement and a proxy solicited by the Board of Directors are
enclosed herewith. To ensure a quorum for the meeting, please sign, date and
return the proxy promptly in the enclosed envelope. If you attend the meeting,
you may revoke your proxy and vote in person. The Company's 1999 Annual Report
to Shareholders is enclosed for your information.
By Order of the Board of Directors
A. Carole Pratt
Secretary
March 10, 2000
Please complete and return the enclosed proxy promptly. If you attend the
meeting in person, you may withdraw your proxy and vote your own shares.
58
<PAGE>
CNB HOLDINGS, INC.
P.O. Box 1060
900 Memorial Drive
Pulaski, Virginia 24301
___________________________
PROXY STATEMENT
___________________________
2000 ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 13, 2000
This Proxy Statement is furnished to the shareholders of CNB Holdings, Inc.
(the "Company") in connection with the solicitation of proxies by the Board of
Directors of the Company to be voted at the 2000 Annual Meeting of Shareholders
of the Company (the "Annual Meeting") and any adjournment thereof. The Annual
Meeting will be held on Thursday, April 13, 2000 at 10:00 a.m., local time at
Community National Bank, 900 Memorial Drive, Pulaski, Virginia. This Proxy
Statement and the accompanying proxy are being mailed to shareholders on or
about March 10, 2000.
VOTING
General
The securities that can be voted at the Annual Meeting consist of the
common stock of the Company (the "Common Stock"), with each share entitling its
owner to one vote on each matter submitted to the shareholders. The record of
shareholders entitled to vote at the Annual Meeting was taken as of the close of
business on Monday February 28, 2000. On that date the company had outstanding
and entitled to vote 926,399 shares of Common Stock, with each share entitled to
one vote.
Proxies
All properly executed proxy cards delivered pursuant to this solicitation
and not revoked will be voted at the Annual Meeting in accordance with the
directions given. Shareholders should specify their choices with regard to the
election of directors on the accompanying proxy card. If no specific
instructions are given with regard to the matters to be voted upon, then the
shares represented by a signed proxy card will be voted "FOR" the election of
all director nominees. If any other matters properly come before the Annual
Meeting, the persons named as proxies will vote upon such matters according to
their judgment.
All proxy cards delivered pursuant to this solicitation are revocable at
any time at the option of the persons executing them by giving written notice to
the Secretary of the Company at P.O. Box 1060, 900 Memorial Drive, Pulaski,
Virginia 24301, or by executing and delivering to the Secretary a later dated
proxy, or by voting in person at the Annual Meeting.
All expenses incurred in connection with the solicitation of proxies will
be borne by the Company. Such costs include charges by brokers, fiduciaries and
custodians for forwarding proxy materials to beneficial owners of stock held in
their names. Solicitation may be undertaken by mail, telephone and personal
contact by directors, officers and employees of the Company without additional
compensation.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of the Common Stock
by the directors, executive officers and holders of 5% or more of the
outstanding shares of the Common Stock and all directors and executive officers
of the Company as a group as of February 28, 2000.
59
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation Shares Percentage of
Name, Age & Address Director During the Beneficially Shares
of Beneficial Owner Since Past Five Years Owned Outstanding(1)
-------------------------- ------------- ----------------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
DIRECTORS TO SERVE UNTIL 2002
Hiawatha Nicely, Jr., 50 1993 Chairman, President and CEO 57,001 4.9%
Dublin, Virginia of the Company, COO of the
Bank 1997-1999, Chairman of
the Bank 1993-1997
A. Carole Pratt, D.D.S., 48 1993 Secretary of the Company; 29,901(2) 2.6%
Pulaski, Virginia General Dentistry
David W. Ratcliff, Jr., 55 1993 Business Manager, Defense 27,706(3) 2.4%
Pulaski, Virginia Reconversion and Development
- Alliant Techsystems, Inc.
DIRECTORS TO SERVE UNTIL 2001
Sybil S. Atkinson, 53 1993 Mediaid of America, Inc.; 30,204(4) 2.7%
Virginia Parish Administrator of
Christ Episcopal Church
Randolph V. Chrisley, 52 1993 Vice President of Sales, 54,596 4.7%
Draper, Virginia Pulaski Furniture
Corporation
J. David Wine, 51 1993 Founder of Advance 55,970(5) 4.8%
Pulaski, Virginia Health-Care Services, Inc.;
and Advanced Health
Services, Inc.; cofounder of
Bay State Medical, Inc., and
Home Care Solutions, Inc.
<CAPTION>
Principal Occupation Shares Percentage of
Name, Age & Address Director During the Beneficially Shares
of Beneficial Owner Since Past Five Years Owned Outstanding(1)
-------------------------- ------------- ----------------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
NOMINEES FOR ELECTION AS
DIRECTORS TO SERVE UNTIL 2003
Jack W. Bowling, 53 1993 President, H. T. Bowling, 60,721(6) 5.2%
Dublin, Virginia Inc.
Jackson M. Bruce, 57 1993 Partner, law firm of Gilmer, 54,876 4.7%
Dublin, Virginia Sadler, Ingram,
Sutherland & Hutton
Chairman of the Bank 1999 -
present
Nathaniel R. Tuck, D.C., 47 1993 President and Owner, 33,638 2.9%
Pulaski, Virginia Tuck Clinic of
Chiropractic, P.C.
All Directors and 404,613 34.9%
Executive Officers
as a Group (9 Persons)
</TABLE>
-
(1) For purposed of this table, beneficial ownership has been determined in
accordance with the provision of Rule 13d-3 of the Securities Exchange Act
of 1934 under which, in general, a person is deemed to be the beneficial
owner of a security if he has or shares the power to vote or direct the
voting of the security or the power to dispose of or direct the disposition
of the security, or if he has the right to acquire beneficial ownership of
the security within sixty days. Percentage is determined on the basis of
926,399 shares of Common Stock issued and outstanding, plus in each case
shares subject to currently exercisable options. The option ownership of
the directors reflected in this column is as follows: Mr. Nicely - 27,376;
Dr. Pratt - 14,876; Mr. Ratcliff - 14,876; Ms. Atkinson - 14,876; Mr.
Chrisley -27,096; Mr. Wine - 27,220; Mr. Bowling - 27,344; Mr. Bruce -
27,376; and Dr. Tuck - 14,876.
60
<PAGE>
(2) Includes 380 shares held by Ms. Pratt's minor children.
(3) Includes 374 shares held jointly with Mr. Ratcliff's children.
(4) Includes 1,263 shares owned by Ms. Atkinson's minor children.
(5) Includes 3,143 shares owned by an individual retirement account for the
benefit of Mr. Wine's wife.
(6) Includes 32,625 shares held by an investment company affiliate of Mr.
Bowling.
ELECTION OF DIRECTORS
Nominees
By resolution of the Board of Directors, the Board shall consist of nine
directors. The terms of the directors are staggered so that each year
approximately one-third of the Board of Directors is elected and each director
serves until the third Annual Meeting following his or her election and
thereafter until a successor has been elected and has qualified. This year, the
terms of three directors are expiring and thus three directors will be elected.
Certain information concerning the nominees for election of directors at
this Annual Meeting who will serve until the 2003 Annual Meeting of Shareholders
is set forth above, as is certain information about the other classes of
directors whose terms will expire at the 2001 and 2002 Annual Meetings of
Shareholders. All of the nominees are currently directors of the Company and
Community National Bank, the Company's subsidiary bank (the "Bank").
In the event that any nominee withdraws or for any reason is not able to
serve as a director, the proxy will be voted for such other person as may be
designated by the Board of Directors as substitute nominee, but in no event will
the proxy be voted for more than three nominees. The Board of Directors has no
reason to believe that any nominee will not serve if elected.
Director Compensation
Neither the Company nor the Bank paid directors' fees during the last
fiscal year. Directors of the Company participate in the Company's stock option
plan. See "Stock Option Plan."
Company Board and Committee Meetings and Attendance
The Board of Directors of the Company held five meetings during the fiscal
year. All directors attended at least 75% of all meetings of the Board. The
Company's only standing committee is the Stock Option Committee. See "Stock
Option Plan".
Certain Relationships and Related Transactions
The Company has purchased two insurance policies (a general business policy
and a worker's compensation policy) through James L. Webb, Jr., a former
director of the Company and the Bank (Mr. Webb resigned from the Board in May
1999). The premiums for these policies totaled approximately $25,000 in 1999.
The Company and the Bank have had and expect to have banking and other
transactions in the ordinary course of business with directors and officers of
the Company and the Bank and their affiliates, including members of their
families or corporations, partnerships or other organizations in which such
directors or officers have a controlling interest, on substantially the same
terms (including price, interest rates and collateral) as those prevailing at
the time for comparable transactions with unrelated parties. Such transactions
are not expected to involve more than the normal risk of collectibility nor
present other unfavorable features to the Company and the Bank. The Bank is
subject to a limit on the aggregate amount it may lend to its and the Company's
directors and officers as a group equal to its unimpaired capital and surplus
(or, under a regulatory exemption available to banks with less than $100 million
in deposits, twice that amount). Loans to individual directors and officers must
also comply with the Bank's lending policies and statutory lending limits, and
61
<PAGE>
directors with a personal interest in any loan application are excluded from the
consideration of such loan application.
The executive officers of the Company are elected by the Board of Directors
and serve at the pleasure of the Board. There are no family relationships among
any of the directors or executive officers.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO
ELECT THE THREE NOMINEES LISTED ABOVE AS DIRECTORS OF THE COMPANY.
Executive Compensation
The following table shows the cash compensation paid by the Company to the
Company's Chief Executive Officer for the last three fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Other Annual
Name and Principal Position Year Salary(1) Compensation(2)
------------------------------------------------------ ---- --------- --------------
<S> <C> <C> <C>
Hiawatha Nicely, Jr. 1999 $12,187 ---
Chairman, President and Chief Executive Officer 1998 $53,950 $ 62
1997 $22,232
Wayne L. Carpenter 1999 $62,893 ---
Chief Financial Officer 1998 $61,700 $2,790
Bank Chairman, President and Chief Executive Officer 1997 $62,096 $2,878
Phillip M. Baker 1999 $18,333 $2,000
Chief Financial Officer
</TABLE>
Acting President and Chief Executive Officer of Bank
_______________________
(1) Mr. Carpenter served as President and Chief Executive Officer of the
Company until August 1997. In August 1997, Hiawatha Nicely, Jr. was appointed
as President and Chief Executive Officer of the Company. Mr. Nicely served as
Chief Operations Officer of the Bank from 1997 until February 1999. Mr.
Carpenter served as President and Chief Executive Officer of the Bank through
August 1999. In September 1999 Phillip M. Baker was named as Acting President
and Chief Executive Officer. In November 1999 Mr. Baker was appointed Chief
Financial Officer and Chief Accounting Officer of the Company.
(2) Includes payments by the Company of health insurance premiums and 401(k)
contributions for Mr. Carpenter and Mr. Nicely.
The following table lists the stock options granted during fiscal year
1999 to Hiawatha Nicely, Jr., elected President and Chief Executive Officer of
the Company in August 1997, and Wayne L. Carpenter, the President and Chief
Executive Officer of the Company from 1993 through August 1997 and President and
Chief Executive Officer of the Bank through August 1999. The options listed
below were granted under the CNB Holdings, Inc. 1995 Stock Option Plan, pursuant
to which directors, executive officers and certain other key employees of the
Company and the Bank can receive options to purchase shares of the Company's
Common Stock. See "Stock Option Plan."
62
<PAGE>
Name Granted in Fiscal Year(1) Base Price Date
---------------------- ------- ------------------- ----------- ----------
Hiawatha Nicely, Jr. 594 9.5% $9.13 April 2009
Wayne L. Carpenter 594 9.5% $9.13 April 2009
-----------------------
(1) Options for a total of 5,660 shares of Company Common Stock were granted
under the Stock Option Plan. Each director of the Company received shares
under the plan.
Employment Agreements
Mr. Carpenter was a party to an Employment Agreement with the Bank pursuant
to which he was employed as President and Chief Executive Officer of the Bank.
The Employment Agreement provided for the initial term to expire five years
after the Bank opened for business (August 28, 1999). Mr. Carpenter's Employment
Agreement was not renewed upon expiration on August 28, 1999. The Employment
Agreement provided that following termination of his employment with the Bank,
Mr. Carpenter may not be employed in the banking business in Pulaski County, any
county that borders Pulaski County, or the cities of Radford or Galax for a
period of two years following termination.
No other employee of the Company or the Bank has an employment agreement.
Stock Option Plan
The Company's Stock Option Plan (the "Plan") was approved by shareholders
at the 1995 Annual Meeting. The provides for the issuance of stock options and
restricted stock covering an aggregate of 344,375 shares (adjusted for the May
30, 1997 five-for four stock split) to directors, officers and certain key
employees of the Company and the Bank and other participants designated under
the Plan (collectively, the "Participants"). The Plan provides for the issuance
of incentive stock options to officers and key employees of the Company and the
Bank and nonqualified stock options and restricted stock to all Plan
Participants. The Plan is administered by the Stock Option Committee of the
Board of Directors, which consists of Messrs. Bruce, Chrisley, Nicely and Wine
and Dr. Pratt.
Incentive Stock Options. The Plan provides for the issuance of incentive
stock options covering a maximum of 62,500 shares of the Common Stock (as
adjusted for the May 30, 1997 five-for four stock split), subject to future
adjustment for any stock splits, stock dividends, combinations or exchanges, or
other changes which affect the Common Stock. As discussed below, incentive stock
options afford certain tax benefits to the recipients. In general, to qualify as
an incentive stock option, the option must be granted only to employees of the
Company, be granted within ten years of the earlier of the date the Plan is
adopted by the Board or the date of approval of the Plan by the Company's
shareholders, not be exercisable more than ten years after the date of grant,
have an exercise price of not less than the fair market value of the Common
Stock at the time of grant, not be transferable other than by will or the laws
of descent and distribution, and be granted to a person who does not own more
than 10% of the total combined voting power of all classes of stock of the
Company or its subsidiaries at the time of grant. In addition, the Internal
Revenue Code limits the value of shares that can be exercised for the first time
by an employee in any one year under an incentive stock option plan to $100,000.
Nonqualified Stock Options. The Plan provides for automatic annual grants
of nonqualified stock options beginning in 1996 to the directors of the Company
on the day following the annual meeting of shareholders based on a formula that
reflects his or her performance during the year as judged by certain objective
criteria (the "Annual Director Grants"). The formula provides that the number of
shares of Common Stock covered by each Annual Director Grant is 625 shares,
subject to adjustment (i) downward by 31 shares if the director has missed more
than one meeting of the Board of Directors since the last annual meeting, (ii)
downward by 31 shares if the director has failed to complete a director
63
<PAGE>
education seminar since the last annual meeting, and (iii) upward or downward by
not more than 31 shares based on the percentage by which the Bank exceeds or
fails to exceed its performance goals. The exercise price is the estimated
market price on the grant date.
In 1995, the Company provided a one-time grant of options to the directors
based on performance criteria relating to their participation as directors in
the success of the Company and the Bank, including the number of shares
purchased in the initial offering, service in leadership positions on committees
of the Bank's Board of Directors, and other contributions. The aggregate amount
of shares covered by such options was 206,250, as adjusted for the May 30, 1997
five-for-four stock split, exercisable until 2005. The exercise price of those
options, as adjusted for the May 30, 1997 stock split, is $8.00 per share.
All of the nonqualified options issuable to directors described above
provide that the options are forfeited should the Company or the Bank be
required to increase its equity capital pursuant to a capital directive issued
by the Office of Comptroller of the Currency and the holder does not exercise
the options with certain time frames.
Restricted Stock. The Plan permits the issuance of shares of Common Stock
to Participants subject to vesting requirements based on continued service to
the Company or the Bank, the Company's or the Bank's performance, the individual
performance of the grantee, and other conditions deemed appropriate by the Stock
Option Committee. Shares of restricted stock are not transferable until vested.
Assuming the maximum option grants described above are made based on the
Company's current management structure, there will be no shares of restricted
stock available for issuance under the Plan. There are no present plans to issue
any shares of restricted stock.
Compliance with Section 16 of the Securities Exchange Act of 1934
Based on a review of the reports of changes in beneficial ownership of
Company Common Stock furnished to the Company, the Company believes that its
officers and directors filed on a timely basis the reports required to be filed
under Section 16 of the Securities Exchange Act of 1934 during the fiscal year
ended December 31, 1999.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Larrowe & Company, PLC, Galax, Virginia, acted as the Company's principal
independent certified public accountants for the fiscal years ended December 31,
1993 through 1999 and has been selected by the Board of Directors to act as the
Company's independent certified public accountants for the current fiscal year.
Representatives of Larrowe & Company, PLC are expected to be present at the
shareholders' meeting and will have the opportunity to make a statement if they
desire to do so and to respond to appropriate questions.
OTHER MATTERS WHICH MAY COME BEFORE THE MEETING
The Board of Directors knows of no matters other than those stated above
which are to be brought before the meeting. However, if any other matter should
be presented for consideration and voting, it is the intention of the persons
named in the enclosed form of Proxy to vote the Proxy in accordance with their
judgment of what is in the best interest of the Company.
Information Relating to Shareholder Proposals
Proposals of shareholders intended to be presented at the 2001 Annual
Meeting of Shareholders of the Company must be received by the Company no later
than October 31, 2000 in order for such proposals to be included in the
Company's proxy statement and form of proxy relating to such meeting.
64
<PAGE>
Availability of Form 10-KSB
On or about March 31, 2000, the Company will file with the Securities and
Exchange Commission an annual report (Form 10-KSB) for the year ended December
31, 1999. A copy of the Company's Form 10-KSB can be obtained without charge by
writing to the Corporate Secretary at P.O. Box 1060, 900 Memorial Drive,
Pulaski, Virginia 24301.
By order of the Board of Directors
A. CAROLE PRATT
Secretary
Pulaski, Virginia
March 10, 2000
CNB HOLDINGS, INC.
P. O. Box 1060
900 Memorial Drive
Pulaski, Virginia 24301
This Proxy is solicited by the Board of Directors of CNB Holdings, Inc.
(the "Company") for the 2000 Annual Meeting of Shareholders to be held on April
13, 2000 (the "Annual Meeting").
The undersigned hereby appoints David W. Ratcliff, Jr. and A. Carole Pratt
and each of them, with full power of substitution, as proxies to vote all of the
shares of Common Stock of the Company which the undersigned may be entitled to
vote at the Annual Meeting, and at any adjournments thereof, on the following
matters in the following manner:
1. Election of three directors of the Company to serve until the 2003 Annual
Meeting of Shareholders.
[_] FOR all nominees listed below (except [_] WITHHOLD AUTHORITY to vote
as marked to the for all nominees listed
contrary below) below
Jack W. Bowling, Jackson M. Bruce, and Nathaniel R. Tuck, D.C.
(Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name below.)
-------------------------------------------------------------------------------
2. In accordance with their judgment, upon such other matters as may properly
come before the Annual Meeting or any adjournment thereof.
When this Proxy is properly executed and returned, and not revoked, the
shares it represents will be noted at the meeting in accordance with the choices
specified above. If no choice is specified, it will be voted for the election of
the nominees listed above.
PLEASE DATE AND SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS BELOW.
Date: ___________________ , 2000 ____________________________________
(Signature of Shareholder)
____________________________________
(Signature of Shareholder)
65
<PAGE>
NOTE: When signing as attorney, trustee, administrator, executor or guardian,
please give your full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. In the case of joint
tenants, each joint owner must sign.
66
<PAGE>
ARTICLE 9
LEGEND
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CNB
HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1000
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
LEGEND
PERIOD-TYPE 12-MOS
FISCAL-YEAR-END DEC-31-1999
PERIOD-END DEC-31-1999
CASH 2,896,627
INT-BEARING-DEPOSITS 0
FED-FUNDS-SOLD 760,000
TRADING-ASSETS 0
INVESTMENTS-HELD-FOR-SALE 14,188,398
INVESTMENTS-CARRYING 0
INVESTMENTS-MARKET 0
LOANS 31,892,248
ALLOWANCE 321,574
TOTAL-ASSETS 51,778,331
DEPOSITS 45,769,733
SHORT-TERM 0
LIABILITIES-OTHER 89,049
LONG-TERM 126,570
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 4,631,995
OTHER-SE 1,160,984
TOTAL-LIABILITIES-AND-EQUITY 51,778,331
INTEREST-LOAN 2,759,294
INTEREST-INVEST 831,176
INTEREST-OTHER 57,161
INTEREST-TOTAL 3,647,631
INTEREST-DEPOSIT 1,812,721
INTEREST-EXPENSE 1,831,143
INTEREST-INCOME-NET 1,816,488
LOAN-LOSSES 173,292
SECURITIES-GAINS 0
EXPENSE-OTHER 1,878,928
INCOME-PRETAX 29,438
INCOME-PRE-EXTRAORDINARY 29,438
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 29,438
EPS-BASIC .03
EPS-DILUTED .03
YIELD-ACTUAL 3.90
LOANS-NON 0
LOANS-PAST 126,534
LOANS-TROUBLED 0
LOANS-PROBLEM 126,534
ALLOWANCE-OPEN 372,574
CHARGE-OFFS 224,292
RECOVERIES 0
67
<PAGE>
ALLOWANCE-CLOSE 321,574
ALLOWANCE-DOMESTIC 321,574
ALLOWANCE-FOREIGN 0
ALLOWANCE-UNALLOCATED 0
68
<PAGE>
APPENDIX C
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of
--
1934 for the quarterly period ended June 30, 2000.
Or
_____Transition Report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934 for the transition period from __________________ to __________________.
Commission File No. 33-69326
CNB HOLDINGS, INC.
(Exact name of the registrant as specified in its charter)
Virginia 54-1663340
(State of Incorporation) (I.R.S. Employer Identification No.)
P.O. Box 1060, 900 Memorial Drive, Pulaski, Virginia 24301
(Address of principal executive offices)
(540) 994-0831
(Issuer's telephone number, including area code)
---------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
------ -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
926,399 shares of common stock, $5.00 par value per share (the "Common Stock"),
issued and outstanding as of August 4, 2000.
Transitional Small Business Disclosure Format (check one): Yes No X
------- ---
<PAGE>
CNB Holdings, Inc.
Form 10-QSB
INDEX
------------------------------------------------------------------------------
PART 1. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
The financial statements of CNB Holdings, Inc. (the "Company") are set forth in
the following pages.
Consolidated Balance Sheets as of June 30, 2000 and
December 31,1999........................................... 3
Consolidated Statements of Operations for the Six Months
Ended June 30, 2000 and 1999.............................. 4
Consolidated Statements of Operations for the Three Months
Ended June 30, 2000 and 1999.............................. 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999.............................. 6
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2000 and 1999.............................. 7
Notes to Consolidated Financial Statements................... 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 10
Item 2. Changes in Securities................................ 10
Item 3. Defaults Upon Senior Securities...................... 10
Item 4. Submission of Matters to a Vote of Security Holders.. 10
Item 5. Other Information.................................... 10
Item 6. Exhibits and Reports on Form 8-K..................... 10
SIGNATURES................................................... 10
All schedules have been omitted because they are inapplicable or the required
information is provided in the financial statements, including the notes
thereto.
2
<PAGE>
CNB Holdings, Inc. and Subsidiary
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Assets
Cash and due from banks $ 3,666,160 $ 2,896,627
Federal funds sold - 760,000
Investment securities available for sale 16,764,853 14,188,398
Loans, net of allowance for loan losses
of $339,496 in 2000 and $321,574 in 1999 31,546,697 31,570,674
Property and equipment, net 1,967,111 1,994,281
Accrued income 316,545 307,451
Other assets 55,709 60,900
----------- -----------
Total assets $54,317,075 $51,778,331
=========== ===========
Liabilities
Demand deposits $ 3,358,933 $ 3,507,508
Interest-bearing demand deposits 16,712,181 15,923,772
Savings deposits 9,403,203 6,805,463
Large denomination time deposits 3,705,747 4,041,584
Other time deposits 14,809,043 15,491,406
----------- ----------
Total deposits 47,989,107 45,769,733
Federal funds purchased 95,000 -
Other borrowed funds 123,430 126,570
Accrued interest payable 59,922 61,095
Other liabilities 18,647 27,954
----------- ----------
Total liabilities 48,286,106 45,985,352
----------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; 1,000,000 shares
authorized; none outstanding - -
Common stock, $5 par value; 10,000,000 shares
authorized; 926,399 shares outstanding
in 2000 and 1999 4,631,995 4,631,995
Surplus 2,803,782 2,803,782
Retained deficit (902,344) (1,156,366)
Unrealized depreciation on investment
securities available for sale (502,464) (486,432)
----------- -----------
Total stockholders' equity 6,030,969 5,792,979
----------- -----------
Total liabilities and stockholders' equity $54,317,075 $51,778,331
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
CNB Holdings, Inc. and Subsidiary
Consolidated Statements of Operations
Six months ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Interest income:
Loans and fees on loans $1,370,919 $1,404,559
Federal funds sold 8,826 39,374
Taxable investment securities 457,308 380,775
---------- ----------
Total interest income 1,837,053 1,824,708
---------- ----------
Interest expense:
Deposits 908,146 934,111
Federal funds purchased 6,923 3,131
Other borrowed funds 3,551 3,724
---------- ----------
Total interest expense 918,620 940,966
---------- ----------
Net interest income 918,433 883,742
Provision for loan losses 28,750 25,489
---------- ----------
Net interest income after provision for loan losses 889,683 858,253
---------- ----------
Noninterest income:
Service charges on deposit accounts 94,381 82,276
Net realized gains on sales of securities - -
Other income 86,898 62,843
---------- ----------
Total noninterest income 181,279 145,119
---------- ----------
Noninterest expense:
Salaries and employee benefits 364,778 431,663
Occupancy expense 64,850 71,266
Equipment expense 51,697 56,975
Other expense 335,615 380,348
---------- ----------
Total noninterest expense 816,940 940,252
---------- ----------
Net income (loss) $ 254,022 $ 63,120
========== ==========
Basic earnings per share $.27 $.07
========== ==========
Weighted average shares outstanding $ 926,399 926,399
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
CNB Holdings, Inc. and Subsidiary
Consolidated Statements of Operations
Three months ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Interest income:
Loans and fees on loans $689,592 $702,497
Federal funds sold 4,562 25,620
Taxable investment securities 232,002 190,854
-------- --------
Total interest income 926,156 918,971
-------- --------
Interest expense:
Deposits 454,555 469,080
Federal funds purchased 4,304 3,131
Other borrowed funds 1,764 1,851
-------- --------
Total interest expense 460,623 474,062
-------- --------
Net interest income 465,533 444,909
Provision for loan losses 13,750 413
-------- --------
Net interest income after provision for loan losses 451,783 444,496
-------- --------
Noninterest income:
Service charges on deposit accounts 48,710 42,533
Net realized gains on sales of securities - -
Other income 36,682 29,043
-------- --------
Total noninterest income 85,392 71,576
-------- --------
Noninterest expense:
Salaries and employee benefits 189,072 197,365
Occupancy expense 31,631 33,466
Equipment expense 22,654 26,108
Other expense 173,014 177,661
-------- --------
Total noninterest expense 416,371 434,600
-------- --------
Net income $120,804 $ 81,472
======== ========
Basic earnings per share $.13 $.09
======== ========
Weighted average shares outstanding $926,399 926,399
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
CNB Holdings, Inc. and Subsidiary Consolidated Statements of Cash Flows Six
months ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
2000 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 254,022 $ 63,120
Adjustments to reconcile net income (loss)
to net cash used by operations:
Depreciation and amortization 60,851 66,044
Provision for loan losses 28,750 25,489
Accretion of discount on securities, net 11,338 34,945
Changes in assets and liabilities:
Accrued income (9,094) 64,055
Other assets 5,191 (25,681)
Accrued interest payable (1,173) 10,650
Other liabilities (9,307) (1,545)
------------ -----------
Net cash flows provided by operating activities 340,578 237,077
------------ -----------
Cash flows from investing activities:
Net (increase) decrease in federal funds sold 760,000 (316,000)
Purchases of investment securities (15,987,334) (6,905,397)
Sales of available for sale securities - 2,498,716
Maturities of investment securities 13,383,509 4,588,430
Net (increase) decrease in loans (4,773) (1,191,511)
Purchases of property and equipment (33,681) (18,793)
------------ -----------
Net cash flows provided by investing activities (1,882,279) (1,344,555)
------------ -----------
Cash flows from financing activities:
Net increase in demand, NOW, and savings deposits 3,237,574 108,803
Net increase (decrease) in time deposits (1,018,200) 1,312,961
Net increase (decrease) in federal funds purchased 95,000 (851,000)
Repayment of borrowed funds (3,140) (2,967)
------------ -----------
Net cash flows used by financing activities 2,311,234 567,797
------------ -----------
Net increase in cash and cash equivalents 769,533 (539,681)
Cash and cash equivalents, beginning 2,896,627 2,925,106
------------ -----------
Cash and cash equivalents, ending $ 3,666,160 $ 2,385,425
============ ===========
Supplemental disclosure of cash flow information:
Interest paid $ 919,793 $ 930,316
============ ===========
Income taxes paid - $ -
============ ===========
Supplemental disclosure of noncash investing activities:
Other real estate acquired in settlement of loans $ - $ -
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
CNB Holdings, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three months ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 120,804 $ 81,472
Adjustments to reconcile net income (loss)
to net cash used by operations:
Depreciation and amortization 30,833 32,954
Provision for loan losses 13,750 413
Accretion of discount on securities, net 4,469 15,464
Changes in assets and liabilities:
Accrued income (18,392) (27,193)
Other assets 8,085 (27,914)
Accrued interest payable 9,781 6,186
Other liabilities (46,437) (1,989)
----------- -----------
Net cash flows provided by operating activities 122,893 79,393
----------- -----------
Cash flows from investing activities:
Net (increase) decrease in federal funds sold 50,000 1,435,000
Purchases of investment securities (6,705,808) (3,933,403)
Sales of available for sale securities - -
Maturities of investment securities 4,310,015 684,051
Net (increase) decrease in loans (224,665) 789,343
Purchases of property and equipment (3,698) (3,158)
----------- -----------
Net cash flows provided by investing activities (2,574,156) (1,028,167)
----------- -----------
Cash flows from financing activities:
Net increase in demand, NOW, and savings deposits 2,807,027 (607,086)
Net increase (decrease) in time deposits 581,811 673,365
Net increase (decrease) in federal funds purchased (209,000) -
Repayment of borrowed funds (1,581) (1,494)
----------- -----------
Net cash flows used by financing activities 3,178,257 64,785
----------- -----------
Net increase (decrease) in cash and cash equivalents 726,994 (883,989)
Cash and cash equivalents, beginning 2,939,166 3,269,414
----------- -----------
Cash and cash equivalents, ending $ 3,666,160 $ 2,385,425
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 450,842 $ 467,876
=========== ===========
Income taxes paid - $ -
=========== ===========
Supplemental disclosure of noncash investing activities:
Other real estate acquired in settlement of loans $ $ -
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
7
<PAGE>
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies
Organization
CNB Holdings, Inc. (the Company) is a bank holding company incorporated under
the laws of Virginia on April 29, 1993. On August 29, 1994, the Company's wholly
owned subsidiary, Community National Bank (the Bank), was chartered as an FDIC
insured National Banking Association under the laws of the United States and the
Bank opened for business in Pulaski, Virginia. As an FDIC insured National
Banking Association, the Bank operates two banking offices and is subject to
regulation by the Comptroller of the Currency. The Company is regulated by the
Federal Reserve.
Basis of Presentation
The consolidated financial statements as of June 30, 2000 and for the periods
ended June 30, 2000 and 1999 included herein, have been prepared by CNB
holdings, Inc., without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
information furnished in the interim consolidated financial statements reflects
all adjustments necessary to present fairly the Company's consolidated financial
position, results of operations, changes in stockholders' equity and cash flows
for such interim periods. Management believes that all interim period
adjustments are of a normal recurring nature. These consolidated financial
statements should be read in conjunction with the Company's audited financial
statements and the notes thereto as of December 31, 1999, included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1999.
The accounting and reporting policies of the Company and the Bank follow
generally accepted accounting principles and general practices within the
financial services industry.
Note 2. Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending other loan facilities to customers. Collateral held
varies as specified above and is required in instances which the Bank deems
necessary.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANACIAL CONDITION AND
RESULTS OF OPERATIONS.
Discussion of Operations
The Company had net income of $254,000 (or $.27 per share, based on 926,399
weighted average shares of Common Stock outstanding during the period) for the
six months ended June 30, 2000, compared with a income of $63,000 (or $.07 per
share) for the six months ended June 30, 1999.
At June 30, 2000, the Company had total assets of approximately $54.3 million
compared to $51.8 million at December 31, 1999. Total assets had an increase of
$2.5 million, or 4.9% since year end 1999. At June 30, 2000, assets were
comprised principally of loans and investment securities. Loans decreased
slightly, to $31.5 million at June 30, 2000. Loans were $31.6 million at
December 31, 1999. Investment securities increased $2.6 million, or 18.2%. As
quality loan demand continues to develop, the bank will be in a position to
invest more of its excess funds into higher yielding loans instead of investment
8
<PAGE>
securities.
The Company's liabilities at June 30, 2000 were $48.3 million compared to $46.0
million at December 31, 1999. These liabilities consisted almost entirely of
deposits for both periods. Demand and saving deposits increased by $3.2 million,
or 12.3% to $29.5 million, and time deposits decreased $1.0 million, or 5.2%, to
$18.5 million. At June 30, 2000, $3.4 million, or 7.0%, of total deposits were
non interest-bearing compared to $3.5 million, or 7.7%, at December 31, 1999.
The Bank offers competitive interest rates in its local market and has been
successful at attracting depositors.
At June 30, 2000 and December 31, 1999, the Company had stockholders' equity of
approximately $6.0 million and $5.8 million, respectively. Stock-holders' equity
was affected by the Company's first six months of 2000 income of $254,000, and a
$16,000 decrease in the market value of investment securities available for
sale.
Management of the Company believes that the Bank has sufficient capital to fund
its operations until the Bank begins to generate profits on a more consistent
basis, but there can be no assurance that this will be the case. During the
first quarter of 1999 the Bank became a member of the Federal Home Loan Bank
system which would provide the Bank with borrowing capacity to meet liquidity or
loan needs, however, management has not identified other sources of capital for
the Company or the Bank should they be needed.
At June 30, 2000, the Bank was in compliance with all regulatory capital
requirements. Management believes that the Bank has sufficient liquidity on a
short-term basis to meet any funding needs it may have, and expects that its
long-term liquidity needs can be achieved through deposit growth, however there
can be no assurance that such growth will develop.
Year 2000 Compliance
The Company experienced no problems related to Y2K. The Company incurred no Y2K
related expenses in the six months ended June 30, 2000 and no future Y2K
expenses are anticipated. Y2K related expense was $15,075 in the first half of
1999.
9
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
There are no matters pending legal proceedings to which the Company or
any of its subsidiaries is a party or of which any of their property is subject.
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On July 11, 2000, the company announced plans to affiliate with FNB,
Corporation., a bank holding company headquartered in Christiansburg,
Virginia. Under the terms of the agreement, shareholders of CNB will
receive consideration valued at $10.60 for each share of CNB common
stock, in the form of cash, stock of FNB, or a combination of cash and
stock, at each CNB shareholder's election. The cash and FNB stock
portion of the consideration, however, will each be limited to 50
percent of the total consideration paid.
For those CNB shares which are converted into FNB shares, the number of
FNB shares issues will be determined by dividing $10.60 by the average
closing price of FNB share for the 30 trading days ending 10 days prior
to closing, but in no case will FNB issue more than 0.642 shares or less
that 0.544 shares. The transaction will be structured as a tax-free
reorganization to the extent of the shares exchanged and accounted for
under the purchase method of accounting. It is expected to be accretive
to cash earnings per share in the first full year of operation. The plan
is subject to approval by the shareholders of CNB Holdings, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on 8-K
None.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CNB HOLDINGS, INC.
Date: August 8, 2000 By: /s/Phillip M. Baker
------------------------------
Phillip M. Baker
Chief Financial Officer
10
<PAGE>
PERIOD-TYPE 6-MOS
FISCAL-YEAR-END DEC-31-2000
PERIOD-START JAN-01-2000
PERIOD-END JUN-30-2000
CASH 3,666
INT-BEARING-DEPOSITS 0
FED-FUNDS-SOLD 0
TRADING-ASSETS 0
INVESTMENTS-HELD-FOR-SALE 16,765
INVESTMENTS-CARRYING 0
INVESTMENTS-MARKET 0
LOANS 31,547
ALLOWANCE 339
TOTAL-ASSETS 54,317
DEPOSITS 47,989
SHORT-TERM 95
LIABILITIES-OTHER 78,569
LONG-TERM 123
PREFERRED-MANDATORY 4,632
PREFERRED 0
COMMON 0
OTHER-SE 1,399
TOTAL-LIABILITIES-AND-EQUITY 54,317
INTEREST-LOAN 1,371
INTEREST-INVEST 457
INTEREST-OTHER 9
INTEREST-TOTAL 1,837
INTEREST-DEPOSIT 908
INTEREST-EXPENSE 919
INTEREST-INCOME-NET 918
LOAN-LOSSES 29
SECURITIES-GAINS 0
EXPENSE-OTHER 817
INCOME-PRETAX 254
INCOME-PRE-EXTRAORDINARY 254
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 254
EPS-BASIC 0.27
EPS-DILUTED 0.27
YIELD-ACTUAL 3.97
LOANS-NON 155
LOANS-PAST 0
LOANS-TROUBLED 184
LOANS-PROBLEM 36
ALLOWANCE-OPEN 323
CHARGE-OFFS 13
RECOVERIES 0
ALLOWANCE-CLOSE 339
ALLOWANCE-DOMESTIC 339
11
<PAGE>
ALLOWANCE-FOREIGN 0
ALLOWANCE-UNALLOCATED 339
12
<PAGE>
APPENDIX D
DAVENPORT FAIRNESS OPINION
[Date of Proxy]
The Board of Directors
CNB Holdings, Inc.
900 Memorial Drive
Pulaski, Virginia 24301
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of CNB Holdings, Inc. ("CNB") of the
consideration to be received by the CNB shareholders in the merger of FNB
Corporation ("FNB") with CNB (the "Merger"), pursuant to the Agreement and Plan
of Merger dated July 10, 2000 (the "Agreement"). As is more specifically set
forth in the Agreement, upon consummation of the Merger, each outstanding share
of the common stock of CNB, except for any dissenting shares, will be entitled
to receive consideration of $10.60 per share of CNB common stock, in the form of
cash, stock of FNB or a combination of cash and stock, at each shareholder's
election, subject to certain adjustments.
Davenport & Company LLC, as part of its investment banking business is
regularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. Davenport has acted as financial advisor to the Board of
Directors of CNB in connection with the transaction described above. We are
familiar with CNB having provided certain investment banking services to CNB in
the past.
In arriving at our opinion, we have, among other things: (i) reviewed
the Agreement and Plan of Merger; (ii) reviewed the proxy statement/prospectus;
(iii) reviewed certain publicly available financial statements and other
information of CNB and FNB; (iv) reviewed certain internal financial statements
and other information and operating data of CNB provided by its management; (v)
reviewed certain publicly available forward looking information for FNB; (vi)
reviewed the reported prices and trading activity for CNB common stock and FNB
common stock; (vii) held discussions with members of CNB's management regarding
past and current business operations, financial condition, results of regulatory
examinations, the Merger and the business and future prospects of CNB; (viii)
compared the results of operations and market value of CNB and FNB with similar
information for certain other publicly traded companies which we deemed to be
relevant; (ix) compared the financial terms of the merger with the financial
terms of certain other mergers and acquisitions of financial institutions in
recent years; (x) taken into account our assessment of general economic, market
and financial conditions and our experience in other transactions, as well as
our experience in securities valuations and knowledge of the commercial banking
industry generally; and (xi) conducted such other studies, analysis and
investigations and considered such other information as we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of all of the financial and other
information provided to us or publicly available and we have not assumed any
responsibility for independently verifying the accuracy or
<PAGE>
completeness of any such information. We are not experts in the evaluation of
loan portfolios for the purpose of assessing the adequacy of the allowance for
losses, and assumed that such allowances, for each of the companies, are in the
aggregate, adequate to cover such losses. Davenport did not review any
individual credit files nor make any independent evaluation, appraisal or
physical inspection of the assets or individual properties of CNB or FNB, nor
was Davenport furnished with such evaluation or appraisal. We have also assumed
that the Merger and the other transactions contemplated by the Agreement will be
consummated as described in the Agreement. Our opinion is necessarily based upon
conditions as they exist and can be evaluated on the date hereof and the
information made available to us through the date hereof.
Our opinion expressed herein was prepared solely for the Board of
Directors of CNB in connection with and for the purposes of its evaluation of
the Merger. This opinion does not address the merits of the underlying decision
by CNB to engage in the Merger, and does not constitute a recommendation to any
shareholder of CNB as to how such shareholder should vote with respect to the
Merger.
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the consideration to be received by the shareholders of CNB
pursuant to the Agreement is fair, from a financial point of view, to the
shareholders of CNB.
Sincerely,
DAVENPORT & COMPANY LLC
By:_____________________________
Robert F. Mizell, CFA
Senior Vice President
2
<PAGE>
Appendix E
ARTICLE 15 - CODE OF VIRGINIA
E-1
<PAGE>
ARTICLE 15.
DISSENTERS' RIGHTS
ss.13.1-729. Definitions.--In this article:
"Corporation" means the issuer of the shares held by a dissenter before
the corporate action, except that (i) with respect to a merger, "corporation"
means the surviving domestic or foreign corporation or limited liability company
by merger of that issuer, and (ii) with respect to a share exchange,
"corporation" means the acquiring corporation by share exchange, rather than the
issuer, if the plan of share exchange places the responsibility for dissenters'
rights on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss. 13.1-730 and who exercises that right when and in the
manner required by ss.13.1-732 through ss.13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
<PAGE>
CODE OF VIRGINIA
ss 13.1-730
"Shareholder" means the record shareholder or the beneficial
shareholder. (1985, C. 522; 1992,C. 575.)
Law Review.--For article, "Dissenting Stockholders' Rights in Virginia:
Exclusivity of the Cash-Out Remedy and Determination of 'Fair Value,'" see 12 U.
Rich. L. Rev. 505 (1978). For article, "The New Virginia Stock Corporation Act:
A Primer," see 20 U. Rich. L. Rev. 67 (1985). For article, "Virginia's
Affiliated Transactions' Statute: Indulging Form Over Substance in Second
Generation Takeover Legislation," see 21 U. Rich. L. Rev. 489 (1987).
Editor's note.--The cases below were decided under prior law.
"Fair value" defined.--The term "fair value" of the stock of a
stockholder who dissents from a sale means the intrinsic worth of teh
dissenter's stock, which is to be arrived at after an appraisal of all the
elements of value. Lucas v. Pembroke Water Co., 205 Va. 84, 135 S.E.2d 147
(1964).
Elements of "fair value."--Among the elements to be considered in
arriving at the "fair value" or "fair cash value" of a dissenter's stock are its
market value, net asset value, investment value, and earning capacity. Lucas v.
Pembroke Water Co., 205 Va. 84, 135 S.E.2d 147 (1964).
The book value, or net asset value, of the stock is only one of the
factors to be considered. Mere book value alone is not determinative. Lucas v.
Pembroke Water Co., 205 Va. 84, 135 S.E.2d 147 (1964).
Excessive salary payments to officers and directors of a corporation
are assets of the corporation to be considered along with other assets in fixing
the value of the stock. Lucas v. Pembroke Water Co., 205 Va. 84, 135 S.E.2d 147
(1964).
"Fair cash value" means actual value.--Actual value of the shares of a
stockholder dissenting to a consolidation or merger of a corporation is
practically synonymous with "fair cash value" as those words were used in
repealed ss 13-47. Adams v. United States Distrib. Corp., 184 Va. 134, 34 S.E.2d
244 (1945), cert. denied, 327 U.S. 788, 66 S. Ct. 807, 90 L. Ed. 1014 (1946).
The term "fair cash value" means the intrinsic worth of the dissenter's
stock, which is to be arrived at after an appraisal of all the elements of
value. Adams v. United States Distrib. Corp., 184 Va. 134, 34 S.E.2d 244 (1945),
cert. denied, 327 U.S. 788, 66 S. Ct. 807, 90 L. Ed. 1014 (1946).
And not contractual value.--Dissenters may not recover the "contractual
value" of their shares, the par value plus accrued cumulative dividends, as
distinguished from the "fair cash value" or the "actual value." Adams v. United
States Distrib. Corp., 184 Va. 134, 34 S.E.2d 244 (1945), cert. denied, 327 U.S.
788, 66 S. Ct. 807, 90 L. Ed. 1014 (1946).
Determination of fair value of dissenters' stock upon conflicting
evidence is for the trial court. Lucas v. Pembroke Water Co., 205 Va. 84, 135
S.E.2d 147 (1964).
Amount of allowance of interest is left to discretion of trial court.
Lucas v. Pembroke Water Co., 205 Va. 84, 135 S.E.2d 147 (1964).
ss.13.1-730. Right to Dissent.--A. A shareholder is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any of
the following corporate actions:
1. Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by ss.13.1-718 or the
articles of incorporation and the shareholder is entitled to vote on the merger
or (ii) if the corporation is a subsidiary that is merged with its parent under
ss.13.1-719;
2. Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation if the shareholder was entitled to vote on the
sale or exchange or if the sale or exchange was in furtherance of a dissolution
on which the shareholder was entitled to vote, provided that such dissenter's
rights shall not apply in the case of (i) a sale or exchange pursuant to court
order, or (ii) a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors
<PAGE>
ss.13.1-730 CORPORATIONS ss.13.1-730
provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with respect to
a plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Securities System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such shares
provide otherwise;
2. In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange to
accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership
interests and cash in lieu of fractional shares (i) of the surviving or
acquiring corporation or limited liability company or (ii) of any other
corporation or limited liability company which, at the record date
fixed to determine the shareholders entitled to receive notice of and
to vote at the meeting at which the plan of merger or share exchange is
to be acted on, were either listed subject to notice of issuance on a
national securities exchange or held of record by at least 2,000 record
shareholders or members; or
c. A combination of cash and shares or membership interests as
set forth in subdivisions 2a and 2b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and is
not approved by a majority of "disinterested directors" as such terms are
defined in ss.13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
E. Notwithstanding any other provision of this article, no shareholder
of a corporation located in a county having a county manager form of government
and which is exempt from income taxation under ss.501 (c) or ss.528 of the
Internal Revenue Code and no part of whose income inures or may inure to the
benefit of any private shareholder or individual shall be entitled to dissent
and obtain payment for his shares under this article. (Code 1950, S.S. 13-85,
13.1-75, 13.1-78; 1956, c. 428; 1968, c. 733; 1972, c. 425; 1975, c. 500; 1984,
c. 613; 1985, c. 522; 1986, c. 540; 1988, c. 442; 1990, c. 229; 1992, c. 575;
1996, c. 246; 1999, c. 288.)
The 1999 amendment added subsection E.
Law Review.--For article discussing shareholder approval of mergers,
see 56 Va. L. Rev. 755 (1970). For survey of Virginia law on business
associations for the year 1971-1972, see 58 Va. L. Rev. 1172 (1972). For survey
of Virginia administrative law for the year 1974-1975, see 61 Va. L. Rev. 1632
(1975). For survey of Virginia law on business associations for the year
1974-1975, see 61 Va. L. Rev. 1650 (1975).
<PAGE>
ss.13.1-731 CODE OF VIRGINIA ss.13.1-732
For article, "Virginia's Affiliated Transactions' Statute: Indulging Form Over
Substance in Second Generation Takeover Legislation," see 21 U. Rich. L. Rev.
489 (1987).
Editor's note.--The cases below were decided under prior law.
Purpose of statutes.--The design of the statutes relating to the rights
of a dissenting stockholder is to assure him that he will be fully compensated
for the value of that of which he has been deprived by the merger, and no more.
Adams v. United States Distrib. Corp., 184 Va. 134, 34 S.E.2d 244 (1945), cert.
denied, 327 U.S. 788, 66 S. Ct. 807, 90 L. Ed. 1014 (1946).
Stockholder has election as to dissent.--Every stockholder of a merging
corporation has an election either to dissent and secure in the prescribed
manner the fair cash value of his stock or, if he fails to dissent, to be bound
by the terms of the merger. Adams v. United States Distrib. Corp., 184 Va. 134,
34 S.E.2d 244 (1945), cert. denied, 327 U.S. 788, 66 S. Ct. 807, 90 L. Ed. 1014
(1946); Pittston Co. v. O'Hara, 191 Va. 886, 63 S.E.2d 34, appeal dismissed, 342
U.S. 803, 72 S. Ct. 38, 96 L. Ed. 608 (1951).
Exclusiveness of statutory remedy.--Unless a corporate merger be
tainted with fraud or illegality, the dissenting stockholder must pursue the
remedy prescribed by statute. Adams v. United States Distrib. Corp., 184 Va.
134, 34 S.E.2d 244 (1945), cert. denied, 327 U.S. 788, 66 S. Ct. 807, 90 L. Ed.
1014 (1946), wherein the court expressly refused to agree with Weiss v. Atkins,
52 F. Supp. 418 (S.D.N.Y. 1943), rev'd, 149 F.2d 193 (2nd Cir. 1945), and
pointed out that Winfree v. Riverside Cotton Mills, 113 Va. 717, 75 S.E. 309
(1912), holding contra, was no longer applicable. See McGhee v. General Fin.
Corp., 84 F. Supp. 24 (W.D. Va. 1949), holding that the remedy is available
only in state courts.
The provisions of former law in regard to the valuation of the interest
of dissatisfied members or stockholders in case of the merger of their
corporation with another, were held to apply only in those cases in which the
corporations seeking to merge had proceeded in all respects by authority of law.
The provisions, therefore, were not exclusive of the right of dissatisfied
members to contest the validity of an order of merger by the State Corporation
Commission claimed to be destructive of their rights and interests, and utterly
without warrant of law. Jones v. Rhea, 130 Va. 345, 107 S.E. 814 (1921).
It was held that the existence of a summary remedy of appraisal and
payment under former ss 13-85 did not make the remedy at law adequate in such a
manner as to defeat equity jurisdiction, and the existence of such remedy did
not otherwise foreclose the plenary jurisdiction of a court of equity to grant
an injunction in advance of action or to grant a money award on equitable
principles after action. Craddock-Terry Co. v. Powell, 181 Va. 417, 25 S.E.2d
363 (1943); Pittston Co. v. O'Hara, 191 Va. 886, 63 S.E.2d 34, appeal dismissed,
342 U.S. 803, 72 S. Ct. 38, 96 L. Ed. 608 (1951).
Purchaser of stock is legally put upon notice that in event of merger
his remedy will be provided by the statute. McGhee v. General Fin. Corp., 84 F.
Supp. 24 (W.D. Va. 1949).
ss.13.1-731. Dissent by Nominees and Beneficial Owners.--A. A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
1. He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote. (Code 1950, S.S.
13-85, 13.1-75, 13.1-78; 1956, c. 428; 1968, c. 733; 1972, c. 425; 1975, c. 500;
1984, c. 613; 1985, c. 522.)
ss.13.1-732. Notice of Dissenters' Rights.--A. If proposed corporate
action creating dissenters' rights under ss. 13.1-730 is submitted to a vote at
a shareholders' meeting, the meeting notice shall state that shareholders are or
<PAGE>
ss.13.1-733 CORPORATIONS ss.13.1-735
may be entitled to assert dissenters' rights under this article and be
accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under ss.13.1-730 is
taken without a vote of shareholders, the corporation, during the ten-day period
after the effectuation of such corporate action, shall notify in writing all
record shareholders entitled to assert dissenters' rights that the action was
taken and send them the dissenters' notice described in ss.13.1-734.(1985, c.
522.)
ss.13.1-733. Notice of Intent to Demand Payment.--A. If proposed
corporate action creating dissenters' rights under ss.13.1-730 is submitted to a
vote at a shareholders' meeting, a shareholder who wishes to assert dissenters'
rights (i) shall deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed action is
effectuated and (ii) shall not vote such shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A
of this section is not entitled to payment for his shares under this article.
(Code 1950, S.S. 13-85, 13.1-75, 13.1-78; 1956, c. 428; 1968, c. 733; 1972, c.
425; 1975, c. 500; 1984, c. 613; 1985, c. 522.)
ss.13.1-734. Dissenters' Notice.--A. If proposed corporate action
creating dissenters' rights under ss.13.1-730 is authorized at a shareholders'
meeting, the corporation, during the ten-day period after the effectuation of
such corporate action, shall deliver a dissenters' notice in writing to all
shareholders who satisfied the requirements of ss.13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not he acquired beneficial ownership of the shares before or
after that date;
4. Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the date
of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article. (Code 1950, S.S. 13-85,
13.1-75, 13.1-78; 1956, c. 428; 1968, c. 733; 1972, c. 425; 1975, c. 500; 1984,
c. 613; 1985, c. 522.)
ss.13.1-735. Duty to Demand Payment.--A. A shareholder sent a
dissenters' notice described in ss.13.1-734 shall demand payment, certify that
he acquired beneficial-ownership of the shares before or after the date required
to be set forth in the dissenters' notice pursuant to paragraph 3 of subsection
B of ss. 13.1-734, and, in the case of certificated shares, deposit his
certificates in accordance with the terms of the notice.
B. The shareholder who deposits his shares pursuant to subsection A of
this section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article. (Code 1950, S.S.
13-85, 13.1-75, 13.1-78; 1956, c. 428; 1968, c. 733; 1972, c. 425; 1975, c. 500;
1984, c. 613; 1985, c. 522.)
<PAGE>
ss.13.1-736 CODE OF VIRGINIA ss.13.1-739
ss.13.1-736. Share Restrictions.--A. The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received.
B. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder except to the
extent that these rights are canceled or modified by the taking of the proposed
corporate action. (Code 1950, S.S. 13-85, 13.1-75, 13.1-78; 1956, c. 428; 1968,
c. 733; 1972, c. 425; 1975, c. 500; 1984, c. 613; 1985, c. 522.)
ss.13.1-737. Payment.--A. Except as provided in ss.13.1-738, within
thirty days after receipt of a payment demand made pursuant to ss.13.1-735, the
corporation shall pay the dissenter the amount the corporation estimates to be
the fair value of his shares, plus accrued interest. The obligation of the
corporation under this paragraph may be enforced (i) by the circuit court in the
city or county where the corporation's principal office is located, or, if none
in this Commonwealth, where its registered office is located or (ii) at the
election of any dissenter residing or having its principal office in the
Commonwealth, by the circuit court in the city or county where the dissenter
resides or has its principal office. The court shall dispose of the complaint on
an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the effective date of the corporate
action creating dissenters' rights, an income statement for that year, a
statement of changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair value of
the shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under
ss.13.1-739; and
4. A copy of this article. (Code 1950, S.S. 13-85, 13.1-75, 13.1-78;
1956, c. 428; 1968, c. 733; 1972, c. 425; 1975, c. 500; 1984, c. 613; 1985, c.
522.)
ss.13.1-738. After-Acquired Shares.--A. A corporation may elect to
withhold payment required by ss. 13.1-737 from a dissenter unless he was the
beneficial owner of the shares on the date of the first publication by news
media or the first announcement to shareholders generally, whichever is earlier,
of the terms of the proposed corporate action, as set forth in the dissenters'
notice.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount of each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under ss.13.1-739. (1985, c. 522.)
ss.13.1-739. Procedure if Shareholder Dissatisfied with Payment or
Offer.--A. A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and the amount of interest due, and demand
payment of his estimate (less any payment under ss. 13.1-737), or reject the
corporation's offer under ss. 13.1-738 and demand payment of the fair value of
his shares and interest due, if the dissenter believes that the amount paid
under ss.13.1-737 or offered under ss. 13.1-738 is less than the fair value of
his shares or that the interest due is incorrectly calculated.
<PAGE>
ss.13.1-740 CORPORATIONS ss.13.1-741
B. A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection A
of this section within thirty days after the corporation made or offered payment
for his shares. (Code 1950, S.S. 13-85, 13.1-75, 13.1-78; 1956, c. 428; 1968, c.
733; 1972, c. 425; 1975, c. 500; 1984, c. 613; 1985, c. 522.)
ss.13.1-740. Court Action.--A. If a demand for payment under
ss.13.1-739 remains unsettled, the corporation shall commence a proceeding
within sixty days after receiving the payment demand and petition the circuit
court in the city or county described in subsection B of this section to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the sixty-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
B. The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth were the registered office
of the domestic corporation merged with or whose shares were acquired by the
foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents
of this Commonwealth, whose demands remain unsettled parties to the proceeding
as in an action against their shares and all parties shall be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
D. The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this article. If the court
determines that such shareholder has not complied with the provisions of this
article, he shall be dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to
judgment (i) for the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation or (ii)
for the fair value, plus accrued interest, of his after-acquired shares for
which the corporation elected to withhold payment under ss.13.1-738. (Code 1950,
S.S. 13-85, 13.1-75, 13.1-78; 1956, c. 428; 1968, c. 733; 1972, c. 425; 1975, c.
500; 1984, c. 613; 1985, c. 522.)
ss.13.1-741. Court Costs and Counsel Fees.--A. The court in an
appraisal proceeding commenced under ss.13.1-740 shall determine all costs of
the proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters did not act in good faith in demanding payment under ss.13.1-739.
B. The court may also assess the reasonable fees and expenses of
experts,
<PAGE>
ss.13.1-742 CODE OF VIRGINIA ss.13.1-742
excluding those of counsel, for the respective parties, in amounts the
court finds equitable:
1. Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of ss. 13.1-732 through ss. 13.1-739; or
2. Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed did not act in good faith with respect to the rights provided by this
article.
C. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, the court
may award to these counsel reasonable fees to be paid out of the amounts awarded
the dissenters who were benefited.
D. In a proceeding commenced under subsection A of ss. 13.1-737 the
court shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding. (Code
1950, S.S. 13-85, 13.1-75, 13.1-78; 1956, c. 428; 1968, c. 733; 1972, c. 425;
1975, c. 500; 1984, c. 613; 1985, c. 522.)
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article 10 of Chapter 9 of Title 13.1 of the Code of Virginia permits
a Virginia corporation to indemnify any director or officer for reasonable
expenses incurred in any legal proceeding in advance of final disposition of the
proceeding, if the director or officer furnishes the corporation a written
statement of his good faith belief that he has met the standard of conduct
prescribed by the Code, and a determination is made by the board of directors
that such standard has been met. In a proceeding by or in the right of the
corporation, no indemnification shall be made in respect of any matter as to
which an officer or director is adjudged to be liable to the corporation, unless
the court in which the proceeding took place determines that, despite such
liability, such person is reasonably entitled to indemnification in view of all
the relevant circumstances. In any other proceeding, no indemnification shall be
made if the director or officer is adjudged liable to the corporation on the
basis that he improperly received personal benefit. Corporations are given the
power to make any other or further indemnity, including advancement of expenses,
to any director or officer that may be authorized by the articles of
incorporation or any bylaw made by the shareholders, or any resolution adopted,
before or after the event, by the shareholders, except an indemnity against
willful misconduct or a knowing violation of the criminal law. Unless limited by
its articles of incorporation, indemnification of a director or officer is
mandatory when he entirely prevails in the defense of any proceeding to which he
is a party because he is or was a director or officer.
The Articles of Incorporation of the Registrant contain provisions
indemnifying the directors and officers of the Registrant to the full extent
permitted by Virginia law. In addition, the Articles of Incorporation eliminate
the personal liability of the Registrant's directors and officers to the
Registrant or its shareholders for monetary damages in excess of one dollar to
the full extent permitted by Virginia law.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits:
The following exhibits are filed on behalf of the Registrant as part
of this Registration Statement:
Exhibit No. Document
----------- --------
2 Agreement and Plan of Reorganization dated as of
February 1, 1996, between the Registrant, First
National Bank, and FNB Bank, filed as Exhibit 2 to the
Registration Statement on Form S-4 filed by FNB
Corporation with the Securities and Exchange Commission
on May 3, 1996 (Registration number 333-2524) is
incorporated herein by reference.
2.1 Agreement and Plan of Merger and the Plan of Merger
between CNB Holdings, Inc. and FNB Corporation, dated
as July 10, 2000, filed as Appendix A to the Proxy
Statement included in this Registration Statement.
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<PAGE>
3.1 Articles of Incorporation of FNB Corporation,
incorporated herein by reference to Exhibit 3.1 of the
Registrant's Form 10-K, dated as of December 31, 1996.
3.2 Bylaws of Virginia FNB Corporation, incorporated herein
by reference to Exhibit 3.2 of the Registrant's Form
10-K, dated as of December 31, 1997.
3.3 Articles of Amendment to the Articles of Incorporation.
5 Legal opinion of Mays & Valentine, L.L.P.
8 Form of tax opinion of Mays &Valentine, L.L.P.
10.A Consulting and Noncompetition Agreement With Put Option
dated January 15, 1999, between Samuel H. Tollison and
Registrant, filed with the Commission as Exhibit (10) D
on Form 10-K for the year ended December 31, 1998, is
incorporated herein by reference.
10.B First Amendment to Consulting and Noncompetition
Agreement dated December 23, 1999, between Samuel H.
Tollison and Registrant, filed with the Commission as
Exhibit (10) B on Form 10-K for the year ended December
31, 1999, is incorporated herein by reference.
10.C Employment Agreement dated September 11, 1997 between
Julian D. Hardy, Jr., First National Bank, and
Registrant, filed with the Commission as Exhibit (10)B
on Form 10-Q for the quarter ended September 30, 1997,
is incorporated herein by reference.
10.D Change in control agreements with seven senior officers
of First National Bank and one senior officer of
Registrant. All agreements have identical terms and, as
such, only a sample copy of the agreements was filed
with the Commission as Exhibit (10)C on Form 10-Q for
the quarter ended September 30, 1997, and is
incorporated herein by reference. The officers covered
by the agreements are as follows:
(1) Daniel A. Becker, Senior Vice President, Chief
Financial Officer, dated April 1, 1999
(2) Keith J. Houghton, Senior Vice President, Manager
Commercial Banking, dated April 1, 1999
(3) Darlene S. Lancaster, Senior Vice President,
Manager, Mortgage Loan Department, dated August
25, 1997
(4) R. Bruce Munro, Senior Vice President, Chief
Credit Administration Officer, dated August 25,
1997
(5) Woody B. Nester, Senior Vice President, Cashier,
dated August 25, 1997
(6) Peter A. Seitz, Executive Vice President, dated
August 25, 1997
II-2
<PAGE>
(7) Perry D. Taylor, Senior Vice President,
Comptroller, dated August 25, 1997
(8) Litz H. Van Dyke, Executive Vice President, dated
August 25, 1997
The agreements with Mr. Seitz and Mr. Van Dyke were
terminated under the terms of the Employment Agreement
referred to in Exhibit (10) E below.
10.E Employment agreement dated March 23, 1999 with two
executive officers of First National Bank. Both
agreements have identical terms and, as such, only a
sample copy of the agreement was filed with the
Commission as Exhibit (10) E on Form 10-Q for the
quarter ended March 31, 1999, and is incorporated
herein by reference. The officers covered by this
agreement are:
(1) Peter A. Seitz, Executive Vice President
(2) Litz H. Van Dyke, Executive Vice President
21 Subsidiaries of the Registrant.
23.1 Consent of Mays & Valentine, L.L.P. (included in
Exhibit 5).
23.2 Consent of McLeod & Company.
23.3 Consent of Larrowe & Company PLC.
23.4 Consent of Davenport & Company, LLC.
24 Powers of attorney (included on signature page).
99.1 Form of Proxy of CNB Holdings, Inc.
(b) Financial Statement Schedules
Not applicable.
(c) Reports, Opinions or Appraisals.
Not applicable.
Item 22. Undertakings
(a) Undertakings Required by Item 512 of Regulation S-K.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
II-3
<PAGE>
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party which is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or
II-4
<PAGE>
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned; thereunto duly authorized, in Christianburg,
Virginia, on September 11, 2000.
FNB CORPORATION
By: /s/ J. Daniel Hardy, Jr.
------------------------------
J. Daniel Hardy, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
Each of the undersigned hereby appoints [J. Daniel Hardy, Jr. and
Peter A. Seitz] as attorneys and agents for the undersigned, with full power of
substitution, for and in the name, place and stead of the undersigned, to sign
and file with the Securities and Exchange Commission under the Securities Act of
1933, as amended, any and all amendments and exhibits to this Registration
Statement and any and all applications, instruments and other documents to be
filed with the Securities and Exchange Commission pertaining to the registration
of securities covered hereby with full power and authority to do and perform any
and all acts and things whatsoever requisite or desirable.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Daniel Hardy, Jr. President and Chief Executive Officer 9/11/00
------------------------------------ -------
J. Daniel Hardy, Jr. (Principal Executive Officer)
/s/ Daniel A. Becker Chief Financial Officer 9/11/00
------------------------------------ -------
Daniel A. Becker (Principal Accounting Officer and
Principal Financial Officer
/s/ Kendall O. Clay Director 9/11/00
------------------------------------ -------
Kendall O. Clay
/s/ Daniel D. Hamrick Director 9/11/00
------------------------------------ -------
Daniel D. Hamrick
/s/ Joan H.Munford Director 9/11/00
------------------------------------ -------
Joan H. Munford
</TABLE>
II-6
<PAGE>
/s/ Douglas Covington Director 9/11/00
------------------------------------ -------
Douglas Covington
/s/ James L.Hutton Director 9/11/00
------------------------------------ -------
James L. Hutton
/s/ Steven D. Irvin Director 9/11/00
------------------------------------ -------
Steven D. Irvin
/s/ Charles W. Steger Director 9/11/00
------------------------------------ -------
Charles W. Steger
/s/ John T. Wyatt Director 9/11/00
------------------------------------ -------
John T. Wyatt
II-7
<PAGE>
EXHIBIT INDEX
Exhibit No. Document
---------- --------
2 Agreement and Plan of Reorganization dated as of February 1,
1996, between the Registrant, First National Bank, and FNB
Bank, filed as Exhibit 2 to the Registration Statement on
Form S-4 filed by FNB Corporation with the Securities and
Exchange Commission on May 3, 1996 (Registration number 333-
2524) is incorporated herein by reference.
2.1 Agreement and Plan of Merger and Plan of Merger between CNB
Holdings, Inc. and FNB Corporation, dated as of July 10,
2000, filed as Appendix A to the Proxy Statement included in
this Registration Statement.
3.1 Articles of Incorporation of FNB Corporation, as amended,
incorporated herein by reference to Exhibit 3.1 of the
Registrant's Form 10-K, dated as of December 31, 1996.
3.2 Bylaws of FNB Corporation, incorporated herein by reference
to Exhibit 3.2 of the Registrant's Form 10-K, dated as of
December 31, 1997.
3.3 Articles of Amendment to the Articles of Incorporation.
5 Legal opinion of Mays & Valentine, L.L.P.
8 Form of tax opinion of Mays & Valentine, L.L.P.
10.A Consulting and Noncompetition Agreement With Put Option
dated January 15, 1999, between Samuel H. Tollison and
Registrant, filed with the Commission as Exhibit (10) D on
Form 10-K for the year ended December 31, 1998, is
incorporated herein by reference.
10.B First Amendment to Consulting and Noncompetition Agreement
dated December 23, 1999, between Samuel H. Tollison and
Registrant, filed with the Commission as Exhibit (10) B on
Form 10-K for the year ended December 31, 1999, incorporated
herein by reference.
10.C Employment Agreement dated September 11, 1997 between Julian
D. Hardy, Jr., First National Bank, and Registrant, filed
with the Commission as Exhibit (10)B on Form 10-Q for the
quarter ended September 30, 1997, is incorporated herein by
reference.
10.D Change in control agreements with seven senior officers of
First National Bank and one senior officer of Registrant.
All agreements have identical terms and, as
II-8
<PAGE>
such, only a sample copy of the agreements was filed with
the Commission as Exhibit (10)C on Form 10-Q for the quarter
ended September 30, 1997, and is incorporated herein by
reference. The officers covered by the agreements are as
follows:
(1) Daniel A. Becker, Senior Vice President, Chief
Financial Officer, dated April 1, 1999
(2) Keith J. Houghton, Senior Vice President, Manager
Commercial Banking, dated April 1, 1999
(3) Darlene S. Lancaster, Senior Vice President, Manager,
Mortgage Loan Department, dated August 25, 1997
(4) R. Bruce Munro, Senior Vice President, Chief Credit
Administration Officer, dated August 25, 1997
(5) Woody B. Nester, Senior Vice President, Cashier, dated
August 25, 1997
(6) Peter A. Seitz, Executive Vice President, dated August
25, 1997
(7) Perry D. Taylor, Senior Vice President, Comptroller,
dated August 25, 1997
(8) Litz H. Van Dyke, Executive Vice President, dated
August 25, 1997
The agreements with Mr. Seitz and Mr. Van Dyke were
terminated under the terms of the Employment Agreement
referred to in Exhibit (10) E below.
10.E Employment agreement dated March 23, 1999 with two executive
officers of First National Bank. Both agreements have
identical terms and, as such, only a sample copy of the
agreement was filed with the Commission as Exhibit (10) E on
Form 10-Q for the quarter ended March 31, 1999, and is
incorporated herein by reference. The officers covered by
this agreement are:
(1) Peter A. Seitz, Executive Vice President
(2) Litz H. Van Dyke, Executive Vice President
21 Subsidiaries of the Registrant.
23.1 Consent of Mays & Valentine, L.L.P. (included in Exhibit 5).
23.2 Consent of McLeod & Company.
23.3 Consent of Larrowe & Company PLC.
23.4 Consent of Davenport & Company, LLC.
24 Powers of attorney (included on signature page).
99.1 Form of Proxy of CNB Holdings, Inc.
II-9
