<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the quarterly period ended
SEPTEMBER 30, 1998
| | Transition report under Section 13 or 15(d) of the Exchange
Act for the transition period from ____________ to
____________
Commission file number: 000-23991
CNB HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Georgia 58-2362335
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
7855 North Point Parkway
Suite 200
Alpharetta, Georgia 30022-4849
(Address of principal executive offices)
(770) 650-8262
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 | |
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at September 30, 1998
----- ---------------------------------
<S> <C>
Common Stock, $1.00 par value 1,235,000
</TABLE>
Transitional Small Business Disclosure Format: Yes| | No |X|
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CNB HOLDINGS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and due from banks ................. $ 506,991 $ 60,698
Federal Funds sold ...................... 4,790,000 --
Investment securities:
Securities available-for-sale,
at market value ................ 4,872,777 --
Other securities ........................ 339,100 --
Certificates of Deposit ................. 70,000 --
Loans (net) ............................. 8,367,898 --
Premises and equipment (net) ............ 418,244 60,947
Accrued interest receivable ............. 123,132 --
Other assets ............................ 110,595 73,400
============ ============
TOTAL ASSETS ........................ $ 19,598,737 $ 195,045
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand .......... $ 920,069 $ --
Interest-bearing demand and
money market ................... 2,641,302 --
Savings ............................. 6,499 --
Time deposits of $100,000 or more ... 5,001,916 --
Other time deposits ................. 117,262 --
------------ ------------
Total Deposits ................. 8,687,037 --
Accrued interest payable ................ 10,738 --
Other liabilities ....................... 32,713 103,324
------------ ------------
TOTAL LIABILITIES ................... 8,730,488 103,324
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value not stated;
10,000,000 shares authorized, no
shares issued and outstanding ....... -- --
Common stock, par value $1.00 per share;
10,000,000 shares authorized ........ 1,235,000 --
Surplus ................................. 10,170,283 120,000
FASB 115 Gain/Loss ...................... 20,205 --
Deficit accumulated during development .. (28,279) (28,279)
Accumulated other comprehensive
income (loss) ...................... (528,960) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY .............. 10,868,249 195,045
------------ ------------
TOTAL LIABILITIES AND EQUITY ............ $ 19,598,737 $ 195,045
============ ============
</TABLE>
2
<PAGE> 3
CNB HOLDINGS, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Interest income
Loans, including fees ..................... $ 103,321 $ 103,321
Investment securities:
U.S. Treasury Securities .............. 16,350 16,350
U.S. Government agencies .............. 2,663 2,663
Other investments ..................... -- --
Federal funds sold ........................ 167,179 129,696
--------- ---------
Total interest income ................. 289,513 252,030
--------- ---------
Interest expense
Interest bearing demand and money market .. 22,976 22,976
Savings ................................... 17 17
Time deposits of $100,000 or more ......... 39,482 39,482
Other time deposits ....................... 2,089 2,089
Other borrowings .......................... 4,668 4,668
--------- ---------
Total interest expense ................ 69,232 69,232
--------- ---------
Net interest income ................... 220,281 182,798
Provision for possible loan losses ............. 127,000 127,000
--------- ---------
Net interest income after provision for
possible loan losses ............. 93,281 55,798
--------- ---------
Other income
Service charges on deposit accounts ....... 82 82
Investment securities gains (net) ......... -- --
Other income .............................. 16,809 16,809
--------- ---------
Total other income .................... 16,891 16,891
--------- ---------
Other expense
Salaries and other compensation ........... 236,040 130,951
Employee benefits ......................... 52,098 26,157
Net occupancy and equipment expense ....... 49,958 28,466
Professional and other outside services ... 41,187 36,768
Other expense ............................. 107,953 73,415
--------- ---------
Total other expenses .................. 487,236 295,757
--------- ---------
Net income (loss) (before change in
accounting principle)...................... (377,064) (223,068)
Income taxes ................................... -- --
--------- ---------
Net income (loss) (before change in
accounting principle) ..................... $(377,064) $(223,068)
--------- ---------
Change in accounting principle ................. 151,913 151,913
--------- ---------
Net income (loss) .............................. $(528,977) $(374,981)
========= =========
Basic income (loss) per share .................. $ (.59) $ (0.31)
========= =========
</TABLE>
3
<PAGE> 4
CNB HOLDINGS, INC.
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
--------- ---------
<S> <C> <C>
Net loss ......................................... $(528,977) $(374,981)
Other comprehensive income, before tax:
Unrealized holding gains (losses) arising
during period .................. 20,205 20,205
Income tax benefit (expense) ............ -- --
--------- ---------
Comprehensive loss ............................... $(508,772) $(354,776)
========= =========
</TABLE>
4
<PAGE> 5
CNB HOLDINGS, INC.
STATEMENT OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
NINE-MONTH
PERIOD ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Cash flows from operating activities:
Net loss .................................................................. $ (528,977)
Adjustments to reconcile net loss to net cash used by operating activities:
Net (accretion) amortization of investment securities ................. 818
Depreciation and amortization of premises and equipment ............... (6,396)
Provision for loan losses ............................................. (127,000)
Deferred income tax benefit ........................................... --
Increases in other assets ............................................. (104,865)
Decrease in deferred organizational costs ............................. 47,400
Increase in accrued interest receivable ............................... (123,132)
Increase in accrued interest payable .................................. 10,738
Decrease in other liabilities ......................................... (70,611)
------------
Net cash used by operating activities ............................ (902,025)
------------
Cash flows from investing activities:
Purchases of investment securities available-for-sale ..................... (4,893,800)
Purchases of other investments ............................................ (409,100)
Loans originated, net of principal repayments ............................. (8,240,898)
Purchases of premises and equipment ....................................... (350,902)
------------
Net cash used by investing activities ................................. (13,894,700)
------------
Cash flows from financing activities:
Sale of common stock ...................................................... 11,285,283
Increase in deposits ...................................................... 8,687,037
------------
Net cash provided from financing activities ........................... 19,972,320
------------
Net increase in cash and cash equivalents ...................................... 5,175,595
Cash and cash equivalents, beginning of period ................................. 60,698
------------
Cash and cash equivalents, end of period ....................................... $ 5,236,293
============
</TABLE>
Refer to notes to the financial statements.
5
<PAGE> 6
CNB HOLDINGS, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-QSB. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine and three month periods ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. Since the Bank began principal banking operations in July of 1998, income
statements and statements of cash flow for interim periods of fiscal year 1997
are not meaningful and thus not presented. For further information, refer to the
financial statements and footnotes included in the Company's Registration
Statement on Form SB-2 (Registration No. 333-49137).
NOTE 2 - ORGANIZATION OF THE BUSINESS
CNB Holdings, Inc., Alpharetta, Georgia (the "Company"), was
incorporated under the laws of the State of Georgia on November 5, 1997, for the
purpose of becoming a bank holding company for a proposed national bank,
Chattahoochee National Bank (the "Bank"). On April 30, 1998, the Company
completed an offering (the "Organizers' Offering") of its common stock, $1.00
par value per share (the "Common Stock"), to its organizers. Each share of
Common Stock was sold for $10.00 per share, and 200,000 shares were sold.
Proceeds from the Organizers' Offering amounted to $1,607,500, net of selling
expenses and repayment of the organizers. On June 12, 1998, the Company
commenced an initial public offering of Common Stock and sold 900,000 shares of
Common Stock at $10.00 per share. The underwriter also exercised a 30-day
over-allotment option in July 1998 to purchase an additional 135,000 shares.
Proceeds from the initial public offering (excluding the exercise of the
over-allotment option) amounted to $8,257,500, net of selling expenses. Proceeds
from exercise of the over-allotment option amounted to $1,238,625, net of
expenses. The Company contributed approximately $9.6 million into the Bank's
capital accounts upon opening on July 27, 1998, the day that the Bank began
principal banking operations.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Reclassification. The September 30, 1998
financial information presents consolidated financial statements that include
the accounts of the Company and the Bank, with all significant intercompany
accounts and transactions eliminated in consolidation.
Basis of Accounting. The accounting and reporting policies of the
Company conform to generally accepted accounting principles and to general
practices in the banking industry. The Company uses the accrual basis of
accounting by recognizing revenues when earned and expenses when incurred,
without regarding the time of receipt or payment of cash.
Organizational Costs. In accordance with Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-Up Activities," the Company elected to
expense the start-up and organizational costs in September 1998. The cumulative
affect of the change in this accounting principle was to increase expenses
during the nine and three month periods ending September 30, 1998 by $151,913.
Investment Securities. The Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investment in Debt and
Equity Securities" ("SFAS 115") on April 24, 1998. SFAS 115 requires investments
in equity and debt securities to be classified into three categories:
1. Held-to-maturity securities: These are securities which the
Company has the ability and intent to hold until maturity.
These securities are stated at cost, adjusted for amortization
of premiums and the accretion of discounts.
6
<PAGE> 7
CNB HOLDINGS, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
2. Trading securities: These are securities which are bought and
held principally for the purpose of selling in the near
future. Trading securities are reported at fair market value,
and related unrealized gains and losses are recognized in the
income statement.
3. Available-for-sale securities: These are securities which are
not classified as either held-to-maturity or as trading
securities. These securities are reported at fair market
value. Unrealized gains and losses are reported, net of tax,
as separate components of shareholders' equity. Unrealized
gains and losses are excluded from the income statement.
Premium and discount on all investment securities are amortized
(deducted) and accredited (added), respectively, to interest income on the
effective yield method over the period to the maturity of the related
securities.
Gains or losses on disposition are computed by the specific
identification method for all securities.
Property and Equipment. Furniture and equipment are stated at cost, net
of accumulated depreciation. Depreciation is computed using the straight line
method over the estimated useful lives of the related assets. Maintenance and
repairs are charged to operations, while major improvements are capitalized.
Upon retirement, sale or other disposition of property and equipment, the cost
and accumulated depreciation are eliminated from the accounts, and gain or loss
is included in income from operations.
Income Taxes. The financial statements have been prepared on the
accrual basis. When income and expenses are recognized in different periods from
financial reporting purposes and for purposes of computing income taxes
currently payable, deferred taxes are provided on such temporary differences.
Effective April 24, 1998, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been recognized in the financial
statements or tax return. Deferred tax assets and liabilities are measured using
the enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be realized or settled.
Statement of Cash Flows. For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are purchased or sold for one day periods.
Net Income (Loss) Per Share. Net income per share was calculated using
1,223,261, as the weighted average number of shares outstanding for the period
ended September 30, 1998. For the nine-month period ended September 30, 1998 net
income (loss) per share was ($.59). For the three-month period ended September
30, 1998 net income (loss) per share was $(.31).
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125") is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Earlier or retroactive
application is not permitted. However, in December 1996, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 127 ("SFAS 127"), "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125." This statement defers the effective date of certain
provisions for one year (December 31, 1997). The deferred provisions relate to
repurchase agreements, dollar-roll transactions, securities lending, and similar
transactions. The effective date for all other transfers and servicing of
financial assets is unchanged. The adoption of SFAS 125 did not have a material
impact on the Company's financial statements.
7
<PAGE> 8
CNB HOLDINGS, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Earnings Per Common Share. The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share." This statement is effective for financial statements
issued for periods ending after December 15, 1997. This statement supersedes
Accounting Principles Board Opinion No. 15 ("APB 15"), "Earnings Per Share," and
simplifies earnings per share computations by replacing primary earnings per
share with basic earnings per share, which shows no effects from dilutive
securities. Entities with complex capital structures will have to show diluted
earnings per share, which is similar to the fully diluted earnings per share
computation under APB 15. The adoption of SFAS 128 did not have a significant
impact on the financial condition or results of operations of the Company.
Disclosure of Information About Capital Structure. The Financial
Accounting Standards Board has issued Statement of Financing Accounting
Standards No. 129 ("SFAS 129"), "Disclosure of Information About Capital
Structure." This statement is effective for financial statements issued for
periods ending after December 15, 1997. This statement consolidates existing
disclosure requirements on capital structure. The adoption of SFAS 129 did not
have a significant impact on the financial condition or results of operations of
the Company.
Reporting Comprehensive Income. The Financial Accounting Standards
Board has issued Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income." SFAS 130 is effective July 1, 1998.
Under SFAS 130, a company will begin showing changes in assets and liabilities
in a new comprehensive income statement or alternative presentation as opposed
to showing some of the items as transactions in shareholders' equity accounts.
Upon adoption, all comparative annual and interim financial statements will
present a comprehensive income statement or alternative disclosure, for all
years presented. The adoption of SFAS 130 did not have a significant impact on
the financial condition or results of operations of the Company.
Accounting Pronouncements. The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Relation Information." SFAS 131
became effective July 1, 1998, and requires disclosure of certain financial
information by segments of a company's business. The adoption of SFAS 131 did
not have a significant impact on the financial condition or results of
operations of the Company.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 132 ("SFAS 132"), "Employers' Disclosures
about Pensions and other Postretirement Benefits." SFAS 132 is effective for
fiscal years beginning after December 31, 1997. The adoption of SFAS 132 did not
have a significant impact on the financial condition or results of operations of
the Company.
NOTE 4 - OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss) is composed of the following:
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
ON SECURITIES
-------------
<S> <C>
Beginning balance - January 1, 1998 $ --
Current - period change 20,205
-------
Ending balance - September 30, 1998 $20,205
=======
</TABLE>
8
<PAGE> 9
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this Report, the
matters reflected or discussed in this Report which relate to the Company's
beliefs, expectations, plans, future estimates and the like are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Without limiting the generality of the foregoing, the words "believe,"
"anticipate," "estimate," "expect," "intend," "plan," "seek" and similar
expressions, when used in this Report and in such other statements, are intended
to identify forward-looking statements. Such forward-looking statements are
subject to risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to differ materially from
historical results or from any results expressed or implied by such
forward-looking statements. Such factors include, without limitation, general
economic conditions, governmental monetary and fiscal policies, deposit levels,
loan demand, loan collateral values, securities portfolio values and interest
rate risk management, the effects of competition in the banking business from
other commercial banks, savings and loan associations, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms, insurance
companies, money market mutual funds and other financial institutions operating
in the Company's market area and elsewhere, including institutions operating
through the Internet, changes in government regulations relating to the banking
industry, including regulations relating to branching and acquisitions, failure
of assumptions underlying the establishment of reserves for loan losses,
including the value of collateral underlying delinquent loans, representations
regarding Year 2000 issues by the Company's vendors and counterparties,
technological advances and other factors discussed in this report, the Company's
Registration Statement on Form SB-2 (Registration No. 333-49137) and the
Company's other filings with the Securities and Exchange Commission (the
"Commission"). Many such factors are beyond the Company's ability to control
or predict, and readers are cautioned not to put undue reliance on such
forward-looking statements. By making these forward-looking statements, the
Company does not undertake to update them in any manner except as may be
required by the Company's disclosure obligations in filings it makes with the
Commission under the Federal securities laws.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CNB Holdings, Inc. (the "Company") was incorporated in Georgia on
November 5, 1997 to become a bank holding company and to own and control all of
the outstanding shares of a de novo bank, Chattahoochee National Bank,
Alpharetta, Georgia (the "Bank"). In a private offering and a separate public
offering conducted during 1998, the Company sold and issued an aggregate of
1,235,000 shares of common stock, par value $1.00 per share (the "Common
Stock"), at $10.00 per share. Proceeds from these stock offerings amounted to an
aggregate of $11,103,625, net of selling expenses and repayment to organizers.
The Company purchased 100% of the Bank's common stock by injecting approximately
$9.6 million into the Bank's capital accounts immediately prior to commencement
of banking operations on July 27, 1998.
FINANCIAL CONDITION
Since principal banking operations commenced on July 27, 1998, a
comparison of financial condition on September 30, 1998 (when banking results
were in progress) to those of September 30, 1997 (when banking operations had
not commenced) is not meaningful. This discussion will therefore only compare
the Company's financial condition of September 30, 1998 with that of December
31, 1997.
Total assets increased from $195,045 on December 31, 1997 to 19,598,737
on September 30, 1998, an increase of 19,403,692. This increase was due to an
increase in capital of $10,673,204, and $8,687,037 increase in deposits. Since
principal banking operations only commenced on July 27, 1998, the assets on
December 31, 1997 represent the assets of CNB Holdings, Inc. only. The assets on
September 30, 1998 represent a consolidated figure.
Allowance for Loan Losses
Because principal banking operations commenced on July 27, 1998,
management is not yet in a position to determine the composition of
non-performing assets. Additions to the allowance for loan losses will be made
9
<PAGE> 10
periodically to maintain the allowance at an appropriate level based upon
management's analysis of potential risk in the loan portfolio. The amount of the
loan loss provision will be determined by an evaluation for the level of loans
outstanding, the level of non-performing loans, historical loan loss experience,
delinquency trends, the amount of actual losses charged to the reserve in a
given period, and assessment of present and anticipated economic conditions. As
of September 30, 1998, the Company had no nonperforming assets.
At December 31, 1997, the allowance for loan losses amounted to $0, as
the Bank commenced operations after December 31, 1997. By September 30, 1998,
the allowance had grown to $127,000. The allowance for loan losses, as a
percentage of total gross loans, for September 30, 1998 was 1.50%. Management
considers the allowance for loan losses to be adequate and sufficient to absorb
future losses; however, there can be no assurance that charge-offs in future
periods will not exceed the allowance for loan losses or that additional
provisions of the allowance will not be required.
Liquidity and Sources of Capital
Liquidity is the Company's ability to meet all deposit withdrawals
immediately, while also providing for the credit needs of customers. The
September 30, 1998 financial statements evidence a satisfactory liquidity
position as total cash and cash equivalents amounted to approximately $5.2
million, representing 26.7% of total assets. Securities amounted to
$5.2 million, representing 26.5% of total assets: these securities provide a
secondary source of liquidity since they can be converted into cash in a timely
manner. Note that the Company's ability to maintain and expand its deposit base
and borrowing capabilities are a source of liquidity. For the nine-month period
ended September 30, 1998, total deposits increased $8.7 million. The Company's
management closely monitors and maintains appropriate levels of interest earning
assets and interest bearing liabilities so that maturities of assets are such
that adequate funds are provided to meet customer withdrawals and loan demand.
This table below illustrates the Company's regulatory capital ratios at
September 30, 1998:
<TABLE>
<CAPTION>
MINIMUM
REGULATORY
SEPTEMBER 30, 1998 REQUIREMENT
------------------ -----------
<S> <C> <C>
Tier 1 Capital 46.8% 4.0%
Tier 2 Capital .65 --
Total risk-based capital ratio 47.4% 8.0%
---- ---
Leverage ratio 55.4% 3.0%
---- ---
</TABLE>
Note that with respect to the leverage ratio, the Office of the
Comptroller of the Currency expects a minimum of 5.0 percent to 6.0 percent
ratio for banks that are not rated CAMEL 1. The Bank does not yet have a CAMEL
rating.
RESULTS OF OPERATIONS
Since principal banking operations commenced on July 27, 1998, a
comparison of the September 30, 1998 results (when banking operations were in
progress) to those of September 30, 1997 (when banking operations had not
commenced) is not meaningful, and is thus not presented.
10
<PAGE> 11
Nine-Month Period Ended September 30, 1998
Net loss for the nine-month period ended September 30, 1998 amounted to
$528,977, or $(.59) per share. The following is a brief discussion of the more
significant components of net income (loss) during this period:
a. Net interest income represents the difference between interest
received on interest earning assets and interest paid on
interest bearing liabilities. The following presents, in a
tabular form, the main components of interest earning assets
and interest bearing liabilities.
<TABLE>
<CAPTION>
Interest Interest Annualized
Earning Assets/ Average Income/ Yield/
Bearing Liabilities Balance Cost Cost
------------------- ------- ---- ----
<S> <C> <C> <C>
Federal funds sold $ 7,207,857 $167,179 5.40%
Securities 2,299,197 19,013 4.96%
Loans 5,897,902 103,321 10.48%
----------- -------- -----
Total $15,404,956 $289,513 7.55%
=========== ======== =====
Deposits $ 7,630,779 $ 64,563 5.08%
=========== ======== =====
Net interest income $224,950 2.47%
======== =====
Net yield on earning assets 4.33%
=====
</TABLE>
b. Other income for the nine-month period ended September 30,
1998 amounted to $16,891. On an annualized basis, this
represents .34% of total assets. The figure is relatively low
because, in order to attract new banking relationships, the
Bank's fee structure and charges are low when compared to
other banks. The above fees and charges may increase in the
future.
c. Operating expenses for the nine-month period ended September
30, 1998 amounted to $487,236. On an annualized basis, this
represents 3.3% of total assets. The Company expects that in
the future this percentage will increase due to costs and
expenses associated with the commencement of operations.
d. In 1998, the Accounting Standards Executive Committee issued a
Statement of Position (SOP), Number 98-5, "Reporting on the
Costs of Start-Up Activities." This SOP requires that the
costs of start-up activities, including organization costs, be
expensed as incurred. The SOP is effective for fiscal years
beginning after December 15, 1998, with earlier application
encouraged for fiscal years for which an annual financial
statement has not been issued. Management expensed these
deferred costs in the quarter ended September 30, 1998, and
the cumulative affect of the change in this accounting
principle as $151,913.
11
<PAGE> 12
Three-Month Period Ended September 30, 1998
Net loss for the three-month period ended September 30, 1998 amounted
to $374,981, or $(.31) per share. The following is a brief discussion of the
more significant components of net income (loss) during this period:
a. Net interest income represents the difference between interest
received on interest earning assets and interest paid on
interest bearing liabilities. The following presents, in a
tabular form, the main components of interest earning assets
and interest bearing liabilities.
<TABLE>
<CAPTION>
Interest Interest Annualized
Earning Assets/ Average Income/ Yield/
Bearing Liabilities Balance Cost Cost
------------------- ------- ---- ----
<S> <C> <C> <C>
Federal funds sold $ 9,310,000 $129,696 5.53%
Securities 2,299,197 19,013 4.96%
Loans 5,897,902 103,321 10.48%
----------- -------- -----
Total $17,507,099 $239,926 7.39%
=========== ======== =====
Deposits $ 7,630,779 $ 64,563 5.08%
=========== ======== =====
Net interest income $175,363 2.31%
======== =====
Net yield on earning assets 4.35%
=====
</TABLE>
b. Other income for the three-month period ended September 30,
1998 amounted to $16,891. On an annualized basis, this
represents .34% of total assets. The figure is relatively low
because, in order to attract new banking relationships, the
Bank's fee structure and charges are low when compared to
other banks. Such fees and charges may increase in the
future.
c. Operating expenses for the three-month period ended September
30, 1998 amounted to $295,757. On an annualized basis, this
represents 5.3% of total assets. In the future, this
percentage will increase due to costs and expenses associated
with the commencement of operations.
d. In 1998, the Accounting Standards Executive Committee issued a
Statement of Position (SOP), Number 98-5, "Reporting on the
Costs of Start-Up Activities." This SOP requires that the
costs of start-up activities, including organization costs, be
expensed as incurred. The SOP is effective for fiscal years
beginning after December 15, 1998, with earlier application
encouraged for fiscal years for which an annual financial
statement has not been issued. Management expensed these
deferred costs in the quarter ended September 30, 1998, and
the cumulative affect of the change in this accounting
principle was $151,913.
YEAR 2000 COMPLIANCE
The Year 2000 issue refers generally to the data structure problem that
may prevent systems from properly recognizing dates after the year 1999. The
Year 2000 issue affects information technology ("IT") systems, such as computer
programs and various types of electronic equipment that process date information
by using only two digits rather than four digits to define the applicable year,
and thus may recognize a date using "00" as the year 1900 rather than the year
2000. The issue also affects some non-IT systems, such as devices which rely on
a microcontroller to process date information. The Year 2000 issue could result
in system failures or miscalculations, causing disruptions of a company's
operations. For example, computer systems may compute payment, interest,
delinquency or other figures important to the operations of the Company based on
the wrong date. Moreover, even if the Company's systems are Year 2000 compliant,
a problem may exist to the extent that third parties with whom the Company deals
in financial transactions are not compliant.
12
<PAGE> 13
The Federal Deposit Insurance Corporation ("FDIC") has issued
guidelines for insured financial institutions with respect to Year 2000
compliance. The Company has developed a Year 2000 action plan based in part on
the guidelines and timetables issued by the FDIC. The Company's action plan
focuses on four primary areas: (1) information systems, (2) embedded systems
located at the Bank's offices, (3) third party and customer relationships, and
(4) contingency planning. The Company has designated a Year 2000 compliance
team, headed by its Chief Financial Officer and Chief Executive Officer, who
reports to the board of directors. In addition, the Company has engaged outside
consultants for purposes of conducting Year 2000 readiness assessments and
remediation where necessary.
Information Systems. The Company has identified all mission critical
information ("IT") systems and has developed a schedule for testing and
remediation of such systems. Testing of key computer hardware has been
completed, and the Company expects to have mission critical hardware
modification or replacement completed during the fourth quarter of 1998. The
Company has completed its inventory of mission critical software and is in the
process of contacting software vendors for certification of Year 2000
compliance. The Company plans to complete any programming changes to critical
systems and commence testing of the new programming in the fourth quarter of
1998. Testing of internal mission-critical systems is scheduled to take place
during the first quarter of 1999 and implementation is scheduled to be complete
by June 30, 1999.
Embedded Systems. The Company is performing a comprehensive inventory
of its embedded systems, such as microcontrollers used to operate security
systems, and has completed its inventory of mission critical non-IT systems. The
Company is in the process of contacting manufacturers and vendors of those
components utilized in operations to determine whether such components are Year
2000 compliant. The Company intends to remediate or replace, as applicable, any
non-compliant components and expects to complete this process for mission
critical systems by June 30, 1999. The quality of the responses from
manufacturers and vendors, the estimated impact of the individual system or
component on the Bank's operations, and the ability of the Company to perform
meaningful and verifiable tests will influence its decision regarding whether to
have independent tests conducted on its embedded systems.
Third-Party and Customer Relationships. The Company is in the process
of initiating communications with all suppliers and vendors to determine the
potential impact of such third parties' failure to remediate their own Year 2000
issues. These third parties include other financial institutions, office supply
vendors and telephone, electric and other utility companies. The Company is
encouraging its counterparties and customers to conduct their own Year 2000
assessment and take appropriate steps to become Year 2000 compliant.
The Company outsources its principal data processing activities to a
third-party processor, and the Company is actively communicating with and
monitoring the progress of such third-party processor to assess the impact of
Year 2000 issues on such third-party processor and its ability to provide such
data processing services. The Company will consider new business relationships
with alternate providers of products and services if necessary. Additionally,
the Company has initiated communications with its larger and commercial
borrowers to assess the potential impact of Year 2000 on them and their ability
to remain current on loan repayments.
Contingency Plans. As part of the Company's normal business practice,
it maintains contingency plans to follow in the event of emergency situations,
some of which could arise from Year 2000-related problems. The Company is in the
process of formulating a detailed Year 2000 contingency plan, which will assess
several possible scenarios to which the Company may be required to react. The
Company's formal Year 2000 contingency plan is expected to be completed by the
end of first quarter 1999.
Financial Implications. The Company believes that, since its equipment
is new, the Year 2000 problem will not pose significant internal operational
problems or generate material additional expenditures. Maintenance, testing, and
modification costs will be expensed as incurred, while the costs of new software
or hardware will be capitalized and amortized over their useful lives.
Management currently does not expect the amounts required to be expensed to
resolve Year 2000 issues to have a material effect on its financial position or
results of operations. The Company currently estimates that the costs of
assessing, testing and remediation of Year 2000 issues will total approximately
$15,000 in 1998 and $5,000 in 1999. The anticipated costs associated with the
Company's Year 2000 compliance program do not include time and costs that may be
incurred as a result of any potential failure of third parties to become Year
2000 compliant or costs to implement the Company's contingency plans.
13
<PAGE> 14
Potential Risks. The Year 2000 issue presents a number of risks to the
business and financial condition of the Company and the Bank. External factors,
which include but are not limited to electric and telephone service, are beyond
the control of the Company and the failure of such systems could have a material
adverse effect on the Company, its customers and third parties on whom the
Company relies for its day-to-day operations. The business of many of the
Company's customers may be negatively affected by the Year 2000 issue, and any
financial difficulties incurred by the Company's customers in connection with
the century change could negatively affect such customers' ability to repay
loans to the Company. The failure of the Bank's computer system or applications
or those operated by customers or third parties could have a material adverse
effect on the Company's results of operations and financial condition.
The foregoing are forward-looking statements reflecting management's
current assessment and estimates with respect to the Company's Year 2000
compliance efforts and the impact of Year 2000 issues on the Company's business
and operations. Various factors could cause actual plans and results to differ
materially from those contemplated by such assessments, estimates and
forward-looking statements, many of which are beyond the control of the Company.
Some of these factors include, but are not limited to, representations by the
Company's vendors and counterparties, technological advances, economic
considerations, and consumer perceptions. The Company's Year 2000 compliance
program is an ongoing process involving continual evaluation and may be subject
to change in response to new developments.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a special meeting of shareholders on October 21, 1998, at which
three issues were presented to the shareholders of the Company: i) the approval
of the Amended and Restated CNB Holdings, Inc. 1998 Non Qualified Stock Option
Plan, ii) the approval of the Amended and Restated CNB Holdings, Inc. 1998
Incentive Stock Option Plan, and iii) the ratification of the appointment of BDO
Seidman, LLP as the Company's independent auditors. The meeting was adjourned
until November 25, 1998, at which time a final vote will be taken on these
matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed with this Report:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
18 Letter on Change in Accounting Principles.
27 Financial Data Schedule (for Commission use only).
</TABLE>
(b) Reports on Form 8-K. No report on Form 8-K was filed during the
quarter ended September 30, 1998.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Date: November 16, 1998 By: /s/ H. N. Padget, Jr.
--------------------------------------------------------
H. N. Padget, Jr., President and Chief Executive Officer
Date: November 16, 1998 By: /s/ Valerie Donnell
--------------------------------------------------------
Valerie Donnell, Chief Financial Officer
</TABLE>
16
<PAGE> 1
BDO SEIDMAN, LLP EXHIBIT 18
November 13, 1998
Mrs. Valerie Donnell
Chief Financial Officer
CNB Holdings, Inc.
7855 North Point Parkway
Suite 200
Alpharetta, Georgia 30022
Dear Mrs. Donnell:
We are providing this letter to you for inclusion as an exhibit in the filing of
Form 10-QSB of CNB Holdings, Inc. (Company) pursuant to Item 601 of Regulation
S-B.
We have read management's justification for the Company's change in accounting
method for reporting on the costs of start-up activities. In 1998, the
Accounting Standards Board's Executive Committee issued Statement of Position
98-5, which requires that the costs of start-up activities, including
organization costs, be expensed as incurred. The Company elected to expense its
previously deferred organizational costs in the third quarter ended September
30, 1998. Based upon our discussions with Company management and their stated
reasons for the change, we concur that the newly adopted accounting principle
described above is preferable, in the Company's circumstances, to the method
previously applied.
We have not made an audit in accordance with generally accepted auditing
standards of the financial statements of the Company for the three-month or
nine-month periods ended September 30, 1998 or September 30, 1997 and,
accordingly, we express no opinion thereon or on the financial information filed
as part of the Form 10-QSB of which this letter is to be an exhibit.
Very truly yours,
BDO Seidman, LLP
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CNB HOLDINGS, INC. FOR THE NINE MONTH PERIOD FROM
JANUARY 1, 1998 THROUGH SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 506,991
<INT-BEARING-DEPOSITS> 7,766,979
<FED-FUNDS-SOLD> 4,790,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,872,777
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 8,494,898
<ALLOWANCE> 127,000
<TOTAL-ASSETS> 19,598,737
<DEPOSITS> 8,687,037
<SHORT-TERM> 0
<LIABILITIES-OTHER> 43,451
<LONG-TERM> 0
0
0
<COMMON> 1,235,000
<OTHER-SE> 10,170,283
<TOTAL-LIABILITIES-AND-EQUITY> 19,598,737
<INTEREST-LOAN> 103,321
<INTEREST-INVEST> 186,192
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 289,513
<INTEREST-DEPOSIT> 64,564
<INTEREST-EXPENSE> 4,668
<INTEREST-INCOME-NET> 220,281
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 487,236
<INCOME-PRETAX> (377,064)
<INCOME-PRE-EXTRAORDINARY> (377,064)
<EXTRAORDINARY> 0
<CHANGES> (151,913)
<NET-INCOME> (528,977)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
