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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File No. 000-23991
` CNB HOLDINGS, INC.
(Name of Small Business Issuer in Its Charter)
Georgia 58-2362335
(State of Incorporation) (I.R.S. Employer Identification Number)
7855 North Point Parkway, Suite 200 30022-4849
Alpharetta, Georgia (Zip Code)
(Address of Principal Executive Offices)
(770) 650-8262
(Issuer's Telephone Number, Including Area Code)
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Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Exchange on Which Registered
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None N/A
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $1.00 par value per share
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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
|_|
Check if 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 the issuer'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. |_|
The issuer's revenues for its most recent fiscal year were $748,456.
The aggregate market value of the common stock held by non-affiliates of
the issuer (939,550 shares) on March 29, 1999 was approximately $8,690,838. For
the purpose of this response, directors, officers and holders of 5% or more of
the issuer's common stock are considered the affiliates of the issuer at that
date. Although directors and executive officers of the registrant were assumed
to be "affiliates" of the issuer for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
As of March 29, 1999, there were 1,235,000 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
Documents Incorporated by Reference
Portions of the issuer's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Report.
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PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements made in this Report and in documents
incorporated by reference herein, including matters discussed under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations," may constitute forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements are based on management's beliefs, current
expectations, estimates and projections about the financial services
industry, the economy and about CNB Holdings, Inc. (the "Company") and its
wholly-owned subsidiary, Chattahoochee National Bank (the "Bank") in general.
The words "expect," "anticipate," "intend," "plan," "believe," "seek,"
"estimate" and similar expressions are intended to identify such
forward-looking statements; however, this Report also contains other
forward-looking statements in addition to historical information. Such
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to differ materially from
any results expressed or implied by such forward-looking statements. Such
factors include, without limitation, (i) increased competition with other
financial institutions, (ii) lack of sustained growth in the economies in the
Bank's primary service areas, (iii) rapid fluctuations in interest rates,
(iv) the inability of the Bank to maintain regulatory capital standards, and
(v) changes in the legislative and regulatory environment. Many of 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.
The Company disclaims any obligation to update or revise any forward-looking
statements contained in this Report, whether as a result of new information,
future events or otherwise.
Item 1. Description of Business
General
The Company was incorporated under the laws of the State of Georgia on
November 5, 1997 and owns all of the outstanding capital stock of 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. On May 29,
1998, the Company received approval from the Board of Governors of the Federal
Reserve System (the "Federal Reserve") and the Georgia Department of Banking and
Finance ("DBF") to become a bank holding company. Accordingly, 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 the commencement
of banking operations on July 27, 1998.
The Company was incorporated as a mechanism to enhance the Bank's ability
to serve its future customers' requirements for financial services. The holding
company structure provides flexibility for expansion of the company's banking
business through the acquisition of other financial institutions and the
provision of additional banking-related services which the traditional
commercial bank may not be able to provide under present laws. For example,
banking regulations require that the Bank maintain a minimum ratio of capital to
assets. In the event that the Bank's growth is such that this minimum ratio is
not maintained, the Company may borrow funds, subject to the capital adequacy
guidelines of the Federal Reserve, and contribute them to the capital of the
Bank and otherwise raise capital in a manner which is unavailable to the Bank
under existing banking regulations.
At December 31, 1998, the assets of the Company consisted primarily of its
ownership of the capital stock of the Bank.
The Company's executive office is located at the Bank's facilities, 7855
North Point Parkway, Suite 200, Alpharetta, Georgia, and its telephone number at
such location is (770) 650-8262. See "Item 2. Description of Properties."
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Business of the Bank
The Bank was organized in 1998 as a national bank to conduct a commercial
banking business from Alpharetta, Georgia. The Bank's primary federal regulator
is the Office of the Comptroller of the Currency ("OCC") and the Bank's deposits
are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank
commenced operations on July 27, 1998. The Bank was formed to meet the banking
needs of individuals and small-to medium-sized businesses.
The Bank performs banking services customary for full service banks of
similar size and character. Such services include making consumer loans, real
estate loans, commercial loans and commercial leases, providing other banking
services such as cash management services, travelers checks, and maintaining
deposit accounts such as checking accounts, money market accounts, and a
variety of certificates of deposit and IRA accounts.
Loan Approval and Review. The Bank's loan approval policies provide for
various levels of officer lending authority. When the amount of aggregate loans
to a single borrower exceeds that individual officer's lending authority, the
loan request is considered and approved by an officer with a higher lending
limit or the Loan Committee. The Bank does make any loans to any director or
executive officer of the Bank unless the loan is approved by the Board of
Directors of the Bank and is made on terms not more favorable to such person
than would be available to a person not affiliated with the Bank.
Lending Limits. 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
the borrower's 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 within the guidelines set forth in 12 U.S.C. Section 84 as an
exception to the 15% limit. The Bank's initial lending limit is $1,351,000 for
loans not fully secured plus an additional $901,000 (or an aggregate of
approximately $2,252,000) for loans which meet the 12 U.S.C. Section 84
guidelines. These limits will increase or decrease as the Bank's capital
increases or decreases as a result of the Bank's earnings or losses, among other
reasons. Unless the Bank is able to sell participations in its loans to other
financial institutions, the Bank will not be able to meet all of the lending
needs of loan customers requiring aggregate extensions of credit above these
limits.
Consumer Loans. The Bank makes a variety of loans to individuals for personal
and household purposes, including secured and unsecured installment and term
loans, home equity loans and lines of credit, and revolving lines of credit such
as credit cards. These loans typically carry balances of less than $25,000 and,
in the case of non-revolving loans, are amortized over a period not exceeding 60
months, in many cases bearing interest at a fixed rate. The revolving loans
typically bear interest at a fixed rate and require monthly payments of interest
and a portion of the principal balance. The underwriting criteria for home
equity loans and lines of credit generally is the same as applied by the Bank
when making a first mortgage loan, and home equity lines of credit typically
expire ten years or less after origination. As with the other categories of
loans, the principal economic risk associated with consumer loans is the
creditworthiness of the Bank's borrowers. Borrower creditworthiness is affected
by general economic conditions, including unemployment rates, interest rates,
consumer bankruptcy rates and levels of consumer spending. The principal
competitors for consumer loans will be the established banks in the north Fulton
County area.
Real Estate Loans. The Bank makes commercial real estate loans,
construction and development loans, and residential real estate loans in and
around the Bank's primary service area ("PSA"). These loans include certain
commercial loans where the Bank takes a security interest in real estate out of
an abundance of caution and not as the principal collateral for the loan, but
exclude home equity loans, which are classified as consumer loans. Loan terms
generally are limited to five years or less, although payments may be structured
on a longer amortization basis. Interest rates may be fixed or adjustable. The
Bank generally charges an origination fee. Management attempts to reduce credit
risk in the commercial real estate portfolio by emphasizing loans on
owner-occupied office and retail buildings where the loan-to-value ratio,
established by independent appraisals, does not exceed 80%. In addition, the
Bank may require personal guarantees of the principal owners of the property
backed with a review by the Bank of the personal financial statements of the
principal owners. The principal economic risk associated with each category of
anticipated loans, including real estate loans, is the creditworthiness of the
Bank's borrowers. The risks associated with real estate loans vary with many
economic factors, including employment levels and fluctuations in the value of
real estate, new job creation trends, tenant vacancy rates and the quality of
the borrower's management. The Bank competes for real estate loans with a number
of bank competitors which are well established in the PSA. Most of
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these competitors have substantially greater resources and lending limits than
the Bank. As a result, the Bank may charge lower interest rates to attract
borrowers.
The Bank also originates mortgage loans for sale into the secondary
market. The Bank limits interest rate risk and credit risk on these loans by
locking the interest rate for each loan with the secondary investor and
receiving the investor's underwriting approval prior to originating the loan.
Commercial Loans and Leases. Loans for commercial purposes in various
lines of businesses are one of the primary components of the Bank's loan
portfolio. The terms of such loans vary by their purpose and underlying
collateral (if any). Equipment loans and leases are typically made for a term of
five years or less at fixed or variable rates, with the loan or lease fully
amortized over the term and secured by the financed equipment and with a
loan-to-value ratio of 80% or less and a lease-to-value ratio of 92% or less.
Leases have terms not to exceed 36 months and are mostly for heavy equipment
used in construction and road building. Loans to support working capital
typically have terms not exceeding one year and are usually secured by accounts
receivable, inventory or personal guarantees of the principals of the business.
For loans secured by accounts receivable or inventory, principal is typically
repaid as the assets securing the loan are converted into cash, and in other
cases, principal is typically due at maturity. The principal economic risk
associated with each category of anticipated loans, including commercial loans,
is the creditworthiness of the Bank's borrowers, which in turn is affected by
general economic conditions and the strength of the services and retail market
segments. In addition, the quality of the borrower's management and its ability
to properly evaluate changes in the supply and demand characteristics affecting
its respective markets for products and services and to effectively respond to
such changes are significant factors in the creditworthiness of a commercial
borrower. General economic factors affecting a borrower's ability to repay
include interest, inflation and employment rates, as well as other factors
affecting a borrower's customers, suppliers and employees. The well established
banks in the PSA make proportionately more loans to medium-to-large sized
businesses than the Bank. Many of the Bank's commercial loans are made to
small-to-medium-sized businesses who may be less able to withstand competitive,
economic and financial conditions than larger borrowers.
Other Banking Services. Other bank services include cash management
services, travelers checks, direct deposit of payroll and social security
checks, and automatic drafts for various accounts. The Bank is associated with a
shared network of automated teller machines that may be used by Bank customers
throughout Georgia and other states. The Bank also offers MasterCard and VISA
credit card services through The Banker's Bank, Atlanta, Georgia as an agent for
the Bank.
The Bank also offers to its targeted commercial customers a courier
service that will pick up non-cash deposits and minimal cash deposits of up to
$200 from the customer's place of business and deliver it to the Bank. The Bank
believes that this is an important service for its customers because the Bank
currently has only one location. The Bank has contracted with a third party
courier service which has been approved by the Georgia Public Service Commission
for bank-related work.
Investments. In addition to loans, the Bank makes other investments
primarily in obligations of the United States or obligations guaranteed as to
principal and interest by the United States and other taxable securities. No
investment in any of those instruments exceeds any applicable limitation imposed
by law or regulation.
Deposits. The Bank offers a variety of deposit programs to individuals and
to small to medium-sized businesses and other organizations. The Bank offers
checking accounts, money market accounts, a variety of certificates of deposit
and IRA accounts. The primary sources of deposits are residents of, and
businesses and their employees located in, the PSA obtained through personal
solicitation by the Bank's officers and directors, direct mail solicitations and
advertisements published in the local media. Deposits are generated by offering
a broad array of competitively priced deposit services, including demand
deposits, regular savings accounts, money market deposits (transaction and
investment), certificates of deposit, retirement accounts and other deposit or
funds transfer services which may be permitted by law or regulation. The Bank is
authorized to accept and pay interest on deposits from individuals,
corporations, partnerships and any other type of legal entity, including
fiduciaries (such as private trusts). Qualified deposits are insured by the FDIC
in an amount up to $100,000.
At December 31, 1998, the Bank had two deposit relationships that
represented concentrations. The total deposit amounts of these two relationships
were $3,060,628 and $1,507,248, approximately 25.4% and 12.5% of total deposits
respectively.
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Asset and Liability Management. The Bank manages its assets and
liabilities to provide an optimum and stable net interest margin, a profitable
after-tax return on assets and return on equity and adequate liquidity. These
management functions are conducted within the framework of written loan and
investment policies. The Bank attempts to maintain a balanced position between
rate sensitive assets and rate sensitive liabilities. Specifically, it charts
assets and liabilities on a matrix by maturity, effective duration and interest
adjustment period and endeavors to manage any gaps in maturity ranges.
Correspondent Banking. Correspondent banking involves the providing of
services by one bank to another bank which cannot provide that service for
itself from an economic or practical standpoint. The Bank is required to
purchase correspondent services offered by larger banks, including check
collections, purchase of Federal Funds, security safekeeping, investment
services, coin and currency supplies, overline and liquidity loan participations
and sales of loans to or participations with correspondent banks. The Bank sells
loan participations to correspondent banks with respect to loans which exceed
the Bank's lending limit. As compensation for services provided by a
correspondent, the Bank may maintain certain balances with such correspondents
in non-interest bearing accounts. The Bank has a correspondent relationship with
several banks, including Compass Bank, Birmingham, Alabama, The Banker's Bank,
Atlanta, Georgia, and the Federal Home Loan Bank of Atlanta. At December 31,
1998 the Bank had outstanding participations with its correspondent banks of
approximately $800,000.
Primary Service Area. The PSA represents a geographic area which includes
Sandy Springs, Dunwoody, Roswell and Alpharetta. The boundaries of the PSA are
represented by the Fulton County/Forsyth County line on the north, the Fulton
County/Gwinnett County line on the east, Interstate 285 on the south and the
Fulton County/Cobb County line on the west. Areas of the PSA are located within
15 to 30 minutes drive time from Buckhead and downtown Atlanta and 30 to 45
minutes drive time from the north Georgia mountains and Lake Lanier.
Economic and Demographic Factors. The PSA represents a diverse suburban
market made up of older home communities, new golf club communities, municipal
facilities, two major shopping malls, numerous dining amenities, growing public
and private schools, headquarter locations of major national and international
companies and numerous small businesses. The cities of Alpharetta and Roswell
are the key economic focal points of the PSA. According to estimates released by
the U.S. Census Bureau on November 18, 1997, Alpharetta ranked second in Georgia
in terms of population growth between 1990 and 1996, representing a 57.5%
change. Roswell ranked twelfth with a population change of 15.6%. The aggregate
population of the PSA reported by the U.S. Census totaled 182,502 in 1990, is
estimated to be 232,098 in 1996 and is projected to be 264,672 by 2001. The
median family income was $78,592 for 1996 and is projected to be $92,983 by
2001. The median age of the adult population is 42.6 years.
The strength of the economy in north Fulton County relies on its large,
diversified small business community. Another significant economic factor of the
PSA is the shopping and retail establishments located at North Point Mall. The
one mile stretch of land located east of Georgia Highway 400 between Mansell
Road and Haynes Bridge Road represents one of the largest commercial retail
shopping areas in Georgia. Its major focal point is North Point Mall, which is
anchored by six major department stores and 180 specialty shops. The Bank is
located at the southern entrance of this retail/commercial area.
Employees. The Bank has 10 full-time employees and four part-time
employees. The Company does not have any employees who are not also employees of
the Bank.
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 mutual funds operating in the
Metropolitan Atlanta area. As of December 31, 1998, the north Fulton County area
was served by 13 commercial banks with a total of 63 offices. A number of these
competitors are well established in the PSA. Most of them have substantially
greater resources and lending limits than the Bank and other certain services,
such as extensive and established branch networks and trust services, that the
Bank does not provide.
The regional bank holding companies represented in the PSA are:
NationsBank, N.A., Wachovia Bank of Georgia, First Union National Bank of
Georgia, SunTrust Bank, SouthTrust Bank of Georgia, Regions Bank and Colonial
Bank. The larger regional banks' presence in the PSA is through branch offices,
with many of the customer service functions, as well as authority for loan
approval, being located outside of the PSA. There are several community banks
located in the PSA. There are also two other de novo banks in the PSA.
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Monetary Policies. The results of operations of the Company and the Bank
are significantly affected by the credit policies of monetary authorities,
particularly the Federal Reserve. The instruments of monetary policy employed by
the Federal Reserve include open market operations in U.S. government
securities, changes in discount rates on member bank borrowings, and changes in
reserve requirements against bank deposits. In view of changing conditions in
the national economy and in the money markets, as well as the effect of action
by monetary and fiscal authorities, including the Federal Reserve, no prediction
can be made as to possible future changes in interest rates, deposit levels,
loan demand, or the business and earnings of the Bank.
Data Processing. The Bank has entered into a data processing servicing
agreement with FiServ Solutions, Inc. d/b/a FiServ Atlanta. This servicing
agreement provides for the Bank to receive a full range of data processing
services, including an automated general ledger, deposit accounting, commercial,
real estate and installment lending data processing, central information file
and ATM processing. Investment portfolio accounting is provided by Compass Bank,
Birmingham, Alabama. Payroll processing is provided by Express Pay, Inc.,
Alpharetta, Georgia.
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.
The 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: (i) information systems,
(ii) embedded systems located at the Bank's offices, (iii) third party and
customer relationships, and (iv) 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 Company's 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 IT
systems and has developed a schedule for testing and remediation of such
systems. Testing of key computer hardware, and the modification or replacement
of such hardware, was completed during the first quarter of 1999. The Company
has completed its inventory of mission critical software and has contacted
software vendors for certification of Year 2000 compliance. The Company
completed all programming changes to critical systems and began testing the new
programming in the fourth quarter of 1998. Testing of internal mission-critical
systems was completed during the first quarter of 1999 and implementation is
scheduled to be completed during the second quarter of 1999.
Embedded Systems. The Company has performed 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
has contacted 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
the end of the second quarter of 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 has communicated 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.
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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
uninterrupted data processing services. The Company will consider new business
relationships with alternate providers of products and services if necessary.
Additionally, the Company has communicated 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. The Company plans to work on a one-on-one
basis with any borrower who has been identified as having high Year 2000 risk
exposure.
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,
including the possibility that the Bank's deposit customers will have increased
demands for cash in the latter part of 1999. The contingency plan will also
likely provide for copies of material documents to be produced in case of
equipment failure, utilization of security personnel in case of security
equipment failure, manual posting of transactions, hiring temporary additional
personnel and telephone verification of information normally received by
electronic means. The Company's formal Year 2000 contingency plan is expected to
be completed by the end of second 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 costs of assessing, testing and remediation of Year
2000 issues totaled approximately $15,000 in 1998 and the Company currently
estimates such costs to total approximately $5,000 in 1999. The 1998 costs and
anticipated costs for 1999 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.
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.
Supervision and Regulation
The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or 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 stockholders. 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 of 1991 ("FDICIA"), numerous
additional regulatory 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.
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Bank Holding Company Regulation. The Company is a bank holding company
within the meaning of the Bank Holding Company Act of 1956, as amended (the
"BHCA") and the Georgia Bank Holding Company Act, as amended (the "Georgia BHC
Act") and is regulated under such acts by the Federal Reserve and the DBF,
respectively.
Under the BHCA and the Georgia BHC Act, the Company is subject to periodic
examination by the Federal Reserve and the DBF and is required to file periodic
reports of its operations and such additional information as the Federal Reserve
and the DBF may require. The Company's and the Bank's 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.
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 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. Acquisition of any additional banks would also require prior approval
from the DBF.
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.
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 suspend the payment of dividends, 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
there exists 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 controlled by the
Company, which in effect makes the Company's assets available to the FDIC to
assist any failing or failed bank subsidiary of the Company.
The Georgia Code. All Georgia bank holding companies must register with
the DBF under the Financial Institutions Code of Georgia (the "Georgia Code"). A
registered bank holding company must provide the DBF with information with
respect to the financial conditions, operations, management and inter-company
relationships of the holding company and its subsidiaries. The DBF may also
require such other information as is necessary to keep itself informed about
whether the provisions of Georgia law and the regulations and orders issued
thereunder by the DBF have been complied with, and the DBF may make examinations
of any bank holding company and its subsidiaries.
Glass-Steagall Act. The Company will also be restricted in its activities
by the provisions of the Glass-Steagall Act, which will generally limit the
ability of the Company to own subsidiaries that are engaged principally in the
issue, flotation, underwriting, public sale, or distribution of securities. The
interpretation, scope and application of the provisions of the Glass-Steagall
Act currently are being considered and reviewed by regulators and legislators
and may be subject to significant revision as a result.
7
<PAGE>
National Bank Regulation. The Bank is the only subsidiary of the Company.
The Bank is a national banking association and a member of the Federal Reserve.
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
examination 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 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 of 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, among 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 is subject to certain
restrictions on extensions of credit to executive officers, directors, certain
principal stockholders 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 and Geographic Expansion. The Georgia Code presently permits the
establishment of branches by a state or national bank located in Georgia with
certain limitations. While banks may establish branches in any county in
Georgia, under the Georgia Code, it is unlawful without the prior approval of
the DBF (i) for any bank holding company to acquire direct or indirect ownership
or control of more than 5% of the voting shares of any bank, (ii) for any bank
holding company or subsidiary thereof, other than a bank, to acquire all or
substantially all of the assets of a bank, or (iii) for any bank holding company
to merge or consolidate with any other bank holding company. It is also unlawful
for any bank holding company to acquire direct or indirect ownership or control
of more than 5% percent of the voting shares of any bank unless such bank has
been in existence and continuously operating or incorporated as a bank for a
period of five years or more prior to the date of application to the DBF for
approval of such acquisition. In addition, in any such acquisition by an
existing bank holding company, the initial banking subsidiary of such bank
holding company must have been incorporated for not less than two years before
the holding company can acquire another bank.
The BHCA, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994 (the
"Interstate Banking Act"), which became effective on September 29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks by
bank holding companies, such that the Company and any other bank holding company
located in Georgia may now acquire a bank located in any other state, and any
bank holding company located outside Georgia may lawfully acquire any bank based
in another state, regardless of state law to the contrary, in either case
subject to certain deposit-percentage, aging requirements and other
restrictions. The Interstate Banking Act also generally provides that after June
1, 1997, national and state-chartered banks may branch interstate through
acquisitions of banks in other states. By adopting legislation prior to that
date, a state has the ability either to "opt in" and accelerate the date after
which interstate branching is permissible or "opt out" and prohibit interstate
branching altogether. In March 1996, the Georgia legislature adopted legislation
opting into interstate branching. As a result of these provisions, banking
organizations in other states, most significantly North Carolina, Florida and
Alabama, have entered the Georgia market through acquisitions of
8
<PAGE>
Georgia institutions. Those acquisitions are subject to federal and Georgia
approval as described above. The Georgia legislation also provides that an
out-of-state bank may not enter the State of Georgia through a de novo branch,
nor may it enter through the acquisition of less than substantially all of the
assets of an existing bank.
Community Reinvestment Act. The Community Reinvestment Act requires that
each insured depository institution shall be evaluated by its primary federal
regulator with respect to its record in meeting the credit needs of its local
community, 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.
Other Regulations. Interest and certain other charges collected or
contracted for 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
borrowers, 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 the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve 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.
Enforcement Policies and Actions. FIRREA and subsequent federal
legislation significantly increased the enforcement authorities of the FDIC and
other federal depository institution regulators, and authorizes the imposition
of civil money penalties up to $1 million per day. Persons who are affiliated
with depository institutions can be removed from any office held in such
institution and banned for life from participating in the affairs of any such
institution. Banking regulators have not hesitated to use the new enforcement
authorities provided under FIRREA. Furthermore, regulators have broad power to
issue cease and desist orders that may, among other things, require affirmative
action to correct any harm resulting from a violation or practice, including
restitution, reimbursement, indemnifications or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of
certain assets, rescind agreements or contracts or take other actions as
determined by the ordering agency to be appropriate.
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 (the Bank Insurance
Fund ("BIF"), and the Savings Association Insurance Fund ("SAIF")) are
maintained 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 high rate of failures in recent years, 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 $.03 to $.27 per $100 of insured deposits depending on
its capital levels and risk profile, as determined by its primary federal
regulator on a semi-annual basis. The Bank has paid premiums at the lower end of
this range during its first year of operations.
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 and state law, regulations, and policies. In addition, the
Federal Reserve has stated that bank holding companies should refrain from or
limit dividend increases or reduce or eliminate dividends under circumstances in
which the bank holding company fails to meet minimum capital requirements or in
which its earnings are impaired.
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 deducting expenses, including reserves for 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
9
<PAGE>
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 of 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. 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.
FDICIA established a capital-based regulatory plan designed to promote
early intervention for troubled banks and requires the FDIC to choose the least
expensive resolution of bank failures. The 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 a "well capitalized" institution, a bank must have a leverage ratio of no
less than 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.
The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier 1 capital. Under the FDICIA
regulations, the applicable agency can treat an institution as if it were in the
next lower category if 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 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 a 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. Tier 1 capital includes stockholders'
equity, qualifying perpetual preferred stock and minority interests in equity
accounts of consolidated subsidiaries, but excludes goodwill and most other
intangible assets 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 revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
The Federal Reserve has also implemented a leverage ratio, which is Tier 1
capital as a percentage of average total assets less intangible assets, 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 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 1-2%.
10
<PAGE>
<TABLE>
<CAPTION>
Tier 1 Risk- Total Risk-
Capital Category Tier 1 Capital Based Capital Ratio Based Capital Ratio
---------------- -------------- ------------------- -------------------
<S> <C> <C> <C>
Well Capitalized (1) 5% or more 6% or more 10% or more
Adequately Capitalized (1) 4% or more 4% or more 8% or more (2)
Undercapitalized (3) less than 4% less than 4% less than 8% (4)
Significantly Undercapitalized less than 3% less than 3% less than 6%
Critically Undercapitalized 2% or less (5) -- --
</TABLE>
- ----------
(1) An institution must meet all three minimums.
(2) 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
(4) Less than 3% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.
(5) Ratio of tangible equity to total assets.
These capital guidelines can affect the Bank and the Company in several
ways. While the Company will initially satisfy its leverage ratio requirements
and the Bank will be considered well-capitalized, rapid growth, poor loan
portfolio performance, or poor earnings performance, or a combination of these
factors, could change the Bank's and the Company's capital position in a
relatively short period of time, making an 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 effect these regulations, when implemented, would have on the
Company and the Bank.
Recent and Future Legislative Developments. Revisions to the Bank Secrecy
Act in 1996 affected numerous issues, including suspicious activity reporting,
funds transfer recording keeping, interim exemption rules, and the definition of
"exempt persons" and the way in which banks designate exempt customers.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 was
enacted in September 1996. This Act primarily provided arrangements for the
recapitalization of the SAIF and regulatory relief for bank holding companies in
several significant areas. Bank holding companies that also owned savings
associations and were, therefore, subject to regulation by the Office of Thrift
Supervision ("OTS") as savings and loan holding companies, were relieved of such
duplicative regulation, and neither future acquisitions of savings associations
by bank holding companies nor mergers of savings associations into banks will
any longer require application to and approval by the OTS. Acquisitions by
well-capitalized and well managed bank holding companies of companies engaging
in permissible nonbanking activities (other than savings associations) may now
be made with only 12 days prior notice to the Federal Reserve, and de novo
engagement in such activities by such bank holding companies may be commenced
without prior notice and with only subsequent notice to the Federal Reserve. The
same legislation also gave regulatory relief to banks in regard to corporate
governance, branching, disclosure (under the Real Estate Settlement Procedures
Act and the Truth in Lending Act) and other operational areas.
The Federal Reserve also recently adopted regulations providing for a
streamlined application process in connection with acquisitions of banks and
bank holding companies by well-capitalized, well-managed bank holding companies.
During 1996, changes were also made to the current system used to rate banks.
On July 3, 1997, President Clinton signed legislation to clarify that
branches of state-chartered banks operating in host states are covered by the
law of their home chartering state. The Riegle-Neal Amendment Act of 1997 is
intended to preserve the dual banking system by having state banks come under
only the rules of their chartering states.
Other legislative and regulatory proposals regarding changes in banking
and the regulation of banks, thrifts and other financial institutions and bank
and bank holding company powers are being considered by the executive branch of
the Federal government, Congress and various state governments, including
Georgia. Among other items under consideration are the possible combination of
the BIF and SAIF, changes in or repeal of the Glass-Steagall Act which separates
commercial banking from investment banking, and changes in the BHCA to broaden
the powers of
11
<PAGE>
"financial services" companies to own and control depository institutions and
engage in activities not closely related to banking. Certain of these proposals,
if adopted, could significantly change the regulation of banks and the financial
services industry. It cannot be predicted whether any of these proposals will be
adopted, and, if adopted, how these proposals will affect the Company and the
Bank.
Item 2. Properties
The Company's executive office is located at the Bank's leased facilities,
7855 North Point Parkway, Suite 200, Alpharetta, Georgia, in Fulton County. The
site is located on the east side of Georgia Highway 400 at the intersection of
Mansell Road and North Point Parkway. The building is a one-story brick facility
which houses three businesses. The Bank has the central location with a small
business on each side. The Bank occupies 3,600 square feet of the total 21,600
square feet of the building. The building houses officers, operations, storage
and a lobby. The Bank has two indoor teller stations and a vault.
This location offers high visibility in a high traffic area just south of
North Point Mall, and is a neighbor to a large retail shopping center. This area
is the central location for business, residential, commuting and shopping in
north Fulton County with proximity to Georgia Highway 400. Management believes
that the facilities maintained by the Company and the Bank are suitable for its
current operations. Management also believes that the Company and the Bank are
adequately covered by insurance.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company or
the Bank is a party or of which any of their properties are subject; nor are
there material proceedings known to the Company to be contemplated by any
governmental authority; nor are there material proceedings known to the Company,
pending or contemplated, in which any director, officer or affiliate or any
principal security holder of the Company, or any associate of any of the
foregoing is a party or has an interest adverse to the Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
A Special Meeting of Shareholders of the Company (the "Special Meeting")
was held on October 21, 1998, at which three proposals 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 (the "Non Qualified Plan"),
(ii) the approval of the Amended and Restated CNB Holdings, Inc. 1998 Incentive
Stock Option Plan (the "Incentive Plan"), and (iii) the ratification of the
appointment of BDO Seidman, LLP as the Company's independent auditors. On
October 21, 1998, the Special Meeting was adjourned until November 25, 1998. At
the reconvened meeting on November 25, 1998, the shareholders of the Company
voted as follows:
1. Approval of the Non Qualified Plan:
<TABLE>
<CAPTION>
Votes Votes Votes Broker
FOR AGAINST ABSTAINING NON-VOTES
--- ------- ---------- ---------
<S> <C> <C> <C>
662,627 189,908 3,200 43,565
</TABLE>
2. Approval of the Incentive Plan:
<TABLE>
<CAPTION>
Votes Votes Votes Broker
FOR AGAINST ABSTAINING NON-VOTES
--- ------- ---------- ---------
<S> <C> <C> <C>
657,527 195,508 2,700 43,565
</TABLE>
3. Ratification of auditors:
<TABLE>
<CAPTION>
Votes Votes Votes
FOR AGAINST ABSTAINING
--- ------- ----------
<S> <C> <C>
865,500 27,100 6,700
</TABLE>
12
<PAGE>
No other matters were presented or voted for at the Special Meeting.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
A. Market Information.
The Common Stock of the Company began trading on the OTC Bulletin
Board (the "OTC BB") under the symbol "CHGD" on June 10, 1998. The market for
the Company's Common Stock must be characterized as a limited market due to its
relatively low trading volume and little analyst coverage. The following table
sets forth, for the periods indicated, the quarterly high and low bid price of
the Common Stock of the Company reported by the OTC BB. Prices reflect
inter-dealer prices without retail mark-up, mark-down or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1998 Bid
----------------------------------- ---------------------
High Low
---- ---
<S> <C> <C>
Third Quarter............................ $12.00 $8.00
Fourth Quarter........................... $ 9.37 $7.50
</TABLE>
B. Holders of Common Stock.
As of March 29, 1999, there were 38 record holders of the Common
Stock of the Company. This number is exclusive of beneficial owners whose
Company Common Stock is held in street name.
C. Dividends.
To date, the Company has not paid any dividends on its Common Stock.
As the Company and the Bank are both start-up operations, it is the policy of
the Board of Directors of the Company to reinvest earnings for such period of
time as is necessary to ensure the success of the operations of the Company and
of the Bank. There are no current plans to initiate payment of cash dividends,
and future dividend policy will depend on the Bank's earnings, capital
requirements, financial condition and other factors considered relevant by the
Board of Directors of the Company.
The Bank is restricted in its ability to pay dividends under national
banking laws and by regulations of the OCC. Pursuant to 12 U.S.C. Section 56, a
national bank may not pay dividends from its capital. All dividends must be paid
out of undivided profits, subject to other applicable provisions of law.
Payments of dividends out of undivided profits is further limited by 12 U.S.C.
Section 60(a), which prohibits the Bank from declaring a dividend on its shares
of Common Stock until its surplus equals its stated capital, unless there has
been transferred to surplus not less than one-tenth of the Bank's net income of
the preceding two consecutive half-year periods (in the case of an annual
dividend). Pursuant to 12 U.S.C. Section 60(b), the approval of the OCC is
required if the total of all dividends declared by the Bank in any calendar year
exceeds the total of its net income for that year combined with its retained net
income for the preceding two years, less any required transfers to surplus.
Item 6. Management's Discussion and Analysis or Plan of Operation
The purpose of the following discussion is to address information relating
to the financial condition and results of operations of the Company that may not
be readily apparent from a review of the consolidated financial statements and
notes thereto, which begin on page F-1 of this Report. This discussion should be
read in conjunction with information provided in the Company's consolidated
financial statements and accompanying footnotes, and with the statistical
information appearing elsewhere in this Report under the caption "Selected
Statistical Information." Unless otherwise noted, the discussion of net interest
income in this financial review is presented on a taxable equivalent basis to
facilitate performance comparisons among various taxable and tax-exempt assets.
Results of Operations
The Company was organized in November 1997 to serve as a bank holding company
for a proposed national bank.
13
<PAGE>
For approximately the first seven months of operation, the main activities
centered on seeking, interviewing and selecting a cohesive group of
organizers/directors; applying for a national bank charter; applying to become a
bank holding company; and filing a Registration Statement (the "Registration
Statement") with the Securities and Exchange Commission pursuant to which the
Company registered 1,035,000 shares of its Common Stock at an offering price of
$10.00 per share. The Company also sold 200,000 shares during a private
placement. Upon the Registration Statement's effectiveness, the
organizers/directors focused their efforts on the sale of such Common Stock and,
by early July 1998, had completed all selling activities. Net of selling
expenses, the Company raised $11,405,283 in the offerings. From late April to
mid-July, management engaged in activities resulting in the opening of the Bank.
During the development stage, from November 5, 1997 ("Inception") to July 27,
1998, net loss amounted to $101,912. Net loss, from the Bank's opening to
December 31, 1998, amounted to $607,377. Losses from Inception to December 31,
1998 amounted to $709,305. Often, denovo banks have losses for the first year of
operations. The results for 1998 were in line with the Company's expectations.
In 1998, total assets increased to $22.8 million and total deposits
increased to $12.0 million, in addition to the $11.4 million capital injection.
Total loans have grown to $14.8 million which creates a loan to deposit ratio of
123.33%.
Net Interest Income. The Company's results of operations are determined by
its ability to manage effectively interest income and expense, to minimize loan
and investment losses, to generate non-interest income and to control
non-interest expense. Since interest rates are determined by market forces and
economic conditions beyond the control of the Company, the ability to generate
net interest income is dependent upon the Company's ability to maintain an
adequate spread between the rate earned on earning assets and the rate paid on
interest-bearing liabilities, such as deposits and borrowings. Thus, net
interest income is the key performance measure of income.
Presented below are various components of assets and liabilities, interest
income and expense as well as their yield/cost for the fiscal year ended 1998.
As the Company had only minimal operations at December 31, 1997, a comparison of
the Company's components of assets and liabilities, interest income and expense
as well as their yield/cost would not be meaningful and thus has not been
provided.
<TABLE>
<CAPTION>
December 31, 1998
In thousands (000), except percentages
---------------------------------------
Interest
Average Income/ Yield/
Balance Earned Cost
------- ------- ----
<S> <C> <C> <C>
Federal funds sold $3,531 $ 190 5.41%
Securities 1,903 102 5.36%
Loans, net 3,883 409 10.53%
------ ------
Total earning assets $9,317 $ 701 7.52%
====== ====== =====
Interest-bearing deposits $3,739 168 4.49%
Other borrowings 71 5 7.00%
------ ------
Total interest-bearing liabilities $3,810 $ 173 4.54%
====== ====== =====
Net yield on earning assets 2.98%
=====
Net interest margin 5.67%
=====
</TABLE>
As reflected above, average yield on earning assets amounted to 7.52%,
while the average cost of funds amounted to 4.54%. Net interest yield for the
period ended December 31, 1998 amounted to 2.98%.
Non-Interest Income. Non-interest income for the period ended December 31,
1998 amounted to $47,607 and represented .46% of average assets. One of
management's goals for 1999 is to improve non-interest income as a percentage of
average assets.
Non-Interest Expense. Non-interest expense for the fiscal year ended
December 31, 1998 amounted to $987,359. As a percent of total average assets,
non-interest expense amounted to 9.48%. Below are the components of non-interest
expense for the fiscal year ended 1998. As the Company had only minimal
operations at December 31, 1997, a comparison of the Company's non-interest
expense at December 31, 1997, with non-interest expense at December 31, 1998
would not be meaningful and thus has not been produced.
14
<PAGE>
<TABLE>
<S> <C>
Salaries and benefits $489,133
Occupancy and depreciation expense 137,067
Legal and professional 160,091
Other operating expenses 201,068
========
Total non-interest expense $987,359
========
</TABLE>
During 1998, $222,000 was provided to the allowance for loan losses. There
were no charge-offs during 1998. As of December 31, 1998, management considers
the allowance for loan losses to be adequate to absorb possible 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 to the
allowance will not be required.
The following table presents an analysis of the net interest earnings of
the Bank for the fiscal year ended 1998 with respect to each major category of
interest-earning asset and each major category of interest-bearing liability. As
the Bank had not commenced banking operations at December 31, 1997, a
presentation of an analysis of the net interest earnings of the Bank for the
fiscal year ended 1997 cannot be produced.
<TABLE>
<CAPTION>
December 31, 1998
In thousands (000), except percentages
---------------------------------------
Average Interest Average
Assets Amount Earned Cost
------- -------- -------
<S> <C> <C> <C>
Federal funds sold $ 3,531 $190,672 5.39%
Taxable securities 1,903 101,513 5.33%
Net loans 3,883(1) 408,664(2) 10.52%
-------- -------- -----
Total earning assets $ 9,317 $700,849 7.52%
======== ======== =====
</TABLE>
<TABLE>
<CAPTION>
Average Interest Average
Liabilities Amount Expense Cost
------- -------- -------
<S> <C> <C> <C>
NOW and money market deposits $ 1,438 $ 43,634 3.03%
Savings deposits 2 62 3.10%
Time deposits 2,299 124,343 5.41%
Other borrowings 71 4,668 6.57%
-------- -------- -----
Total interest-bearing liabilities $ 3,810 $172,707 4.53%
======== ======== ======
Net yield on earning assets 2.99%
======
Net interest margin 5.67%
======
</TABLE>
- ----------
(1) During 1998, all loans were accruing interest.
(2) Interest earned on net loans includes $14,163 in loan fees and loan
service fees.
Rate/Volume Analysis of Net Interest Income. The Rate/Volume Analysis of
Net Interest Income cannot be produced as the Bank had not commenced banking
operations at December 31, 1997. This fact precludes one from comparing 1998
results to 1997 results.
Deposits. The following table presents, for the fiscal year ended 1998,
the average amount of and average rate paid on each of the described deposit
categories. As the Bank had not commenced banking operations at December 31,
1997, a presentation of the average amount of and average rate paid on each of
the Bank's deposit categories for the fiscal year ended 1997 cannot be produced.
December 31, 1998
In thousands (000), except percentages
--------------------------------------
<TABLE>
<CAPTION>
Average Average
Deposit Category Amount Rate Paid
---------------- ------ ---------
<S> <C> <C>
Non interest-bearing demand deposits $ 452 --
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C>
NOW and money market deposits 1,438 3.03%
Savings deposits 2 3.10%
Time deposits 2,299 5.41%
</TABLE>
The following table indicates amounts outstanding of time certificates
of deposit less than $100,000 and $100,000 or more and respective maturities
at December 31, 1998:
<TABLE>
<CAPTION>
Time
Certificates of Deposits
In thousands (000)
------------------
<S> <C>
3 months or less $ 3,166
3-6 months....... 2,723
6-12 months...... 1,210
over 12 months.. 298
-------
Total....... $ 7,397
=======
</TABLE>
At December 31, 1998, the Bank had two deposit relationships that
represented concentrations. The total deposit amounts of these two relationships
were $3,060,628 and $1,507,248, approximately 25.4% and 12.5% of total deposits
respectively.
Financial Condition
The following is a presentation of the average consolidated balance sheet
of the Company for the fiscal year ended 1998. This presentation includes all
major categories of interest earning assets and interest and interest bearing
liabilities. As the Company had only minimal operations at December 31, 1997, a
comparison of the Company's average consolidated balance sheet at December 31,
1997 with the one presented below would not be meaningful and thus has not been
produced.
AVERAGE CONSOLIDATED ASSETS
In thousands (000)
---------------------------------------------
December 31, 1998
-----------------
Federal funds sold $ 3,531
Taxable securities 1,903
Net loans 3,883
-------------
Total earning assets $ 9,317
Other assets 1,098
-------------
Total assets $ 10,415
=============
16
<PAGE>
AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY
In thousands (000)
-------------------------------------------------------------
December 31, 1998
-----------------
Non interest-bearing deposits $ 452
NOW and money market deposits 1,438
Savings deposits 2
Time deposits 2,299
Other borrowings 71
Other liabilities 114
-------
Total liabilities $ 4,376
Stockholders' equity 6,039
-------
Total liabilities and
stockholders' equity $10,415
=======
Loan Portfolio. The following table presents various categories of loans
contained in the Bank's loan portfolio for the fiscal year ended December 31,
1998, and the total amount of all loans for such period. As the Bank had not
commenced banking operations at December 31, 1997, a presentation of the Bank's
loan portfolio for the fiscal year ended 1997 cannot be produced.
December 31, 1998
Type of Loan In thousands (000)
------------ ------------------
Commercial loans $ 8,067
Real estate - construction 1,460
Real estate - mortgage 2,843
Lease financing 1,894
Installment and other loans to individuals 568
----------------
Subtotal 14,832
Less: Allowance for possible loan losses 222
Total (net of allowances) $ 14,610
================
The following is a presentation of an analysis of maturities of loans as
of December 31, 1998:
<TABLE>
<CAPTION>
In thousands (000)
------------------
Due after
Due in 1 1 Year
Year or Less than Due after
Type of Loan Less 5 Years 5 Years Totals
- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Commercial loans $ 3,210 $ 4,687 $ 170 $ 8,067
Real estate - construction 1,460 -- -- 1,460
Real estate - mortgage 1,310 1,446 87 2,843
Installment and other loans to individuals 276 222 70 568
Lease financing 642 1,252 -- 1,894
=========== ============ =========== ============
Total $ 6,898 $ 7,607 $ 327 $ 14,832
=========== ============ =========== ============
</TABLE>
17
<PAGE>
For the above loans, the following is a presentation of an analysis of
sensitivities to changes in interest rates as of December 31, 1998:
<TABLE>
<CAPTION>
In thousands (000)
------------------
Due after 1
Due in 1 Year Less Due after
Interest Category Year or Less than 5 Years 5 Years Totals
- ----------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Predetermined interest rate $ 2,641 $ 3,252 $ 427 $ 6,320
Floating interest rate 8,512 -- -- 8,512
------------- ------------- ----------- ------------
Total $ 11,153 $ 3,252 $ 427 $ 14,832
============= ============= ============ ============
</TABLE>
As of December 31, 1998, all loans were accruing interest, no accruing
loans were contractually past due 90 days or more as to principal and interest
payments and no loans were defined as "troubled debt restructurings."
As of December 31, 1998, there were no loans not disclosed above that are
classified for regulatory purposes as doubtful, substandard or special mention
which (i) represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or (ii) represent material credits about which management
is aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms. There are
no loans not disclosed above where known information about possible credit
problems of borrowers causes management to have serious doubts as to the ability
of such borrowers to comply with the present loan repayment terms.
Accrual of interest is discontinued on a loan when management of the Bank
determines upon consideration of economic and business factors affecting
collection efforts that collection of interest is doubtful. During 1998, all
loans were accruing interest.
Summary of Loan Loss Experience. An analysis of the Bank's loan loss
experience is furnished in the following table for the periods indicated, as
well as a breakdown of the allowance for possible loan losses. As the Bank had
not commenced banking operations at December 31, 1997, an analysis of the Bank's
loan loss experience for the fiscal year ended 1997 cannot be produced.
Analysis of the Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Balance at beginning of period $ 0
Charge-offs:
Commercial loans 0
Real estate - construction 0
Real estate - mortgage 0
Installment and other loans to individuals 0
Lease financing 0
--------
Total 0
Recoveries
Commercial loans 0
Real estate - construction 0
Real estate - mortgage 0
Installment and other loans to individuals 0
Lease financing 0
--------
Total 0
--------
Net charge-offs 0
Additions charged to operations 222,000
--------
Balance at end of period $222,000
========
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
Ratio of net charge-offs during the period to average loans
outstanding during the period 0%
========
</TABLE>
At December 31, 1998, the allowance for possible loan losses was allocated
as follows:
Percent of
loans in
each
category to
Amount total loans
------ -----------
Commercial loans $ 119,880 54%
Real estate - construction 22,200 10%
Real estate - mortgage 42,180 19%
Installment and other loans to individuals 8,880 4%
Lease financing 28,860 13%
Unallocated 0 0%
------------ --------------
Total $ 222,000 100%
============ ==============
Loan Loss Reserve. In considering the adequacy of the Bank's allowance for
possible loan losses, management has focused on the fact that as of December 31,
1998, 54% of outstanding loans are in the category of commercial loans, which
includes commercial and industrial. Commercial loans are generally considered by
management as having greater risk than other categories of loans in the Bank's
loan portfolio. However, over 85% of these commercial loans at December 31, 1998
were made on a secured basis. Management believes that the secured condition of
the preponderant portion of its commercial loan portfolio greatly reduces any
risk of loss inherently present in commercial loans.
Real estate mortgage loans constituted 19% of outstanding loans at
December 31, 1998. All loans in this category represent commercial real estate
mortgages where the amount of the original loan generally does not exceed 80% of
the appraised value of the collateral. These loans are considered by management
to be well secured with a low risk of loss.
Real estate construction loans were 10% of outstanding loans as of
December 31, 1998. The amount of the original loan does not exceed 80% of the
appraised value of the collateral. Generally, these loans are owner occupied
real estate, not leased facilities.
Lease financing represent 13% of the loan portfolio at December 31, 1998.
These leases are generally for income producing commercial equipment, such as
heavy machinery used in construction and road building.
The Bank's consumer loan portfolio constituted 4% of outstanding loans at
December 31, 1998. At December 31, 1998 the majority of the Company's consumer
loans were secured by collateral primarily consisting of automobiles, boats and
other personal property. Management believes that these loans involve less risk
than commercial loans.
A review of the loan portfolio by an independent firm will be conducted
annually beginning in 1999. The purpose of this review is to assess the risk in
the loan portfolio and to determine the adequacy of the allowance for loan
losses. The review will include analyses of historical performance, the level of
non-conforming and rated loans, loan volume and activity, review of loan files
and consideration of economic conditions and other pertinent information. Upon
completion, the report will be approved by the Bank's Board of Directors and
management of the Bank. In addition to the above review, the Bank's primary
regulator, the OCC, also conducts an annual examination of the loan portfolio.
Upon completion, the OCC presents its report of findings to the Bank's Board of
Directors and management of the Bank. Information provided from the above two
independent sources, together with information provided by the management of the
Bank and other information known to the Bank's Board of Directors, are utilized
by the Board of Directors to monitor, on a quarterly basis, the loan portfolio.
Specifically, the Bank's Board of Directors attempts to identify risks inherent
in the loan portfolio (e.g., problem loans, potential problem loans and loans to
be charged off), assess the overall quality and collectibility of the loan
portfolio, and determine amounts of the allowance for loan losses and the
provision for loan losses to be reported based on the results of their review.
19
<PAGE>
Investments. As of December 31, 1998, investment securities comprised
approximately 25% of the Bank's assets, federal funds sold comprised
approximately 1.7% of the Bank's assets, and net loans comprised approximately
64% of the Bank's assets.
The following table presents, for the period indicated, the book value of
the Bank's investments. All securities held at December 31, 1998 were
categorized as available-for-sale. As the Bank had not commenced banking
operations at December 31, 1997, a presentation of the Bank's investments for
the fiscal year ended 1997 cannot be produced.
Investment Category
-------------------
Available-for-Sale: December 31, 1998
------------------- -----------------
Obligations of U.S. Treasury and other U.S. agencies $5,702,770
Federal Reserve Bank stock 288,000
Federal Home Loan Bank stock 51,100
----------
Total $6,041,870
==========
The following table indicates, for the fiscal year ended December 31,
1998, the amount of investments due by contractual maturity in (i) one year or
less, (ii) one to five years, (iii) five to ten years, and (iv) over ten years:
<TABLE>
<CAPTION>
Investment Category
-------------------
Weighted
Average
Available-for-Sale: Amount Yield (1)
------------------- ------ ---------
<S> <C> <C>
Obligations of U.S. Treasury
and other U.S. agencies:
0-1 year $ 0 0
Over 1 through 5 years 5,702,770 5.12%
Over 5 through 10 years 0 0
Over 10 years 0 0
Federal Reserve Bank stock, no maturity 288,000 6.00%
Federal Home Loan Bank stock, no maturity 51,100 7.00%
---------- ----
Total $6,041,870 5.23%
========== ====
</TABLE>
- ----------
(1) The Bank has not invested in any tax-exempt obligations.
Return on Equity and Assets. Returns on average consolidated assets and
average consolidated equity for fiscal year ended December 31, 1998 are
presented below. As the Bank had not commenced banking operations at December
31, 1997, a presentation of the Bank's returns on average consolidated assets
and average consolidated equity cannot be produced.
December 31, 1998
-----------------
Loss on average assets (6.54%)
Loss on average equity (11.28%)
Average equity to average assets ratio 57.98%
Dividend payout ratio N/A
20
<PAGE>
Liquidity and Interest Rate Sensitivity. Net interest income, the
Company's primary source of earnings, fluctuates with significant interest rate
movements. To lessen the impact of these margin swings, the balance sheet should
be structured so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitute interest rate sensitivity.
Interest rate sensitivity refers to the responsiveness of interest-bearing
assets and liabilities to changes in market interest rates. The rate sensitive
position, or gap, is the difference in the volume of rate sensitive assets and
liabilities, at a given time interval. The general objective of gap management
is to manage actively rate sensitive assets and liabilities so as to reduce the
impact of interest rate fluctuations on the net interest margin. Management
generally attempts to maintain a balance between rate sensitive assets and
liabilities as the exposure period is lengthened to minimize the Company's
overall interest rate risks.
The asset mix of the balance sheet is continually evaluated in terms of
several variables: yield, credit quality, appropriate funding sources and
liquidity. To effectively manage the liability mix of the balance sheet, there
should be a focus on expanding the various funding sources. The interest rate
sensitivity position at year-end 1998 is presented in the following table. The
difference between rate sensitive assets and rate sensitive liabilities, or the
interest rate sensitivity gap, is shown at the bottom of the table. Since all
interest rates and yields do not adjust at the same velocity, the gap is only a
general indicator of rate sensitivity.
<TABLE>
<CAPTION>
After 3 After 6 After 1
months but months year but
Within 3 within 6 but within within 5 After 5
months months 1 year years years Totals
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans $10,616 $ 537 $ -- $ 3,252 $ 427 $14,832
US Government and agency securities 5,703 339 6,042
Fed funds sold 380 -- -- -- 380
------- ------- -------- ------- ------- -------
Total earning assets $10,996 $ 537 $ -- $ 8,955 $ 766 $21,254
======= ======= ======== ======= ======= =======
FUNDING SOURCES
Demand deposits, interest-bearing
demand and savings $ 4,614 $ -- $ -- $ -- $ -- $ 4,614
Certificates, less than $100M 5 1,163 907 198 -- 2,273
Certificates $100M and over 3,161 1,245 718 -- -- 5,124
------- ------- -------- ------- ------- -------
Total interest-bearing liabilities $ 7,780 $ 2,408 $ 1,625 $ 198 $ -- $12,011
======= ======= ======== ======= ======= =======
Interest-sensitivity gap $ 3,216 $-1,871 $ -1,625 $ 8,757 $ 766 $ 9,243
Cumulative interest-sensitivity gap $ 3,216 $ 1,345 $ -280 $ 8,477 $ 9,243 $ 9,243
Interest-sensitivity gap ratio 15.13% -8.80% -7.64% 41.20% 3.60% 43.48%
Cumulative interest-sensitivity gap ratio 15.13% 6.33% -1.31% 39.88% 43.48% 43.48%
</TABLE>
As evidenced by the table above, the Company is cumulatively asset
sensitive. In a rising interest rate environment, an asset sensitive position (a
gap ratio over 1.0) is generally more advantageous as earning assets are
repriced sooner than the liabilities. Conversely, in a declining interest rate
environment, a liability sensitive position (a gap ratio of less than 1.0) is
generally more advantageous since liabilities are repriced sooner than assets.
With respect to the Company, an increase in interest rate would result in higher
earnings while a decline in interest rates will reduce income. This, however,
assumes that all other factors affecting income remain constant.
As the Company continues to grow, management will continuously structure
its rate sensitivity position to best hedge against rapidly rising or falling
interest rates. The Bank's Asset/Liability Committee meets on a bi-monthly basis
and develops management's strategy for the upcoming period. Such strategy
includes anticipations of future interest rate movements.
21
<PAGE>
Liquidity represents the ability to provide steady sources of funds for
loan commitments and investment activities, as well as to maintain sufficient
funds to cover deposit withdrawals and payment of debt and operating
obligations. These funds can be obtained by converting assets to cash or by
attracting new deposits. The Company's primary source of liquidity comes from
its ability to maintain and increase deposits through the Bank. Deposits grew by
$12.0 million in 1998. Below are the pertinent liquidity balances and ratios for
the period from Inception to December 31, 1998.
Cash and cash equivalents $ 1,053,182
Federal fund sold $ 380,000
Securities $ 6,041,870
CDs, over $100,000 to total deposits ratio 42.66%
Loan to deposit ratio 123.49%
Brokered deposits N/A
At December 31, 1998, large denomination certificates accounted for 42.66%
of total deposits. Large denomination CDs are generally more volatile than other
deposits. As a result, management continually monitors the competitiveness of
the rates it pays on its large denomination CDs and periodically adjusts its
rates in accordance with market demands. Significant withdrawals of large
denomination CDs may have a material adverse effect on the Bank's liquidity.
Management believes that since a majority of the above certificates were
obtained from Bank customers residing in Fulton County, Georgia, the volatility
of such deposits is lower than if such deposits were obtained from depositors
residing outside of Fulton County, as outside depositors are more likely to be
interest rate sensitive.
Cash and cash equivalents are the primary source of liquidity. At December
31, 1998, cash and cash equivalents amounted to $1.05 million, representing
4.62% of total assets. Securities available for sale provide a secondary source
of liquidity. Approximately $5.7 million of the $6.04 million in the Bank's
securities portfolio is scheduled to mature in 2001.
Brokered deposits are deposit instruments, such as certificates of
deposit, deposit notes, bank investment contracts and certain municipal
investment contracts that are issued through brokers and dealers who then offer
and/or sell these deposit instruments to one or more investors. As of December
31, 1998, the Bank had no brokered deposits in its portfolio.
Management knows of no trends, demands, commitments, events or
uncertainties that should result in or are reasonably likely to result in the
Company's liquidity increasing or decreasing in any material way in the
foreseeable future.
Capital Adequacy. There are now two primary measures of capital adequacy
for banks and bank holding companies: (i) risk-based capital guidelines and (ii)
the leverage ratio.
The risk-based capital guidelines measure the amount of a bank's required
capital in relation to the degree of risk perceived in its assets and its
off-balance sheet items. Note that under the risk-based capital guidelines,
capital is divided into two "tiers." Tier 1 capital consists of common
shareholders' equity, non-cumulative and cumulative (bank holding companies
only) perpetual preferred stock and minority interest. Goodwill is subtracted
from the total. Tier 2 capital consists of the allowance for loan losses, hybrid
capital instruments, term subordinated debt and intermediate term preferred
stock. Banks are required to maintain a minimum risk-based capital ratio of
8.0%, with at least 4.0% consisting of Tier 1 capital.
The second measure of capital adequacy relates to the leverage ratio.
The OCC has established a 3.0% minimum leverage ratio requirement. Note that
the leverage ratio is computed by dividing Tier 1 capital into total average
assets. For banks that are not rated CAMEL 1 by their primary regulator
(which includes the Bank), the minimum leverage ratio should be 3.0% plus an
additional cushion of at least 1 to 2 %, depending upon risk profiles and
other factors.
22
<PAGE>
In 1997, a rule was adopted by the Federal Reserve Board, the OCC and the
FDIC that adds a measure of interest rate risk to the determination of
supervisory capital adequacy. In connection with this new rule, the agencies
have also proposed a measurement process to measure interest rate risk. Under
this proposal, all items reported on the balance sheet, as well as off-balance
sheet items, would be reported according to maturity, repricing dates and cash
flow characteristics. A bank's reporting position would be multiplied by
duration-based risk factors and weighted according to rate sensitivity. The net
risk weighted position would be used in assessing capital adequacy. The
objective of this complex proposal is to determine the sensitivity of a bank to
various rising and declining interest rate scenarios.
The table below illustrates the Bank's and Company's regulatory capital
ratios at the date indicated:
Minimum
regulatory
December 31, 1998 requirement
--------------------- --------------
Bank
Tier 1 Capital 58.9% 4.0%
Tier 2 Capital 1.3% --
--------------------- --------------
Total risk-based capital ratio 60.2% 8.0%
===================== ==============
Leverage Ratio 46.6% 4.0%
===================== ==============
Company - Consolidated
Tier 1 Capital 70.0% 4.0%
Tier 2 Capital 1.3% --
--------------------- --------------
Total risk-based capital ratio 71.3% 8.0%
===================== ==============
Leverage ratio 54.4% 4.0%
===================== ==============
The above ratios indicate that the capital positions of the Bank and the
Company are sound and that both are well positioned for future growth.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities " ("SFAS No. 133"). This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. Retroactive application to financial statements of prior periods
is not required. The Company does not currently have any derivative instruments
nor is it involved in hedging activities.
In October 1998, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 134 (SFAS 134). "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS 134 is effective for the
first fiscal quarter after December 15, 1998, and amends Statement of Financial
Accounting Standards No. 65. "Accounting for Certain Mortgage Banking
Activities," which revises the accounting for retained securities and beneficial
interests. The adoption of SFAS 134 is not expected to have a significant impact
on the consolidated financial condition or results of operations of the Company.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Cost of Start-Up Activities" ("SOP
98-5") which requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application encouraged. The Company elected to
early adopt SOP 98-5 for the year ended December 31, 1998. The cumulative effect
of this accounting change resulted in a charge to earnings of approximately
$47,000.
Effects of Inflation and Changing Prices
23
<PAGE>
Inflation generally increases the cost of funds and operating overhead,
and to the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' increased costs of goods and services purchased, the
cost of salaries and benefits, occupancy expense, and similar items. Inflation
and related increases in interest rates generally decrease the market value of
shareholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
Item 7. Financial Statements
The consolidated financial statements of the Company, including notes
thereto, and the report of independent certified public accountants are included
in this Report beginning at page F-1 and are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no occurrence requiring a response to this Item.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The information appearing under the heading "Election of Directors" and
the subheadings "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement (the "1999 Proxy Statement")
relating to the annual meeting of shareholders of the Company, scheduled to be
held on May 19, 1999, is incorporated herein by reference.
Item 10. Executive Compensation
The information appearing under the heading "Compensation of Executive
Officers and Directors" in the 1999 Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information appearing under the heading "Outstanding Voting Securities
of the Company and Principal Holders Thereof" in the 1999 Proxy Statement is
incorporated herein by reference.
Item 12. Certain Relationship and Related Transactions
The information appearing under the caption "Certain Relationships and
Transactions" in the 1999 Proxy Statement is incorporated herein by reference.
24
<PAGE>
PART IV
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits. Periodic reports, proxy statements and other information
filed by the Company with the SEC pursuant to the informational requirements of
the Securities Exchange Act of 1934, as amended may be inspected and copied at
the SEC's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet
site (http://www.sec.gov) that makes available reports, proxy statements and
other information regarding the Company. The Company's SEC file number reference
is Commission File No. 0-23991.
Exhibit Description
- ------- -----------
3.1 Articles of Incorporation of the Company (Incorporated herein
by reference to the exhibit of the same number of the
Company's Registration Statement on Form SB-2 filed on April
1, 1998 (Commission File No. 333-49137))
3.2 Bylaws of the Company (Incorporated herein by reference to the
exhibit of the same number of the Company's Registration
Statement on Form SB-2 filed on April 1, 1998 (Commission File
No. 333-49137))
4.2 See Exhibits 3.1 and 3.2 hereto for provisions of the Articles
of Incorporation and Bylaws of the Company defining rights of
holders of the Common Stock.
10.1 Shopping Center Form Lease, dated March 23, 1998, between W.B.
Wiggins, Jr., and Chattahoochee National Bank (Incorporated
herein by reference to the exhibit of the same number of the
Company's Registration Statement on Form SB-2 filed on April
1, 1998 (Commission File No. 333-49137))
10.2 Employment Agreement, dated as of November 1, 1997 among
Chattahoochee National Bank (In Organization), CNB Holdings,
Inc. and H. N. Padget, Jr. (Incorporated herein by reference
to the exhibit of the same number of the Company's
Registration Statement on Form SB-2 filed on April 1, 1998
(Commission File No. 333-49137))
10.3 Form of CNB Holdings, Inc. Organizers' Warrant Agreement
(Incorporated herein by reference to the exhibit of the same
number of the Company's Registration Statement on Form SB-2
filed on April 1, 1998 (Commission File No. 333-49137))
10.4 Amended and Restated CNB Holdings, Inc. 1998 Incentive Stock
Option Plan (Incorporated herein by reference to Annex B of
the Company's Proxy Statement dated October 2, 1998
(Commission File No. 0-23991))
10.5 Amended and Restated CNB Holdings, Inc. 1998 Non-Qualified
Stock Option Plan (Incorporated herein by reference to Annex A
of the Company's Proxy Statement dated October 2, 1998
(Commission File No. 0-23991))
18.0 Letter On Change In Accounting Principles (Incorporated herein
by reference to the exhibit of the same number of the
Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1998 (Commission File No. 0-23991))
21.1 Subsidiary of CNB Holdings, Inc.
27.1 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were required to be filed
by the Company during the fourth quarter of 1998.
25
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CNB HOLDINGS, INC.
Dated: March 31, 1999 By: /S/H. N. Padget, Jr.
-------------------------------------------
H. N. Padget, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Dated: March 31, 1999 By: /S/Danny F. Dukes
-------------------------------------------
Danny F. Dukes
Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant, in the capacities and on the dates indicated.
/S/W. David Sweatt
- --------------------------------------------- Date: March 31, 1999
W. David Sweatt, Chairman of the Board of
Directors
/S/Michael L. Aldredge
- --------------------------------------------- Date: March 31, 1999
Michael L. Aldredge, Director
/S/C. Dan Alford
- --------------------------------------------- Date: March 31, 1999
C. Dan Alford, Director
/S/Patricia R. Grimes
- --------------------------------------------- Date: March 31, 1999
Patricia R. Grimes, Director
/S/ William H. Groce, Jr.
- --------------------------------------------- Date: March 31, 1999
William H. Groce, Jr., Secretary and Director
/S/David R. Hink
- --------------------------------------------- Date: March 31, 1999
David R. Hink, Director
/S/Mary E. Johnson
- --------------------------------------------- Date: March 31, 1999
Mary E. Johnson, Director
/S/Robert W. Johnston
- --------------------------------------------- Date: March 31, 1999
Robert W. Johnston, Director
/S/Heber N. Padget, Sr.
- --------------------------------------------- Date: March 31, 1999
Heber N. Padget, Sr., Director
/S/John A. Pond
- --------------------------------------------- Date: March 31, 1999
John A. Pond, Director
/S/Reid W. Simmons
- --------------------------------------------- Date: March 31, 1999
Reid W. Simmons, Director
/S/W. Darrell Sumner
- --------------------------------------------- Date: March 31, 1999
W. Darrell Sumner, Director
<PAGE>
/S/H.N. Padget, Jr.
- --------------------------------------------- Date: March 31, 1999
H.N. Padget, Jr., President, Chief Executive
Officer and Director
(Principal Executive Officer)
/S/Danny F. Dukes
- --------------------------------------------- Date: March 31, 1999
Danny F. Dukes, Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
CNB Holdings, Inc. and Subsidiary
Financial Statements
Year ended December 31, 1998
and period from Inception to
December 31, 1997
Contents
Report of Independent Certified Public Accountants 2
Consolidated and Parent-Only Financial Statements
Balance sheets 3
Statements of loss 4-5
Statements of changes in stockholders' equity 6
Statements of cash flows 7
Notes to financial statements 8-26
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
CNB Holdings, Inc. and Subsidiary
Alpharetta, Georgia
We have audited the accompanying consolidated balance sheet of CNB Holdings,
Inc. and subsidiary as of December 31, 1998, and the related consolidated
statements of loss, changes in stockholders' equity and cash flows for the year
then ended. 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 audit. The financial statements
of CNB Holdings, Inc. (a Development Stage Corporation) for the period from
inception (November 5, 1997) to December 31, 1997, were audited by Bricker &
Melton, P.A., whose practice has been combined with our Firm and whose report
dated February 27, 1998, expressed an unqualified opinion on those statements;
such report contained an explanatory paragraph relating to the Company's ability
to continue as a going concern.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CNB Holdings, Inc. and subsidiary as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 16 to the consolidated financial statements, CNB Holdings,
Inc. and subsidiary changed their method of accounting for deferred organization
costs in 1998.
Duluth, Georgia
January 29, 1999
2
<PAGE>
CNB Holdings, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 1997
======================================================================================================
(Parent only)
<S> <C> <C>
Assets
Cash and due from banks (Note 2) $ 1,053,182 $ 60,698
Federal funds sold 380,000 --
Investment securities available for sale (Note 3) 5,702,770 --
Other investments (Note 3) 339,100 --
Loans and leases receivable, net of allowance for loan and lease
losses of $222,000 in 1998 (Notes 4 and 10) 14,609,983 --
Premises and equipment, net (Note 5) 470,523 60,947
Accrued interest receivable 140,547 --
Other assets 120,465 73,400
- ------------------------------------------------------------------------------------------------------
Total Assets $ 22,816,570 $ 195,045
======================================================================================================
Liabilities and Stockholders' Equity
Liabilities
Deposits: (Notes 9 and 13)
Noninterest-bearing demand $ 1,346,146 $ --
Interest-bearing demand and money market 3,268,262 --
Time deposits of $100,000 or more 5,124,023 --
Other time deposits 2,272,812 --
- ------------------------------------------------------------------------------------------------------
Total deposits 12,011,243 --
- ------------------------------------------------------------------------------------------------------
Accrued interest payable 30,764 --
Note payable -- 57,479
Accounts payable and other liabilities (Note 6) 69,306 45,845
- ------------------------------------------------------------------------------------------------------
Total liabilities 12,111,313 103,324
- ------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 5 and 17)
Stockholders' equity (Note 11)
Preferred stock, par value not stated; 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, par value $1.00; 10,000,000 shares authorized,
1,235,000 and 0 shares issued and outstanding, respectively 1,235,000 --
Capital surplus 10,170,283 120,000
Accumulated deficit (709,289) (28,279)
Accumulated other comprehensive income - market valuation reserve
on investment securities available for sale (Note 3) 9,263 --
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 10,705,257 91,721
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 22,816,570 $ 195,045
======================================================================================================
</TABLE>
See accompanying notes to consolidated and parent-only financial statements.
3
<PAGE>
CNB Holdings, Inc. and Subsidiary
Consolidated Statements of Loss
<TABLE>
<CAPTION>
For the period
For the year ended from inception to
December 31, 1998 December 31, 1997
=======================================================================================================
(Parent only)
<S> <C> <C>
Interest income
Loans and leases, including fees $ 408,664 $ --
Investment securities:
U.S. Treasury securities 64,667 --
U.S. Government agencies and corporations 26,267 --
Other investments 10,579 736
Federal funds sold 190,672 --
- -------------------------------------------------------------------------------------------------------
Total interest income 700,849 736
- -------------------------------------------------------------------------------------------------------
Interest expense
Interest-bearing demand and money market 43,634 --
Time deposits of $100,000 or more 107,986 --
Other time deposits 16,419 --
Other borrowings (Note 6) 4,668 --
- -------------------------------------------------------------------------------------------------------
Total interest expense 172,707 --
- -------------------------------------------------------------------------------------------------------
Net interest income 528,142 736
Provision for loan losses (Note 4) 222,000 --
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 306,142 736
- -------------------------------------------------------------------------------------------------------
Other income
Service charges on deposit accounts 916 --
Other income 46,691 --
- -------------------------------------------------------------------------------------------------------
Total other income 47,607 --
- -------------------------------------------------------------------------------------------------------
Other expense
Salaries and other compensation 420,425 25,516
Employee benefits 68,708 --
Net occupancy and equipment expense 137,067 --
Professional and outside services 160,091 --
Other expense 201,068 3,499
- -------------------------------------------------------------------------------------------------------
Total other expense 987,359 29,015
- -------------------------------------------------------------------------------------------------------
Loss before income tax benefit (633,610) (28,279)
Income tax benefit (Note 8) -- --
- -------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (633,610) (28,279)
Cumulative effect on prior years of change in accounting
principle for deferred organization costs, net of tax (Note 16) (47,400) --
- -------------------------------------------------------------------------------------------------------
Net loss $(681,010) $ (28,279)
=======================================================================================================
</TABLE>
See accompanying notes to consolidated and parent-only financial statements.
(Continued)
4
<PAGE>
CNB Holdings, Inc. and Subsidiary
Consolidated Statements of Loss (Continued)
<TABLE>
<CAPTION>
For the period
For the year ended from inception to
December 31, 1998 December 31, 1997
=======================================================================================================
(Parent only)
<S> <C> <C>
Basic loss per common share: (Note 1)
Loss before cumulative effect of change in accounting principle $ (.90) $ --
Cumulative effect on prior years of change in
accounting principle for deferred organization
costs, net of tax (Note 16) (.07) --
- -------------------------------------------------------------------------------------------------------
Basic loss per common share $ (.97) $ --
=======================================================================================================
</TABLE>
See accompanying notes to consolidated and parent-only financial statements.
5
<PAGE>
CNB Holdings, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income-Market
Comprehensive Accumulated Valuation Common
Total Income Deficit Reserve Stock Surplus
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance at inception
(Parent only) $ -- $ -- $ -- $ -- $ --
Capital contribution 120,000 -- -- -- 120,000
Comprehensive income:
Net loss (28,279) $ (28,279) (28,279) -- -- --
-------------
Comprehensive income (loss) $ (28,279)
=============
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997
(Parent only) 91,721 (28,279) -- -- 120,000
Capital contribution 240,000 -- -- -- 240,000
Proceeds from sale of
capital stock, net of
expenses 11,405,283 -- -- 1,235,000 10,170,283
Repayment of initial
capital contribution (360,000) -- -- -- (360,000)
Comprehensive income:
Net loss (681,010) $ (681,010) (681,010) -- -- --
Other comprehensive
income, net of tax:
Market valuation
adjustment on
securities
available for sale 9,263 9,263 -- 9,263 -- --
-------------
Comprehensive income (loss) $ (671,747)
=============
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 10,705,257 $ (709,289) $ 9,263 $ 1,235,000 $ 10,170,283
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated and parent-only financial statements.
6
<PAGE>
CNB Holdings, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the period
For the year ended from inception to
December 31, 1998 December 31, 1997
====================================================================================================================================
(Parent only)
<S> <C> <C>
Cash flows from operating activities
Net loss $ (681,010) $ (28,279)
Adjustments to reconcile net loss to net cash used by
operating activities:
Net accretion of investment securities 7,077 --
Depreciation and amortization of premises and equipment 54,871 --
Provision for loan losses 222,000 --
Cumulative effect of change in accounting for organization costs
47,400 --
Increase in other assets (94,464) (73,400)
Increase in accrued interest receivable (140,547) --
Increase in accrued interest payable 30,764 --
Increase in accounts payable and other liabilities 17,794 45,845
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (536,115) (55,834)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchases of investment securities available for sale (5,865,109) --
Purchases of other investments (339,100) --
Paydowns of investment securities available for sale 170,191 --
Loans originated, net of principal repayments (14,831,983) --
Purchases of premises and equipment (464,447) (60,947)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (21,330,448) (60,947)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from capital stock, net of expenses 11,405,283 --
Net increase in demand, money market and savings deposits 4,614,408 --
Time deposits accepted, net of repayments 7,396,835 --
Proceeds from other borrowings -- 57,479
Repayment of other borrowings (57,479) --
Proceeds from initial capital contribution 240,000 120,000
Repayment of initial capital contribution (360,000) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 23,239,047 177,479
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,372,484 60,698
Cash and cash equivalents at beginning of year 60,698 --
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,433,182 $ 60,698
====================================================================================================================================
Supplemental disclosures of cash paid
Interest $ 141,943 $ --
Income taxes -- --
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated and parent-only financial statements.
7
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
1. Summary of Significant Accounting Policies
CNB Holdings, Inc. provides a full range of banking and bank-related services to
individual and corporate customers through its bank subsidiary, located in north
Fulton County, Georgia. CNB Holdings, Inc. and subsidiary are subject to intense
competition from other financial institutions and are also subject to the
regulations of certain government agencies and, therefore, undergo periodic
examinations by those regulatory authorities.
The accounting and reporting policies of CNB Holdings, Inc. and subsidiary
conform to generally accepted accounting principles and to general practices
within the banking industry. The following is a summary of the more significant
of these policies.
Basis of Presentation
CNB Holdings, Inc. (the Parent Company) was incorporated under the laws of
the State of Georgia on November 5, 1997, to operate as a bank holding
company pursuant to the Federal Bank Holding Company Act of 1956, as amended,
and the Georgia Bank Holding Company Act to organize and own 100 percent of
the issued and outstanding capital stock of Chattahoochee National Bank (the
Bank), an association organized under the laws of the United States, which
was incorporated in 1998 and began as a general banking business on July 27,
1998 as a wholly-owned subsidiary of the parent company. The 1998
consolidated financial statements include the accounts of the Parent Company
and its wholly-owned subsidiary, the Bank, collectively known as the Company.
All significant intercompany accounts and transactions have been eliminated
in consolidation. The financial statements for the period from inception
(November 5, 1997) to December 31, 1997, are for CNB Holdings, Inc. (a
Development Stage Corporation), the Parent Company only.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates. For
instance, material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses. Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the adequacy of the allowance for
loan losses. Such agencies may require the recognition of additions to the
allowance based on their judgments about information available to them at the
time of their examination.
Cash and Cash Equivalents
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 and sold for one-day periods.
Investment Securities
Investment securities available for sale are reported at fair market value, with
unrealized gains and losses reported as a separate component of stockholders'
equity, net of the related tax effect. Other investments are reported at cost
and, accordingly, earnings are reported when interest is accrued or when
dividends are received.
8
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
Premium and discount on all investment securities are amortized (deducted) and
accreted (added), respectively, to interest income on the straight-line and
interest methods over the period to the maturity of the related securities.
Premium on mortgage-backed securities are amortized (deducted) and accreted
(added), respectively, to interest income using a method which approximates a
level yield over the period to maturity of the related securities, taking into
consideration assumed prepayment patterns.
Gains or losses on disposition are computed by the specific identification
method for all securities.
Loans and Leases Receivable
Loans are reported at the gross amount outstanding, less a valuation
allowance for loan losses. Interest income on loans is recognized over the
terms of the loans based on the principal amount outstanding. If the
collectibility of interest appears doubtful, the accrual thereof is
discontinued. Interest income on nonaccrual loans is recognized on a cash
basis, if there is no doubt of future collection of principal.
The Bank originates commercial financing leases. Leases receivable are
reported at the total of minimum lease payments receivable from lessees. The
difference between the total of minimum lease payments and the cost
associated with the leases is recorded as deferred revenue. Interest income
is recognized over the terms of the leases based on the imputed interest
rates of the lease. When interest is recognized, a reduction in deferred
revenue is recorded.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is established through a provision for
loan and lease losses charged to expense. The allowance represents an amount
which, in management's judgment, will be adequate to absorb probable losses on
existing loans or leases that may become uncollectible. Management's judgment in
determining the adequacy of the allowance is based on evaluations of the
collectibility of loans and leases and takes into consideration such factors as
the balance of impaired loans and leases, changes in the nature and volume of
the loan and lease portfolio, current economic conditions that may affect the
borrower's ability to pay, overall portfolio quality and a review of specific
problem loans or leases. Periodic revisions are made to the allowance when
circumstances which necessitate such revisions become known. Recognized losses
are charged to the allowance for loan and lease losses, while subsequent
recoveries are added to the allowance.
A loan or lease is impaired when it is probable the Company will be unable to
collect all principal and interest payments due in accordance with the terms of
the loan or lease agreement. Individually identified impaired loans are measured
based on the present value of payments expected to be received, using the
contractual loan rate as the discount rate. Alternatively, measurement may be
based on observable market prices, or for loans that are solely dependent on the
collateral for repayment, measurement may be based on the fair value of the
collateral. If the recorded investment in the impaired loan exceeds the measure
of fair value, a valuation allowance is established as a component of the
allowance for loan losses. Changes to the valuation allowance are recorded as a
component of the provision for loan losses.
9
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
In addition, regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses, and may
require the Company to record additions to the allowance based on their
judgement about information available to them at the time of their examinations.
Sale of Loans
The Bank originates and sells participations in certain loans. Gain or losses
on the sale of loans are recorded in non-interest income, based on the net
proceeds received in the recorded investment in the loan sold.
Premises and Equipment
Bank premises, furniture and equipment, and leasehold improvements are reported
at cost less accumulated depreciation and amortization. For financial reporting
purposes, depreciation and amortization are computed using primarily
straight-line methods over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to operations as incurred,
while major renewals and betterments are capitalized. When property is disposed
of, the related cost and accumulated depreciation are removed from the accounts
and any gain or loss is reflected in income. For federal tax reporting purposes,
depreciation and amortization are computed using primarily accelerated methods.
Income Taxes
The tax effects of transactions are recorded at current tax rates in the periods
the transactions are reported for financial statement purposes. Deferred income
taxes are established for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
Recognition of deferred tax asset balance sheet amounts is based on
management's belief that it is more likely than not that the tax benefit
associated with certain temporary differences, tax operating loss
carryforwards and tax credits will be realized. A valuation allowance is
recorded for those deferred tax assets for which it is more likely than not
that realization will not occur in the near term.
The Company and the Bank file a consolidated income tax return. Each entity
provides for income taxes based on its contribution to income taxes (benefits)
of the consolidated group.
Earnings Per Common Share
Earnings per share is computed by dividing income available to common
stockholders by the weighted average number of shares outstanding during each
year, which totaled 700,068 shares for the year ended December 31, 1998. There
were no shares outstanding for the period from inception to December 31, 1997.
There were no potentially dilutive common shares at December 31, 1998.
10
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
Stock-Based Compensation
The Company accounts for stock options under Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Under
APB 25, no compensation expense is recognized when the exercise price in the
granted options is equal to or greater than the market price of the
underlying stock at the date of grant.
Off-Balance-Sheet Financial Instruments
In the normal course of business, the Company originates financial instruments
with off-balance-sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These commitments involve varying degrees of risk in excess of the
amounts recognized in the consolidated balance sheet. Commitments to extend
credit represent legally binding agreements to lend to a customer with fixed
expiration dates or other termination clauses. Since many commitments expire
without being funded, total commitment amounts do not necessarily represent
future liquidity requirements. The amount of collateral obtained is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable; inventory; and property, plant and equipment.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing the performance of a customer to a third party.
Fair Values of Financial Instruments
The Company uses the following methods and assumptions in estimating fair values
of financial instruments (see Note 15):
Cash and cash equivalents - For other investments, which consist of common
stock in the Federal Reserve Bank of Atlanta and the Federal Home Loan Bank
of Atlanta, the carrying amount approximates fair value.
Investment securities - The fair value of investment securities available for
sale is estimated based on bid quotations received from independent pricing
services. The carrying amount of other investments approximates fair value.
Loans - For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. For all other
loans, fair values are calculated by discounting the contractual cash flows
using estimated market discount rates which reflect the credit and interest risk
inherent in the loan, or by using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same remaining
maturities.
Deposits - The fair value of deposits with no stated maturity, such as demand,
NOW and money market, and savings accounts, is equal to the amount payable on
demand at year-end. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows using the rates currently offered for
deposits of similar remaining maturities.
Accrued interest - The carrying amount of accrued interest receivable and
payable approximates fair value.
Off-balance-sheet instruments - The fair value for off-balance-sheet lending
commitments is equal to the amount of commitments outstanding at December 31,
1998. This is based on the fact that the Company generally does not offer
lending commitments or standby letters of credit to its customers for long
periods, and therefore, the underlying rates of the commitments approximate
market rates.
11
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
New Accounting Pronouncements
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
Effective November 5, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." SFAS 125 is effective
for such transactions entered into subsequent to December 31, 1996, and for
certain excess servicing rights recorded at December 31, 1996. Under SFAS 125, a
company recognizes the financial and servicing assets it controls and the
liabilities it has incurred and derecognizes financial assets when control has
been surrendered and liabilities when extinguished. The Financial Accounting
Standards Board has issued Statement of Financial Accounting Standards No. 127
(SFAS 127), "Deferral of the Effective Date of FASB Statement No. 125," which
delays the effective date of certain provisions of SFAS 125 until 1998. The
adoption of SFAS 125 and SFAS 127 did not have a significant impact on the
consolidated financial condition or results of operations of the Company.
Disclosure of Information About Capital Structure
Effective November 5, 1997, the Company adopted Statement of Financial
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.
Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." 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 only in stockholders' equity accounts.
All comparative annual and interim financial statements will present a
comprehensive income statement disclosure for all years presented.
Segment Reporting
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 establishes standards for the
disclosure of segment information about services, geographic areas, and major
customers. The Company acts as an independent community financial services
provider and offers traditional banking services to individual, commercial,
and government customers. Because Management of the Company views and
operates the Bank as one versus multiple segments, no segmentation of bank
operations between services, types of customers and market areas is provided.
Parent Company only financial information is provided in Note 18.
12
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
Employer Disclosure About Pension and Other Postretirement Benefits
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employers' Disclosures about Pension and Other
Benefits." SFAS 132 standardizes the disclosure requirements for pensions and
other postretirement benefits.
Pending Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133 (SFAS 133) "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 is effective for fiscal years beginning after
June 15, 1999. Under SFAS 133, a company will recognize all free-standing
derivative instruments in the statement of financial position as either assets
or liabilities and will measure them at fair value. The difference between a
derivative's previous carrying amount and its fair value shall be reported as a
transition adjustment presented in net income or other comprehensive income, as
appropriate, in a manner similar to the cumulative effect of a change in
accounting principle. This statement also determines the accounting for the
changes in fair value of a derivative, depending on the intended use of the
derivative and resulting designation. The adoption of SFAS 133 is not expected
to have a significant impact on the consolidated financial condition or results
of operations of the Company.
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134 (SFAS 134), "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS 134 is effective for the
first fiscal quarter after December 15, 1998, and amends Statement of Financial
Accounting Standards No. 65, "Accounting for Certain Mortgage Banking
Activities," which revises the accounting for retained securities and beneficial
interests. The adoption of SFAS 134 is not expected to have a significant impact
on the consolidated financial condition or results of operations of the Company.
2. Cash and Due From Banks
The Federal Reserve Board requires that banks maintain reserve balances with the
Federal Reserve Bank or in cash on hand, based on the institution's deposit
balances. At December 31, 1998, the Bank's reserve requirement had not been
required to be computed or reported to the Federal Reserve Bank.
3. Investment Securities
The amortized cost and estimated market value of investment securities available
for sale are as follows:
Amortized Unrealized Unrealized Market
December 31, 1998 Cost Gains Losses Value
================================================================================
U.S. Treasury obligations $4,028,752 $21,641 $(7,348) $4,043,045
U.S. Government agencies and
corporations 1,659,088 1,406 (769) 1,659,725
- --------------------------------------------------------------------------------
$5,687,840 $23,047 $(8,117) $5,702,770
================================================================================
13
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
Other investments consists of common stock in the Federal Reserve Bank of
Atlanta and the Federal Home Loan Bank of Atlanta.
In 1998, the unrealized gain on available-for-sale securities was $14,930, or
$9,263 net of $5,667 in tax, and is included as a separate component of
stockholders' equity.
The amortized cost and estimated market value of investment securities available
for sale, by contractual maturity, are shown as follows. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations without call or prepayment penalties.
Investment Securities
Available for Sale
----------------------------------
Amortized Market
December 31, 1998 Cost Value
================================================================================
Due in one year or less $ -- $ --
Due after one year through three years 4,028,752 4,043,045
Mortgage-backed securities 1,659,088 1,659,725
- --------------------------------------------------------------------------------
$5,687,840 $5,702,770
================================================================================
At December 31, 1998, the Bank had no municipal deposits which required pledged
securities.
At December 31, 1998, the Bank had no outstanding off-balance-sheet derivative
financial instruments, such as swaps, options, futures, or forward contracts.
4. Loans and Leases Receivable
Major classifications of loans and leases are as follows:
December 31, 1998
================================================================
Commercial loans $ 8,066,156
Commercial leases 1,893,655
Real estate--commercial and residential 4,303,328
Installment loans to individuals 568,844
- ----------------------------------------------------------------
Total loans 14,831,983
Less: Allowance for loan and lease losses 222,000
- ----------------------------------------------------------------
Loans and leases receivable, net $ 14,609,983
================================================================
Most of the Bank's business activity is with customers located within north
Fulton County and the surrounding area. As of December 31, 1998, the Bank had
approximately $4,347,225 of its loan portfolio secured by real estate.
At December 31, 1998, the Bank has no loans or leases which are considered
impaired.
14
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
The following is a summary of transactions in the allowance for loan and lease
losses:
Year ended December 31, 1998
===============================================================
Balance, beginning of year $ --
Provision charged to expense 222,000
Loans charged off --
Recoveries of loans previously charged off --
- ---------------------------------------------------------------
Balance, end of year $222,000
===============================================================
5. Premises and Equipment
Premises and equipment are comprised of the following:
December 31, 1998 1997
===============================================================================
(Parent only)
Leasehold improvements $ 76,469 $ --
Furniture, fixtures and equipment 448,925 60,947
- -------------------------------------------------------------------------------
525,394 60,947
Less accumulated depreciation and amortization 54,871 --
- -------------------------------------------------------------------------------
Premises and equipment, net $470,523 $60,947
===============================================================================
Depreciation and amortization expense totaled $54,871 for 1998. No depreciation
was recorded in 1997.
The Company operates out of offices in a retail facility pursuant to an
operating lease at a monthly rental of $5,453. Rental expense was $49,073 in
1998.
Future minimum lease payments under the operating lease are as follows:
Years ending December 31,
==========================================
1999 $ 65,430
2000 65,430
2001 65,430
2002 65,430
2003 39,258
- ------------------------------------------
$300,978
==========================================
6. Short-Term and Other Borrowings
On July 27, 1998, management obtained a $2,500,000 federal funds
accommodation from a bank at the lending bank's federal funds cost plus 0.25
percent. Any advances under this line, plus interest, are due the following
business day. The line of credit is unsecured.
15
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
The Bank may not maintain a balance under the line for more than 14 days in a
30-day period. All amounts borrowed under this line were repaid as of December
31, 1998.
On November 19, 1997, management obtained a $1,000,000 federal funds credit
line from a bank at a rate determined solely by the lending bank and subject
to change daily. Advances under the line plus interest were due the following
business day. The Bank did not borrow under the line for a period of more
than 14 consecutive days. Personal guarantees of the organizers, up to
$66,667 each, were required by the lender. This line of credit was used to
repay (without interest) the Organizer's initial funding of the Company and
provided additional operating funds until equity funding was obtained in 1998.
Approximately $295,900 was drawn against this line of credit in 1997 and was
repaid in full in 1998. The line of credit expired in 1998.
7. Employee Benefits Plan
Effective October 1, 1998, the Company established a contributory 401(k)
employee profit sharing plan, subject to certain minimum age and service
requirements. Under the provisions of the plan, participants may contribute from
1 to 15 percent of their salaries, up to the legal contribution limit. The
Company may elect to make a matching contribution to the plan at the discretion
of the Board of Directors. Amounts expensed in the year ended December 31, 1998,
as a result of the Company's contributions to the plan, totaled $609. Eligible
employees become 33.3 percent vested in the Company's contributions to the plan
for each year of service. Eligible employees become fully vested in the plan
after three years.
8. Income Taxes
The following are the components of income tax expense as provided:
For the period
For the year ended from inception to
December 31, 1998 December 31, 1997
================================================================================
(Parent only)
Current income tax provision $ -- $ --
Deferred income tax benefit -- --
- --------------------------------------------------------------------------------
$ -- $ --
================================================================================
16
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
A reconciliation of income taxes computed at the federal statutory income tax
rate to total income taxes is as follows:
<TABLE>
<CAPTION>
For the period
For the year ended from inception to
December 31, 1998 December 31, 1997
========================================================================================================
(Parent only)
<S> <C> <C>
Pretax income (loss) $(681,010) $ (28,279)
========================================================================================================
Income tax (benefit) computed at federal statutory tax rate $(231,543) $ (9,615)
Increase (decrease) resulting from:
Nondeductible meals and entertainment 2,876 525
State income tax benefit, net of federal tax benefit (26,968) (1,119)
Valuation allowance 255,635 10,209
- --------------------------------------------------------------------------------------------------------
$ -- $ --
========================================================================================================
</TABLE>
The following summarizes the tax effects of temporary differences which comprise
net deferred tax assets:
<TABLE>
<CAPTION>
December 31, 1998 1997
======================================================================================================
(Parent only)
<S> <C> <C>
Deferred income tax assets:
Allowance for loan losses $ 63,659 $ --
Net operating loss carryforward 159,779 10,209
Deferred organization costs 46,133 --
- ------------------------------------------------------------------------------------------------------
Total deferred income tax assets 269,591 10,209
- ------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Unrealized (gain) loss on investment securities available
for sale (5,667) --
Other, net (3,747) --
- ------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities (9,414) --
- ------------------------------------------------------------------------------------------------------
Valuation allowance (265,844) (10,209)
- ------------------------------------------------------------------------------------------------------
Net deferred income tax (liability) asset $ (5,667) $ --
======================================================================================================
</TABLE>
As of December 31, 1998 and 1997, the Company had cumulative net operating loss
carryforwards of approximately $700,000 and $26,900, respectively, for book
purposes, and $421,000 and $26,900, respectively, for tax purposes. The 1998 and
1997 net operating loss carryforwards of $394,100 and $26,900 are subject to
20-year and 15-year carryforward limitations, respectively.
17
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
9. Time Deposits
The aggregate amount of time deposits with a minimum denomination of $100,000
was approximately $5,124,000 at December 31, 1998.
At December 31, 1998, the scheduled maturities of time deposits of $100,000 or
more and other time deposits are as follows:
Years ending December 31,
========================================================
1999 $7,098,835
2000 298,000
Thereafter --
- --------------------------------------------------------
$7,396,835
========================================================
10. Related Party Transactions
At December 31, 1998, the Bank had direct and indirect loans which aggregated
$2,201,710, outstanding to or for the benefit of certain of the Bank's officers,
directors and their related interests. During 1998, $2,285,043 of such loans
were made and repayments totaled $83,333. These loans were made in the ordinary
course of business in conformity with normal credit terms, including interest
rates and collateral requirements prevailing at the time for comparable
transactions with other borrowers. These individuals and their related interests
also maintain customary demand and time deposit accounts with the Bank.
11. Stockholders' Equity
The Bank is subject to various regulatory capital requirements administered by
the 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
Bank's financial statements. The regulations require the Bank to meet specific
capital adequacy 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 classification is 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
following table) of Tier 1 capital (as defined in the regulations) to total
average assets (as defined), and minimum ratios of Tier 1 and total capital (as
defined) to risk-weighted assets (as defined). To be considered well capitalized
and adequately capitalized (as defined) under the regulatory framework for
prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1
risk-based, and total risk-based ratios as set forth in the table. The Bank's
and Company's actual capital amounts and ratios are also presented in the table.
18
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
<TABLE>
<CAPTION>
Adequately
Well Capitalized Capitalized
December 31, 1998 Requirement Requirement Actual
==============================================================================================================
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital (to Average
Assets)
Bank $ 965,000 5.0% $ 771,600 4.0% $ 9,008,000 46.6%
Consolidated $ 985,000 5.0% $ 788,000 4.0% $10,711,000 54.4%
Tier 1 Capital (to Risk
Weighted Assets)
Bank $ 1,184,000 6.0% $ 789,500 4.0% $ 9,008,000 58.9%
Consolidated $ 1,182,000 6.0% $ 788,160 4.0% $10,711,000 70.0%
Total Capital (to Risk Weighted
Assets)
Bank $ 1,974,000 10.0% $ 1,579,000 8.0% $ 9,198,000 60.2%
Consolidated $ 1,970,000 10.0% $ 1,576,000 8.0% $10,902,000 71.3%
</TABLE>
Management believes that, as of December 31, 1998, the Bank and Company meet all
capital requirements to which they are subject.
Dividends paid by the Bank are the primary source of funds available to the
Company. Banking regulations limit the amount of dividends which the Bank may
pay without obtaining prior regulatory approval. These restrictions are based on
the level of regulatory classified assets, the prior years' net earnings, and
the ratio of equity capital to total assets. At December 31, 1998, total
stockholders' equity of the Bank was $9,001,885 and was not available for
dividends.
Stock Options
During 1998, the Company's Board of Directors approved a nonqualified stock
option plan, which allows for a total of 185,000 common stock options to be
granted to members of the Board of Directors. The exercise price for each option
shall be $10.00 per share. Options are to be granted from time to time, as
determined by the Board of Directors, and expire ten years after the date of
grant. Summarized information related to these nonqualified options is as
follows:
19
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
<TABLE>
<CAPTION>
Exercise Weighted Average
Shares Price Exercise Price
======================================================================================================
<S> <C> <C> <C>
Balance at December 31, 1997 -- $ -- $ --
Granted 145,000 10.00 10.00
Exercised -- -- --
Expired -- -- --
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 145,000 $10.00 $10.00
======================================================================================================
Options exercisable at December 31, 1998 --
Weighted average fair value of options granted
during 1998 $3.66
======================================================================================================
</TABLE>
During 1998, the Board of Directors approved an incentive stock option plan
which allows for a total of 115,000 common stock options to be granted to key
employees. The Board of Directors of the Bank may grant incentive stock options
to any employee, including an employee who is a director of the Company, subject
to the provisions of the plan. The maximum number of shares of common stock of
the Company that may be optioned or sold is 115,000 shares. Such shares may be
treasury, or authorized but unissued, shares of common stock of the Company.
The exercise price for common stock option under each qualified incentive stock
options and nonqualified stock options must be equal to 100 percent of the
market price on the day the option is granted, as determined by the Board of
Directors. The exercise price under a qualified incentive stock option granted
to a person owning stock representing more than 10 percent of common stock must
equal at least 110 percent of the fair market value at the date of the grant,
but in no case less than par value, and such option is not exercisable after ten
years from the date the incentive stock option is granted. Summarized
information related to the incentive stock options is as follows:
<TABLE>
<CAPTION>
Exercise Weighted Average
Shares Price Exercise Price
======================================================================================================
<S> <C> <C> <C>
Balance at December 31, 1997 -- $ -- $ --
Granted 105,500 10.00 10.00
Exercised -- -- --
Expired -- -- --
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 105,500 $10.00 $10.00
======================================================================================================
Options exercisable at December 31, 1998 22,500
Weighted average fair value of options granted
during 1998 $3.66
======================================================================================================
</TABLE>
20
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
The Board of Directors may, at its discretion, provide that an option not be
exercisable, in whole or in part, for any period or periods of time, as
specified in the option agreements. No option may be exercised after the
expiration of ten years from the date it was granted. Summarized information
regarding outstanding stock options at December 31, 1998, is as follows:
Outstanding Options Options Exercisable
- ----------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding at Contractual Exercise Exercisable at Exercise
December 31, 1998 Life Price December 31, 1998 Price
- -----------------------------------------------------------------------------
145,000 9.8 $10.00 - $10.00
105,500 9.8 10.00 22,500 10.00
- -----------------------------------------------------------------------------
250,500 9.8 $10.00 22,500 $10.00
- -----------------------------------------------------------------------------
At December 31, 1998, the Company has two stock option plans which are described
in the above tables. The Company applied Accounting Principles Board Opinion No.
25 (APB 25) and related Interpretation in accounting for these plans.
Accordingly, no compensation cost has been recognized for the Company's stock
option plans in 1998. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of accounting required in Statement of
Financial Accounting Standards No. 123 (SFAS 123), the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated as
follows:
Year ended December 31, 1998
- ----------------------------------------------------------------------
Net loss
As reported $(681,010)
Pro forma (765,055)
Basic and diluted loss per common share
As reported $ (.97)
Pro forma (1.09)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998: dividend yield of 0 percent, historical
volatility of 62 percent, risk-free interest rate of 4.93 percent, and expected
lives of nine to ten years.
12. Off-Balance-Sheet Financial Instruments
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet. The contract amounts of these
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
21
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
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 is
represented by the contractual amounts of these instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
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 some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. At December 31, 1998, commitments to extend
credit totaled approximately $8,674,000. The Bank's experience has been that
approximately 80 percent of loan commitments are drawn upon by customers. A
substantial amount of these contracts expire without being drawn upon. As a
result, total contractual amounts do not represent future credit exposure or
liquidity 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 other party.
Collateral held varies but may include accounts receivable; inventory; property,
plant and equipment; and income-producing commercial properties on those
commitments for which collateral is deemed necessary.
13. Deposit Concentrations
At December 31, 1998, the Bank had two deposit relationships that represented
concentrations. The total deposit amounts of these two relationships were
$3,060,628 and $1,507,248.
14. Supplemental Financial Data
Components of other income in excess of 1 percent of total income are as
follows:
Year ended December 31, 1998
==============================================================================
Mortgage origination fees $32,552
22
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
Components of other expense in excess of 1 percent of total income are as
follows:
Year ended December 31, 1998
==============================================================================
Data processing fees $37,048
Printing and supplies 28,471
Marketing expense 35,108
Loan review and compliance 12,500
Insurance--directors and officers 21,281
Postage and courier expense 10,206
Business development 14,822
15. Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows:
1998
---------------------------------
Carrying Estimated
December 31, Value Fair Value
================================================================================
Financial assets:
Cash and cash equivalents $ 1,433,182 $ 1,433,182
Investment securities
available for sale 5,702,770 5,702,770
Other investments 339,100 339,100
Loans 12,716,328 12,712,093
Accrued interest receivable 140,547 140,547
Financial liabilities:
Noncontractual deposits $ 4,614,408 $ 4,614,408
Contractual deposits 7,396,835 7,445,566
Accrued interest payable 30,764 30,764
Off-balance-sheet instruments:
Undisbursed credit lines $ 1,679,210
16. Change in Accounting Principle--Deferred Organization Costs
Effective January 1, 1998, the Company changed its method of accounting for
organization costs in order to expense these costs in the period incurred. Prior
to 1998, the Company capitalized organization costs and amortized them to
expense over a five-year period. This change in accounting method was made in
order for the Company to be in compliance with AICPA Statement of Position 98-5
(SOP 98-5), which states that the costs of start-up activities, which include
organization costs, be expensed as incurred. SOP 98-5 is effective for fiscal
years beginning after December 15, 1998; however the Company elected early
adoption, which is encouraged. The Company recorded a charge of approximately
$47,400, or $.07 per share, in 1998 as the cumulative effect of this accounting
change. Of this amount, approximately $47,400 was related to the Parent Company.
This change also increased 1998 total costs and expenses by approximately
$139,000, or $.20 per share.
23
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
17. Commitment
The Company entered into a letter of employment with the President and Chief
Executive Officer of the Bank. The letter of employment continues for two more
years and provides for an annual base salary, plus medical insurance premiums,
and such other benefits which are generally made available to other senior
executives of the Company and the Bank. The letter of employment also provides
for granting 30,000 incentive stock options to purchase the Company's common
stock at a price of $10.00 per share. These options are vested and fully
exercisable in year 2008; however, there is accelerated vesting if certain
events occur. At December 31, 1998, 15,000 of these options were vested.
18. Condensed Financial Information of CNB Holdings, Inc.
Condensed Balance Sheets
(Parent Only)
December 31, 1998 1997
================================================================================
Assets
Cash on hand or at other financial institutions $ 42,048 $ 60,698
Cash on deposit with subsidiary 1,661,283 -
Deferred organization costs - 47,400
Investment in subsidiary 9,001,885 -
Other assets 275 86,947
- --------------------------------------------------------------------------------
Total Assets $10,705,491 $195,045
================================================================================
Liabilities and Stockholders' Equity
Liabilities
Note payable $ - $ 57,479
Other liabilities 234 45,845
- --------------------------------------------------------------------------------
Total liabilities 234 103,324
- --------------------------------------------------------------------------------
Stockholders' equity
Preferred stock - -
Common stock 1,235,000 -
Capital surplus 10,170,283 120,000
Accumulated deficit (709,289) (28,279)
Accumulated other comprehensive income: valuation
reserve on investment securities available for
sale 9,263 -
- --------------------------------------------------------------------------------
Total stockholders' equity 10,705,257 91,721
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $10,705,491 $195,045
================================================================================
24
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
Condensed Statements of Loss
(Parent Only)
<TABLE>
<CAPTION>
For the period
For the year ended from inception to
December 31, 1998 December 31, 1997
=============================================================================================================
<S> <C> <C>
Operating income
Interest income $ 109,015 $ 736
- -------------------------------------------------------------------------------------------------------------
Total operating income 109,015 736
- -------------------------------------------------------------------------------------------------------------
Operating expense
Salaries and benefits 56,882 25,516
Insurance 12,982 -
Interest expense on other borrowings 4,668 -
Legal and accounting fees 32,212 -
Other expense 28,503 3,499
- -------------------------------------------------------------------------------------------------------------
Total operating expense 135,247 29,015
- -------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting
principle, income tax benefit, and equity in
undistributed loss of subsidiary (26,232) (28,279)
Cumulative effect of change in accounting principle (47,400) -
- -------------------------------------------------------------------------------------------------------------
Loss before income tax benefit and equity in
undistributed loss of subsidiary (73,632) (28,279)
Income tax benefit - -
- -------------------------------------------------------------------------------------------------------------
Loss before equity in undistributed loss of subsidiary (73,632) (28,279)
Equity in undistributed loss of subsidiary (607,378) -
- -------------------------------------------------------------------------------------------------------------
Net loss $(681,010) $(28,279)
=============================================================================================================
</TABLE>
25
<PAGE>
CNB Holdings, Inc. and Subsidiary
Notes to Consolidated and Parent-Only Financial Statements
Condensed Statements of Cash Flows
(Parent Only)
<TABLE>
<CAPTION>
For the period
For the year ended from inception to
December 31, 1998 December 31, 1997
=========================================================================================================
<S> <C> <C>
Cash flows from operating activities
Net loss $ (681,010) $ (28,279)
Equity in undistributed loss of bank subsidiary 607,378 --
Cumulative effect of change in accounting for
organization costs 47,400 --
Decrease (increase) in other assets 86,672 (134,347)
(Decrease) increase in other liabilities (45,611) 45,845
- ---------------------------------------------------------------------------------------------------------
Net cash used by operating activities 14,829 (116,781)
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Contribution of capital to bank subsidiary (9,600,000) --
- ---------------------------------------------------------------------------------------------------------
Net cash used by investing activities (9,600,000) --
- ---------------------------------------------------------------------------------------------------------
Net cash from financing activities
Proceeds from sales of capital stock, net of expenses 11,405,283 --
Proceeds from initial capital contribution 240,000 120,000
Return of initial capital contribution (360,000) --
Proceeds from other borrowings -- 57,479
Repayment of other borrowings (57,479) --
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,227,804 177,479
- ---------------------------------------------------------------------------------------------------------
Net increase in cash 1,642,633 60,698
Cash and cash equivalents at beginning of year 60,698 --
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,703,331 $ 60,698
=========================================================================================================
</TABLE>
26
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
-------------- ----------------------
21.1 Subsidiary of CNB Holdings, Inc.
27.1 Financial Data Schedule
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,053,182
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 380,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,702,770
<INVESTMENTS-CARRYING> 339,100
<INVESTMENTS-MARKET> 0
<LOANS> 14,831,983
<ALLOWANCE> 222,000
<TOTAL-ASSETS> 22,816,570
<DEPOSITS> 12,011,243
<SHORT-TERM> 0
<LIABILITIES-OTHER> 100,070
<LONG-TERM> 0
0
0
<COMMON> 1,235,000
<OTHER-SE> 9,470,257
<TOTAL-LIABILITIES-AND-EQUITY> 22,816,570
<INTEREST-LOAN> 408,664
<INTEREST-INVEST> 101,513
<INTEREST-OTHER> 190,672
<INTEREST-TOTAL> 700,849
<INTEREST-DEPOSIT> 168,039
<INTEREST-EXPENSE> 172,707
<INTEREST-INCOME-NET> 550,142
<LOAN-LOSSES> 222,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 987,359
<INCOME-PRETAX> 633,610
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 47,400
<NET-INCOME> 681,010
<EPS-PRIMARY> .97
<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> 222,000
</TABLE>
