Filed with the Securities and Exchange Commission on December 10, 1997
Registration No. 333-38727
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
CNB Holdings, Inc.
(Name of small business issuer in its charter)
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Virginia 6021 54-1663340
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
P.O. Box 1060, 900 Memorial Drive, Pulaski, Virginia 24301
(540) 944-0831
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(Address and telephone number of principal executive offices)
copy to:
WAYNE L. CARPENTER HUGH B. WELLONS, ESQ.
CNB Holdings, Inc. Mays & Valentine, L.L.P.
900 Memorial Drive 1111 East Main Street
Pulaski, Virginia 24301 Richmond, Virginia 23218
(540) 944-0831 (804) 697-1374
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities or an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Each Class Proposed Maximum Proposed Maximum
of Securities to Amount to Offering Price Aggregate Amount of
be Registered be Registered Per Unit (1) Offering Price Registration
Fee (2)
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Common Stock,
$5.00 par value 380,000 shares $ 9.00 $ 3,420,000 $ 1,036
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(1) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Previously paid.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
330,000 Shares
[LOGO]
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CNB HOLDINGS, INC.
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Common Stock
CNB Holdings, Inc. (the "Company"), the holding company for Community
National Bank (the "Bank"), is offering for sale 330,000 shares of common stock
(the "Shares"), par value $5.00 per share (the "Common Stock"). The Bank is a
commercial bank primarily serving the New River Valley of Southwest Virginia,
including Pulaski, Virginia and surrounding areas. The Common Stock is not
actively traded. See "Risk Factors - Determination of Offering Price" for
information concerning the factors considered in determining the public
offering price.
The offering will be terminated by the Company upon the sale of the Shares
offered hereby or on February 10, 1998 whichever occurs first, unless the
offering is extended, at the discretion of the Company, for additional periods
ending no later than March 10, 1998. Subscriptions from shareholders of record
on December 10, 1997 ("Present Shareholders") received prior to January 10,
1998 will be confirmed prior to sales to other investors.
See "Risk Factors" on page 6 for certain information that should be
considered by prospective investors.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION OR BANK REGULATORY
AGENCY NOR HAS ANY SUCH COMMISSION OR AGENCY PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS
AND ARE NOT INSURED BY THE INSURANCE FUND OF THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY.
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Price to Selling Proceeds to the
Public Commissions (1) Company (2)
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Per Share ............ $ 9.00 $ .45 $ 8.55
Total Maximum (3) ...... $2,970,000 $74,250 $2,895,750
</TABLE>
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(1) The Company will pay the Placement Agent a commission of $.45 for each
Share sold by it in this offering, excluding Shares subscribed for by the
Present Shareholders. For purposes of estimating total Selling
Commissions, the Company has assumed that the Placement Agent will sell
165,000 shares. The Company has agreed to indemnify the Placement Agent
against certain civil liabilities.
(2) Before deducting offering expenses payable by the Company estimated at
$150,000, including payment to the Placement Agent of a financial advisory
fee of $25,000. See "Placement Agent."
(3) The Company has the right at its sole option, prior to the closing of this
offering, to issue up to a maximum of 50,000 additional shares of Common
Stock, on the same terms and conditions as set forth above. If all such
additional shares are sold by the Placement Agent, the total Price to
Public, total Selling Commissions and total Proceeds to the Company will
be $3,420,000, $96,750, and $3,323,250, respectively.
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The Shares are being offered by the Company and by Davenport & Company
LLC, as agent for the Company (the "Placement Agent"), on a "best efforts"
basis and the offering is not subject to the sale of any minimum number of
Shares. Proceeds will be deposited with Crestar Bank, Richmond, Virginia in a
non-interest bearing escrow account pending the closing of the offering.
Subscriptions from Present Shareholders are binding on subscribers and may not
be revoked. The Company may reject any subscription in whole or in part prior
to closing. It is expected that such funds will be released from the escrow
account and delivery of the Shares will be made promptly after completion of
this Offering. See "The Offering."
DAVENPORT & COMPANY LLC
The date of this Prospectus is December 10, 1997.
<PAGE>
COMMUNITY NATIONAL BANK
Market Area
[Map of counties surrounding bank. The map shows main roads and towns.]
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements appearing elsewhere in this Prospectus or
incorporated herein by reference. All information in this Prospectus reflects a
five-for-four stock split effective as of May 30, 1997. Unless otherwise
indicated, the information contained in this Prospectus assumes that the
Company's right to issue 50,000 additional Shares is not exercised.
CNB Holdings, Inc.
CNB Holdings, Inc. (the "Company") is an independent, community-owned
bank holding company based in Pulaski, Virginia, and incorporated under the laws
of Virginia. The Company conducts substantially all of its business activities
through its wholly-owned subsidiary bank, Community National Bank, a national
banking association (the "Bank"). In July 1994, the Company successfully raised
its initial capital of $4.3 million through a public offering sold primarily in
the Pulaski community. The Bank was opened for business on August 29, 1994.
Since that time, the Bank has grown rapidly to $37.6 million in assets and $34.3
million in deposits as of September 30, 1997.
The Bank currently operates two full-service retail banking offices in
Pulaski, Virginia. The Bank's first permanent office, which opened in December
1995, also serves as the corporate headquarters for the Company. The Bank's
second full service branch, which opened October 4, 1997, is located in downtown
Pulaski at the site of a former branch banking office of a regional bank. The
Bank offers a range of banking and related financial services, including
checking, savings, certificates of deposit and other depository services. The
Bank's lending activities include commercial, real estate and consumer loans.
The Bank maintains automated teller machines ("ATM's") at each of its full
service locations and recently installed a stand-alone ATM on the campus of the
New River Community College. The Bank also contracted to and completed the
purchase of a 20,000 square foot former branch building of NationsBank for
$187,000.
The Bank's target market is the New River Valley of Southwest Virginia,
which includes Pulaski, Giles, Montgomery, Wythe, and Bland Counties and the
City of Radford, Virginia. The Bank's goal is to become the leading community
bank in the New River Valley by opening new offices and by cultivating a large
community ownership base. Management believes that the on-going consolidation of
the banking industry has created an opportunity for community-based lenders,
like the Bank, which emphasize retail lending and superior customer service. To
exploit this opportunity, the Bank relies in part on the long-standing community
relationships enjoyed by its senior officers and board of directors.
Wayne L. Carpenter is the President, Chief Executive Officer, and Chairman
of the Bank. Mr. Carpenter, age 51, has 24 years of banking experience in the
New River Valley, including 20 years with NationsBank, N.A. and its
predecessors. Mr. Hiawatha ("Hi") Nicely, Jr., age 48, is the President, Chief
Executive Officer, and Chairman of the Company and the Chief Operating Officer
of the Bank. In addition to relying on management, the Company relies heavily on
its active and experienced board of directors. Senior management and the board
of directors of the Company have made a substantial investment in the Company,
beneficially owning in the aggregate more than 40% of the currently outstanding
shares.
The Company intends to use the proceeds of this offering to fund future
growth of the Bank, including the potential opening of one or more new branches,
and other general corporate purposes. The Company and the Bank's main office is
located at 900 Memorial Drive, Pulaski, Virginia 24301. The telephone number is
(540) 994-0831.
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<PAGE>
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The Offering
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Shares offered........................ 330,000 shares of Common Stock. In addition, the Company has the right at its
sole option, prior to the closing of this offering, to issue up to a maximum of
50,000 additional shares of Common Stock.
Common Stock outstanding.............. 546,399 shares at December 3, 1997; 876,399 shares after completion of the
offering, assuming the sale of all 330,000 Shares and excluding the additional
Shares that may be offered at the discretion of the Company.
Use of proceeds....................... General corporate purposes, including future growth in deposits and assets, and
the potential opening of new branches. See "Use of Proceeds."
Market The New River Valley of Southwest Virginia, which includes Pulaski, Giles,
area.................................... Montgomery, Wythe, and Bland Counties and the City of Radford, Virginia.
Dividends............................. The Company has not declared or paid cash dividends since its formation. The
Company expects that it will retain any earnings to support the development and
growth of its business and, accordingly, does not anticipate paying cash
dividends in the foreseeable future. See "Dividend Policy," "Supervision and
Regulation" and "Description of Capital Stock."
Risk factors.......................... Prospective investors should consider the information discussed under the
caption "Risk Factors" before purchasing any of the Shares offered.
</TABLE>
Except for the historical information contained in this Prospectus,
the matters set forth herein include Forward-Looking Statements within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. These Forward-Looking Statements include, among other
things, statements of goals, plans, intentions, and expectations, regarding or
based upon desired business strategies, general economic conditions, interest
rates, developments in local and national markets, and other matters, which, by
their nature, are subject to significant uncertainties. Because of these
uncertainties and the assumptions upon which this Prospectus is based, actual
future developments with respect to the business of the Bank and the Company may
differ materially from those contemplated by such statements.
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SELECTED FINANCIAL DATA
The following selected financial data of the Company should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto appearing elsewhere in this Prospectus and the information
contained in the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Interim results at and for the
nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997.
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<CAPTION>
Nine Months Ended
September 30, (unaudited) Year Ended December 31,
(Dollars in thousands except per share data)
1997 1996 1996 1995 1994
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Income Statement Data:
Net interest income............................ $773 $509 $721 $465 $112
Provision for loan losses...................... 126 80 104 68 30
Other income................................... 108 105 127 60 3
Operating expenses............................. 925 652 930 789 412
------ ----- ----- ----- ---
Net income (loss).............................. ($170) ($118) ($186) ($332) ($327)
====== ====== ====== ======= ======
Per Share Data:(1)
Net income..................................... ($ .31) ($ .22) ($ .34) ($ .61) ($1.19)
Cash dividends declared........................ - - - - -
Book value..................................... 5.84 5.95 6.08 6.63 7.04
Average shares outstanding..................... 546,464 546,531 546,531 546,303 275,404
Balance Sheet Data:
Total assets................................... $37,649 $26,053 $27,417 $15,601 $7,581
Investment securities available for sale....... 12,912 10,088 11,313 5,465 4,388
Deposits....................................... 34,327 22,715 24,041 11,937 3,721
Net loans...................................... 20,419 10,821 12,723 6,690 1,227
Shareholders' equity........................... 3,190 3,249 3,324 3,623 3,848
Selected Financial Ratios and Other Data: (2)
Net interest margin(3)............................ 3.49% 3.64% 3.63% 4.68% 4.69%
Efficiency ratio(4)............................... 105.13% 110.36% 111.82% 153.22% 358.29%
Return on average assets.......................... (0.68%) (0.73%) (0.81%) (2.87%) (10.77%)
Return on average equity.......................... (7.08%) (4.66%) (5.89%) (9.44%) (17.52%)
Risk-weighted assets.............................. $22,308 $12,285 $14,286 $8,712 $2,462
Capital Ratios:
Leverage(5)....................................... 8.02% 12.26% 11.45% 21.75% 50.03%
Risk-based:
Tier 1 capital................................. 13.54% 25.99% 21.97% 39.60% 154.06%
Total capital.................................. 14.65% 27.11% 23.06% 40.50% 155.28%
Average equity to average assets................. 9.57% 15.62% 13.71% 30.39% 61.47%
Asset Quality Ratios:
Allowance for loan losses to gross loans.......... 1.20% 1.20% 1.20% 1.20% 2.39%
Allowance for loan losses to nonaccrual loans(6).. - 9.12x - -
-
Nonperforming assets to gross loans............... 0.28% - % 0.13% 0.11% - %
Net charge-offs to average loans.................. 0.20% 0.23% 0.31% 0.47% - %
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(1) Adjusted to reflect the five-for-four stock split of the Company's Common
Stock effected through a stock dividend on May 30, 1997.
(2) Interim return ratios have been annualized for comparative purposes.
(3) Calculated as tax equivalent net interest income divided by average earning
assets; represents the Bank's net yield on its earning assets.
(4) Calculated by dividing non-interest expense by the sum of net interest
income and non-interest income, net of securities gains or losses.
(5) Calculated as period-end Tier 1 capital divided by period end total assets.
(6) This ratio is only provided for 1996, because there were no nonaccrual loans
in the other periods presented.
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<PAGE>
RISK FACTORS
An investment in the Company's Common Stock involves certain risks.
Prospective investors should consider carefully the following risk factors, in
addition to the other information contained in this Prospectus, before
purchasing shares of Common Stock.
Ability to Implement Business Strategy
The Company's business strategy is to continue to grow within its
general market area and to increase profitability through an increase in loan
volume and an expansion of products offered. Implementing this strategy depends
in large part on the Company's ability to raise capital and improve
profitability, and also on the Company's ability to obtain regulatory approval
for expansion and additional product lines. At September 30, 1997, the Company's
risk-based total capital and tier 1 capital ratios were 14.65% and 13.54%,
respectively, and its leverage ratio was 8.02%. The Company's capital ratios
have declined since December 31, 1996 because of net losses and asset growth. If
this offering is undersubscribed, it is possible that the Company will lack the
capital to expand its business through continued asset growth.
Limited Operating History and Lack of Profitability
The Company and the Bank have a limited operating history. The Company
and the Bank began business in August 1994, and the Company has completed only
two full fiscal years. The Company has not yet reported a profitable quarter.
The business of the Company continues to be subject to the risks inherent in
establishing a new business. Although management and the Board of Directors
believe that the Company has an achievable financial plan and an understanding
of the needs of the market, there can be no assurance that the Company can
achieve its objectives and operate profitably. See "Business."
Determination of Offering Price
The offering price of the Common Stock has been determined by the
Company after consultation with the Placement Agent and consideration of several
factors, including the most recent trading prices in the Company's Common Stock,
and the Company's lack of operating history, prospects for growth, limited
trading market, dependence on key persons and other factors. The offering price
is not comparable to the market prices of other banking institutions which, to a
large extent, are based on earnings per share and return on shareholders'
equity. Since the Company has not reported a profitable quarter, the offering
price exceeds the prices of the common stock of many community banks as a
multiple of earnings. There can be no assurance that the Common Stock can be
resold at or above the offering price.
Limited Trading Market
There is no established market for the Company's Common Stock. Shares
of Common Stock have traded sporadically and the volume of trades has been
insufficient to determine a meaningful market price. The Company does not meet
the criteria for listing the Common Stock on the Nasdaq Stock Market, although
the Company may consider a Bulletin Board listing at some point in the future.
It is doubtful that an active market will develop for the Common Stock in the
foreseeable future. The Common Stock should be purchased only as a long term
investment.
Potential Consequences of Undersubscribed Offering
The Company cannot predict the number of Shares for which existing
shareholders will subscribe. Additionally, the Placement Agent is selling the
Common Stock on a best efforts basis, which means that it may sell all, none or
only some of the Shares that are not purchased by existing shareholders. Since
there is no minimum number of Shares which must be sold, a closing could occur
even if only a small number of Shares is sold, and it is possible that expenses
of the offering could exceed the offering proceeds. See "The Offering." In such
event, the Company may be required to pursue other methods of raising capital,
or alter its business strategy and limit its growth.
Dividend Policy
The Company has not paid any cash dividends since its inception and has no
present plans to pay cash dividends. The Company intends to reinvest any profits
into its business for the foreseeable future. See "Dividend Policy."
Dependence on Key Personnel
The Company and the Bank have been substantially dependent upon the
services of Wayne L. Carpenter, the President, Chief Executive Officer, and
Chairman of the Bank, since it opened. Mr. Carpenter is presently under a
contract which expires in 1999. The loss of the services of Mr. Carpenter could
have a material adverse affect upon the future prospects of the Company and the
Bank. Hiawatha Nicely, Jr., who has served as the Chairman of the Board of
Directors of the Company since 1993, was named President and Chief Executive
Officer of the Company and Chief Operating Officer of the Bank in August 1997,
in order to provide management support for Mr. Carpenter. Although Mr. Nicely
has no direct experience as a full-time bank employee, he has extensive
education and experience in finance and business. See "Management and
Directors."
Control of the Company
The Board of Directors owns 239,718 shares of the Company's Common
Stock or 43.9% of the shares presently outstanding. The Directors also hold
options to purchase an additional 219,254 shares of Common Stock at a price of
$8.00 per share at any time within ten years of the grant of the options (the
"Stock Options"). It is not expected that the Directors will purchase a
significant percentage of the shares offered hereby. As a result of their
present ownership of Common Stock and Stock Options, the Directors as a group
will have effective control of the Company and the Bank following the offering,
even if the Directors do not purchase a significant amount of Common Stock in
this offering. Directors will have the opportunity to profit from any rise in
the market value of the Common Stock without investing additional funds in this
offering. The Company has agreed to issue no further options to Directors for at
least one year from the date of this Prospectus. See "Capitalization and
Dilution" and "Management and Directors."
Dilution
This Offering will result in an increase in net tangible book value to
existing shareholders of the Company and a corresponding dilution in net
tangible book value to new investors at the public offering price. Net tangible
book value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. If the
Offering had been made as of September 30, 1997, assuming expenses of the
offering are $150,000, and that one-half of the shares offered are sold by the
Placement Agent, the net tangible book value of the Company at September 30,
1997 would have been $4.97 million, or $6.49 per share of Common Stock if
220,000 shares are sold, compared to an actual net tangible book value of the
Common Stock of the Company of $5.84 per share at September 30, 1997. This
represents an immediate dilution in net tangible book value to new investors of
$0.65 per share. See "Capitalization and Dilution."
Regulation
The banking industry is subject to extensive governmental supervision,
regulation and control, which has materially affected the business of the
Company and the Bank in the past and is likely to do so in the future.
Regulations affecting the banking industry may be changed at any time, and the
interpretation of those regulations by examining authorities of the banking
industry is subject to change. This supervision and regulation establishes a
comprehensive framework of activities in which a depository institution may
engage, and is intended primarily for the protection of depositors, not
shareholders. This regulatory structure also provides the Office of the
Comptroller of the Currency ("OCC"), which regulates national banks, significant
discretion in supervising its banks and enforcing its regulations. There can be
no assurance that future changes in legislation, administrative regulations, or
governmental policy will not adversely affect the banking industry and the
business of the Company. See "Supervision and Regulation."
Competition
Federal and state legislative changes have significantly increased
competition among financial institutions, and current trends towards additional
deregulation may be expected to increase competition even further. In its market
area, the Bank competes with several statewide banking institutions. In
addition, the Bank competes with thrift institutions, money market funds,
consumer finance companies, credit unions and other financial service
organizations. Many of the financial organizations competing with the Bank have
greater financial resources than the Bank, offer services that the Bank is
unable to offer and are able to offer similar services at lower prices and have
the capacity to make larger loans than the Bank. The National Bank Act limits
the amount that the Bank may loan to a single borrower based on the capital of
the Bank. Because the Bank is relatively small, it is restricted in the amount
that it may loan to a single borrower, and therefore is not in a position to
compete effectively against large financial institutions for large commercial
loans. The Bank may not be able to make loans in excess of approximately
$500,000 to a single borrower (determined as of September 30, 1997), unless the
Bank can sell participations in its loans to other financial institutions. See
"Business" and "Supervision and Regulation."
Geographic Concentration of Loan Portfolio
The majority of the Bank's loans are made to borrowers within Pulaski
County, Virginia and the adjacent counties. In September 1997, the unemployment
rate in Pulaski County was 4.3%, compared to a state-wide average of 4.1%. A
significant deterioration in the economy of Pulaski County or the surrounding
counties could significantly and adversely affect the repayment of loans held by
the Bank.
Broad Discretion in Use of Proceeds
The net proceeds of this offering will be used to support future growth
in deposits and assets, the potential opening of one or more new branches,
increased loan capacity, and other general corporate purposes, and will be used
for such specific purposes as Company management may determine. Management will
have broad discretion to use the proceeds as it sees fit. Purchasers of Shares
will rely on the judgment of management to decide how to use the proceeds of
this offering. See "Use of Proceeds."
<PAGE>
General Economic Conditions
The success of the Company and the Bank will depend to a large degree
on economic conditions, both local and national, as well as governmental
monetary policies. Conditions such as inflation, recession, unemployment, high
interest rates and other factors beyond the control of the Company and the Bank
may affect the Bank's deposit and loan demand adversely, and therefore affect
the earnings of the Bank and the Company. Although the Company expects that its
market area will continue to grow, there can be no assurance that economic
development will continue or improve.
Impact of Fluctuations in Interest Rates
The Company's results of operations are highly influenced by the level
of interest rates, changes in interest rates and other economic conditions that
are beyond the control of the Company, including monetary and fiscal policies of
the federal government. The Company is in an asset-sensitive interest rate
position in which falling interest rates are likely to affect earnings
adversely, because the Company's assets will reprice faster than its
liabilities.
<PAGE>
THE OFFERING
General
The Company is offering for sale a maximum of 330,000 Shares of Common
Stock for $9.00 per share. The minimum purchase for any investor is 100 Shares.
The closing of the offering is not contingent on the sale of a minimum number of
Shares. The Company has the right at its sole option, prior to the closing of
the offering, to issue up to a maximum of 50,000 additional shares of Common
Stock.
The offering will be terminated by the Company upon the sale of the
Shares offered hereby or on February 10, 1998, whichever occurs first, unless
the offering is extended, at the discretion of the Company, for additional
periods ending no later than March 10, 1998. Subscriptions from shareholders of
record on December 10, 1997 ("Present Shareholders") received prior to January
10, 1998 will be confirmed prior to sales to other investors.
Subscriptions are nonrevocable, unless such revocation is consented to
by the Company. The Company may reject any subscription in whole or in part
prior to closing on such subscription. The Company and the Placement Agent may,
in their discretion, allocate Shares among Present Shareholders and other
investors in the event of excess demand for the Shares. In the event that the
Company or the Placement Agent rejects all or accepts less than all, of any
subscription, the Company will refund such subscription funds promptly, without
payment of interest and without deduction of any fees, commissions or expenses.
The Company also reserves the right to terminate the offering at any time for
any reason whatsoever.
Certificates representing the Common Stock will be delivered to
purchasers promptly following the closing of the offering.
The offering price of the Shares was established by the Company after
consulting with the Placement Agent and consideration of several factors. See
"Risk Factors - Determination of Offering Price."
Escrow Arrangement
Subscription proceeds from Present Shareholders received by the Company
or the Placement Agent will be promptly deposited in a non-interest bearing
escrow account with Crestar Bank (the "Escrow Agent"), until the closing of the
offering. The escrow arrangement is intended to ensure delivery of offering
proceeds to the Company and the Placement Agent at the closing of the offering
and to provide a mechanism for delivery of shares to Present Shareholders. The
Escrow Agent may hold funds without payment of interest from the commencement of
the offering until the date of closing or cancellation of the offering. Upon the
cancellation of the offering for any reason, the Escrow Agent shall return any
funds contributed to the Escrow Account to the subscribers or the Placement
Agent in the exact amount contributed by them. The street address of the Escrow
Agent is: Crestar Bank, Corporate Trust Department, Post Office Box 26665,
Richmond, Virginia 23261.
How to Purchase Shares
Present Shareholders. Subscriptions to purchase Shares can be made only
by completing the Shareholder Subscription Agreement shown as Exhibit A to this
Prospectus, and mailing or delivering that agreement to the Company at the
address indicated. The full subscription price for Shares must be included with
the subscription, paid in U.S. dollars, in cash or by check, bank draft, or
money order payable to the order of "Crestar Bank as Escrow Agent for CNB
Holdings, Inc." The Company may disregard any subscription which does not
include the full subscription price.
Subscriptions received from Present Shareholders during the 30 days
after the commencement of the offering (the "Preference Period") will have a
preference over any Shares subscribed to by Present Shareholders who subscribe
after termination of the Preference Period or which are sold by the Placement
Agent. The Company may accept or reject any subscription at any time, but it is
anticipated that subscriptions received from Present Shareholders during the
Preference Period will be accepted. The Company may accept subscriptions from
Present Shareholders following this Preference Period, but such subscriptions
will not have a preference over sales to investors solicited by the Placement
Agent. Once a subscription is received by the Company, it cannot be withdrawn by
the subscriber unless the Company consents. All subscriptions by Present
Shareholders, whenever submitted, should be delivered to the Company.
Other Investors. Prospective investors that are not Present
Shareholders should contact their investment broker at Davenport & Company LLC,
or any other brokerage firms that participate in this offering, to purchase
Shares. Prospective investors that do not have an investment broker may contact
Davenport & Company LLC at 1-800-613-1197 to purchase Shares. Prospective
investors who are not Present Shareholders should not fill out the Shareholder
Subscription Agreement.
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of Shares
offered hereby for general corporate purposes, including future growth in
deposits and assets, and the potential opening of one or more new branches for
the Bank. The Company is currently studying expansion opportunities,
particularly in Wythe and Giles Counties, but has no specific plans at this
time. The Company estimates the net proceeds from this offering to be
approximately $2,745,750 if all Shares offered hereby (not including its right
at its sole discretion to issue a maximum of 50,000 additional shares) are sold,
after deduction of the selling commissions assuming one-half of the Shares are
sold by the Placement Agent, and deduction of other expenses of the offering
estimated at approximately $150,000.
MARKET FOR COMMON STOCK
The Company was formed in 1993 and has 546,399 shares of its Common
Stock outstanding as of the date of this Prospectus. There currently is no
market for the Common Stock. The Company's stock is not listed on a bulletin
board trading system or any type of exchange. There can be no assurance that the
Common Stock will ever be listed on a trading system or exchange or that an
active and liquid trading market will develop or, if developed, will be
maintained. No assurance can be given that an investor will be able to resell
the Common Stock at or above the price at which such Common Stock is offered
hereby. See "Risk Factors--Limited Trading Market."
Trades in the Company's Common Stock have been infrequent. Since the
Company was organized, fewer than 10,000 total shares have changed hands. At
December 3, 1997, there were approximately 587 holders of record of the Common
Stock. The most recent trade of which the Company is aware occurred on November
14, 1997 and was for 125 shares at $9.125 per share. The following table sets
forth the range of high and low sales prices for the Company's Common Stock for
all trades reported to the Company during the fiscal quarters indicated. The
prices have been adjusted to reflect a five-for-four stock split of the
Company's Common Stock on May 30, 1997. Due to the limited number of trades such
reported trade prices may not be meaningful.
<PAGE>
<TABLE>
<CAPTION>
Stock Prices
High Low
<S> <C>
1995
1st Quarter.......................................... (1) (1)
2nd Quarter.......................................... (1) (1)
3rd Quarter..........................................$ 8.60 $ 8.00
4th Quarter.......................................... 8.60 8.10
1996
1st Quarter..........................................$ 8.80 $ 8.40
2nd Quarter.......................................... 9.00 8.10
3rd Quarter.......................................... 9.00 8.40
4th Quarter.......................................... (1) (1)
1997
1st Quarter.......................................... $ 9.20 $ 8.75
2nd Quarter.......................................... 8.875 8.75
3rd Quarter.......................................... 8.875 8.875
4th Quarter through December 10, 1997................ 9.25 8.625
- -------------
(1) No trades recorded.
</TABLE>
DIVIDEND POLICY
The Company has paid no dividends to shareholders since its formation.
The Company presently intends to retain future earnings, if any, for use in its
business and does not anticipate declaring or paying any cash dividends on its
Common Stock in the foreseeable future. In the event that the Board of Directors
does determine to pay dividends in the future, any such payment will depend upon
a number of factors, including investment opportunities available to the Company
or the Bank, capital requirements, regulatory limitations, the Company's or the
Bank's financial condition and results of operations, tax considerations and
general economic conditions.
The Company is subject to the requirements of Virginia law, which imposes
certain restrictions on distributions of dividends to shareholders of the
Company. The Company's shareholders are entitled to receive dividends as
declared by the Company's Board of Directors in accordance with Section 13.1-653
of the Virginia Stock Corporation Act (the "Virginia SCA"). Generally,
distributions are made out of surplus, or if there is no surplus, out of net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Dividend payments therefore may be limited in accordance
with the provisions of the Virginia SCA and the Company's Articles.
National Banks likewise have limitations imposed upon all dividends,
including cash dividends, payments to repurchase or otherwise acquire its
shares, payments to shareholders of another institution in a cash-out merger,
and other distributions charged against capital. Under applicable federal laws,
the OCC restricts, without prior approval, the total dividend payments of the
Bank in any calendar year to the net profits of that year, as defined by law,
combined with the net retained profits for the two preceding years. As of
September 30, 1997, federal statutory guidelines do not permit the Bank to pay a
dividend to the Company.
<PAGE>
CAPITALIZATION AND DILUTION
The net tangible book value of the Common Stock of the Company at
September 30, 1997, was $5.84 per share. Net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of Common Stock outstanding. After giving effect to the
offering and the application of the net proceeds therefrom, assuming expenses of
the offering are $150,000, and that one-half of the shares offered are sold by
the Placement Agent, and looking at a range of shares sold at a public offering
price of $9.00 per share, the net tangible book value of the Company at
September 30, 1997 would have been $4.01 million, or $6.10 per share of Common
Stock if 110,000 shares are sold, $4.97 million, or $6.49 per share of Common
Stock if 220,000 shares are sold, and $5.94 million, or $6.77 per share of
Common Stock if 330,000 shares are sold (reflecting the sale of 33 1/3%, 66 2/3%
and 100% of the shares offered hereby). This represents an immediate increase in
net tangible book value to the existing stockholders of the Company and an
immediate dilution in net tangible book value to new investors at the public
offering price. The following table illustrates this dilution per share.
<TABLE>
<CAPTION>
<S> <C>
Shares assumed sold in this offering: 110,000 220,000 330,000
------- ------- -------
Public offering price per share........................................$ 9.00 $ 9.00 $ 9.00
======== ======== ========
Net tangible book value
per share as of September 30, 1997.............................$ 5.84 $ 5.84 $ 5.84
Increase in net tangible book value
per share resulting from the offering.......................... 0.26 0.65 0.93
Pro forma net tangible book value after the offering................... 6.10 6.49 6.77
======== ======== ========
Dilution per share to new investors....................................$ 2.90 $ 2.51 $ 2.23
======== ======== ========
</TABLE>
The Stock Options presently outstanding are not dilutive to book value,
because all Stock Options are exercisable at prices greater than the current
book value per share. However, such options, if exercised, would contribute less
per share than an investor's purchase of shares in this offering, because all
such options are exercisable at $8.00 per share. Also, while the Company has not
yet had positive earnings for any fiscal quarter since its formation, if the
Company does earn money in the future, these options could be dilutive to
earnings per share. See "Management and Directors - Stock Option Plan" and
"-Additional Stock Options."
BUSINESS
General
The Company was incorporated under the laws of Virginia on April 29,
1993, for the purpose of becoming a bank holding company. In July 1994, the
Company completed its initial public offering of 546,225 shares of its common
stock, $5.00 par value per share at a price of $8.00 per share, adjusted for the
Company's five-for-four stock split on May 30, 1997. The Company received final
approval of its application to charter the Bank from the OCC and final approval
of its application for deposit insurance for the Bank from the Federal Deposit
Insurance Corporation ("FDIC") on August 29, 1994. On August 29, 1994, the Bank
opened for business.
As of September 30, 1997, the Company had assets of $37.6 million, net
loans of $20.4 million, total deposits of $34.3 million and total shareholders'
equity of $3.2 million. Substantially all of the Company's revenue is derived
from the operation of the Bank.
Market Area
The Bank's primary service area is Pulaski County and includes portions
of Giles, Montgomery, Wythe and Bland Counties and the City of Radford,
Virginia. The Bank conducts a general commercial banking business in its service
area, and focuses on serving the banking needs of small-to-medium sized
businesses, professional concerns and individuals. The Bank operates from its
main office at 900 Memorial Drive, Pulaski, Virginia, which is at the corner of
Memorial Drive and Lee Highway (U.S. Route 11) and it's second branch, located
at One Main Street in downtown Pulaski. The Bank also has an ATM located at the
New River Community College in Dublin. The Bank draws most of its customer
deposits from, and conducts most of its lending transactions with borrowers
within, its primary service area. The Bank is the only locally owned and
operated commercial bank in Pulaski County.
Pulaski County is located in the New River Valley of Southwest
Virginia. Pulaski, the county seat, is approximately 53 miles southwest of
Roanoke, 90 miles northeast of the Tri-cities, Tennessee (Johnson City,
Kingsport and Bristol), and 150 miles north of Charlotte, North Carolina.
Pulaski County had a population of 34,400 and a median family income of $35,238
in 1996. Virginia Polytechnic Institute and State University ("Virginia Tech"),
a four-year, comprehensive university with over 22,000 students, is located
approximately 15 miles from Pulaski County.
Goals and Strategy
The Bank's target market is the New River Valley of Southwest Virginia,
which includes Pulaski, Giles, Montgomery, Wythe and Bland Counties and the City
of Radford, Virginia. Despite strong competition in the market, the Bank's goal
is to become the leading community bank in the New River Valley by opening new
offices and by cultivating a large community ownership base. Management believes
that the on-going consolidation of the banking industry has created an
opportunity for community-based lenders like the Bank which emphasize retail
lending, superior customer service and relationship banking. To maximize this
opportunity, the Bank relies in part on the long-standing community
relationships enjoyed by its senior officers and board of directors. The Bank's
business strategy is to target middle market operating companies, professional
concerns and individuals in the Pulaski service area for loans, deposits, and
other financial services and to explore selected opportunities to establish
branches in areas that demographically compliment the Bank's existing and
targeted customer base.
Deposits and Loan Products
The Bank offers a full range of deposit services that are typically
available in banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts, IRA's and other time deposits of
various types, ranging from daily money market accounts to longer-term
certificates of deposit. The transaction accounts and time certificates are
tailored to the Bank's principal market at competitive rates. All deposit
accounts are insured by the FDIC up to the maximum amount allowed by law
(generally $100,000 per depositor subject to aggregation rules). The Bank
solicits these accounts from individuals, businesses, associations,
organizations, and governmental entities.
The Bank also offers a full range of short-to-medium term commercial
and personal loans. Commercial loans include both secured and unsecured loans
for working capital (including inventory and accounts receivable), business
expansion (including acquisition of real estate and improvements) and purchase
of equipment and machinery. Consumer loans include secured and unsecured loans
for financing automobiles, home improvements, education and personal
investments. The Bank also makes real estate construction and acquisition loans
and originates and holds fixed and variable rate mortgage loans. See "Bank
Lending Practices."
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 approved by the Board of Directors of the Bank and is fully secured
by readily marketable collateral. The Bank may not make loans to any director,
officer, employee or 10% shareholder of the Company or the Bank unless the loan
is approved by the Board of Directors of the Bank and is made on terms not more
favorable than would be available to a person not affiliated with the Bank. For
a further analysis of the Company's loan portfolio, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Loans."
Other bank services include cash management services, travelers checks,
direct deposit of payroll and social security checks, and automated drafts for
various accounts. The Bank is associated with the Honor, Plus and VISA shared
networks of automated teller machines and debit card retail locations that Bank
customers may use throughout Virginia and other regions. The Bank also offers
VISA credit card services. The Bank has no current plans to exercise trust
powers. The Bank may in the future offer trust services, but cannot do so
without the prior approval of the OCC.
Bank Lending Practices
The Bank's lending efforts are directed entirely to making loans to
individuals and businesses in its market area. The Bank believes that its
lending and credit policies are conservative. The Bank had approximately $20.9
million in loans and $3.7 million in unfunded loan commitments outstanding at
September 30, 1997.
One of the Bank's primary lending programs has been the origination of
loans secured by one- to four-family residences, all of which have been located
in its market area. The Bank evaluates both the borrower's ability to make
principal and interest payments and the value of the property that will secure
the loan. Federal law permits the Bank to make loans in amounts of up to 100% of
the appraised value of the underlying real estate. Loans are made with a loan to
value ratio of up to 95% for conventional mortgage loans and up to 100% for
loans guaranteed by either the Federal Housing Authority ("FHA") or the Veterans
Administration ("VA"). For conventional loans in excess of 80% loan to value,
private mortgage insurance is secured insuring the mortgage loans to 75% loan to
value. The Bank makes primarily one-, three-, and five-year adjustable rate
mortgages ("ARMs") with the primary loan indexed to one, three, and five year
U.S. Treasury Notes, respectively. There are unquantifiable risks resulting from
potential increased costs to the borrower as a result of repricing. It is
possible that during periods of rising interest rates, the risk of defaults on
ARMs may increase due to the upward adjustment of interest rates to borrowers.
Recently, the Bank has begun making fixed rate residential mortgage loans, as
well, but only on terms that permit the loans to be sold on the secondary
market. The Bank generally "pre-sells" such fixed rate loans to the secondary
market. If the loans are not made to the credit standards of the FHLMC,
additional fees and a higher rate are charged.
The Bank also makes certain consumer loans, including unsecured
personal loans and lines of credit, automobile loans, deposit account loans,
installment and time loans, and home equity loans, and the Bank offers a
Bank-sponsored VISA credit card. The Bank's primary focus when making such
consumer loans is the customer's ability to repay the loan. Consumer loans
generally warrant higher interest rates and fees, but such loans, particularly
unsecured consumer loans, also may entail greater risk than residential mortgage
loans. Even when a loan is secured, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment. Consumer loan
collections are dependent on the borrower's continuing financial stability, and
are more likely to be affected adversely by job loss, divorce, illness, or
personal bankruptcy. Various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans and
such loans may give rise to claims and defenses by a consumer loan borrower.
Consumer loan delinquencies may increase over time as loans age. The Bank adds
provisions to its allowance for loan losses at the end of the month that such
loans are originated.
The Bank also makes commercial loans to qualified small businesses in
its market area. Commercial business loans generally have a higher degree of
risk than residential mortgage loans, but have commensurately higher yields. To
manage these risks, the Bank generally secures appropriate collateral and
carefully monitors the financial condition of its business borrowers.
Residential mortgage loans generally are made on the basis of the borrower's
ability to make repayment from his employment and other income and are secured
by real estate whose value often is easily ascertainable. In contrast,
commercial business loans typically are made on the basis of the borrower's
ability to make repayment from cash flow from its business and are secured by
business assets, such as commercial real estate, accounts receivable, equipment
and inventory. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself. The collateral for commercial business loans may depreciate
over time and cannot be appraised with as much precision as residential real
estate. Commercial loans typically involve larger loan balances concentrated
with single borrowers or groups of related borrowers. The Bank has a credit
review and monitoring system to review regularly the cash flow of commercial
borrowers. The Bank makes few construction or commercial real estate loans, due
to the risk inherent in such loans. As the Bank grows, it may make more such
loans, but it will employ the same conservative lending practices with
construction or commercial real estate loans that it now employs for commercial
loans.
Competition
Federal and state legislative changes have significantly increased
competition among financial institutions, and current trends towards further
deregulation may be expected to increase competition even further. In its market
area, the Bank competes with several statewide banking institutions. In
addition, the Bank competes with thrift institutions, money market funds,
consumer finance companies, credit unions and other financial service
organizations. Most of the financial organizations competing with the Bank have
greater financial resources than the Bank and are able to offer similar services
at lower prices and have the capacity to make larger loans than the Bank. The
National Bank Act limits the amount that the Bank may loan to a single borrower
based on the capital of the Bank. Because the Bank is relatively small, it is
restricted in the amount of loans it can make to a single borrower, and
therefore is not in a position to compete effectively against large financial
institutions for large commercial loans. The Bank may not be able to make loans
in excess of approximately $500,000 to a single borrower (as of September 30,
1997), unless the Bank can sell participations in such loans to other financial
institutions.
Employees
The Bank currently has 22 full-time employees and 9 part-time
employees, or a total of 26 full-time equivalents. The Company does not have any
employees other than its officers, none of whom receive any remuneration for
their services to the Company but rather are compensated as employees of the
Bank. None of the Bank's employees is represented by a union or covered by a
collective bargaining agreement. Management considers employee relations to be
good.
Description of Property
The main offices of the Company and the Bank are located on a 4.9 acre
plot at 900 Memorial Drive in Pulaski, Virginia. The Bank opened for business on
August 29, 1994, in a temporary modular building on the site and used the
temporary facility for sixteen months while the permanent facility was
constructed. Construction was completed on December 1, 1995. The cost of the
building, its furniture, fixtures, and equipment were just over $1.0 million.
The permanent facility is a two-story brick building and contains approximately
10,500 square feet. It features five inside teller windows, three drive-up
lanes, a drive-up night depository, and a drive-up automated teller machine. The
land for the main office was purchased from a partnership 100%-owned by Jack W.
Bowling, a director of the Company and the Bank, and five members of his
immediate family in exchange for 31,250 shares of Common Stock. See "Certain
Relationships and Related Transactions." The main office site is wholly-owned by
the Company free and clear of any liens or encumbrances
The second branch office of the Bank, which opened October 4, 1997, is
located at One Main Street, Pulaski, Virginia at the site of a regional bank's
former branch office. It is a full-service branch, with three inside teller
windows, a drive-up lane, a night depository, an automated teller machine, and
safety deposit boxes. The property is subject to a lease which terminates on
July 31, 1999, and the Bank has a right of first refusal to continue leasing the
property after that date on terms mutually agreeable between the parties. The
owner of that property is a limited liability company in which Mr. James L.
Webb, a director of the Company and the Bank, is an investor. See "Certain
Relationships and Related Transactions." The Bank believes that it is leasing
that property at or below applicable market rates. The Bank also recently
installed a stand-alone automated teller machine on the campus of the New River
Community College in Dublin, Virginia.
Finally, the Bank recently contracted to and completed the purchase of
the former branch office of NationsBank at 202 North Washington Avenue in
downtown Pulaski, for $187,000. This three story building has approximately
20,000 square feet and will house the Bank's operations department. In addition,
there may be opportunities for leasing part of the building to third parties,
and the Bank plans to move its downtown branch into that building in the future.
Legal Proceedings
The Company is a party to various legal proceedings from time to time
in the ordinary course of business. Based upon information currently available,
management believes that such legal proceedings, if determined adversely to the
Company, would not have a material adverse effect on the Company's business,
financial position or results of operations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of the
consolidated financial condition and results of operations of the Company as of
the dates and for the periods indicated. This discussion should be read in
conjunction with the Selected Financial Data, the Company's Consolidated
Financial Statements and the Notes thereto, and other financial data appearing
elsewhere in this Prospectus.
The Consolidated Financial Statements include the financial information
of the Company and the Bank. As the Bank represents substantially all of the
Company's activities, comparative discussions of consolidated versus
non-consolidated financial statements are unnecessary.
The Company is not aware of any current recommendations by regulatory
authorities which, if implemented, would have a material effect on its
liquidity, capital resources or results of operations. There are no agreements
between the Company and either the OCC or the Federal Reserve Board, nor has
either regulatory agency made any recommendations concerning the operations of
the Company that could have a material effect on its liquidity, capital
resources or results of operations.
Overview
The Company commenced operations on March 8, 1993, while the Bank began
operations on August 29, 1994. Accordingly, financial data for 1994 reflects
only four months of activity. The Company's sole subsidiary, the Bank, operates
by attracting deposits from the general public and using such deposit funds to
make commercial, consumer, and residential construction and permanent mortgage
real estate loans. Revenues are derived principally from interest on loans and
investments. Changes in the volume and mix of these assets and liabilities, as
well as changes in the yields earned and rates paid, determine changes in net
interest income. Presently, noninterest expense exceeds net interest income.
The Bank's assets increased over 75% in both 1995 and 1996, and
increased over 37% during the nine months ended September 30, 1997 to a total of
$37.6 million as compared to $27.4 million at December 31, 1996. Virtually all
of this asset growth was from increased deposits. Total deposits were $34.3
million at September 30, 1997, an increase of over 42% from $24.0 million at
December 31, 1996. The Bank used these new resources to fund new loans and to
purchase investment securities. The Bank's net loans increased over 90% in each
of 1995 and 1996, and increased more than 60% in the nine months ended September
30, 1997 to a total of $20.4 million as compared to $12.7 million at December
31, 1996.
Net Interest Income
Net interest income, the principal source of income for the Bank, is
the amount of income generated by earning assets (primarily loans and investment
securities) less the interest expense incurred on interest-bearing liabilities
(primarily deposits used to fund earning assets). Changes in the volume and mix
of interest-earning assets and interest-bearing liabilities, as well as their
respective yields and rates, have a significant impact on the level of net
interest income. The following tables present the average balances of total
interest-earning assets and total interest-bearing liabilities for the periods
indicated, showing the average distribution of assets, liabilities and
stockholders' equity, and the related income, expense, and corresponding
weighted average yields and costs. The average balances used in these tables and
other statistical disclosures were calculated by using the daily average
balances.
<PAGE>
<TABLE>
<CAPTION>
Net Interest Income and Average Balances (dollars in thousands)(1)
Years Ended December 31,
1996 1995 1994
--------------------------- --------------------------- ---------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
<S> <C>
Interest-earning assets:
Deposits in other banks $ - $ - -% $ - $ - -% $ 528 $ 23 4.35%
Taxable investment securities 8,957 578 6.45 5,350 378 7.07 863 53 6.14
Federal funds sold 1,179 71 6.02 967 56 5.79 689 34 4.93
Loans, net 9,695 926 9.55 3,620 377 10.41 317 28 8.83
-------- -------- ------ ------- ----- ------ ----- ----
Total interest-earning
assets 19,831 1,575 9,937 811 2,397 138
-------- ------- ------- ----- ------- -----
Yield on average
interest-earning assets 7.94% 8.16% 5.76%
======= ==== ====
Noninterest-earning assets:
Cash and due from banks 1,465 660 217
Premises and equipment 1,410 718 227
Interest receivable and other 272 249 193
----- ----- -----
Total noninterest-earning
assets 3,147 1,627 637
------- ------- -----
Total assets $ 22,978 $11,564 $ 3,034
======== ======= =========
Interest-bearing liabilities:
Demand deposits $ 5,304 191 3.60% $ 917 33 3.60% $ 72 2 2.77%
Savings deposits 2,276 88 3.87 940 30 3.19 146 5 3.42
Time deposits 10,725 575 5.36 5,008 283 5.65 349 19 5.44
-------- -------- ---- ------ ----- ------- ----- ---------
Total interest-bearing
liabilities 18,305 854 6,865 346 567 26
-------- -------- ------- -------- --------- ---------
Cost of average
interest-bearing liabilities 4.67% 5.04% 4.58%
==== ======= ====
Noninterest-bearing liabilities:
Demand deposits 1,492 1,158 602
Interest payable and other 30 27 -
-------- ------- ---------
Total noninterest-bearing
liabilities 1,522 1,185 602
-------- ------- ---------
Total liabilities 19,827 8,050 1,169
Stockholders' equity 3,151 3,514 1,865
-------- ------- ---------
Total liabilities and
stockholders' equity $ 22,978 $11,564 $ 3,034
======== ======= =========
Net interest income $ 721 $ 465 $ 112
======== ======== =========
Net interest margin 3.63% 4.68% 4.69%
==== ==== ====
</TABLE>
- -----------------
(1) Income and yields are computed on a tax equivalent basis.
<PAGE>
<TABLE>
<CAPTION>
Net Interest Income and Average Balances (dollars in thousands), continued(1)
Nine Month Periods Ended September 30,
1997 1996
--------------------------- ---------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
<S> <C>
Interest-earning assets:
Taxable investment securities $ 12,466 $ 573 6.13% $ 8,693 $ 425 6.52%
Federal funds sold 699 30 5.72 940 40 5.67
Loans, net 16,367 1,160 9.45 9,012 648 9.59
-------- -------- ---- --------- ------- ----
Total interest-earning assets 29,532 1,763 18,645 1,113
-------- ------- --------- -------
Yield on average interest-earning assets 7.96% 7.96%
==== ====
Noninterest-earning assets:
Cash and due from banks 1,932 1,294
Premises and equipment 1,499 1,406
Interest receivable and other 411 317
------- ---------
Total noninterest-earning assets 3,842 3,017
------- --------
Total assets $33,374 $ 21,662
======= ========
Interest-bearing liabilities:
Demand deposits $ 8,121 248 4.07% $ 3,844 108 3.75%
Savings deposits 3,397 652.55 2,259 66 3.89
Time deposits 15,509 663 5.70 10,230 430 5.60
Federal funds purchased 331 14 5.64 - - -
------- -------- ---- -------- ----- ------
Total interest-bearing liabilities 27,358 990 16,333 604 -
------- -------- -------- ----- ------
Cost of average interest-bearing liabilities 4.82% 4.93%
==== ====
Noninterest-bearing liabilities:
Demand deposits 2,707 1,887
Interest payable and other 115 59
Total noninterest-bearing liabilities 2,822 1,946
--------- -------
Total liabilities 30,180 18,279
---------- --------
Stockholders' equity 3,194 3,383
-------- --------
Total liabilities and stockholders' equity $ 33,374 $ 21,662
======== =========
Net interest income $ 773 $ 509
======= ========
Net interest margin 3.49% 3.64%
==== ====
</TABLE>
- -----------------
(1) Income and yields are computed on a tax equivalent basis.
Nine month periods ended September 30, 1997 and 1996:
Interest income for the nine months ended September 30, 1997 was $1.8
million, a 58.4% increase over interest income of $1.1 million for the nine
months ended September 30, 1996. This increase was due to significant growth in
interest earning assets while the yield remained constant. Average investment
securities increased $3.8 million to $12.5 million, a 43.4% increase during the
same period. Average loans were $16.4 million for the nine month period ended
September 30, 1997. This represents an 81.6% increase from the September 30,
1996 nine month average of $9.0 million. On average, loans yielded 9.45% during
the nine month period ended September 30, 1997 and 9.59% during the nine month
period ended September 30, 1996.
<PAGE>
Interest expense for the nine months ended September 30, 1997 was
$990,000, a 63.9% increase over interest expense of $604,000 for the nine month
period ended September 30, 1996. This is due primarily to an increase in
interest-bearing liabilities, which includes deposits and federal funds
purchased, which was partially offset by an 11 basis point decrease in the cost
of interest-bearing liabilities. Interest-bearing demand deposits increased $4.3
million, or 111.3% and the cost of these deposits increased to 4.07% compared to
3.75% at September 30, 1996. These significant changes in interest-bearing
demand deposits are partially attributable to the addition of large municipal
deposits that command higher rates. Average time deposits increased during the
first nine months of 1997 to $15.5 million, a 51.6% increase over the average
for the first nine months of 1996. In order to meet liquidity needs and manage
interest rate risk, the Bank purchased Federal funds for the first time during
the first nine months of 1997. The average balance of Federal funds purchased
was $331,000 at a cost of funds of 5.64%.
Net interest income was $773,000 for the first nine months of 1997, a
51.9% increase over the $509,000 of net interest income in the nine months ended
September 30, 1996. This increase is the result of growth in interest earning
assets. This increase was accomplished even though average interest earning
assets grew 58.4% while average interest-bearing liabilities increased 67.5%.
The net interest margin for the nine months ended September 30, 1997 was 3.49%
as compared to 3.64% for the nine months ended September 30, 1996.
Years ended December 31, 1996, 1995 and 1994:
Interest income for 1996 increased 94.2% to $1.6 million from $811,000
in 1995. Interest income in 1994 totaled $138,000. The increase in interest
income from 1995 to 1996 was due to an increase in average interest-earning
assets of $9.9 million, partially offset by a decrease in yields on earning
assets of 22 basis points from 8.16% in 1995 to 7.94% in 1996. The increase in
interest income from 1994 to 1995 was due to an increase in average
interest-earning assets of $7.5 million combined with a 240 basis point increase
in yields on earning assets from 5.76% in 1994 to 8.16% in 1995.
Interest rates charged on loans vary with the degree of risk, maturity
and amount of the loan. Competitive pressures, money market rates, availability
of funds, and government regulation also influence interest rates. On average,
loans yielded 9.55% in 1996 compared to an average yield of 10.41% in 1995,
reflecting lower market interest rates and an increase in 1-4 family residential
mortgage loans as a percentage of the overall portfolio.
Interest expense increased by 146.8% in 1996 to $854,000 from $346,000
in 1995. This increase was due to an increase in average interest-bearing
liabilities of $11.4 million to $18.3 million in 1996 which was partially offset
by a decrease in the rate paid of 37 basis points compared to 1995. Interest
expense increased by $320,000 in 1995 to $346,000, from $26,000 in 1994. The
increase was due to an increase in average interest bearing liabilities of $6.3
million and an increase in the average rate paid on interest-bearing liabilities
of 46 basis points caused by the increased levels of large denomination
certificates of deposit which command a higher interest rate.
Net interest income in 1996 increased 55.1% to $721,000 from $465,000
in 1995 due to an increase in the volume of net average earning assets which was
partially offset by an 105 basis point decrease in the net interest margin from
4.68% to 3.63%. The decrease in net interest margin during 1996 was due to an
increase in the percentage of average interest-bearing liabilities to average
interest earning assets to 92.3% from 69.1% in 1995. This change is due
primarily to rapid growth combined with net losses. Net interest income in 1995
increased by $353,000, or 315.2%, over 1994. The net interest margin for 1995
was 4.68%, almost identical to 4.69% in 1994, the year the Bank began
operations. The increase in net interest income realized in 1995 was primarily
the result of an increase in net average earning assets of $7.5 million.
<PAGE>
The effects of changes in volumes and rates on net interest income for
various periods are shown in the following table.
<TABLE>
<CAPTION>
Rate/Volume Variance Analysis (dollars in thousands)
Nine Months Ended September Year Ended December 31, 1996
30, 1997 Compared to Nine Months Compared to
Ended September 30, 1996 Year Ended December 31, 1995
-------------------------------- -----------------------------
<S> <C>
Interest Interest
Income/ Income/
Expense Variance Attributable To Expense Variance Attributable To
Variance Rate Volume Variance Rate Volume
Interest-earning assets:
Deposits in other banks $ - $ - $ - $ - $ - $ -
Taxable investment
securities 148 (36) 184 200 (55) 255
Federal funds sold (10) - (10) 15 3 12
Loans 512 (17) 529 549 (83) 632
------- -------- -------- ------- --------- -------
Total 650 (53) 703 764 (135) 899
------- -------- -------- ------- --------- -------
Interest-bearing
liabilities:
Demand deposits 140 20 120 158 - 158
Savings deposits (1) 33 58 15 43 (34)
Time deposits 233 12 221 292 (31) 323
Federal Funds purchased 14 14 - - - -
------- -------- -------- ------- --------- -------
Total 386 12 374 508 (16) 524
------- -------- -------- ------- --------- -------
Net interest income $ 264 $ (65) $ 329 $ 256 $ (119) $ 375
======= ======== ======= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Compared to
Year Ended December 31, 1994
----------------------------
Interest
Income/
Expense Variance Attributable To
Variance Rate Volume
<S> <C>
Interest-earning assets:
Deposits in other banks $ (23) $ - $ (23)
Taxable investment
securities 325 49 276
Federal funds sold 22 8 14
Loans 349 58 291
---------- --------- --------
Total 673 115 558
---------- --------- --------
Interest-bearing
liabilities:
Demand deposits 31 8 23
Savings deposits 25 (2) 27
Time deposits 264 11 253
Federal Funds purchased - - -
---------- --------- --------
Total 320 17 303
---------- --------- --------
Net interest income $ 353 $ 98 $ 255
========== ========= ========
</TABLE>
<PAGE>
31
Noninterest Income
Noninterest income consists of revenues generated from a variety of
financial services and activities. The majority of noninterest income is a
result of service charges on deposit accounts including charges for insufficient
funds, checks and fees charged for nondeposit services.
Nine month periods ended September 30, 1997 and 1996:
Noninterest income was $108,000 for the nine month period ended
September 30, 1997. This was a small increase from the nine month period ended
September 30, 1996 even though gains on sales of investment securities decreased
$22,000. The decrease in gains on sale of investment securities was offset by
increases in service charges on deposit accounts and other income.
Years ended December 31, 1996, 1995 and 1994:
Noninterest income totaled $127,000 in 1996, a significant increase of
111.7% from the $60,000 recorded in 1995. Noninterest income in 1994 totaled
$3,000. The majority of the increase in noninterest income from 1995 to 1996 and
from 1994 to 1995 was due to the increased number of deposit accounts.
The Bank's fee structure is reviewed annually to determine if
adjustments to fees are warranted. There were no changes in the deposit account
fee structure during 1996.
A portion of noninterest income is gain on the sale of investment
securities. Although the Bank generally follows a buy and hold philosophy with
respect to investment securities, occasionally the need to sell some investment
securities is created by changes in market rate conditions or by efforts to
restructure the portfolio to improve the Bank's liquidity or interest rate risk
positions. Noninterest income also includes fees charged for various bank
services such as safe deposit box rental fees and letter of credit fees.
The sources of noninterest income for the periods indicated are
summarized in the following table.
<PAGE>
<TABLE>
<CAPTION>
Sources of Noninterest Income (dollars in thousands)
Nine Months Ended September Years Ended December 31,
30,
------------------------------- --------------------------------------------
1997 1996 1996 1995 1994
------------ -------------- ---------- ------------ ------------
<S> <C>
Service charges on deposit
accounts $ 80 $63 $93 $41 3
Gain on sale of investment
securities 1 23 17 10 -
Other 27 19 17 9 -
------------ -------------- ---------- ------------ ------------
Total noninterest income $ 108 $ 105 $127 $60 $ 3
============ ============== ========= =========== ============
</TABLE>
Noninterest Expense
Nine month periods ended September 30, 1997 and 1996:
Noninterest expense for the nine months ended September 30, 1997 was
$925,000, a 41.8% increase over the noninterest expense of $653,000 for the nine
months ended September 30, 1996. This increase is due primarily to an increase
in personnel expenses of $147,000, or 53.6%, to meet the needs of the Bank due
to its growth. The number of full-time equivalent employees increased to 26 from
13 during the twelve-month period between September 30, 1997 and September 30,
1996. Management expects the number of full-time equivalent employees to
increase at a slower pace through the rest of 1997 and 1998.
Professional services expense for the first nine months of 1997
increased to $67,000 or 97.1% over the September 30, 1996 amount. This increase
is due primarily to the loss of the Company's senior vice president of
operations late in 1996, forcing the Company to outsource portions of the
responsibilities formerly performed by that person. The efficiency ratio of
noninterest expense to adjusted total revenues (net interest income plus
noninterest income excluding securities transactions) for the periods ended
September 30, 1997 and 1996 was 105% and 110%, respectively. Noninterest expense
has increased over the past two years and will likely continue to increase as
the Bank grows. However, as the bank becomes more mature, growth in net interest
income should outpace growth in noninterest expense. Accordingly, management
believes the Bank's efficiency ratio will continue to improve.
Years ended December 31, 1996, 1995 and 1994:
Noninterest expense for 1996 rose $140,000 or 17.7% to $929,000.
Noninterest expense was $789,000 in 1995 and $412,000 in 1994. The efficiency
ratio was 112% in 1996, 153% in 1995 and 358% in 1994.
Total personnel expenses, the largest component of noninterest expense,
increased $59,000 or 17.9% to $388,000 in 1996. Personnel expenses for 1995 were
$329,000, an increase of $130,000 or 65.3%, from the 1994 level of $199,000.
These increases were attributable to the increased number of full time
equivalent employees required due to the high growth rate the Bank has
experienced since opening.
Combined occupancy and furniture and equipment expense increased
$32,000 in 1996 compared to a $67,000, or 167.5%, increase from 1994 to 1995.
The increase in 1996 was primarily due to the opening of the new Bank building
which resulted in increased maintenance, insurance and depreciation. The
increase in 1995 was due to the Bank being open for business for the full year
versus only four months during the previous year.
Professional services expense, fees paid to attorneys, independent
auditors, and state examiners decreased $14,000 or 23.3%, to $46,000 during
1996. Professional services expense totaled $60,000 in 1995, a 140% increase
over the $25,000 level in 1994. These large fluctuations during the past three
years were caused by the Bank incurring significant expenses related to various
examinations and filings that were required subsequent to the initial opening.
Outside services consisting primarily of data processing and credit
card processing fees, increased $25,000, or 33.8% to $99,000 in 1996. These fees
were $74,000 and $19,000 in 1995 and 1994, respectively. These fees relate
directly to the number of accounts serviced and transactions processed.
Management expects these expenses to continue to increase as the Bank grows.
The primary elements of noninterest expense for the past three years
and the nine month periods ended September 30, 1997 and 1996 are as summarized
in the following table.
<TABLE>
<CAPTION>
Sources of Noninterest Expense (dollars in thousands)
Nine Months Ended
September 30, Years Ended December 31,
1997 1996 1996 1995 1994
<S> <C>
Salaries and wages $356 $238 $335 $285 $180
Employee benefits 65 36 53 44 19
------ ------ ------ ------ ------
Total personnel expense 421 274 388 329 199
Occupancy expense 54 49 77 67 30
Furniture and equipment 58 47 62 40 10
Printing and supplies 49 40 48 37 39
Professional services 67 34 46 60 25
Postage 23 17 25 18 6
Telephone 10 7 9 8 7
Dues and subscriptions 14 9 12 8 6
Education and seminars 9 9 11 19 8
Advertising and public
relations 27 24 38 30 11
Insurance expense 18 20 26 30 13
Capital stock tax 21 11 15 7 -
Outside services 92 62 99 74 19
Amortization of organizational
cost 15 18 37 37 10
Other operating expense 47 32 36 25 29
------ ------ ------ ------ ------
Total other expenses $925 $653 $929 $789 $412
==== ==== ==== ==== ====
</TABLE>
Income Taxes
Income tax expense is based on amounts reported in the statements of
income (after adjustments for non-taxable income and non-deductible expenses)
and consists of taxes currently due plus deferred taxes on temporary differences
in the recognition of income and expense for tax and financial statement
purposes. The deferred tax assets and liabilities represent the future Federal
income tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
The Company's deferred income tax benefits and liabilities are the
result of temporary differences in loss carryforwards, provisions for loan
losses, valuation reserves, depreciation, deferred income, and investment
security discount accretion.
Nine month periods ended September 30, 1997 and 1996:
Net deferred income tax assets of approximately $415,000, and $295,000
at September 30, 1997, and 1996, respectively, were also offset by a valuation
allowance. Accordingly, no income tax expense or benefit was reported during the
nine month periods ended September 30, 1997 or 1996. In the event the Company
begins generating a net profit and management feels that the deferred tax asset
is realizable, as defined by accounting standards, the valuation allowance will
be reduced, and corresponding increases in net income will result.
Years ended December 31, 1996, 1995 and 1994:
Net deferred income tax assets of $329,000, $262,000 and $151,000 at
December 31, 1996, 1995, and 1994, respectively, are offset by a valuation
allowance. Accordingly, no income tax expense or benefit was reported during
1996, 1995 or 1994.
Earning Assets
Nine month periods ended September 30, 1997 and 1996:
During the first nine months of 1997, average earning assets increased
to $29.5 million. This represents a 58.4% increase over the same time period a
year earlier. During the nine month period ended September 30, 1997, average
earning assets as a percentage of average total assets increased to 88.5%,
compared to 86.1%, as of the nine months ended September 30, 1996. The trend of
average loans increasing as a percentage of total average assets continued as
loans increased to 49.1% of total average assets for the nine months ended
September 30, 1997 from 41.6% during the prior period. Investment securities
decreased to 37.4% of total average assets for the nine months ended September
30, 1997 as compared to 40.1% for the nine months ended September 30, 1996.
Years ended December 31, 1996, 1995 and 1994:
Average earning assets increased $9.89 million, or 99.6%, during 1996
to $19.8 million. Total earning assets represented 86.3% of total average assets
in 1996 compared to 85.9% in 1995. The mix of average earning assets changed
during 1996 with a larger portion of the Bank's funds being invested in higher
yielding loans. For 1996, average net loans represented 42.2% of total average
assets while average investment securities represented 39.0% of total average
assets. For 1995, average net loans represented 31.3% of average assets and
average investment securities represented 46.3% of average assets. Average
noninterest earning assets increased to $3.1 million from $1.6 million during
1996. This is due to an increase in the amount of cash on hand to meet liquidity
needs and the opening of the permanent bank building.
A summary of average assets is shown in the following table.
<PAGE>
<TABLE>
<CAPTION>
Average Asset Mix (dollars in thousands)
Nine Months
Ended Years Ended December 31,
September 30, -------------------------------------------------------------------
1997 1996 1995 1994
-------------------- ------------------- ------------------- -------------------
Average Average Average Average
Balance Percent Balance Percent Balance Percent Balance Percent
<S> <C>
Earnings assets:
Loans, net $16,367 49.04% $ 9,695 42.19% $ 3,620 31.30% $ 317 10.45%
Investment securities 12,466 37.35 8,957 38.98 5,350 46.26 863 28.44
Federal funds sold 699 2.09 1,179 5.13 967 8.36 689 22.71
Interest-bearing bank balances - - - - - 528 17.40
-------- --------- --------- ------ ------- ----- ----- -----
Total earning assets 29,532 88.48 19,831 86.30 9,937 85.92 2,397 79.00
Nonearning assets:
Cash and due from banks 1,932 5.79 1,465 6.38 660 5.71 217 7.15
Premises and equipment 1,499 4.49 1,410 6.14 718 6.21 227 7.48
Other assets 411 1.24 272 1.18 249 2.16 193 6.37
------- ----- ---------- ----- ---------- ----- --------- -----
Total nonearning assets 3,842 11.52 3,147 13.70 1,627 14.08 637 21.00
--------- ------ --------- ----- --------- ------ --------- ------
Total assets $33,374 100.00% $22,978 100.00% $11,564 100.00% $3,034 100.00%
======= ====== ======= ====== ======= ====== ====== ======
</TABLE>
<PAGE>
Loans
The Bank makes both consumer and commercial loans to borrowers in any
neighborhood within its market area, including the low- and moderate-income
areas. The Bank's market area is generally defined to be all or portions of the
Pulaski, Giles, Wythe, Montgomery and Bland Counties of Virginia and the City of
Radford, Virginia. The Bank emphasizes consumer based installment loans,
commercial loans to small and medium sized businesses and real estate loans.
Nine month periods ended September 30, 1997 and 1996:
While average net loans increased $7.4 million, or 81.6%, during the
twelve month period ended September 30, 1997, the overall mix of loans by loan
type did not change significantly.
Years ended December 31, 1996, 1995 and 1994:
Net loans consist of total loans less unearned income and the allowance
for loan losses. Average net loans totaled $9.7 million during 1996, an increase
of $6.1 million or 167.9% over 1995. The increase in average net loans
outstanding during the past year is due to the efforts of the Bank's management,
increases in loan demand and to the Bank's growing reputation in the community.
A significant portion of the loan portfolio at December 31, 1996, $5.0
million or 38.8%, is made up of loans secured by various types of real estate.
Total loans secured by one to four family residential properties represented
36.2% of total loans at the end of 1996. During 1996, the Bank also experienced
growth in loans for commercial and industrial purposes. These loans increased
106.2% during 1996 to a total of $4.3 million, or 33.6% of total loans
outstanding, compared to a total of $2.1 million at the end of 1995.
<PAGE>
The amounts of loans outstanding by type at September 30, 1997, and
December 31, 1996 and 1995 are shown in the following table.
<TABLE>
<CAPTION>
Loan Portfolio Summary (dollars in thousands)
September 30, 1997 December 31, 1996 December 31, 1995
--------------------------- --------------------- -----------------
<S> <C>
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Construction and development $ 741 3.59% $ 235 1.82% $ 580 8.54%
Farmland - - - - - -
1-4 family residential 6,568 31.78 4,676 36.21 1,980 29.17
Multifamily residential - - - - - -
Nonfarm, nonresidential 132 .63 102 .79 - -
-------- ---- -------- ---- --------- --------
Total real estate 7,441 36.00 5,013 38.82 2,560 37.71
Agricultural 103 .50 8 .05 - -
Commercial and industrial 8,446 40.87 4,344 33.64 2,107 31.04
Credit cards 165 .80 135 1.05 93 1.37
Other consumer 3,746 18.13 2,564 19.85 1,149 16.93
State and political subdivisions 280 1.35 343 2.66 422 6.22
Other 486 2.35 507 3.93 457 6.73
----------- ----- --------- ----- -------- -----
Total $20,667 100.00% $12,914 100.00% $6,788 100.00%
======= ====== ======= ====== ====== ======
</TABLE>
The maturity distribution of variable and fixed rate loans as of
September 30, 1997 and December 31, 1996 are set forth in the following table.
<TABLE>
<CAPTION>
Maturity Schedule of Loans (dollars in thousands)
December 31, 1996
-----------------------------------------------------------------------
Commercial, Total
Financial and Real -------------------------
Agriculture Estate Others Amount Percent
------------- ------ ------ ------ -------
<S> <C>
Fixed rate loans:
Three months or less $ 150 $ - $ 286 $ 436 3.38%
Over three months to twelve months 148 260 425 833 6.45
Over one year to five years 935 191 1,600 2,726 21.11
Over five years 316 448 511 1,275 9.87
------------ ----------- ------------ ------------ -------------
Total fixed rate loans 1,549 899 2,822 5,270 40.81
------------ ----------- ------------ ------------ -------------
Variable rate loans:
Three months or less 1,771 699 420 2,890 22.38
Over three months to twelve months - 139 - 139 1.07
Over one year to five years 45 1,151 19 1,215 9.41
Over five years 987 2,125 288 3,400 26.33
------------ ----------- ------------ ------------ -------------
Total variable rate loans 2,803 4,114 727 7,644 59.19
------------ ----------- ------------ ------------ -------------
Total loans:
Three months or less 1,921 699 706 3,326 25.76
Over three months to twelve months 148 399 425 972 7.52
Over one to five years 980 1,342 1,619 3,941 30.52
Over five years 1,303 2,573 799 4,675 36.20
------------ ----------- ------------ ------------ -------------
Total loans $ 4,352 $ 5,013 $ 3,549 $ 12,914 100.00%
============ =========== ============ ============ =============
September 30, 1997
--------------------------------------------------------------------------
Commercial, Total
Financial and Real -------------------------
Agriculture Estate Others Amount Percent
------------- ------ ------ ------ -------
Fixed rate loans:
Three months or less $ 261 $ 198 $ 352 $ 811 3.92%
Over three months to twelve months 390 350 429 1,169 5.66
Over one year to five years 900 307 2,012 3,219 15.58
Over five years 423 387 1,052 1,862 9.01
------------ ----------- ------------ ------------ ------------
Total fixed rate loans 1,974 1,242 3,845 7,061 34.17
============ =========== ============ ============ ============
Variable rate loans:
Three months or less 2,135 841 251 3,227 15.61
Over three months to twelve months 41 242 - 283 1.37
Over one year to five years 469 1,684 105 2,258 10.93
Over five years 3,930 3,432 476 7,838 37.92
------------ ----------- ------------ ------------ ------------
Total variable rate loans 6,575 6,199 832 13,606 65.83
============ =========== ============ ============ ============
Total loans:
Three months or less 2,396 1,039 603 4,038 19.53
Over three months to twelve months 431 592 429 1,452 7.03
Over one to five years 1,369 1,991 2,117 5,477 26.51
Over five years 4,353 3,819 1,528 9,700 46.93
------------ ----------- ------------ ------------ ------------
Total loans $ 8,549 $ 7,441 $ 4,677 $ 20,667 100.00%
============ =========== ============ ============ ============
</TABLE>
Investment Securities
The Bank uses its investment portfolio to provide liquidity for
unexpected deposit decreases, to fund loans, to meet the Bank's interest rate
sensitivity goals, and to generate income.
Securities are classified as securities held to maturity when
management has the intent and the Company has the ability at the time of
purchase to hold the securities to maturity. Securities held to maturity are
carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities to be held for indefinite periods of time are classified
as securities available for sale. Unrealized gains and losses on securities
available for sale are recognized as direct increases or decreases in
shareholders' equity. Securities available for sale include securities that may
be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, general liquidity needs
and other similar factors. The Company's entire securities portfolio is
classified as available for sale.
Management of the investment portfolio has always been conservative
with virtually all investments taking the form of purchases of U.S. Treasury,
U.S. Government agency and State and local bond issues. Management views the
investment portfolio as a source of income, and purchases securities with that
in mind. However, adjustments are necessary in the portfolio to provide an
adequate source of liquidity which can be used to meet funding requirements for
loan demand and deposit fluctuations and to control interest rate risk.
Therefore, management may sell certain securities prior to their maturity.
The following table presents the investment portfolio at December 31,
1996 and September 30, 1997, by major types of investments and maturity ranges.
Maturities may differ from scheduled maturities in mortgage-backed securities
because the mortgages underlying the securities may be called or repaid prior to
the scheduled maturity date. Maturities on all other securities are based on the
contractual maturity.
<PAGE>
<TABLE>
<CAPTION>
Investment Securities (dollars in thousands)
December 31, 1996
--------------------------------------------------------------------------------------
Amortized Cost Due
------------------------------------------------
After One After Five After
In One Yr. Through Through Ten Equity Fair
or Less Five Yrs. Ten Years Years Securities Total Value
------- --------- --------- ----- ---------- ----- -----
<S> <C>
U.S. Treasury $1,302 $2,691 $ - $ - $ - $ 3,993 $ 4,013
U.S. Government agencies and
Mortgage-Backed 748 2,673 3,621 - - 7,042 6,962
Securities
State and political
subdivisions - 197 - - - 197 201
Equity securities - - - - 137 137 137
---------- ---------- ---------- --------- ----------- --------- ---------
Total $2,050 $5,561 $3,621 $ - $ 137 $11,369 $11,313
====== ====== ====== ======== ========== ======= =======
Weighted average yields:
U.S. Treasury 5.63% 6.27% -% -% 5.97%
U.S. Government agencies
and Mortgage-Backed
Securities 5.33 6.30 6.38 - 6.25
State and political - 6.54 - 6.54
subdivisions ------- ---- ----------- ---- ----
Total 5.35% 6.29% 6.38% -% 6.15%
==== ==== ==== ======== ====
September 30, 1997
---------------------------------------------------------------------------------------
Amortized Cost Due
---------------------------------------------
After One After Five After
In One Yr. Through Through Ten Equity Fair
or Less Five Yrs. Ten Years Years Securities Total Value
------- --------- --------- ----- ---------- ----- -----
U.S. Treasury $1,899 $ 995 $ - $ - $ - $ 2,894 $ 2,907
U.S. Government agencies and
Mortgage-Backed
Securities 4,014 3,038 2,639 - - 9,691 9,656
State and political
subdivisions - 198 - - - 198 201
Equity securities - - - - 148 148 148
---------- ---------- ---------- --------- ----------- ---------- ---------
Total $5,913 $4,231 $2,639 $ - $ 148 $12,931 $12,912
====== ====== ====== ======== ========== ======= =======
Weighted average yields:
U.S. Treasury 5.88% 6.38% -% -% 6.05%
U.S. Government agencies
and Mortgage-Backed
Securities 5.34 6.29 6.35 - 5.91
State and political
subdivisions - 6.45 - - 6.45
---- ---- ----- ---- ----
Total 5.51% 6.32% 6.35% -% 5.95%
==== ==== ==== ======= ====
</TABLE>
Nine month periods ended September 30, 1997 and 1996:
The average yield on the investment portfolio was 6.13% and 6.52%
during the nine month periods ended September 30, 1997 and 1996, respectively.
This decrease in the average yield reflects the increase in the amount of
shorter term investments purchased in an effort to manage liquidity and interest
rate risk associated with large denomination certificates of deposit. At
September 30, 1997, the market value of the investment portfolio was $12.9
million which was approximately $19,000 below amortized cost.
Years ended December 31, 1996, 1995 and 1994:
The interest rate environment in 1996 caused the average yield on the
investment portfolio to decrease to 6.54% from 7.07% in 1995. At December 31,
1996, the market value of the investment portfolio was $11.3 million,
representing depreciation of $56,000 below amortized cost. This compared to a
market value of $5.5 million and an appreciation of $59,000 above amortized cost
a year earlier.
Federal Funds Sold
Federal funds represent the most liquid portion of the Bank's invested
funds and generally the lowest yielding portion of earning assets. Management
has made an effort to maintain federal funds at the lowest level possible
consistent with prudent interest rate risk management strategies and liquidity
needs.
Nine month periods ended September 30, 1997 and 1996:
Federal funds sold were $34,000 at September 30, 1997. They averaged
$699,000 during the nine month period ended September 30, 1997, a decrease of
$241,000 or 25.6% from the nine month period ended September 30, 1996. During
the first nine months of 1997 average federal funds were 2.4% of average
earnings assets.
Years ended December 31, 1996, 1995 and 1994:
Average federal funds sold totaled $1.2 million in 1996 which
represented a 21.9% increase from $967,000 in 1995. During 1996, average federal
funds sold represented 5.9% of average earning assets, down from the 9.7% during
1995.
Deposits
The Bank relies on deposits generated in its market area to provide the
majority of funds needed to support lending activities and for investments in
liquid assets. More specifically, core deposits (total deposits less time
deposits in denominations of $100,000 or more) are the primary funding source.
The Bank's balance sheet growth is largely determined by the
availability of deposits in its markets, the cost of attracting the deposits,
and the prospects of profitably utilizing the available deposits by increasing
the loan or investment portfolios. Market conditions have resulted in depositors
shopping for better deposit rates more than in the past. An increased customer
awareness of interest rates adds to the importance of rate management. The
Bank's management must monitor continuously market pricing, competitor's rates,
and internal interest rate spreads to maintain the Bank's growth and
profitability. The Bank attempts to structure rates so as to promote deposit and
asset growth while at the same time increasing the overall profitability of the
Bank.
Nine month periods ended September 30, 1997 and 1996:
Average total deposits were $29.7 million for the nine months ended
September 30, 1997. This is an increase of $11.5 million or 63.2% from the nine
months ended September 30, 1996. Average core deposits were $24.1 million for
the nine months ended September 30, 1997.
The trend of increasing interest-bearing deposits as a percentage of
total deposits continued. Average interest-bearing deposits were 90.9% and 89.6%
of total average deposits for the nine month periods ended September 30, 1997
and 1996, respectively.
Large municipal deposits were $10.4 million and $7.5 million at
September 30, 1997 and September 30, 1996, respectively. The large increase is
due primarily to a $3.0 million certificate of deposit issued to a local
government during June, 1997. This large certificate of deposit accounts for the
difference between the average large denomination certificates of deposit for
the nine month periods ended September 30, 1997 and September 30, 1996, which
were $5.6 million and $3.0 million, respectively.
Years ended December 31, 1996, 1995 and 1994:
Average total deposits for the year ended December 31, 1996 amounted to
$19.8 million which was an increase of $11.8 million, or 146.7%, over 1995.
Average core deposits totaled $16.7 million in 1996, an increase of $10.3
million, or 159.8%, over 1995. The percentage of the Bank's average deposits
that are interest-bearing increased to 92.5% in 1996 from 85.6% in 1995. Average
demand deposits which earn no interest increased $334,000 to $1.5 million in
1996 as compared to 1995.
The average certificates of deposit issued in denominations of $100,000
or more increased by $1.5 million, or 93.8%, in 1996. Even though certificates
of deposit issued in denominations of $100,000 or more have increased, average
large denomination certificates of deposit as a percentage of total average
deposits have decreased slightly for the past two years. Average certificates of
deposit issued in denominations of $100,000 or more as a percentage of total
average deposits were 15.6%, 19.8%, and 26.3% for the years ended December 31,
1996, 1995, and 1994, respectively. Large municipal deposits from local
governments were $9.0 million and $2.1 million at December 31, 1996 and 1995,
respectively. There were no municipal deposits during 1994. Management believes
that the Bank is paying market rates for these municipal deposits. Management's
strategy has been to support loan and investment growth with core deposits and
not to aggressively solicit the more volatile, large denomination certificates
of deposit. Large denomination certificates of deposit and large municipal
deposits are particularly sensitive to changes in interest rates. Management
considers these deposits to be volatile and, in order to minimize liquidity and
interest rate risks, invests these funds in short-term investments.
Average deposits for the nine months ended September 30, 1997 and the
three years ended December 31, 1996, 1995 and 1994 are summarized in the table
below.
<PAGE>
<TABLE>
<CAPTION>
Deposit Mix (dollars in thousands)
Nine Months Ended Years Ended December 31,
September 30, 1997 1996 1995 1994
------------------ ----------- ----------- ------------
Average Average Average Average
Balance Percent Balance Percent Balance Percent Balance Percent
------- ------- ------- ------- ------- ------- ------- -------
<S> <C>
Interest-bearing deposits:
NOW accounts $ 8,121 27.31% $ 5,304 26.79% $ 917 11.43% $ 72 6.16%
Money market 1,661 5.59 982 4.96 687 8.56 111 9.50
Savings 1,736 5.84 1,294 6.54 253 3.15 35 2.99
Small denomination certificates 9,905 33.31 7,642 38.60 3,417 42.59 41 3.51
Large denomination certificates 5,604 18.85 3,083 15.57 1,591 19.83 308 26.35
--------- ----- --------- ----- ------- ----- --------- -----
Total interest bearing
deposits 27,027 90.90 18,305 92.46 6,865 85.56 567 48.51
Noninterest bearing deposits:
Demand deposits 2,707 9.10 1,492 7.54 1,158 14.44 602 51.49
--------- -------- --------- -------- ------- ------ -------- -------
Total deposits $29,734 100.00% $19,797 100.00% $8,023 100.00% $1,169 100.00%
======= ====== ======= ====== ====== ====== ====== ======
</TABLE>
The following table provides maturity information relating to time
deposits of $100,000 or more at September 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
Large Time Deposit Maturities, (dollars in thousands)
September 30, December 31,
1997 1996
--------------- ------------
<S> <C>
Remaining maturity of three months or less $ 3,014 $ 1,392
Remaining maturity over three through twelve months 3,152 1,155
Remaining maturity over twelve months 806 532
--------------- ----------------
Total time deposits of $100,000 or more $ 6,972 $ 3,079
=============== ================
</TABLE>
Short-Term Debt
The Bank had no short-term debt at December 31, 1996, 1995, or 1994.
The Bank borrowed using Federal funds purchased for the first time during the
first nine months of 1997, in order to provide liquidity and reduce interest
rate risk. The average balance of Federal funds purchased was $331,000 for the
nine month period ended September 30, 1997. The related interest expense on
these borrowings was $14,000, for a cost of funds of 5.64%.
Capital Adequacy
Regulatory guidelines relating to capital adequacy provide minimum
risk-based ratios which assess capital adequacy while encompassing all credit
risks, including those related to off-balance sheet activities. Capital ratios
under these guidelines are computed by weighing the relative risk of each asset
category to derive risk-adjusted assets. The risk-based capital guidelines
require minimum ratios of core (Tier I) capital (common stockholders' equity and
qualifying preferred stockholders' equity, less intangible assets) to
risk-weighted assets of 4.0% and total regulatory capital (core capital plus
allowance for loan losses up to 1.25% of risk-weighted assets and qualifying
subordinated debt) to risk-weighted assets of 8.0%. See "Supervision and
Regulation."
In addition, a minimum leverage ratio of average Tier I capital to
average total assets for the previous quarter, ranging from 3% to 5%, is
required by federal bank regulators subject to the regulator's evaluation of the
Bank's overall safety and soundness. As of December 31, 1996, the Bank had a
ratio of year-end Tier I capital to average total assets for the fourth quarter
of 1996 of 11.62%.
The Bank exceeds all required regulatory capital ratios.
Nine month periods ended September 30, 1997 and 1996:
Shareholders' equity was unchanged at $3.2 million for September 30,
1997 and September 30, 1996. Net losses were offset by increases in the market
value of investment securities available for sale of approximately $179,000.
Average shareholder's equity as a percentage of average total assets during the
nine month periods ended September 30, 1997 and 1996 was 9.57% and 15.62%,
respectively. This change was due primarily to an increase in total average
assets of $11.7 million, or 54.1%, between the two nine month periods ended
September 30, 1996 and September 30, 1997. The other contributing factor in the
change in the ratio of average equity to average assets is a $189,000 decrease
in average equity between the two nine month periods, due to net losses. For the
quarter ended September 30, 1997, the Bank's Tier I capital to average total
assets was 9.1%. The Bank's Tier I and total capital to risk-weighted assets
were 13.54% and 14.65%, respectively.
<PAGE>
Years ended December 31, 1996, 1995 and 1994:
Shareholders' equity was $3.3 million at December 31, 1996, an 8.3%
decrease from the 1995 year-end total of $3.6 million. The decrease was
primarily a result of the net loss in 1996 and a decrease in the market value of
securities that are classified as available for sale. Average shareholders'
equity as a percentage of average total assets was 13.71% in 1996 and 30.39% in
1995.
At December 31, 1996 the Bank had a ratio of Tier I capital to
risk-weighted assets of 21.97% and a ratio of total regulatory capital to
risk-weighted assets of 23.06%, well above the regulatory minimum of 4.0% and
8.0%, respectively.
The Bank's analysis of capital for the quarters ended September 30,
1997 and December 31, 1996 is presented in the following table.
<TABLE>
<CAPTION>
Risk-Based Capital, (dollars in thousands)
Quarters Ended
-----------------------------------
September 30, December 31,
1997 1996
----------------- ----------------
<S> <C>
Tier I capital $ 3,021 $ 3,139
Qualifying allowance for loan losses(1) 248 155
--------------- -----------
Total regulatory capital $ 3,269 $ 3,294
=============== ===========
Total risk-weighted assets $ 22,308 $ 14,286
=============== ===========
Tier I as a percent of risk-weighted assets 13.54% 21.97%
Total Tier II capital as a percent of risk-weighted assets 14.65% 23.06%
Leverage ratio(2) 7.86% 11.62%
</TABLE>
(1) Limited to 1.25% of risk-weighted assets.
(2) Period end Tier I capital to adjusted average assets per quarter.
Common Stock Outstanding
At December 31, 1996 the Company had 437,225 shares of common stock
outstanding. Shareholders of record as of May 1, 1997 received a 25% stock
dividend. At September 30, 1997 and December 3, 1997 the Company had 546,399
shares of common stock outstanding. These shares are held by approximately 587
shareholders of record.
Nonperforming and Problem Assets
Certain credit risks are inherent in making loans, particularly
commercial and consumer loans. Management prudently assesses these risks and
attempts to manage them effectively. The Bank also attempts to reduce repayment
risks by adhering to internal credit policies and procedures. These policies and
procedures include officer and customer limits, periodic loan documentation
review and follow up on exceptions to credit policies.
The allowance for loan losses is maintained at a level adequate to
absorb probable losses. Some of the factors which management considers in
determining the appropriate level of the allowance for loan losses are: past
loss experience, an evaluation of the current loan portfolio, identified loan
problems, the loan volume outstanding, the present and expected economic
conditions in general, regulatory policies, and in particular, how such
conditions relate to the market areas that the Bank serves. Bank regulators also
periodically review the Bank's loans and other assets to assess their quality.
Loans deemed uncollectible are charged to the allowance. Provisions for loan
losses and recoveries on loans previously charged off are added to the
allowance.
The accrual of interest on loans is discontinued on a loan when, in the
opinion of management, there is an indication that the borrower may be unable to
meet payments as they become due. Upon such discontinuance, all unpaid accrued
interest is reversed.
Provision for Loan Losses
The provision for loan losses is charged to income in an amount
necessary to maintain an allowance for loan losses adequate to provide for
expected losses in the Bank's loan portfolio. Loan losses and recoveries are
charged or credited directly to the allowance for loan losses.
Nine month periods ended September 30, 1997 and 1996:
The provision for loan losses was increased to $126,000 from $80,000
during the nine month periods ended September 30, 1997 and 1996, respectively.
The Bank's allowance for loan losses as a percentage of gross loans at September
30, 1997 and 1996, was 1.2%. Management believes the allowance for loan losses
is adequate as of September 30, 1997.
Years ended December 31, 1996, 1995 and 1994:
Management increased the provision for loan losses from $68,000 in 1995
to $104,000 in 1996. The provision for loan losses was $30,000 in 1994. The
increases in the loan loss provision were made because of the significant growth
of the loan portfolio during these periods. The Bank's allowance for loan losses
as a percentage of gross loans was 1.2% at the end of 1996 and 1995, and 2.4% at
December 31, 1994.
Additional information regarding loan loss provisions is discussed in
"Nonperforming and Problem Assets."
The provision for loan losses, net charge-offs and the activity in the
allowance for loan losses is detailed in the following table.
Allowance for Loan Losses (dollars in thousands)
<TABLE>
<CAPTION>
December 31,
September 30, -----------------------------------------
1997 1996 1995 1994
------------ ----------- ---------- ------------
<S> <C>
Allowance for loan losses, beginning $ 155 $ 81 $ 30 $ -
Provision for loan losses, added 126 104 68 30
------------ ----------- ---------- ------------
281 185 98 30
Loans charged off (44) (43) (18) -
Recoveries of loans previously charged off 11 13 1 -
------------ ----------- ---------- ------------
Net charge-offs (33) (30) (17) -
------------ ----------- ---------- ------------
Allowance for loan losses, ending $ 248 $ 155 $ 81 $ 30
============ ============ =========== ============
</TABLE>
The loan portfolio also included loans to various borrowers (watch
loans) at period-end for which management had concerns about the ability of the
borrowers to continue to comply with present loan repayment terms, and which
could result in some or all of these loans being uncollectible. Management
monitors these loans carefully and has provided for these loans in the allowance
for loan losses.
Management realizes that general economic trends greatly affect loan
losses and no assurances can be made about future losses. Management does,
however, consider the allowance for loan losses to be adequate at December 31,
1996 and September 30, 1997. The allocation of the allowance for loan losses is
shown in the following table.
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses (dollars in thousands)
September 30, 1997 1996 1995 1994
-------------------- ------------------ ---------------------- ---------------------
Balance at end of period
applicable to: Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1)
- ---------------------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C>
Commercial, financial
and agricultural $ 139 41.37% $ 85 33.73% $26 24.71% $ 6 36.44%
Real estate, construction - 3.59 - - - - - -
Real estate, mortgage 37 32.41 23 38.13 16 44.41 8 24.18
Installment loans to
individuals, other 72 22.63 47 28.14 39 30.88 16 39.38
------ ------ ------ ------ ---- -------- ---- --------
Total $248 100.00% $155 100.00% $81 100.00% $30 100.00%
==== ====== ==== ====== === ======== === ======
</TABLE>
(1) Percent of loans in each category to total loans.
Nonperforming Assets at September 30, 1997 and December 31, 1996 and
1995 are set forth in the table below.
<TABLE>
<CAPTION>
Nonperforming Assets (dollars in thousands)
September 30, December 31,
1997 1996 1995
-------------------- ---------- ---------
<S> <C>
Nonaccrual loans $ - $ 17 $ -
Restructured loans - - -
Foreclosed and in-substance
foreclosed properties 58 - 8
------ ------ -------
Total $ 58 $ 17 $ 8
====== ====== =======
</TABLE>
Nine month periods ended September 30, 1997 and 1996:
At September 30, 1997 nonperforming assets were .28% of gross loans
outstanding and there were no loans past due 90 or more days. During the first
nine months of 1997 and 1996 net loan charge-offs as a percentage of average
loans were .20% and .23%, respectively. At September 30, 1997 the allowance for
loan losses was $248,000, or 1.2% of gross outstanding loans.
Years ended December 31, 1996, 1995 and 1994:
Nonperforming assets at year-end 1996 and 1995 were .1% of gross loans
outstanding. In addition to the nonperforming assets, loans which were past due
90 days or more amounted to $52,000 at December 31, 1996 and $18,000 at December
31, 1995. Net loan charge-offs as a percentage of average loans were .31%, and
.47% in 1996 and 1995, respectively. There were no charge-offs during 1994. The
allowance for loan losses was $155,000 and $81,000 at December 31, 1996 and
1995, respectively, or 1.2% of total gross loans outstanding for both years.
<PAGE>
Liquidity and Sensitivity
The principal goals of the Bank's asset and liability management
strategy are the maintenance of adequate liquidity and the management of
interest rate risk. Liquidity is the ability to convert assets to cash in order
to fund depositors' withdrawals or borrowers' loans without significant loss.
Interest rate risk management balances the effects of interest rate changes on
assets that earn interest against liabilities on which interest is paid, to
protect the Bank from wide fluctuations in its net interest income which could
result from interest rate changes.
Management must insure that adequate funds are available at all times
to meet the needs of its customers. On the asset side of the balance sheet,
maturing investments, loan payments, maturing loans, federal funds sold, and
unpledged investment securities are principal sources of liquidity. On the
liability side of the balance sheet, liquidity sources include core deposits,
the ability to increase large denomination certificates, federal funds lines
from correspondent banks, borrowings from the Federal Reserve Bank, as well as
the ability to generate funds through the issuance of long-term debt and equity.
Interest rate risk is the effect that changes in interest rates would
have on interest income and interest expense as interest-sensitive assets and
interest-sensitive liabilities either reprice or mature. Management attempts to
maintain the portfolios of earning assets and interest-bearing liabilities with
maturities or repricing opportunities at levels that will afford protection from
erosion of net interest margin, to the extent practical, from changes in
interest rates. The table below shows the sensitivity of the Bank's balance
sheet at the dates indicated, but is not necessarily indicative of the position
on other dates.
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity (dollars in thousands)
December 31, 1996
Maturities/Repricing
------------------------------------------------------------------
1-3 4-12 13-60 Over 60
Months Months Months Months Total
----------- ---------- --------- --------- ---------
<S> <C>
Earning assets:
Loans $ 3,636 $ 1,980 $ 7,018 $ 280 $ 12,914
Investments 999 1,051 5,561 3,758 11,369
Federal funds sold 402 - - - 402
----------- ----------- ----------- ----------- -----------
Total 5,037 3,031 12,579 4,038 24,685
----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
NOW accounts 8,266 - - - 8,266
Money market 1,376 - - - 1,376
Savings 963 - - - 963
Certificates of deposit 2,859 4,453 3,494 - 10,806
----------- ----------- ----------- ----------- -----------
Total 13,464 4,453 3,494 - 21,411
----------- ----------- ----------- ----------- -----------
Interest rate gap $ (8,427) $ (1,422) $ 9,085 $ 4,038 $ 3,274
=========== =========== =========== =========== ===========
Cumulative interest sensitivity gap $ (8,427) $ (9,849) $ (764) $ 3,274 -
Ratio of sensitivity gap to total
earning assets (34.14%) (5.76%) 36.80% 16.36% 13.26%
Cumulative ratio of sensitivity gap
to total earning assets (34.14%) (39.90%) (3.10%) 13.26% -
September 30, 1997
Maturities/Repricing
--------------------------------------------------------------
1-3 4-12 13-60 Over 60
Months Months Months Months Total
------- ------- ------- -------- ------
Earning assets:
Loans $ 5,731 $ 2,251 $ 11,733 $ 952 $ 20,667
Investments 4,470 1,443 4,212 2,787 12,912
Federal funds sold 34 - - - 34
----------- ----------- ----------- ----------- -----------
Total 10,235 3,694 15,945 3,739 33,613
----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
NOW accounts 7,668 - - - 7,668
Money market 1,960 - - - 1,960
Savings 2,452 - - - 2,452
Certificates of deposit 4,339 10,007 5,213 - 19,559
----------- ----------- ----------- ----------- -----------
Total 16,419 10,007 5,213 - 31,639
----------- ----------- ----------- ----------- -----------
Interest rate gap $ (6,184) $ (6,313) $ 10,732 $ 3,739 $ 1,974
=========== =========== =========== =========== ===========
Cumulative interest sensitivity gap $ (6,184) $ (12,497) $ (1,765) $ 1,974 -
Ratio of sensitivity gap to total
earning assets (18.40%) (18.78%) 31.93% 11.12% 5.87%
Cumulative ratio of sensitivity gap
to total earning assets (18.40%) (37.18%) (5.25%) 5.87% -
</TABLE>
The liquidity ratio remained steady during the first nine months of
1997 and the September 30, 1997 ratio was 40.1%. This ratio is considered to be
adequate by management.
There have been no significant changes in the Bank's interest rate risk
position in the first nine months of 1997. At September 30, 1997, the Bank was
cumulatively asset-sensitive (earning assets subject to interest rate changes
exceeded interest-bearing liabilities subject to changes in interest rates). NOW
and money market account repricings within three months were $9.6 million, which
historically have not been as interest-sensitive as other types of
interest-bearing deposits. Removing the impact of NOW and money market accounts,
the Bank is asset sensitive in the three month or less time, period with the
four to twelve months time period being liability-sensitive, the thirteen to
sixty months time period being asset-sensitive and the over sixty months time
period being asset-sensitive.
Certificates of deposit in denominations of $100,000 or more and large
municipal deposits are especially susceptible to interest rate changes. These
deposits are matched with short-term investments. Matching sensitive positions
alone does not ensure that the Bank has no interest rate risk. The repricing
characteristics of assets are different from the repricing characteristics of
funding sources. Thus, net interest income can be impacted by changes in
interest rates even if the repricing opportunities of assets and liabilities are
perfectly matched.
Effects of Inflation
Interest rates are affected by inflation, but the timing and magnitude
of the changes may not coincide with changes in the consumer price index.
Management actively monitors the Bank's interest rate sensitivity in order to
minimize the effects of inflationary trends on the Bank's operations. Other
areas of non-interest expenses may be more directly affected by inflation.
Financial Ratios
The following table summarizes ratios considered to be significant
indicators of the Bank's operating results and financial condition for the
periods indicated.
<TABLE>
<CAPTION>
Key Financial Ratios
Nine Months Ended
September 30, Years Ended December 31,
------------------- -----------------------------
1997 1996 1996 1995 1994
-------- ------- ------ ------- --------
<S> <C>
Return on average assets(1) (.68%) (.73%) (.81%) (2.87%) (10.77%)
Return on average equity(1) (7.08%) (4.66%) (5.89%) (9.44%) (17.52%)
Average equity to average assets 9.57% 15.62% 13.71% 30.39% 61.47%
</TABLE>
- ------------------------
(1) Calculated on an annualized basis.
<PAGE>
MANAGEMENT AND DIRECTORS
Security Ownership of Certain Beneficial Owners and Management
The Board of Directors of the Company and the Bank are listed in the
table below. The principal occupation for each individual, as well as their
respective class and term of office, is also set forth below. None of the
individuals are related. The table sets forth the beneficial ownership of the
Common Stock by the directors, executive officers and holders of five percent or
more of the outstanding shares of the Common Stock and all directors and
executive officers of the Company as a group as of October 31, 1997. No director
of the Company acts as director of another company with a class of securities
registered under Section 12 or 15 of the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
Principal Occupation Shares Beneficially
Name, Age & Address Director During the Owned
of Beneficial Owner Since Past Five Years (% Outstanding)(1)
- -------------------- -------- -------------------- -------------------
<S> <C>
DIRECTORS TO SERVE UNTIL 2000
Jack W. Bowling, 51 1993 President, H. T. Bowling, Inc. 59,588
Dublin, Virginia (10.4%)(2)
Jackson M. Bruce, 55 1993 Partner, law firm of Gilmer, Sadler, Ingram, 53,688
Pulaski, Virginia Sutherland & Hutton (9.4%)
Nathaniel R. Tuck, D.C., 45 1993 President and Owner, Tuck Clinic of Chiropractic, 32,450
Dublin, Virginia P.C. (6.0%)
DIRECTORS TO SERVE UNTIL 1999
Wayne L. Carpenter, 51 1993 Chairman of the Bank 1997, President and CEO of 40,338
Pulaski, Virginia the Bank 1994 - present, President and CEO of the (7.1%)
Company 1993-1997, Vice President and
Relationship Manager, NationsBank
Hiawatha Nicely, Jr., 48 1993 President and CEO of the Company, COO of the Bank 53,813
Pulaski, Virginia 1997 - present, Chairman of the Company 1993 - (9.4%)
present, Chairman of the Bank 1994-1997
A. Carole Pratt, D.D.S., 46 1993 Secretary of the Company; General Dentistry 28,713
Pulaski, Virginia (5.1%)(3)
David W. Ratcliff, Jr., 53 1993 Director of Finance and Administration 26,518
Hiwassee, Virginia Alliant Techsystems, Inc. (4.7%)(4)
<PAGE>
`
Principal Occupation Shares Beneficially
Name, Age & Address Director During the Owned
of Beneficial Owner Since Past Five Years (% Outstanding)(1)
- ------------------- ------------ --------------------- --------------------
DIRECTORS TO SERVE UNTIL 1998
Sybil S. Atkinson, 51 1993 Medicaid of America, Inc.; Parish Administrator 29,016
Pulaski, Virginia of Christ Episcopal Church (5.2%)(5)
Randolph V. Chrisley, 50 1993 Vice President of Sales, Pulaski Furniture 53,656
Draper, Virginia Corporation (9.4%)
James L. Webb, Jr., 46 1993 Vice President in Charge of Marketing of Old 26,286
Pulaski, Virginia Dominion Insurance Services, Inc. (4.7%)
J. David Wine, 49 1993 Founder of New River Oxygen Therapy, Inc. and 54,906
Pulaski, Virginia Advance Health-Care Services, Inc.; cofounder of (9.6%)(6)
Bay State Medical, Inc., Home Pharmacy, Inc. and
Home Care Solutions, Inc.
All Directors and 458,972
Executive Officers (59.9%)
as a Group (11 Persons)
</TABLE>
(1) Percentage is determined on the basis of 546,399 shares of Common Stock
issued and outstanding, plus in each case shares subject to currently
exercisable options deemed to be outstanding pursuant to Rule 13d-3(d)(1)
of the Securities Exchange Act of 1934. The option ownership of the
directors as reflected in this column is as follows: Mr. Bowling - 26,188;
Mr. Bruce - 26,188; Mr. Tuck - 13,688; Mr. Carpenter - 19,938; Mr. Nicely -
26,188; Dr. Pratt - 13,688; Mr. Ratcliff - 13,688; Ms. Atkinson - 13,688;
Mr. Chrisley - 26,156; Mr. Webb - 13,688; and Mr. Wine - 26,156. Some
directors have indicated that they may participate in the offering, but
director participation is not expected to be a material part of the total
sales. It is impossible to predict the effect of the offering on the
ownership percentage of individual directors or the Board as a group.
(2) Includes 33,400 shares held by an investment company affiliate of Mr.
Bowling.
(3) Includes 380 shares held by Ms. Pratt's minor children.
(4) Includes 374 shares held jointly with Mr. Ratcliff's children.
(5) Includes 1,263 shares owned by Ms. Atkinson's minor children.
(6) Includes 3,143 shares owned by an individual retirement account for the
benefit of Mr. Wine's wife.
Executive Management
Wayne L. Carpenter. Mr. Carpenter is the Chairman, President and Chief
Executive Officer of the Bank. He is a veteran banker with more than twenty
years of banking experience in Pulaski. He joined Virginia National Bank, which
subsequently became NationsBank, in 1973 as a management trainee in Pulaski,
Virginia, after graduating from Bridgewater College. He worked for NationsBank
for twenty years, holding diverse positions, culminating as Vice President and
Relationship Manager with responsibility for the administration and development
of a $43.9 million commercial loan portfolio consisting of large corporate
customers for a seven-county area including Pulaski County. He has served in
various capacities on the Pulaski County Chamber of Commerce, including the
Board of Directors and President. He is also President and a Board Member of the
New River Valley Development Corporation and on the Advisory Board for the New
River Valley Small Business Development Center, the Loan Committee for the
Western Virginia Revolving Loan Fund, the Pulaski Rotary Club and the New River
Valley Economic Development Alliance.
The Company and the Bank have relied since their formation almost
exclusively on Mr. Carpenter for senior leadership in the day-to-day functions
of the Company and Bank. Due to the Bank's rapid growth, the Board concluded in
July, 1997 that additional management was needed to support Mr. Carpenter's
efforts.
Hiawatha Nicely, Jr. In August, 1997, the Board of Directors voted to
appoint Mr. Nicely, who already served as Chairman of the Board of the Company,
as Chief Executive Officer and President of the Company. In addition, the Board
of Directors of the Bank voted to appoint Mr. Nicely as Chief Operating Officer
of the Bank. This action was taken primarily to provide the management of the
Bank with support in operations and financial controls and to allow Mr.
Carpenter to concentrate on the management, performance, and growth of the Bank.
Mr. Nicely has served with different companies as a chief operating
officer, an executive vice president, and a business consultant.
Mr. Nicely was General Manager for Hercules Inc.'s local iron oxide
facilities, Executive Vice President and Chief Operating Officer for Magnox Inc.
and Magnox Pulaski Inc., Vice President for West Main Manufacturing, Director of
Economic and Business Development for Columbia HealthCare of Southwest Virginia,
and President and Chief Executive Officer of New Century Consultants Inc. Mr.
Nicely has been Chairman of the Company since its formation in 1993, and he was
Chairman of the Bank from its formation in 1994 until Mr. Carpenter was
appointed to that position in August 1997. Mr. Nicely has attended several
banking schools and seminars sponsored by the Virginia Bankers Association, the
Virginia Association of Community Banks, and the Independent Bankers Association
of America. Although Mr. Nicely has no prior direct experience as a full-time
bank employee, he has extensive education and experience in finance and
business. Mr. Nicely attended Dabney S. Lancaster Community College and Virginia
Tech. Mr. Nicely does not have an employment agreement at this time.
In addition to Mr. Nicely's professional history, he has remained
extremely active in the community. A partial list of his activities includes his
prior service as President of the Pulaski Rotary Club, the Pulaski County
Chamber of Commerce, and the New River Valley Economic Development Alliance;
Secretary/Treasurer of the Pulaski Redevelopment-Main Street Program; Chairman
of the Pulaski Development Commission; and President of New River Community
College Scholarship Foundation.
Executive Compensation
The following table shows the compensation paid by the Company or the
Bank to the Company's Chief Executive Officer for the last three fiscal years.
No officer of the Company or the Bank received compensation in excess of
$100,000 during any of the last three fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Other Annual
Name and Principal Position Year Salary Compensation(1)
<S> <C>
Wayne L. Carpenter 1996 $ 60,000 $ 2,915
President and Chief Executive Officer (2) 1995 58,900 2,599
1994 47,364 3,284
</TABLE>
(1) Includes payments by the Company of health insurance premiums for Mr.
Carpenter and 401(k) contributions.
(2) Mr. Carpenter was President and Chief Executive Officer of the Company and
the Bank at December 31, 1996. In August 1997, Hiawatha Nicely, Jr. was
appointed as President and Chief Executive Officer of the Company, and Mr.
Carpenter remained President and Chief Executive Officer of the Bank. See "-
Executive Management" above.
The executive officers of the Company are elected by the Board of
Directors and serve at the pleasure of the Board. There are no family
relationships among any of the directors or executive officers.
<TABLE>
<CAPTION>
Option Grants in Fiscal Year 1996
Percent of Total
Options
Granted to
Options Employees Exercise or Expiration
Name Granted in Fiscal Year(1) Base Price Date
<S> <C>
Wayne L. Carpenter 594 100% $8.00 April 12, 2005
</TABLE>
(1) Adjusted for the Company's five-for-four Common Stock split on May 30,
1997. Options for a total of 5,225 shares of Common Stock were granted
under the Stock Option Plan in 1996. Each director of the Company received
options under the plan.
No stock options were exercised by the Chief Executive Officer of the
Company during 1996. The following table sets forth certain information
regarding options held by Mr. Carpenter as of December 31, 1996.
<TABLE>
<CAPTION>
Aggregate Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 1996 (#) (1) December 31, 1996($) (2)
-------------------------------- ---------------------------
<S> <C>
Name Exercisable Unexercisable Exercisable Unexercisable
Wayne L. Carpenter 19,344 -- $19,344 --
</TABLE>
(1) The exercise price of these options is $8.00 per share.
(2) Assumes a current market value of $9.00 per share.
Director Compensation
Neither the Company nor the Bank has ever paid directors' fees, and
neither intends to pay directors' fees in the immediate future. Directors of the
Company participate in the Company's Stock Option Plan. See "Stock Option Plan."
Employment Agreements
Mr. Carpenter has an Employment Agreement with the Bank pursuant to
which he is employed as President and Chief Executive Officer. The Employment
Agreement provides for the initial term to expire August 28, 1999. The
Employment Agreement provides for a base salary of $60,000 and for bonuses to be
paid to Mr. Carpenter based upon the achievement by the Bank of specified levels
of pre-tax income. Beginning with the fourth fiscal year of the Bank's
operations, Mr. Carpenter will receive a cash bonus equal to 5% of the Bank's
pre-tax income, up to a maximum of 50% of his annual base salary. The Employment
Agreement also provides Mr. Carpenter with employee benefits to the extent
provided to other employees, reimbursement of Bank related expenses, including
dues for a business or civic club, payment for a life insurance policy in the
amount of three times Mr. Carpenter's base salary with his estate named as
beneficiary, and a 401(k) savings plan with matching contributions up to 3% of
his base salary.
The Bank may terminate Mr. Carpenter's employment without cause, but in
such an event or if Mr. Carpenter's employment is terminated due to a sale,
merger or dissolution of the Company and/or the Bank, the Bank will be obligated
to continue his salary and benefits for six months, but not pay any bonus.
Subject to the foregoing, the Bank may terminate Mr. Carpenter's employment with
cause, as defined in the Employment Agreement, without paying any additional
compensation. In addition, the Employment Agreement provides that following
termination of his employment with the Bank, Mr. Carpenter may not be employed
in the banking business in Pulaski County, any county that borders Pulaski
County, or the cities of Radford or Galax for a period of two years following
termination. No other employee of the Company or the Bank has an employment
agreement.
Stock Option Plan
The Company's Stock Option Plan (the "Plan") was approved by
shareholders at the 1995 Annual Meeting. The Plan provides for the issuance of
stock options and restricted stock covering an aggregate of 344,375 shares
(adjusted for the May 30, 1997 five-for-four stock split) to directors, officers
and certain key employees of the Company and the Bank and other participants
designated under the Plan (collectively, the "Participants"). The Plan provides
for the issuance of incentive stock options to officers and key employees of the
Company and the Bank and nonqualified stock options and restricted stock to all
Plan Participants. The Plan is administered by the Stock Option Committee of the
Board of Directors, which consists of Messrs. Bruce, Chrisley, and Wine and Mrs.
Pratt. The Company has agreed to issue no additional options to Participants
until at least one year after the date of this Prospectus.
Incentive Stock Options. The Plan provides for the issuance of
incentive stock options covering a maximum of 62,500 shares of Common Stock (as
adjusted for the May 30, 1997 five-for-four stock split), subject to future
adjustment for any stock splits, stock dividends, combinations or exchanges, or
other changes which affect the Common Stock. As discussed below, incentive stock
options afford certain tax benefits to the recipients. In general, to qualify as
an incentive stock option, the option must be granted only to employees of the
Company, be granted within ten years of the earlier of the date the Plan is
adopted by the Board or the date of approval of the Plan by the Company's
shareholders, not be exercisable more than ten years after the date of grant,
have an exercise price of not less than the fair market value of the Common
Stock at the time of grant, not be transferable other than by will or the laws
of descent and distribution, and be granted to a person who does not own more
than 10% of the total combined voting power of all classes of stock of the
Company or its subsidiaries at the time of grant. In addition, the Internal
Revenue Code limits the value of shares that can be exercised for the first time
by an employee in any one year under an incentive stock option plan to $100,000.
Nonqualified Stock Options. The Plan provides for automatic annual
grants of nonqualified stock options beginning in 1996 to the directors of the
Company on the day following the annual meeting of shareholders based on a
formula that reflects his or her performance during the year as judged by
certain objective criteria (the "Annual Director Grants"). The formula provides
that the number of shares of Common Stock covered by each Annual Director Grant
is 625 shares, subject to adjustment (i) downward by 31 shares, if the director
has missed more than one meeting of the Board of Directors since the last annual
meeting, (ii) downward by 31 shares if the director has failed to complete a
director education seminar since the last annual meeting, and (iii) upward or
downward by not more than 31 shares based on the percentage by which the Bank
exceeds or fails to exceed its performance goals. The exercise price is the
estimated market price on the grant date.
In 1995, the Company provided a one-time grant of options to the
directors based on performance criteria relating to their participation as
directors in the success of the Company and the Bank, including the number of
shares purchased in the initial offering, service in leadership positions on
committees of the Bank's Board of Directors, and other contributions. The
aggregate amount of shares covered by such options was 206,250, as adjusted for
the recent five-for-four stock split, exercisable until 2005. The exercise price
of those options, as adjusted for the recent stock split, is $8.00 per share.
All of the nonqualified options issuable to directors described above
provide that the options are forfeited should the Company or the Bank be
required to increase its equity capital pursuant to a capital directive issued
by the OCC and the holder does not exercise the options within certain time
frames.
Restricted Stock. The Plan permits the issuance of shares of Common
Stock to Participants subject to vesting requirements based on continued service
to the Company or the Bank, the Company's or the Bank's performance, the
individual performance of the grantee, and other conditions deemed appropriate
by the Stock Option Committee. Shares of restricted stock are not transferable
until vested. Assuming the maximum option grants described above are made based
on the Company's current management structure, there will be no shares of
restricted stock available for issuance under the Plan. There are no present
plans to issue any shares of restricted stock.
Option Grants in 1996
Stock Options for a total of 5,225 shares of Company Common Stock were
granted under the Plan in 1996. Of the total amount of options granted in 1996,
Wayne L. Carpenter, President and Chief Executive Officer of the Company during
1996, was awarded 594 Stock Options (adjusted for the Company's May 30, 1997
five-for-four stock split). Each director of the Company received Stock Options
under the Plan. No further options were awarded during 1996. See "Executive
Compensation."
Certain Relationships and Related Transactions
In 1994, the Company acquired an undeveloped 4.9 acre plot at the
corner of Memorial Drive and Lee Highway (U.S. Route 11) in Pulaski, Virginia,
for the site of the Bank's main office from a partnership 100% owned by Jack W.
Bowling, a director of the Company and the Bank, and five members of his
immediate family. The Company acquired the property in exchange for 31,250
shares of common stock (as adjusted for the May 30, 1997 five-for-four stock
split) valued at $250,000. The purchase price for the site was determined by the
Company after receiving three independent appraisals of the site, which averaged
approximately $284,500. This land had been owned by members of Mr. Bowling's
immediate family for more than twenty years. In connection with the sale of the
property, Mr. Bowling and the other sellers agreed to provide rough grading of
the site.
In 1997, the Bank was provided the opportunity to establish a branch in
downtown Pulaski in a building previously occupied by a regional bank. A limited
liability company in which Mr. James L. Webb, Jr., a director of the Company and
the Bank, is an investor with a 25% interest, acquired the property and leased
it to the Bank. The Bank has had the property independently appraised, and the
Bank believes that it is leasing that property at or below applicable market
rates.
The Company has purchased three insurance policies (a general business
policy, a worker's compensation policy and a key man term life policy in the
amount of $1,000,000 covering Wayne L. Carpenter) through James L. Webb, Jr., a
director of the Company and the Bank. The premiums for these policies totaled
approximately $1,235 in 1996.
The Company and the Bank have had and expect to have banking and other
transactions in the ordinary course of business with directors and officers of
the Company and the Bank and their affiliates, including members of their
families or corporations, partnerships or other organizations in which such
directors or officers have a controlling interest, on substantially the same
terms (including price, interest rates and collateral) as those prevailing at
the time for comparable transactions with unrelated parties. Such transactions
are not expected to involve more than the normal risk of collectibility nor
present other unfavorable features to the Company and the Bank. The Bank is
subject to a limit on the aggregate amount it may lend to its and the Company's
directors and officers as a group equal to its unimpaired capital and surplus
(or, under a regulatory exemption available to banks with less than $100 million
in deposits, twice that amount). Loans to individual directors and officers must
also comply with the Bank's lending policies and statutory lending limits, and
directors with a personal interest in any loan application are excluded from the
consideration of such loan application.
DESCRIPTION OF CAPITAL STOCK
Common Stock
The Company's Articles of Incorporation authorize the issuance of
10,000,000 shares of Common Stock, par value $5.00 per share, of which 546,399
shares were issued and outstanding on September 30, 1997 (as adjusted for the
five-for-four stock split to shareholders of record on May 30, 1997). There were
587 shareholders of record as of December 3, 1997. The Board of Directors may
issue shares of its Common Stock from time to time for such consideration as the
Board may deem advisable without further shareholder approval.
Preferred Stock
The Company's Articles of Incorporation authorize the issuance of
1,000,000 shares of a special class of stock, par value $1.00 per share
("Preferred Stock"). The Board of Directors is authorized by the Articles of
Incorporation, without shareholder approval, to designate preferences,
limitations and related rights for part or all of the Preferred Stock in such
series as may be determined by the Board of Directors. This authority gives the
Board of Directors of the Company flexibility in the structuring and financing
of acquisitions and other financial activities. The Company may use the
Preferred Stock to help deter hostile takeover attempts by assigning certain
rights and preferences to the Preferred Stock which could adversely affect the
voting power of the holders of Company Common Stock thus making it more
difficult for a third party to gain control of the Company. No shares of
Preferred Stock are currently issued and the board of directors of the Company
has no immediate intention of issuing such shares.
The summary below of certain other characteristics of the Company's
capital stock does not purport to be complete and is qualified in its entirety
by the provisions of the Virginia SCA, and the Company's Articles of
Incorporation and Bylaws.
Dividend Rights. The Company may pay dividends as declared from time to
time by the Board of Directors out of funds legally available therefore, subject
to certain restrictions imposed by state and federal laws. The Board of
Directors of the Company expects to follow a policy of retaining all earnings to
provide funds to operate and expand the business. Consequently, it is unlikely
that any cash dividends will be paid in the near future. See "Dividend Policy."
The holders of Common Stock will be entitled to receive and share equally in
such dividends as may be declared by the Board of Directors.
Voting Rights. In all elections of directors, each shareholder shall
have the right to cast one vote for each share of stock owned by him for as many
persons as there are directors to be elected. Shareholders of the Company do not
have cumulative voting rights. On any other question to be determined by a vote
of shares at any meeting of shareholders, each shareholder shall be entitled to
one vote for each share of stock owned and entitled to vote by him.
Preemptive Rights. Holders of Common Stock have no preemptive rights
with respect to issues of Common Stock.
Liquidation Rights. Upon liquidation, after payment of all creditors,
the remaining assets of the Company would be distributed to the holders of the
Common Stock on a pro rata basis.
Calls and Assessments. All Common Stock outstanding is fully paid and
nonassessable.
Limitation of Liability of Directors. The Articles of Incorporation
provide no director shall be personally liable to the Company or its
shareholders for monetary damages for breach of the duty of care or any other
duty as a director, except that such liability shall not be eliminated if the
director engaged in willful misconduct or a knowing violation of the criminal
law or of any federal or state securities law.
Staggered Terms for Directors. Directors of the Company serve
staggered, three-year terms. The number of directors may be fixed between the
range of five and twenty-five by the Board of Directors. Staggering the terms of
the Board may have an anti-takeover effect since two annual meetings may be
required to elect a majority of the Board of Directors.
Removal of Directors. The Virginia SCA provides that shareholders may
remove directors with or without cause, unless the articles of incorporation
provide that directors may be removed only with cause. Directors may be removed
only at a meeting called for that purpose. The Articles of Incorporation of the
Company provide that a director may be removed only for cause. Currently, under
Virginia law and the Company's Articles of Incorporation, a vote of a majority
of the shares entitled to vote on the election of directors is required to
remove the directors.
Reports to Shareholders. The Company furnishes its shareholders with
annual reports, including audited financial statements, and quarterly reports
containing unaudited financial information.
Transfer Agent. The Company's transfer agent is First Citizens Bank &
Trust Company, Raleigh, North Carolina.
State Anti-Takeover Statutes. The Virginia SCA restricts transactions
between the Company and its affiliates and potential acquirors. The following
summaries of two primary chapters of the Virginia SCA are necessarily general
and are not intended to be a complete description of all the features and
consequences of those provisions, and are qualified in their entirety by
reference to the statutory provisions contained in the Virginia SCA.
The Virginia Affiliated Transactions Statute restricts certain
transactions ("affiliated transactions") between a Virginia corporation having
more than 300 shareholders of record and a beneficial owner of more than 10% of
any class of voting stock (an "interested shareholder"). An "affiliated
transaction" is defined in the Corporation Act as any of the following
transactions with or proposed by an interested shareholder: a merger, a share
exchange; certain dispositions of assets or guaranties of indebtedness other
than in the ordinary course of business; certain significant securities
issuances; dissolution of the corporation; or reclassification of the
corporation's securities. Under the statute, an affiliated transaction generally
requires the approval of a majority of disinterested directors and two-thirds of
the voting shares of the corporation other than shares owned by an interested
shareholder during a three-year period commencing as of the date the interested
shareholder crosses the 10% threshold. This special voting provision does not
apply if a majority of disinterested directors approved the acquisition of the
more than 10% interest in advance. After the expiration of the three-year
moratorium, an interested shareholder may engage in an affiliated transaction
only if it is approved by a majority of disinterested directors or by two-thirds
of the outstanding shares held by disinterested shareholders, or if the
transaction complies with certain fair price provisions. This special voting
rule is in addition to, and not in lieu of, other voting provisions contained in
the Corporation Act and the Company's Articles of Incorporation.
The Virginia Control Share Acquisitions statute also is designed to
afford shareholders of a public company incorporated in Virginia protection
against certain types of non-negotiated acquisitions in which a person, entity
or group ("Acquiring Person") seeks to gain voting control of that corporation.
With certain enumerated exceptions, the statute applies to acquisitions of
shares of a corporation which would result in an Acquiring Person's ownership of
the corporation's shares entitled to vote in the election of directors falling
within any one of the following ranges: 20% to 33-1/3%, 33-1/3% to 50% or 50% or
more (a "Control Share Acquisition"). Shares that are the subject of a Control
Share Acquisition ("Control Shares") will not be entitled to voting rights
unless the holders of a majority of the "Disinterested Shares" vote at an annual
or special meeting of shareholders of the corporation to accord the Control
Shares with voting rights. Disinterested Shares do not include shares owned by
the Acquiring Person or by officers and inside directors of the target company.
Under certain circumstances, the statute permits an Acquiring Person to call a
special shareholders' meeting for the purpose of considering granting voting
rights to the holders of the Control Shares. As a condition to having this
matter considered at either an annual or special meeting, the Acquiring Person
must provide shareholders with detailed disclosures about his identity, the
method and financing of the Control Share Acquisition and any plans to engage in
certain transactions with, or to make fundamental changes to, the corporation,
its management or business. Under certain circumstances, the statute grants
dissenters' rights to shareholders who vote against granting voting rights to
the Control Shares. The Virginia Control Share Acquisitions Statute also enables
a corporation to make provisions for redemption of Control Shares with no voting
rights. A corporation may opt-out of the statute, which the Company has not
done, by so providing in its articles of incorporation or bylaws. Among the
acquisitions specifically excluded from the statute are acquisitions which are a
part of certain negotiated transactions to which the corporation is a party, and
which, in the case of mergers or share exchanges, have been approved by the
corporation's shareholders under other provisions of the Virginia SCA.
SUPERVISION AND REGULATION
General
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of the Company and the Bank can be affected not only by management
decisions and general economic conditions, but also by the statutes administered
by, and the regulations and policies of, various governmental regulatory
authorities including, but not limited to, the Federal Reserve Board ("FRB"),
the FDIC, the OCC, the Internal Revenue Service, federal and state taxing
authorities, and the Commission. The effect of such statutes, regulations and
policies can be significant, and cannot be predicted with a high degree of
certainty.
Federal and state laws and regulations generally applicable to
financial institutions and their holding companies regulate, among other things,
the scope of business, investments, reserves against deposits, capital levels
relative to operations, the nature and amount of collateral for loans, the
establishment of branches, mergers, consolidations and dividends. The system of
supervision and regulation applicable to the Company and the Bank establishes a
comprehensive framework for their respective operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors, rather than the shareholders, of the Bank.
The following references to material statutes and regulations affecting
the Company and the Bank are brief summaries thereof and do not purport to be
complete, and are qualified in their entirety by reference to such statutes and
regulations. Any change in applicable law or regulations may have a material
effect on the business of the Company and the Bank.
CNB Holdings, Inc.
Bank Holding Companies
As a registered holding company, the Company is regulated under the
Bank Holding Company Act ("BHC Act") and is subject to supervision and regular
inspection by the FRB. The FRB has jurisdiction under the BHC Act to approve any
bank or nonbank acquisition, merger or consolidation proposed by a bank holding
company. The BHC Act generally limits the activities of a bank holding company
and its subsidiaries to that of banking, managing or controlling banks, or any
other activity which is so closely related to banking, or to managing or
controlling banks, that it is a proper incident thereof.
Previously, the BHC Act prohibited the FRB from approving an
application from a bank holding company to acquire the shares of a bank located
outside the state in which the operations of the holding company's principal
bank subsidiary was located, unless such acquisition was expressly authorized by
statute of the state where the bank whose shares were to be acquired was
located. Effective June 1, 1997, the restriction on interstate acquisitions was
abolished and bank holding companies from any state are able to acquire banks
and bank holding companies located in any other state, subject to certain
conditions, including nationwide and state imposed concentration limits. Also,
banks may now branch across state lines by acquisition, merger or de novo
(unless state law permitted such interstate branching at an earlier date),
provided certain conditions are met, including that applicable state law must
expressly permit such interstate branching.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries that are
designed to reduce potential loss exposure to the depositors of the depository
institutions and to the FDIC insurance fund. For example, under a policy of the
FRB, a bank holding company is required to serve as a source of financial
strength to its subsidiary depository institutions and to commit resources to
support such institutions in circumstances where it might not do so absent such
policy. A bank holding company's failure to meet its obligations to serve as a
source of strength to its subsidiary banks will generally be considered by the
FRB to be an unsafe and unsound banking practice or a violation of the FRB's
regulations or both.
Banking laws also provide that amounts received from the liquidation or
other dissolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of any bank or bank subsidiary.
The Company also was required to register in Virginia with the State
Corporation Commission ("SCC") under the financial institution holding company
laws of Virginia. Accordingly, the Company, and to a limited extent the Bank,
will be subject to regulation and supervision by the SCC.
Finally, the Company will be subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended, including but
not limited to, filing annual, quarterly and other current reports with the
Commission.
Regulatory Capital Requirements
All financial institutions are required to maintain minimum levels of
regulatory capital. The FRB and OCC have established substantially similar
risk-based and leveraged capital standards for the financial institutions they
regulate. These regulatory agencies also may impose capital requirements in
excess of these standards on a case-by-case basis for various reasons, including
financial condition or actual or anticipated growth. Under the risk-based
capital requirements of these regulatory agencies, the Bank is required to
maintain a minimum ratio of total capital to risk-weighted assets of at least
8%. At least half of the total capital is required to be "Tier l capital," which
consists principally of common and certain qualifying preferred shareholders'
equity, less certain intangibles and other adjustments. The remainder, "Tier 2
capital," consists of a limited amount of subordinated and other qualifying debt
(including certain hybrid capital instruments) and a limited amount of the
general loan loss reserve. The Tier 1 and total capital to risk-weighted assets
ratios of the Bank as of September 30, 1997 are 13.54% and 14.65%, respectively,
exceeding the minimums required. Based upon the applicable FRB and OCC
regulations, at September 30, 1997, the Company and the Bank would be considered
"well capitalized." (See the "Capital Ratios" table in this section below.)
In addition, the federal regulatory agencies have established a minimum
leveraged capital ratio (Tier 1 capital to period end total assets). These
guidelines provide for a minimum leveraged capital ratio of 3% for banks and
their respective holding companies that meet certain specified criteria,
including that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
that minimum. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. The leverage ratio of the
Bank as of September 30, 1997, was 8.02%, which was above the minimum
requirements.
Each federal regulatory agency is required to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multifamily mortgages. The FRB has solicited comments on a proposed framework
for implementing the interest rate risk component of the risk-based capital
guidelines. Under the proposal, an institution's assets, liabilities, and
off-balance sheet positions would be weighted by risk factors that approximate
the instruments' price sensitivity to a 100 basis point change in interest
rates. Institutions with interest rate risk exposure in excess of a threshold
level would be required to hold additional capital proportional to that risk. In
1995, the FRB and the OCC solicited comments on a proposed revision to the
risk-based capital guidelines to take account of concentration of credit risk
and the risk of nontraditional activities. The revision proposed to amend each
agency's risk-based capital standards by explicitly identifying concentration of
credit risk and the risk arising from nontraditional activities, as well as an
institution's ability to manage those risks, as important factors to be taken
into account by the agency in assessing an institution's overall capital
adequacy. The proposal was adopted as a final rule by the FRB and the OCC and
subsequently became effective on January 17, 1996. The Company and the Bank do
not expect the final rule to have a material impact on their respective capital
requirements; however, one or more of the applicable federal regulatory agencies
may, as an integral part of their examination process, require either the
Company or the Bank to provide additional capital based on such agency's
judgment of information available at the time of examination.
The following table summarizes the minimum regulatory and current
capital ratios for the Company at September 30, 1997.
<TABLE>
<CAPTION>
Capital Ratios
Regulatory
Minimum September 30, 1997
Risk-based capital:
<S> <C>
Tier 1 (1) 4.00% 13.54%
Total (1) 8.00 14.65%
Leverage (1) 3.00 8.02%
Total shareholders' equity
to total assets N/A 8.47%
</TABLE>
(1) Risk-based capital ratios and leverage ratios are applicable only to the
Bank and are period end calculations.
Community National Bank
In addition to the regulatory provisions regarding holding companies
addressed above, the Bank is subject to extensive regulation as well. The Bank
is a federally chartered national bank, and as such it is subject to regulation
by the OCC. The Bank must file reports with the OCC concerning its activities
and financial condition, and in addition obtain regulatory approval before
entering into certain transactions such as mergers with or acquisitions of other
financial institutions. The Bank's deposit accounts are insured up to applicable
limits by the FDIC. See, "--Insurance of Accounts, Assessments and Regulation by
the FDIC". The OCC, as the primary regulator of national banks, has enforcement
authority over all national banks. The FDIC also has authority to impose
enforcement action on such banks and all "institution-affiliated parties,"
including directors, officers, controlling stockholders, and other persons or
entities participating in the affairs of the national banks, as well as
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to harm an insured institution. The OCC conducts periodic
examinations to evaluate each national bank's compliance with various regulatory
requirements. The OCC conducted its most recent regular supervisory examination
of the Bank on September 29, 1997. The Bank is also a member of the FRB.
National banks have restrictions on their investment and lending
authorities. Secured or unsecured loans for commercial, corporate, business or
agricultural purposes are subject to limitations based upon the institution's
capital. In addition, the aggregate amount of all loans secured by liens on
nonresidential real property may not exceed prescribed multiples of the
institution's regulatory capital; however, an institution may be permitted to
exceed a specific lending limit only if the OCC determines that relief from this
restriction poses no significant risk to the safe and sound operation of the
national bank and is consistent with prudent operating practices. National banks
may make loans for personal, family or household purposes, but such loans and
investments are also subject to limitations. At December 31, 1996 and September
30, 1997, the Bank was in compliance with each of the applicable limitations and
requirements.
Additional limitations are imposed on the aggregate amount of loans
that a national bank may make to any one borrower, including related entities.
With certain limited exceptions, a loan-to-one-borrower not fully secured by
collateral having a market value at least equal to the amount of the loan may
not exceed 15% of the bank's unimpaired capital and surplus. A
loan-to-one-borrower fully secured by readily marketable collateral at least
equal in value to the amount of the loan outstanding may not exceed an
additional 10% of the bank's unimpaired capital and surplus. At September 30,
1997, the maximum amount which the Bank could have loaned unsecured to one
borrower (and related entities) under the limit imposed was approximately
$500,000. At December 31, 1996 and September 30, 1997, the Bank had no borrowers
to which it had outstanding loans in excess of its loans-to-one-borrower limit.
Insurance of Accounts, Assessments and Regulation by the FDIC
The Bank is a member of the Bank Insurance Fund ("BIF") of the FDIC. As
a BIF insured institution, the Bank is subject to FDIC rules and regulations as
administrator of the BIF. The Bank's deposits are insured up to $100,000 per
insured depositor, as defined by law and regulation. As insurer, the FDIC is
authorized to conduct examinations of and to require reporting by BIF
institutions. The actual assessment to be paid by each BIF member is based on
the institution's assessment risk classification and whether the institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns.
Under the FDIC's risk-based insurance system, BIF-insured institutions
are currently assessed premiums of between zero and twenty seven cents per $100
of eligible deposits, depending on the institution's capital position and other
supervisory factors. Congress recently enacted legislation that, among other
things, provides for assessments against BIF-insured institutions that will be
used to pay certain Financing Corporation ("FICO") obligations. In addition to
any BIF insurance assessments, BIF-insured banks are expected to make payment
for the FICO obligations equal to an estimated $0.0129 per $100 of eligible
deposits each year during 1997 through 1999, and an estimated $0.024 per $100 of
eligible deposits thereafter. The Bank is currently classified as
"well-capitalized" and therefore pays the lowest amount allowed. As a BIF
institution, the Bank's BIF assessment rate falls within a range of 0.00% to
0.31% of BIF insured deposits depending upon, among other things, the
institution's regulatory capital levels and other factors which relate to the
institution's perceived risk to the insurance funds administered by the FDIC.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the insurance fund. Also, the FDIC may initiate enforcement
actions against banks after first giving the institution's primary regulatory
authority an opportunity to take such action. The FDIC may terminate the deposit
insurance of any depository institution, including the Bank, if it determines,
after a hearing, that the institution has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations,
or has violated any applicable law, regulation, order or any condition imposed
in writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two
years, as determined by the FDIC. Management is aware of no existing
circumstances that could result in termination of the Bank's deposit insurance.
Other Safety and Soundness Regulations
The federal banking agencies have broad powers under current federal
law to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," as such terms are defined under uniform regulations defining
such capital levels issued by each of the federal banking agencies.
Each of the federal banking agencies also must develop regulations
addressing certain safety and soundness standards for insured depository
institutions and depository institution holding companies, including
compensation standards, operational and managerial standards, asset quality,
earnings and stock valuation. The federal banking agencies have issued a joint
notice of proposed rulemaking, which requested comment on the implementation of
these standards. The proposed rule sets forth general operational and managerial
standards in the areas of internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth and compensation, fees and benefits. The proposal contemplates that
each federal agency would determine compliance with these standards through the
examination process, and if necessary to correct weaknesses, require an
institution to file a written safety and soundness compliance plan. The Company
has not yet determined the effect that the proposed rule would have on its
operations and the operations of the Bank if the proposed rule is enacted
substantially as proposed.
Community Reinvestment
The requirements of the Community Reinvestment Act ("CRA") affect the
Bank. The CRA imposes on financial institutions an affirmative obligation to
help meet the credit needs of their local communities, including low- and
moderate-income neighborhoods, consistent with the safe and sound operation of
those institutions. Each financial institution's efforts in helping meet
community credit needs currently is evaluated as part of the examination process
pursuant to a new regulation recently adopted by the banking regulatory
agencies. Under the new regulation a financial institution's efforts in helping
meet its community's credit needs are evaluated according to a three-pronged
test (lending, investment and service), which replaces the twelve assessment
factors used previously. The grade received by a bank is considered in
evaluating mergers, acquisitions and applications to open a branch or facility.
To the best knowledge of the Bank, it is meeting its obligations under the CRA.
PLACEMENT AGENT
The Agency Agreement between the Company and Davenport & Company LLC
(the Placement Agent) provides that up to 330,000 shares of Common Stock will be
offered by the Placement Agent, acting as agent for the Company, on a "best
efforts" basis, subject to offers and sales by the Company to Present
Shareholders. The offering is being made without a firm commitment underwriting
by the Placement Agent. The Placement Agent has made no commitment to, and will
not, purchase all or any part of the Shares. Also, the Company has the right at
its sole option, prior to the closing of the Offering, to issue up to a maximum
of 50,000 additional shares of Common Stock. Sales of such additional shares may
result in additional compensation for the Placement Agent. There is no minimum
number of shares offered.
The Placement Agent has informed the Company that it proposes to offer
the Shares, as agent for the Company, directly to the public at the public
offering price set forth on the cover page of this Prospectus and to selected
dealers who are members of the National Association of Securities Dealers, Inc.
at such price less a concession not in excess of $.36 per Share. No commission
will be paid to the Placement Agent or any selected dealers for Shares sold to
Present Shareholders.
The Placement Agent has been retained by the Company to provide advice
regarding the offering, including the offering of Shares to the Present
Shareholders, assist in the development of marketing and sales plans and provide
other financial advice requested by the Company. For these services the
Placement Agent will receive a fee of $25,000. The Company has also agreed to
reimburse the Placement Agent for its reasonable out-of-pocket expenses related
to the offering, including the fees of its legal counsel, and to indemnify the
Placement Agent against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
The Company's officers and directors have agreed that they will not
offer, sell or contract to sell or otherwise dispose of shares of Common Stock
(other than by operation of law, or by gift to a person who agrees not to so
sell) for a period of 180 days after the date of the closing of the offering
made by this Prospectus without the prior written consent of the Placement
Agent.
The Placement Agent does not intend to sell the Shares to any accounts
over which it exercises discretionary authority.
LEGAL OPINIONS
Certain legal matters relating to the Shares offered hereby will be
passed upon for the Company by Mays & Valentine, L.L.P., Richmond, Virginia, and
for the Placement Agent by Williams Mullen Christian & Dobbins, Richmond,
Virginia.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and December 31, 1995 and for the three years ended December 31, 1996,
included in this Prospectus have been audited by Larrowe, Cardwell & Company,
LC, independent auditors, whose report thereon appears elsewhere herein and are
included in reliance upon the reports of such firm, given upon their authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the "Commission").
These may be inspected and copied at the public reference facilities of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, NY
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661-2511. Copies of such material can be obtained by mail from the Office of
Filings and Information Services (public information section) of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and also
may be obtained from the Electronic Data Gathering and Retrieval System
("EDGAR") of the Commission, found on the internet at http://www.sec.gov.
The Company has filed with the Commission a registration statement
under the Securities Act of 1933 with respect to the Common Stock offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus does not contain all the information set forth in the registration
statement. This Prospectus contains a description of the material terms and
features of all material contracts, reports or exhibits to the registration
statement required to be described; however, the statements contained in this
Prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document. For further information with respect to
the Company, reference is made to the Registration Statement and exhibits filed
therewith, which may be examined without charge at, or copies obtained upon
payment of prescribed fees from, the Commission and at the regional offices of
the Commission at the locations listed above or on the Commission's website.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Virginia corporate law and the Company's articles of incorporation and
bylaws provide for indemnification for directors, officers, and employees of the
Company, possibly even indemnification for liabilities arising under the
Securities Act of 1933, as amended. The Company has been advised that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act of 1933 and is unenforceable.
<PAGE>
<TABLE>
CNB HOLDINGS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
INTERIM PERIODS (UNAUDITED)
Consolidated Balance Sheet as of September 30, 1997........................................................F-2
Consolidated Statements of Operations for the nine months ended September 30, 1997 and 1996................F-3
Consolidated Statements of Stockholders' Equity for the nine months ended
September 30, 1997 and 1996...........................................................................F-4
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996................F-5
Condensed Notes to Consolidated Financial Statements.......................................................F-6
FULL FISCAL YEARS (AUDITED)
Independent Auditor's Report...............................................................................F-7
Consolidated Balance Sheets as of December 31, 1996 and 1995...............................................F-8
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994.................F-9
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995
and 1994..............................................................................................F-10
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994.................F-11
Notes to Consolidated Financial Statements.................................................................F-12
<PAGE>
===================================================================================================================
Consolidated Balance Sheet
September 30, 1997 (unaudited)
- -------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 2,139,404
Federal funds sold 34,000
Investment securities available for sale 12,912,409
Loans, net of allowance for loan losses of $248,000 20,419,208
Property and equipment, net 1,638,110
Accrued income 292,819
Other assets 212,952
----------------
Total assets $ 37,648,902
================
Liabilities
Demand deposits $ 2,686,453
Interest-bearing demand deposits 7,668,424
Savings deposits 4,412,375
Large denomination time deposits 6,971,876
Other time deposits 12,587,571
----------------
Total deposits 34,326,699
Accrued interest payable 91,059
Other liabilities 41,106
----------------
Total liabilities 34,458,864
Commitments and contingencies
Stockholders' equity
Preferred stock, $1 par value; 1,000,000 shares
authorized; none outstanding -
Common stock, $5 par value; 10,000,000 shares
authorized; 546,399 shares outstanding 2,731,995
Surplus 1,609,748
Retained deficit (1,132,374)
Unrealized appreciation (depreciation) on investment
securities available for sale (19,331)
----------------
Total stockholders' equity 3,190,038
----------------
Total liabilities and stockholders' equity $ 37,648,902
================
See Condensed Notes to Consolidated Financial Statements
===================================================================================================================
<PAGE>
Consolidated Statements of Operations
Nine months ended September 30, 1997 and 1996 (unaudited)
- -------------------------------------------------------------------------------------------------------------------
1997 1996
--------------- ----------------
Interest income:
Loans and fees on loans $ 1,160,466 $ 647,510
Federal funds sold 30,072 40,215
Taxable investment securities 572,554 425,415
--------------- ----------------
Total interest income 1,763,092 1,113,140
--------------- ----------------
Interest expense:
Deposits 976,274 604,181
Federal funds purchased 13,661 -
--------------- ----------------
Total interest expense 989,935 604,181
--------------- ----------------
Net interest income 773,157 508,959
Provision for loan losses 125,693 79,745
--------------- ----------------
Net interest income after provision
for loan losses 647,464 429,214
--------------- ----------------
Noninterest income:
Service charges on deposit accounts 79,595 62,719
Net realized gains (losses) on sales of securities 1,166 22,837
Other income 27,606 19,646
--------------- ----------------
Total noninterest income 108,367 105,202
--------------- ----------------
Noninterest expense:
Salaries and employee benefits 420,741 274,043
Occupancy expense 54,059 48,667
Equipment expense 58,222 46,661
Other expense 392,460 283,216
--------------- ----------------
Total noninterest expense 925,482 652,587
--------------- ----------------
Net loss $ (169,651) $ (118,171)
=============== ================
Net loss per common share $ (.31) $ (.22)
=============== ================
Weighted average shares outstanding 546,464 546,531
=============== ================
See Condensed Notes to Consolidated Financial Statements
===================================================================================================================
<PAGE>
Consolidated Statements of Stockholders' Equity
Nine months ended September 30, 1997 and 1996 (unaudited)
- -------------------------------------------------------------------------------------------------------------------
Unrealized
Retained Appreciation
Common Stock Earnings (Depreciation)
Shares Amount Surplus (Deficit) on Securities Total
------ ------ ------- --------- ------------- -----
December 31, 1995 437,042 $ 2,185,210 $ 2,155,867 $ (777,078) $ 58,803 $ 3,622,802
Common stock issued 183 915 915 - - 1,830
Net loss - - - (118,171) - (118,171)
Net change in unrealized
depreciation on investment
securities available for sale - - - - (257,299) (257,299)
----------- ------------ ------------ ------------- ------------- ------------
September 30, 1996,
(unaudited) 437,225 $ 2,186,125 $ 2,156,782 $ (895,249) $ (198,496) $ 3,249,162
============= ============ ============= ============== ============= ============
December 31, 1996 437,225 $ 2,186,125 $ 2,156,782 $ (962,723) $ (56,663) $ 3,323,521
Stock dividend 109,306 546,530 (546,530) - - -
Redemption of fractional
shares (132) (660) (504) - - (1,164)
Net loss - - - (169,651) - (169,651)
Net change in unrealized
depreciation on investment
securities available for sale - - - - 37,332 37,332
----------- ------------ ------------- ------------- ------------ ------------
September 30, 1997,
(unaudited) 546,399 $ 2,731,995 $ 1,609,748 $ (1,132,374) $ (19,331) $ 3,190,038
============= ============ ============= ============= ============ ============
See Condensed Notes to Consolidated Financial Statements
===================================================================================================================
<PAGE>
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996 (unaudited)
- -------------------------------------------------------------------------------------------------------------------
1997 1996
--------------- ----------------
Cash flows from operating activities:
Net loss $ (169,651) $ (118,171)
Adjustments to reconcile net loss
to net cash used by operations:
Depreciation and amortization 65,816 63,761
Provision for loan losses 125,693 79,745
Net realized gains on securities (1,166) (22,837)
Accretion of discount on securities, net (64,261) (12,090)
Changes in assets and liabilities:
Accrued income (31,271) (93,459)
Other assets (64,587) (37,764)
Accrued interest payable 54,447 46,555
Other liabilities 24,618 667
--------------- ----------------
Net cash used by operating activities (60,362) (93,593)
--------------- ----------------
Cash flows from investing activities:
Net (increase) decrease in federal funds sold 368,000 (1,382,000)
Purchases of investment securities (9,909,056) (12,465,306)
Sales of investment securities 1,362,582 7,194,109
Maturities of investment securities 7,049,588 426,514
Net increase in loans (7,864,536) (4,210,469)
Purchases of property and equipment (280,644) (135,390)
--------------- ----------------
Net cash used in investing activities (9,274,066) (10,572,542)
--------------- ----------------
Cash flows from financing activities:
Redemption of common stock (1,164) -
Proceeds from issuance of common stock - 1,830
Net increase in demand, NOW, and savings deposits 1,532,572 7,250,730
Net increase in time deposits 8,753,425 3,527,548
--------------- ----------------
Net cash provided by financing activities 10,284,833 10,780,108
--------------- ----------------
Net increase in cash and cash equivalents 950,405 113,973
Cash and cash equivalents, beginning 1,188,999 1,143,478
--------------- ----------------
Cash and cash equivalents, ending $ 2,139,404 $ 1,257,451
=============== ================
Supplemental disclosure of cash flow information:
Interest paid $ 935,488 $ 557,676
---------------- ----------------
Income taxes paid $ - $ -
================ ================
See Condensed Notes to Consolidated Financial Statements
===================================================================================================================
<PAGE>
Condensed Notes to Consolidated Financial Statements
As of September 30, 1997 and the nine months ended September 30, 1997 and 1996
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies
Organization
CNB Holdings, Inc. (the Company) is a bank holding company incorporated under
the laws of Virginia on April 29, 1993. On August 29, 1994, the Company's wholly
owned subsidiary, Community National Bank (the Bank), was chartered under the
laws of the United States and the Bank opened for business in Pulaski, Virginia.
As an FDIC insured National Banking Association, the Bank operates two banking
offices and is subject to regulation by the Comptroller of the Currency. The
Company is regulated by the Federal Reserve.
Basis of Presentation
The consolidated financial statements as of September 30, 1997, and for the nine
month periods ended September 30, 1997 and 1996, are included herein, and have
been prepared by CNB Holdings, Inc., without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the information furnished in the interim consolidated financial
statements reflects all adjustments necessary to present fairly the Company's
consolidated financial position, results of operations, changes in stockholders'
equity and cash flows for such interim periods. Management believes that all
interim period adjustments are of a normal recurring nature. These unaudited
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and the notes thereto as of
December 31, 1996, appearing elsewhere herein.
The accounting and reporting policies of the Company and the Bank follow
generally accepted accounting principles and general practices within the
financial services industry.
Note 2. Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending other loan facilities to customers. Collateral held
varies as specified above and is required in instances which the Bank deems
necessary.
Note 3. Earnings Per Common Share
Stock Dividend
Net income per share is computed based on the weighted average number of shares
outstanding during the period after giving retroactive effect to stock splits
and dividends. The Company declared a 25% stock dividend payable to stockholders
of record as of May 30, 1997, which resulted in the issuance of 109,174 shares
of Common Stock.
Note 4. Subsequent Events
Sale of Common Stock
The Company has filed with the Securities and Exchange Commission for approval
to sale up to 330,000 shares of common stock at $9.00 per share. Management
expects proceeds of the stock sale, net of commissions and expenses to be
approximately $2,745,000, assuming all 330,000 shares are sold.
<PAGE>
[ LARROWE, CARDWELL & COMPANY, LC LETTER HEAD]
Independent Auditor's Report
Board of Directors and Stockholders
CNB Holdings, Inc.
Pulaski, Virginia
We have audited the consolidated balance sheets of CNB Holdings, Inc. and
subsidiary (Community National Bank) as of December 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CNB Holdings, Inc.
and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Larrowe, Cardwell & Company, LC
Pulaski, Virginia
January 17, 1997
================================================================================
<PAGE>
Consolidated Balance Sheets
December 31, 1996 and 1995
- -------------------------------------------------------------------------------------------------------------------
1996 1995
--------------- ----------------
Assets
Cash and due from banks $ 1,188,999 $ 1,143,478
Federal funds sold 402,000 694,000
Investment securities available for sale 11,312,764 5,465,263
Loans, net of allowance for loan losses
of $155,000 in 1996 and $81,202 in 1995 12,722,865 6,689,951
Property and equipment, net 1,408,596 1,328,951
Accrued income 261,548 116,099
Other assets 120,551 163,371
--------------- ----------------
Total assets $ 27,417,323 $ 15,601,113
=============== ================
Liabilities
Demand deposits $ 2,629,100 $ 1,556,534
Interest-bearing demand deposits 8,266,172 1,900,877
Savings deposits 2,339,408 1,329,739
Large denomination time deposits 3,079,169 1,450,468
Other time deposits 7,726,853 5,699,077
--------------- ----------------
Total deposits 24,040,702 11,936,695
Accrued interest payable 36,612 24,198
Other liabilities 16,488 17,418
--------------- ----------------
Total liabilities 24,093,802 11,978,311
--------------- ----------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $1 par value; 1,000,000 shares
authorized; none outstanding - -
Common stock, $5 par value; 10,000,000 shares
authorized; 437,225 shares outstanding in 1996 and
437,042 shares outstanding in 1995 2,186,125 2,185,210
Surplus 2,156,782 2,155,867
Retained deficit (962,723) (777,078)
Unrealized appreciation (depreciation) on investment
securities available for sale (56,663) 58,803
--------------- ----------------
Total stockholders' equity 3,323,521 3,622,802
--------------- ----------------
Total liabilities and stockholders' equity $ 27,417,323 $ 15,601,113
=============== ================
See Notes to Consolidated Financial Statements
===================================================================================================================
<PAGE>
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------- --------------- ----------------
Interest income:
Loans and fees on loans $ 926,222 $ 377,130 $ 28,100
Federal funds sold 70,412 56,610 33,545
Taxable investment securities 578,359 377,641 52,904
Deposits with banks - - 23,553
---------------- --------------- ----------------
Total interest income 1,574,993 811,381 138,102
Interest expense on deposits 853,867 346,213 25,776
---------------- --------------- ----------------
Net interest income 721,126 465,168 112,326
Provision for loan losses 103,947 68,089 30,000
---------------- --------------- ----------------
Net interest income after provision
for loan losses 617,179 397,079 82,326
---------------- --------------- ----------------
Noninterest income:
Service charges on deposit accounts 92,806 40,886 2,300
Net realized gains on sales of securities 16,550 10,432 -
Other income 17,190 8,570 264
Total noninterest income 126,546 59,888 2,564
---------------- --------------- ----------------
Noninterest expense:
Salaries and employee benefits 387,712 328,559 199,037
Occupancy expense 76,543 67,469 29,611
Equipment expense 62,109 39,776 10,473
Other expense 403,006 352,745 172,521
---------------- --------------- ----------------
Total noninterest expense 929,370 788,549 411,642
---------------- --------------- ----------------
Net loss $ (185,645) $ (331,582) $ (326,752)
================ =============== ================
Net loss per common share $ (.42) $ (.76) $ (1.48)
================ =============== ================
Weighted average shares outstanding 437,225 437,042 220,323
================ =============== ================
See Notes to Consolidated Financial Statements
===================================================================================================================
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------------------------------------------
Unrealized
Retained Appreciation
Common Stock Earnings (Depreciation)
Shares Amount Surplus (Deficit) on Securities Total
------ ------ ------- --------- ------------- -----
December 31, 1993 11 $ 11 $ - $ (118,744) $ - $ (118,733)
Net loss - - - (326,752) - (326,752)
Common stock issued for:
Cash 411,950 2,059,750 2,059,750 - - 4,119,500
Land 25,000 125,000 125,000 - - 250,000
Exchange of 10 initial
shares for 92 shares
and cash 82 450 460 - - 910
Redemption of initial share (1) (1) - - - (1)
Costs of common
stock offering - - (29,343) - - (29,343)
Unrealized depreciation on
investment securities
available for sale - - - - (47,769) (47,769)
------------- ------------ ------------ ------------- ------------- -------------
December 31, 1994 437,042 2,185,210 2,155,867 (445,496) (47,769) 3,847,812
Net loss - - - (331,582) - (331,582)
Net change in unrealized
depreciation on investment
securities available for sale - - - - 106,572 106,572
----------- ------------ ------------ ------------- ------------ ------------
December 31, 1995 437,042 2,185,210 2,155,867 (777,078) 58,803 3,622,802
Net loss - - - (185,645) - (185,645)
Common stock issued 183 915 915 - - 1,830
Net change in unrealized
depreciation on investment
securities available for sale - - - - (115,466) (115,466)
----------- ------------ ------------ ------------- ------------ ------------
December 31, 1996 437,225 $ 2,186,125 $ 2,156,782 $ (962,723) $ (56,663) $ 3,323,521
======= =========== ============ =========== ========== =============
See Notes to Consolidated Financial Statements
===================================================================================================================
<PAGE>
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
Cash flows from operating activities:
Net loss $ (185,645) $ (331,582) $ (326,752)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization 128,833 65,629 21,535
Provision for loan losses 103,947 68,089 30,000
Net realized gains on securities (16,550) (10,432) -
Accretion of discount on securities, net (10,637) (20,588) -
Changes in assets and liabilities:
Accrued income (145,449) (55,054) (61,045)
Other assets (15,806) 3,124 (81,266)
Accrued interest payable 12,414 17,623 6,575
Other liabilities (930) 12,263 (32,693)
---------------- ---------------- ----------------
Net cash used by operating activities (129,823) (250,928) (443,646)
---------------- ---------------- ----------------
Cash flows from investing activities:
Net (increase) decrease in federal funds sold 292,000 184,000 (878,000)
Purchases of investment securities (15,818,430) (4,455,033) (4,435,800)
Sales of investment securities 8,977,234 2,015,393 -
Maturities of investment securities 905,416 1,500,000 -
Net increase in loans (6,136,861) (5,538,966) (1,257,074)
Purchases of property and equipment (148,022) (917,126) (201,005)
Net cash used in investing activities (11,928,663) (7,211,732) (6,771,879)
---------------- ---------------- ----------------
Cash flows from financing activities:
Net increase in demand, NOW, and savings deposits 8,447,530 2,972,125 1,815,025
Net increase in time deposits 3,656,477 5,243,323 1,906,222
Net repayment of short-term debt - - (121,000)
Repayments of advances from related parties - (10,909)
Proceeds from issuance of common stock - - 4,011,329
Stock issuance costs - - (11,604)
---------------- ---------------- ----------------
Net cash provided by financing activities 12,104,007 8,215,448 7,589,063
---------------- ---------------- ----------------
Net increase in cash and cash equivalents 45,521 752,788 373,538
Cash and cash equivalents, beginning 1,143,478 390,690 17,152
---------------- ---------------- ----------------
Cash and cash equivalents, ending $ 1,188,999 $ 1,143,478 $ 390,690
================ ================ ================
Supplemental disclosure of cash flow information:
Interest paid $ 841,453 $ 328,590 $ 19,201
================ ================ ================
Income taxes paid $ - $ 209 $ -
================ ================ ================
Supplemental schedule of noncash investing and financing activities:
On June 30, 1994, the restriction on $3,924,319 was removed and the cash was
released to the Company in exchange for common stock subscriptions. Also, on
June 30, 1994, $10 of the Company's initial common stock and $109,081 of
advances to stockholders were canceled in exchange for common stock
subscriptions.
Bank premises (land) valued at $250,000 was acquired on June 30, 1994 in
exchange for fully paid subscriptions for 25,000 shares of the Company's common
stock.
See Notes to Consolidated Financial Statements
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies
Organization
CNB Holdings, Inc. (the Company) is a bank holding company incorporated under
the laws of Virginia on April 29, 1993. From March 8, 1993 (date of inception)
through August 28, 1994 the Company's activities consisted of organizational
items. On August 29, 1994, the Company's wholly owned subsidiary, Community
National Bank (the Bank), was chartered under the laws of the United States and
the Bank opened for business in Pulaski, Virginia through a single banking
office. Accordingly, as of August 29, 1994, the Company was no longer in the
development stage. As an FDIC insured National Banking Association, the Bank is
subject to regulation by the Comptroller of the Currency. The Company is
regulated by the Federal Reserve.
The accounting and reporting policies of the Company and the Bank follow
generally accepted accounting principles and general practices within the
financial services industry. Following is a summary of the more significant
policies.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
the Bank. All significant intercompany transactions and balances have been
eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. In connection with
the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties.
Substantially all of the Bank's loan portfolio consists of loans in the New
River Valley area of Southwest Virginia. While management uses available
information to recognize loan losses, future additions to the allowance may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as a part of their routine examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examinations. Because of these factors,
it is reasonably possible that the allowance for loan losses may change
materially in the near term.
Cash and cash equivalents
For purposes presenting in the consolidated statement of cash flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
caption "cash and due from banks".
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Trading securities
The Bank does not hold securities for short-term resale and therefore does not
maintain a trading securities portfolio.
Securities held to maturity
Bonds, notes and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates. Currently the Bank has no securities
held to maturity.
Securities available for sale
Available-for-sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held-to-maturity securities.
Unrealized holding gains and losses on available-for-sale securities are
reported as a net amount in a separate component of stockholders' equity.
Realized gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. Premiums and discounts are
recognized in interest income using the interest method over the period to
maturity or to call dates.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below cost that are other than temporary are reflected as write-downs
of the individual securities to fair value. Related write-downs are included in
earnings as realized losses.
Loans receivable and allowance for loan losses
Loans are reported at their outstanding principal balance reduced by an
allowance for loan losses and adjusted for net unamortized origination fees and
costs.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using methods
that approximate the interest method.
Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs, net of recoveries. Management's periodic evaluation of the adequacy
of the allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Property and equipment
Land is carried at cost. Bank premises, furniture and equipment are carried at
cost, less accumulated depreciation computed by the straight-line method over
the following estimated useful lives:
Years
-----
Buildings and land improvements 20 to 40
Furniture and equipment 5 to 10
Organization and stock issuance costs
Costs incurred for the organization of the Company and the Bank were capitalized
and are being amortized over five years. Costs incurred in connection with the
Company's initial stock offering, consisting principally of direct sales and
promotional costs, were deferred and offset against the proceeds of the stock
sales as a charge to surplus.
Stock-based compensation
The Company accounts for its stock-based compensation plans using the accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Company is not required to adopt the fair value based
recognition provisions prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation (issued in October 1995), but complies with the disclosure
requirements set forth in the Statement, which include disclosing pro forma net
income as if the fair value based method of accounting has been applied.
Income taxes
Provision for income tax is based on amounts reported in the statements of
operations (after exclusion for non-taxable income and non-deductible expenses)
and consists of taxes currently due plus deferred taxes on temporary differences
in the recognition of income and expense for tax and financial statement
purposes. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. Deferred tax
assets, net of a valuation allowance if deemed appropriate, are recognized for
operating losses that are available to offset future taxable income.
Earnings per common share
Net income per share is computed based on the weighted average number of shares
outstanding during the period, after giving retroactive effect to stock splits
and dividends.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Financial instruments
Any derivative financial instruments held or issued by the Bank are held or
issued for purposes other than trading.
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and commercial
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
The Bank does not utilize interest-rate exchange agreements or interest rate
futures contracts.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Available-for-sale and held-to-maturity securities: Fair values for securities,
excluding restricted equity securities, are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying value of restricted
equity securities approximate fair values.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.
Other liabilities: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates. The
carrying amounts of other liabilities approximates fair value.
Reclassification
Certain reclassifications have been made to the prior years' financial
statements to place them on a comparable basis with the current presentation.
Net loss and stockholders' equity previously reported were not affected by these
reclassifications.
Note 2. Restricted Cash
Restricted cash, applicable to stock subscriptions received, was released from
escrow on June 30, 1994 upon the Company's satisfaction of requirements set
forth in its public offering prospectus and escrow agreement.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 3. Securities
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values at December 31, follow:
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
--------------- ---------------- --------------- ----------------
Available for sale:
U. S. Treasury securities $ 3,992,931 $ 20,987 $ 1,265 $ 4,012,653
U. S. Government agency securities 6,659,085 1,614 82,055 6,578,644
State and local government securities 197,316 4,056 - 201,372
Mortgage-backed securities 383,045 - - 383,045
Equity securities 137,050 - - 137,050
--------------- ---------------- --------------- ----------------
$ 11,369,427 $ 26,657 $ 83,320 $ 11,312,764
=============== ================ =============== ================
1995
Available for sale:
U. S. Treasury securities $ 389,017 $ 10,739 $ - $ 399,756
U. S. Government agency securities 4,892,093 48,064 - 4,940,157
Equity securities 125,350 - - 125,350
--------------- ---------------- --------------- ----------------
$ 5,406,460 $ 58,803 $ - $ 5,465,263
=============== ================ =============== ================
Investment securities with amortized costs of $7,182,341 and $1,749,803 and
market values of $7,115,039 and $1,771,569 at December 31, 1996 and 1995,
respectively, were pledged as collateral on public deposits or for other banking
purposes.
Gross realized gains and losses for the years ended December 31, 1996, 1995 and
1994 are as follows:
1996 1995 1994
---------------- --------------- ----------------
Realized gains $ 33,265 $ 11,832 $ -
Realized losses (16,715) (1,400) -
---------------- --------------- ----------------
$ 16,550 $ 10,432 $ -
================ =============== ================
The amortized cost and approximate market value at December 31, 1996 of
investment securities by scheduled maturity are shown below.
Available for Sale
Amortized Fair
Cost Value
--------------- ----------------
Due in one year or less $ 2,049,521 $ 2,048,280
Due in one year through five years 5,561,423 5,572,138
Due after five years 3,621,433 3,555,296
Equity securities 137,050 137,050
--------------- ----------------
$ 11,369,427 $ 11,312,764
=============== ================
For the purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date,
have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying
collateral. The mortgage backed securities may mature earlier than their
weighted-average contractual maturities because of principal prepayments.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 4. Loans Receivable
The major components of loans in the consolidated balance sheets at December 31,
1996 and 1995 are as follows:
1996 1995
--------------- ----------------
Commercial $ 4,343,525 $ 2,106,572
Real estate:
Construction and land development 235,000 580,142
Farmland - -
Residential, 1-4 families 4,675,681 1,980,045
Residential, multifamily - -
Nonfarm, nonresidential 101,804 -
Agricultural 7,638 -
Consumer:
Credit cards 135,174 93,202
Other consumer 2,564,454 1,148,781
States and political subdivisions 343,057 422,396
Other 507,293 457,236
--------------- ----------------
12,913,626 6,788,374
Net deferred loan fees (35,761) (17,221)
--------------- ----------------
12,877,865 6,771,153
Allowance for loan losses (155,000) (81,202)
--------------- ----------------
$ 12,722,865 $ 6,689,951
=============== ================
Nonperforming assets at December 31, 1996 and 1995 are detailed as follows:
1996 1995
--------------- ----------------
Nonaccrual loans $ 17,459 $ -
Restructured loans - -
Loans past due 90 days or more 52,258 18,455
--------------- ----------------
Total nonperforming loans 69,717 18,455
Foreclosed, repossessed and idled properties - 8,000
--------------- ----------------
Total nonperforming assets $ 69,717 $ 26,455
=============== ================
Gross interest income that would have been recognized for each year if the
nonaccrual loans and restructured loans had been current in accordance with
their original terms and had been outstanding throughout the period or since
origination, or if held part of the period, is detailed below. Applicable
interest income that was actually collected and included in net income for each
year is also summarized below:
1996 1995 1994
---------------- --------------- ----------------
Nonaccrual loans:
Interest income, original terms $ 4,789 $ - $ -
================ =============== ================
Interest income, recognized $ 2,784 $ - $ -
================ =============== ================
The Bank had no restructured loans during the years ended December 31, 1996,
1995 or 1994.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 4. Loans Receivable, continued
An allowance determined in accordance with SFAS No. 114 and No. 118 is provided
for all impaired loans. The total recorded investment in impaired loans and the
related allowance for loan losses at December 31, the average annual recorded
investment in impaired loans and interest income recognized on impaired loans
for the year (all approximate) are summarized below:
1996 1995 1994
---------------- --------------- ----------------
Recorded investment at December 31, $ 18,533 $ - $ -
================ ================ ================
Allowance for loan losses $ 1,074 $ - $ -
================ ================ ================
Average recorded investment for the year $ 3,658 $ - $ -
================ ================ ================
Interest income recognized for the year $ 2,784 $ - $ -
================ ================ ================
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
Note 5. Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses are as follows:
1996 1995 1994
---------------- --------------- ----------------
Balance, beginning $ 81,202 $ 30,000 $ -
---------------- ---------------- ----------------
Loans charged off (43,291) (18,221) -
Recoveries 13,142 1,334 -
---------------- ---------------- ----------------
Net loans charged off (30,149) (16,887) -
Provision for loan losses 103,947 68,089 30,000
---------------- ---------------- ----------------
Balance, ending $ 155,000 $ 81,202 $ 30,000
================ ================ ================
Note 6. Property and Equipment
Components of property and equipment and total accumulated depreciation at
December 31, 1996 and 1995, are as follows:
1996 1995
--------------- ----------------
Land $ 250,000 $ 250,000
Land improvements 49,564 46,344
Buildings 932,609 815,621
Furniture and equipment 290,921 263,107
--------------- ----------------
1,523,094 1,375,072
Less accumulated depreciation (114,498) (46,121)
--------------- ----------------
$ 1,408,596 $ 1,328,951
=============== ================
The Company leased its temporary banking facility under an agreement accounted
for as an operating lease at a rental of $2,244 per month, increasing to $3,675
per month in July, 1995. This agreement expired in December, 1995. Rental
expense was approximately $33,440 and $17,000 for 1995 and 1994, respectively.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 7. Short-term Debt
The Bank has established a $750,000 line of credit with a correspondent bank to
provide additional liquidity if and as needed. There was no amount outstanding
under this arrangement at December 31, 1996 or 1995, or during the years then
ended.
Note 8. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows
(dollars in thousands):
December 31, 1996 December 31, 1995
------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets
Cash and cash equivalents $ 1,189 $ 1,189 $ 1,143 $ 1,143
Federal funds sold 402 402 694 694
Securities, available-for-sale 11,313 11,313 5,465 5,465
Loans, net of allowance for loan losses 12,723 12,793 6,690 6,648
Financial liabilities
Deposits 24,041 24,049 11,937 12,093
Off-balance-sheet assets (liabilities)
Commitments to extend credit and
standby letters of credit - - - -
Note 9. Common Stock
During 1995 the Company adopted a stock option plan under which up to 275,500
shares of stock may be issued. Shares subject to the plan may be issued in any
combination of incentive stock options, non-incentive stock options, or
restricted stock, provided that the total number of shares issuable pursuant to
incentive stock options may not be more than 50,000 without shareholder
approval. Termination of restrictions on any restricted stock granted and
expiration of any non-incentive stock options granted are controlled by the
terms of each individual grant. Incentive stock options expire no more than 10
years from the date of grant. Exercise prices of all options are determined by
each individual grant except that incentive stock options may not be granted at
less than fair market value and non-incentive stock options may not be granted
at less than 80% of fair market value on each option's respective date of grant.
Vesting of options, if not immediately exerciseable, is determined in accordance
with the terms of each option granted.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 9. Common Stock, continued
Activity under the plan during the years ended December 31, 1996 and 1995 is
summarized below:
Granted
-----------------------------------------------------------------------------
Available Incentive Non-incentive
for Stock Stock Restricted Exercise(1)
Grant Options Options Stock Price Exercised
----- ------- ------- ----- ----- ---------
Plan adopted 275,500 - - - - -
Granted (165,000) - 165,000 - $ 10.00 -
Exercised - - - - - -
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1995 110,500 - 165,000 - 10.00 -
Granted 5,225 - 5,225 - 10.00 -
Exercised - - - - - -
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1996 105,275 - 170,225 - 10.00 -
=========== =========== =========== =========== =========== ===========
Additional information relating to the plan is listed below:
1996 1995 1994
----------- ----------- -----------
Outstanding options at December 31:
Exercise price(1) $ 10.00 $ 10.00 n/a
Range of exercise prices:
From $ 10.00 $ 10.00 n/a
To $ 10.00 $ 10.00 n/a
Remaining contractual life in months(1) 101 112 n/a
Exerciseable options at December 31:
Number 170,225 165,000 n/a
Exercise price $ 10.00 $ 10.00 n/a
Options granted during the year:
Granted-date fair value(1) $ 26,259 $ 829,234 n/a
Exercise price(1) $ 10.00 $ 10.00 n/a
Significant assumptions used in determining fair value:
Risk-free interest rate 7.0% 7.0% n/a
Expected life in years 10 10 n/a
Expected dividends 0.0% 0.0% n/a
Expected volatility 5.0% 2.7% n/a
Results of operations:
Compensation cost recognized in income $ - $ - $ n/a
========== =========== ===========
Pro forma net income(2) $ (211,904) $(1,160,816) $ (326,752)
========== =========== ===========
Pro forma earnings per common share(2) $ (.48) $ (2.66) $ (1.48)
========== =========== ===========
(1) Weighted average
(2) As if the fair value based method prescribed by SFAS No. 123 has been applied.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 10. Employee Benefit Plans
The Bank maintains a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees who have
completed one year of service. Participants may contribute a percentage of
compensation, subject to a maximum allowed under the Code. In addition, the Bank
may make additional contributions at the discretion of Board of Directors. The
Bank made no contributions during the years ended December 31, 1996, 1995 or
1994.
Note 11. Income Taxes
Operating loss and carryforwards
The Company has loss carryforwards of approximately $812,000 for Federal income
tax purposes that may be used to offset future taxable income. If not previously
utilized, the Federal and state loss carryforwards will expire between 2008 and
2011.
Current and deferred income tax components
The components of income tax expense (all Federal) are as follows:
1996 1995 1994
---------------- --------------- ----------------
Current $ - $ - $ -
Deferred (67,750) (111,968) (109,565)
Deferred tax asset valuation allowance change 67,750 111,968 109,565
---------------- --------------- ----------------
$ - $ - $ -
================ =============== ================
Rate Reconciliation
A reconciliation of income tax expense (benefit) computed at the statutory
federal income tax rate expense included in the consolidated statement of
operations follows:
1996 1995 1994
---------------- --------------- ----------------
Tax at statutory federal rate $ (63,119) $ (112,738) $ (110,756)
Other (4,631) 770 1,191
Deferred tax asset valuation allowance change 67,750 111,968 109,565
---------------- --------------- ----------------
$ - $ - $ -
================ =============== ================
Deferred tax analysis
The components of net deferred tax assets (all Federal) at December 31, 1996 and
1995 are summarized as follows:
1996 1995
--------------- ----------------
Deferred tax assets $ 354,588 $ 282,007
Deferred tax liabilities (25,332) (20,501)
Deferred tax asset valuation allowance (329,256) (261,506)
--------------- ----------------
$ - $ -
=============== ================
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 11. Income Taxes, continued
Tax effects of each significant item creating deferred taxes are summarized
below:
1996 1995
--------------- ----------------
Allowance for loan losses $ 18,512 $ 4,644
Pre-operating expenses 46,683 64,755
Net operating losses 276,242 206,183
Deferred fee income 12,159 5,855
Contributions 992 570
Accretion of discount on investment securities (1,828) (4,566)
Depreciation (23,504) (15,935)
--------------- ----------------
$ 329,256 $ 261,506
=============== ================
Note 12. Commitments and Contingencies
Financial instruments with off-balance-sheet risk
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in excess
of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as for on-balance-sheet instruments.
A summary of the Bank's commitments at December 31, 1996 and 1995 are as
follows:
1996 1995
--------------- ----------------
Commitments to extend credit $ 3,921,000 $ 2,590,000
Standby letters of credit - 60,000
--------------- ----------------
$ 3,921,000 $ 2,650,000
=============== ================
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the party. Collateral held varies, but may include accounts
receivable, inventory, property and equipment, residential real estate and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending other loan facilities to customers. Collateral held
varies as specified above and is required in instances which the Bank deems
necessary.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 12. Commitments and Contingencies, continued
Concentrations of credit risk
Substantially all of the Bank's loans, commitments to extend credit, and standby
letters of credit have been granted to customers in the Bank's market area and
such customers are generally depositors of the Bank. The concentrations of
credit by type of loan are set forth in Note 4. The distribution of commitments
to extend credit approximates the distribution of loans outstanding. Standby
letters of credit were granted primarily to commercial borrowers. The Bank's
primary focus is toward consumer oriented and small business transactions, and
accordingly, it does not have a significant number of credits to any single
borrower or group of related borrowers in excess of $250,000. The Bank has cash
and cash equivalents on deposit with financial institutions which exceed
federally-insured limits.
Other
The Company has entered a five-year employment and bonus agreement with the
Company's President which effectively commenced with the opening of the Bank.
Note 13. Regulatory Restrictions
Capital requirements
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in regulations.
Management believes, as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Comptroller of
the Currency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 13. Regulatory Restrictions, continued
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1996
Total Capital
(to Risk-Weighted Assets) $ 3,294,381 23.1% >$ 1,142,913 >8.0% >$ 1,428,641 >10.0%
- - - -
Tier I Capital
(to Risk-Weighted Assets) $ 3,139,381 22.0% >$ 571,457 >4.0% >$ 857,185 >6.0%
- - - -
Tier I Capital
(to Average Assets) $ 3,139,381 11.6% >$ 1,080,749 >4.0% >$ 1,350,936 >5.0%
- - - -
December 31, 1995
Total Capital
(to Risk-Weighted Assets) $ 3,349,994 40.5% >$ 660,960 >8.0% >$ 826,200 >10.0%
- - - -
Tier I Capital
(to Risk-Weighted Assets) $ 3,268,792 39.6% >$ 330,480 >4.0% >$ 495,720 >6.0%
- - - -
Tier I Capital
(to Average Assets) $ 3,268,792 22.7% >$ 576,480 >4.0% >$ 720,600 >5.0%
- - - -
Dividends
The Company's dividend payments (when available) will be made primarily from
dividends received from the Bank. Under applicable federal law, the Comptroller
of the Currency restricts national bank total dividend payments in any calendar
year to net profits of that year, as defined, combined with retained net profits
for the two preceding years. At December 31, 1996, there were no retained net
profits free of such restriction. The Comptroller also has authority under the
Financial Institutions Supervisory Act to prohibit a national bank from engaging
in an unsafe or unsound practice in conducting its business. It is possible,
under certain circumstances, the Comptroller could assert that dividends or
other payments would be an unsafe or unsound practice.
Intercompany transactions
Legal lending limits on loans by the Bank to the Company are governed by Federal
Reserve Act 23A, and differ from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
loan amount do not apply. Under this definition, the legal lending limit for the
Bank on loans to the Company was approximately $317,000 at December 31, 1996. No
23A transactions existed between the Bank and the Company at December 31, 1996.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 14. Transactions with Related Parties
The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.
Loans
Aggregate loan transactions with related parties were as follows:
1996 1995
--------------- ----------------
Balance, beginning $ 524,726 $ 7,412
New loans and advances 867,146 569,268
Repayments (309,392) (51,954)
Change in relationship (6,486) -
---------------- ----------------
Balance, ending $ 1,075,994 $ 524,726
=============== ================
Advances
Advances from related parties at December 31, 1993 consisted of
noninterest-bearing loans from members of the Company's Board of Directors. On
June 30, 1994, 10 Directors elected to convert their advances to common stock
subscriptions. On October 6, 1994, the final Director was repaid by the Company.
Main office site
On June 10, 1994, the Bank acquired a site for its main office from a member of
the Company's Board of Directors and his related interests. Consideration for
the site was 25,000 shares of the Company's common stock, which was sold for $10
per share in the Company's initial public stock offering. The consideration was
determined by negotiation after appraisals of the property were obtained.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 15. Parent Company Financial Information
Condensed financial information of CNB Holdings, Inc. is presented as follows:
Balance Sheets
December 31, 1996 and 1995
1996 1995
--------------- ----------------
Assets
Cash and due from banks $ 181,042 $ 199,651
Investment in subsidiary bank at equity 3,119,995 3,379,310
Other assets 34,149 57,491
--------------- ----------------
Total assets $ 3,335,186 $ 3,636,452
=============== ================
Liabilities
Accounts payable and other liabilities $ 11,665 $ 13,650
--------------- ----------------
Stockholders' equity:
Common stock 2,186,125 2,185,210
Surplus 2,156,782 2,155,867
Retained deficit (962,723) (777,078)
Unrealized depreciation on subsidiary's investment
securities available for sale (56,663) 58,803
--------------- ----------------
Total stockholders' equity 3,323,521 3,622,802
--------------- ----------------
Total liabilities and stockholders' equity $ 3,335,186 $ 3,636,452
=============== ================
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------------- --------------- ----------------
Income, interest on deposits with banks $ 7,633 $ 11,450 $ 25,440
---------------- --------------- ----------------
Expenses:
Professional fees 23,381 59,326 16,131
Other expenses 26,048 23,148 16,150
---------------- --------------- ----------------
Total expenses 49,429 82,474 32,281
---------------- --------------- ----------------
Loss before tax benefit and equity in undistributed
income of subsidiary (41,796) (71,024) (6,841)
Federal income tax benefit - - -
---------------- --------------- ----------------
Loss before equity in undistributed income of subsidiary (41,796) (71,024) (6,841)
Equity in undistributed loss of subsidiary (143,849) (260,558) (319,911)
---------------- --------------- ----------------
Net loss $ (185,645) $ (331,582) $ (326,752)
================ =============== ================
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, 1995 and 1994 and the three years then ended
- --------------------------------------------------------------------------------
Note 15. Parent Company Financial Information, continued
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------------- ---------------- ----------------
Cash flows from operating activities:
Net loss $ (185,645) $ (331,582) (326,752)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization 23,173 15,499 3,862
Increase in equity in undistributed loss of subsidiary:
Attributable to current year 143,849 260,558 319,911
Attributable to prior year - - 99,024
Increase in other assets 1,999 4,339 44,022
Increase (decrease) in other liabilities (1,985) 8,521 (32,719)
---------------- ---------------- ----------------
Net cash provided (used) by operating activities (18,609) (42,665) 107,348
---------------- ---------------- ----------------
Cash flows from investing activities, investment in subsidiary - - (3,750,000)
---------------- ---------------- ----------------
Cash flows from financing activities:
Repayment of short-term debt - - (121,000)
Repayment of advances from related parties - - (10,909)
Proceeds from issuance of stock - - 4,011,329
Stock issuance costs - - (11,604)
---------------- ---------------- ----------------
Net cash provided by financing activities - - 3,867,816
---------------- ---------------- ----------------
Increase (decrease) in cash and due from banks (18,609) (42,665) 225,164
Cash and cash equivalents, beginning 199,651 242,316 17,152
---------------- ---------------- ----------------
Cash and cash equivalents, ending $ 181,042 $ 199,651 $ 242,316
================ ================ ================
</TABLE>
<PAGE>
Exhibit A
SHAREHOLDER SUBSCRIPTION AGREEMENT
TO: CNB Holdings, Inc.
900 Memorial Drive
P.O. Box 1060
Pulaski, Virginia 24301
Attention: Stock Offering
Telephone No.: (540) 994-0831
Gentlemen:
You have informed me that CNB Holdings, Inc., a Virginia corporation
(the "Company"), is offering up to 330,000 shares of its Common Stock (the
"Common Stock") at a price of $9.00 per share, payable as provided herein and as
described in and offered pursuant to the Prospectus furnished to the undersigned
herewith (the "Prospectus").
1. Subscription. Subject to the terms and conditions hereof, the
undersigned hereby tenders this subscription, together with payment in United
States currency by check, bank draft or money order payable to "Crestar Bank, as
Escrow Agent for CNB Holdings, Inc." (the "Funds"), representing the payment of
$9.00 per share for the number of shares of the Common Stock indicated below and
agrees to purchase the shares of Common Stock subscribed for herein. The total
subscription price must be paid at the time the Subscription Agreement is
executed.
2. Acceptance of Subscription. It is understood and agreed that the
Company shall have the right to accept or reject this subscription in whole or
in part, for any reason whatsoever. The Company may reduce the number of shares
for which the undersigned has subscribed, indicating acceptance of less than all
of the shares subscribed on its written form of acceptance.
3. Acknowledgments. The undersigned hereby acknowledges that he or she
has received a copy of the Prospectus and understands and agrees that this
Subscription Agreement and the Prospectus contain the entire agreement between
the undersigned and the Company with respect to the offering and the sale of the
shares of Common Stock to the undersigned.
4. Revocation. The undersigned agrees that once this Subscription
Agreement is tendered to the Company, it may not be withdrawn by the undersigned
except with the consent of the Company and that this Agreement shall survive the
death or disability of the undersigned.
BY EXECUTING THIS AGREEMENT, THE SUBSCRIBER IS NOT WAIVING ANY RIGHTS HE OR SHE
MAY HAVE UNDER FEDERAL SECURITIES LAWS, INCLUDING THE SECURITIES ACT OF 1933 AND
THE SECURITIES EXCHANGE ACT OF 1934.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY.
A-1
<PAGE>
Please indicate in the space provided below the exact name or names
and addresses in which the stock certificate representing shares subscribed for
hereunder should be registered.
- ------------------------------------ ------------------------------------
Number of Shares Subscribed for Name or Names of Subscribers
(minimum 100 shares) (Please Print)
$
----------------------------------- ------------------------------------
Total Subscription Price at $9.00 Please indicate form of ownership
per share (funds must be enclosed) desired (individual, joint tenants,
with right of survivorship, tenants
in common, trust, corporation,
partnership, custodian, etc.)
Date:
------------------------------- ------------------------------------
Signature of Subscriber*
------------------------------------
Signature of Subscriber
(if more than one)
- -------------------------- ------------------------------------
Social Security Number(s), Street Address
Federal Taxpayer
Identification Number(s) ------------------------------------
of Subscriber(s) City, State and Zip Code
----------------------------------
Area Code and Telephone Number
*When signing as attorney, trustee, administrator or guardian, please
give your full title as such. If a corporation, please sign in full corporate
name by president or other authorized officer. In the case of joint tenants or
tenants in common, each proposed owner must sign.
TO BE COMPLETED BY THE COMPANY:
Accepted as of ___________________, 199__, as to _________________
shares.
CNB HOLDINGS, INC.
By:__________________________________
A-2
<PAGE>
FEDERAL INCOME TAX BACKUP WITHHOLDING
In order to prevent the application of federal income tax backup
withholding, each subscriber must provide a correct Taxpayer Identification
Number ("TIN"). An individual's social security number is his or her TIN. The
TIN should be provided in the space provided in the Substitute Form W-9, which
is set forth below.
Under federal income tax law, any person who is required to furnish
his or her correct TIN to another person, and who fails to comply with such
requirements, may be subject to a $50 penalty imposed by the IRS.
If backup withholding applies, 31% of payments of dividends or
interest made to such subscriber may be withheld. Backup withholding is not an
additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If backup withholding
results in an overpayment of taxes, a refund may be obtained from the IRS.
Certain taxpayers, including all corporations, are not subject to these backup
withholding and reporting requirements.
If the shareholder has not been issued a TIN and has applied for a TIN
or intends to apply for a TIN in the near future, "Applied For" should be
written in the space provided for the TIN on the Substitute Form W-9. In such
case, if a TIN is not provided within 60 days, 31% of dividend or interest
payments thereafter made to each subscriber may be withheld until a TIN is
provided.
SUBSTITUTE FORM W-9
Under penalties of perjury, I certify that: (1) The number shown on
this form is my correct Taxpayer Identification Number (or I am waiting for a
Taxpayer Identification Number to be issued to me), and (2) I am not subject to
backup withholding because: (a) I am exempt from backup withholding; or (b) I
have not been notified by the Internal Revenue Service ("IRS") that I am subject
to backup withholding as a result of a failure to report all interest or
dividends; or (c) the IRS has notified me that I am no longer subject to backup
withholding.
You must cross out item (2) above if you have been notified by the IRS
that you are subject to withholding because of underreporting interest or
dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from
the IRS that you are no longer subject to backup withholding, do not cross out
item (2).
Each Subscriber Should Complete this Section.
- --------------------------------- ---------------------------------
Signature of Subscriber Signature of Subscriber
- --------------------------------- ---------------------------------
Printed Name Printed Name
- --------------------------------- ---------------------------------
Social Security or Employer Social Security or Employer
Identification No. Identification No.
A-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representation in connection with this offering
other than contained in this Prospectus, and if given or made, such information
or representation must not be relied upon as having been so authorized by the
Company or the Placement Agent. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities other than those
specifically offered hereby or an offer or solicitation in any jurisdiction to
any person to whom it is unlawful to make an offer or solicitation. Neither the
delivery of this Prospectus nor any sale hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
--------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Prospectus Summary .................................... 3
Selected Financial Data .............................. 5
Risk Factors .......................................... 6
The Offering .......................................... 10
Use of Proceeds ....................................... 11
Market for Common Stock .............................. 11
Dividend Policy ....................................... 12
Capitalization and Dilution ........................... 13
Business ............................................. 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations ...... 18
Management and Directors .............................. 39
Description of Capital Stock ........................... 45
Supervision and Regulation ........................... 47
Placement Agent ....................................... 52
Legal Opinions ....................................... 53
Experts ................................................ 53
Available Information ................................. 53
Indemnification for Securities Act Liabilities ......... 53
Index to Consolidated Financial Statements ............ F-1
Subscription Agreement ................................. A-1
</TABLE>
330,000 Shares
[LOGO]
--------------------------------
CNB HOLDINGS, INC.
--------------------------------
Common Stock
------------------------------
PROSPECTUS
------------------------------
DAVENPORT & COMPANY LLC
December 10, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Part II
Item 24. Indemnification of Directors and Officers.
Title 13.1, Chapter 9, Article 10 of the Code of Virginia of 1950, as
amended, permits a Virginia corporation in general to indemnify any of its
officers and directors, and any person serving at its request as an officer or
director or another corporation or enterprise if he acted in good faith and in a
manner which he believed to be in, or not opposed to, the best interest of the
corporation. In the event, however, that such person is adjudged liable to the
corporation, he will not be entitled to indemnification. The statute also
permits a corporation to provide other or further indemnity in its articles of
incorporation, or in a bylaw or resolution approved by its directors or
shareholders, except for an indemnity against willful misconduct or a knowing
violation of criminal law. Furthermore, unless limited by its articles of
incorporation, a corporation shall indemnify a director who entirely prevails in
the defense of any proceeding to which he was a party because he is or was a
director of the corporation. Finally, the statute authorizes a corporation to
purchase and maintain insurance on behalf of any such person against any
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability.
The Articles of Incorporation of the Registrant provide that, to the
extent and under the circumstances permitted by the Stock Corporation Act of the
Virginia Code, Registrant shall indemnify any person who was or is a party or is
threatened to be made a party to any action, suit or proceeding by reason of the
fact that he is or was a director or officer of the Registrant against
liabilities, penalties, claims and fines, including amounts paid in settlement,
reasonable expenses, and attorney's fees, imposed upon, threatened or asserted
against him or her because he or she is or was an officer or director of the
Registrant, except for an indemnity against willful misconduct or a knowing
violation of criminal law.
Item 25. Other Expenses of Issuance and Distribution.
<TABLE>
<S> <C>
Registration Fees: $ 1,036
Blue Sky Filing Fees: $ 700
Legal Fees: $ 70,000
Accounting Fees: $ 25,000
Printing Fees: $ 4,200
EDGAR Filing Fee: $ 1,000
Other: $ 25,000
</TABLE>
Item 26. Recent Sales of Unregistered Securities
Not Applicable.
Item 27. Exhibits
The following is a list of exhibits included as part of this
registration statement and included herewith at the end of this registration
statement.
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement No. 33-69326 on
Form S-1).
3.2 By-laws (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement No.
33-69326 on Form S-1).
4 Form of Stock Certificate.
5 Opinion of Mays & Valentine, L.L.P. regarding
the legality of the securities being registered
and consent.*
10.1 Employment Agreement dated June 21, 1993, by and
between Wayne L. Carpenter and the Company
(incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement No. 33-69326 on
Form S-1).
10.2 CNB Holdings, Inc. 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to
the Company's 1995 Form 10-KSB).
10.3 Lease Agreement dated August 1, 1997 between the
Bank and Odisi Properties, L.L.C.*
10.4 Agency Agreement between the Davenport & Company
LLC and the Company.**
21 Subsidiaries of CNB Holdings, Inc.*
23.1 Consent of Larrowe & Company.*
23.2 Consent of Mays & Valentine, L.L.P. (included as
part of Exhibit 5).*
23.3 Consent of Williams Mullen Christian & Dobbins.*
24 Powers of Attorney.*
99.1 Form of Subscription Agreement (included with
Prospectus).
99.2 Cover Letter to Shareholders.
---------------
* Previously filed with the initial filing of this Registration
Statement No. 333-38727.
** To be filed by amendment.
Item 28. Undertakings.
The following undertakings apply to the offering:
(a) Rule 415 Offering. The Registrant is registering securities under Rule
415 of the Securities Act, therefore it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the County of
Pulaski, State of Virginia, on December 10, 1997.
CNB HOLDINGS, INC.
By: /s/ Hiawatha Nicely, Jr.
------------------------
Hiawatha Nicely, Jr.
President & Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
/s/ Hiawatha Nicely, Jr. Chairman, President, and Chief Executive December 10, 1997
- ------------------------------------- Officer (Principal Executive Officer)
Hiawatha Nicely, Jr.
/s/ Wayne L. Carpenter Director and Chief Financial and December 10, 1997
- ------------------------------------- Accounting Officer
Wayne L. Carpenter
*/s/ Sybil S. Atkinson Director December 10, 1997
- -------------------------------------
Sybil S. Atkinson
*/s/ Jack W. Bowling Director December 10, 1997
- -------------------------------------
Jack W. Bowling
*/s/ Jackson M. Bruce Director December 10, 1997
- -------------------------------------
Jackson M. Bruce
*/s/ Randolph V. Chrisley Director December 10, 1997
- -------------------------------------
Randolph V. Chrisley
*/s/ A. Carole Pratt Director December 10, 1997
- -------------------------------------
A. Carole Pratt
*/s/ David W. Ratcliff, Jr. Director December 10, 1997
- -------------------------------------
David W. Ratcliff, Jr.
*/s/ Nathaniel R. Tuck Director December 10, 1997
- -------------------------------------
Nathaniel R. Tuck
*/s/ James L. Webb, Jr. Director December 10, 1997
- -------------------------------------
James L. Webb, Jr.
*/s/ J. David Wine Director December 10, 1997
- -------------------------------------
J. David Wine
*By: /s/ Wayne L. Carpenter
- -------------------------------------
Wayne L. Carpenter
Attorney-in-Fact
</TABLE>
Exhibit 4
Number Shares
[CNB Holdings, Inc. Logo]
COMMON STOCK $5.00 PAR VALUE
10,000,000 SHARES AUTHORIZED
This Certifies that ___________________________________________ is the
owner of
______________________________________________________________________________
fully paid and non-assessable Shares of the above Corporation transferable only
on the books of the Corporation by the holder hereof in person or by duly
authorized Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the Corporation has caused this Certificate to be
signed by its duly authorized officers and to be sealed with the Seal of the
Corporation.
Dated____________________________
- ---------------------------------- ------------------------------------
Secretary President
[CNB HOLDINGS, INC. LETTERHEAD]
December 11, 1997
Dear Fellow Shareholder:
We are pleased to enclose a prospectus explaining a new offering of
common stock in your company. CNB Holdings, Inc., the holding company for
Community National Bank in Pulaski, is offering for sale 330,000 shares of
common stock at a price of $9.00 per share. This offering is being made to
current shareholders and the general public, but current shareholders who submit
their Subscription Agreements and checks prior to January 10, 1998 will be
preferred over non- shareholders in the event of an over-subscription.
We invite you to attend an information meeting for current shareholders
to be held December 18, 1997 at 5:30 p.m. at Community National Bank, 900
Memorial Drive, Pulaski, Virginia. During that meeting, management will make a
presentation regarding the Company, the Bank, and the stock offering. Please let
us know if you can attend that meeting by calling the Bank at the number below.
In order to purchase shares in this offering, you should read the
prospectus carefully and complete the enclosed Subscription Agreement. Once
completed, the Subscription Agreement must be returned to the Company at our
Memorial Drive location along with a check for the full amount of shares you
wish to purchase. Complete instructions are contained at the back of the
prospectus. Davenport & Company LLC is serving as the Placement Agent in this
stock offering, but current shareholders should submit their Subscription
Agreements and checks directly to the Company.
Please call either of us at (540) 994-0831 if you have any questions
regarding the Company or this stock offering. We look forward to seeing you on
December 18th.
Sincerely,
Hiawatha Nicely, Jr. Wayne L. Carpenter
Chairman, President and CEO Chairman, President and CEO
CNB Holdings, Inc. Community National Bank
