U.S. Securities And Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
_X_ Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee required) For the fiscal year ended December 31, 1996
or
___ Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required) For the transition period from ________
to _______
Commission file no. 33-69326
CNB HOLDINGS, INC.
________________________________
(Name of small business issuer in its charter)
Virginia 54-1663340
________ __________
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
900 Memorial Drive
Pulaski, Virginia 24301
_________________ _____
(Address of principal executive offices) (Zip Code)
(540) 994-0831
______________
Issuer's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 per share
_______________________________________
Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.
Yes __X__ No_____
Check if there is no disclosure of delinquent filers in response to Item
405 of regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $1,701,539.
The aggregate market value of the voting stock as of March 20, 1997, held by
non-affiliates of the registrant computed by reference to the price at which
the stock was sold, or the average bid and asked prices of such stock, as of
a specified date within the last 60 days was $4,809,475.
437,225 shares of the Issuer's common stock were issued and outstanding as
of March 20, 1996.
Transitional Small Business Disclosure Format. (Check one): Yes___ No _X_
DOCUMENTS INCORPORATED BY REFERENCE
The annual report to security holders for fiscal year ended December 31, 1996
is incorporated by reference into Form 10-KSB Part II, Items 7 and 8, and
Part III, Item 13. The issuer's Proxy Statement dated March 21, 1997 is
incorporated by reference into Form 10-KSB Part III, Items 9, 10, 11 and 12.
<page1>
PART I
______
ITEM 1. DESCRIPTION OF BUSINESS
_______________________________
GENERAL
CNB Holdings, Inc. (the "Company") was incorporated as a Virginia stock
corporation on April 29, 1993, primarily to own and control all of the
capital stock of Community National Bank (the "Bank"). The Company
presently engages in no business other than owning and managing the Bank.
The Bank is a national banking association which engages in a commercial
banking business from its main office in Pulaski, Virginia. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation (the
"FDIC"), and it is a member of the Federal Reserve System.
In July 1994, the Company completed its initial public offering of 437,225
shares of its common stock, $5.00 par value per share (the "Common Stock"),
at a price of $10.00 per share, pursuant to its Prospectus dated November 16,
1993. The Company received final approval of its application to charter the
Bank from the Office of Comptroller of the Currency (the "OCC") and final
approval of its application for deposit insurance for the bank from the
Federal Deposit Insurance Corporation ("FDIC") on August 29, 1994.
On August 29, 1994, the Bank opened for business.
LOCATION AND SERVICE AREA
The Bank's primary service area is Pulaski County and includes portions of
Giles, Montgomery and Wythe Counties and the City of Radford, Virginia. The
Bank conducts a general commercial banking business in its service area,
emphasizing the banking needs of small-to-medium sized businesses, pro-
fessional concerns and individuals. The Bank operates from its main office
at 900 Memorial Drive, Pulaski, Virginia, which is at the corner of Memorial
Drive and Lee Highway (U.S. Route 11). See "Item 2. Description of Property"
below. The Bank draws most of its customer deposits and conducts most of its
lending transactions from within its primary service area. The Bank is the
only locally owned and operated commercial bank in Pulaski County.
Pulaski County is located in the New River Valley area of Southwest Virginia.
Pulaski, the county seat, is approximately 53 miles southwest of Roanoke, 90
miles northeast of the Tri-Cities, Tennessee (Johnson City, Kingsport and
Bristol), and 150 miles north of Charlotte, North Carolina. Pulaski County
had a population of 34,500 in 1994 and a median family income of $28,057 in
1989. Virginia Polytechnic Institute and State University ("Virginia Tech"),
a four-year, comprehensive land grant university with over 22,000 students,
is located approximately 15 miles from Pulaski County.
The principal components of the economy of Pulaski County are manufacturing
(which accounts for the largest share of all economic activity), agriculture,
and tourism. Manufacturing employment is concentrated in the automotive,
furniture and textile industries. The largest industrial employers in the
county include Volvo-GM Heavy Trucks (1,560 employees), Pulaski Furniture
(1,520 employees), Renfro Corporation (a textile manufacturer with 1,200
employees) and Jefferson Mills, Inc. (341 employees). Agricultural
production, consisting primarily of beef cattle and dairy farming,
contributes over $12 million per year to the county's economy. Claytor Lake
State Park, located in the county, attracts over 800,000 visitors each year,
offering swimming, boating, fishing, hiking and other outdoor sports.
<page2>
BANKING SERVICES
The Bank offers a full range of deposit services that are typically available
in most banks and savings and loan associations, including checking accounts,
NOW accounts, savings accounts and other time deposits of various types,
ranging from daily money market accounts to longer-term certificates of
deposit. The transaction accounts and time certificates are tailored to the
Bank's principal market area at rates competitive to those offered in the
area. In addition, the Bank offers certain retirement account services, such
as Individual Retirement Accounts (IRAs). All deposits accounts are insured
by the FDIC up to the maximum amount allowed by law (generally, $100,000 per
depositor subject to aggregation rules). The Bank solicits these accounts
from individuals, businesses, associations, organizations, and governmental
entities.
The Bank also offers a full range of short-to-medium term commercial and
personal loans. Commercial loans include both secured and unsecured loans
for working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans
for financing automobiles, home improvements, education and personal
investments. The Bank also makes real estate construction and acquisition
loans and originates and holds fixed and variable rate mortgage loans.
The Bank's lending activities are subject to a variety of lending limits
imposed by federal law. While differing limits apply in certain circumstances
based on the type of loan or the nature of the borrower (including borrowers'
relationship to the Bank), in general the Bank is subject to a loan-to-one
borrower limit of an amount equal to 15% of the Bank's unimpaired capital and
surplus, or 25% of the unimpaired capital and surplus if the excess over 15%
is approved by the board of directors of the Bank and is fully secured by
readily marketable collateral. The Bank may not make loans to any director,
officer, employee or 10% shareholder of the Company or the Bank unless the
loan is approved by the Board of Directors of the Bank and is made on terms
not more favorable than would be available to a person not affiliated with
the Bank.
Other bank services include cash management services, travelers checks,
direct deposit of payroll and social security checks, and automated drafts
for various accounts. The Bank is associated with Most Plus & VISA shared
networks of automated teller machines and debit card retail locations that
Bank customer may use throughout Virginia and other regions. The Bank also
offers VISA credit card services.
The Bank does not plan to exercise trust powers during its initial years of
operation. The Bank may in the future offer a full-service trust department,
but cannot do so without the prior approval of the OCC.
COMPETITION
The banking business is highly competitive. The Bank competes as a financial
intermediary with other commercial banks, savings and loan associations,
credit unions and money market funds operating in Pulaski County and else-
where, most of which are larger and have greater resources than the Bank.
As of March 20, 1997, there were six commercial banks operating a total of
ten offices in Pulaski County, Virginia. The Bank is the only one of these
institutions that is locally owned and operated. First Virginia Bank is an
in-state bank with one office in Pulaski County, but is headquartered in
Northern Virginia. In 1996, First Virginia Bank announced plans to purchase
Premier Bank. Premier Bank serves a five county area around Pulaski, with
two offices in Pulaski County, but its headquarters are in another county.
Crestar Bank and Signet Bank with one and three offices in the county,
respectively, are statewide banks which are based in Richmond. Signet Bank
recently announced that the two offices in the Town of Pulaski will be
consolidated into one during 1997. NationsBank, with 2 offices in Pulaski
County, is an affiliate bank of southeast regional bank holding company head-
quartered in Charlotte, North Carolina. First National Bank of Christiansburg,
a community bank which is headquartered in nearby Montgomery County, acquired
a site in Pulaski County in 1995 and established a new branch in 1996.
<page3>
In addition to the commercial banks described above, First American Bank,
a federally chartered savings association, operates two branches in Pulaski
County. Two credit unions also operate in the county. In addition, the
Bank is subject to aggressive competition from a wide variety of financial
service companies offering an expansive array of financial products and
services.
The Company believes that the community focus of the Bank, with its emphasis
on service to small businesses, individuals, and professional concerns, gives
it an advantage in some segments of this market.
EMPLOYEES
The Bank presently has 18 full-time employees and 8 part-time employees for a
total of 22 full-time equivalents. The Company does not have any employees
other than its officers, none of whom receive any remuneration for their
services to the Company.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws and
regulations. These impose specific requirements and restrictions and provide
for general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary
describes statutory or regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any
change in applicable laws or regulations may have a material effect on the
business and prospects of the Company. Beginning with the enactment of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
and following with the Federal Deposit Insurance Corporation Improvement Act
("FDICIA"), enacted in 1991, numerous additional regulator requirements have
been placed on the banking industry in the past five years, and additional
changes have been proposed. The operations of the Company and the Bank may
be affected by legislative changes and the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent of
the effect on its business and earnings that fiscal or monetary policies,
economic control, or new federal or state legislation may have in the future.
Federal Bank Holding Company Regulation
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956 (the "BHCA"), Under the BHCA, the Company is subject to
periodic examination by the Board of Governors of the Federal Reserve System
(the "Federal Reserve") and is required to file periodic reports of it
operations and such information as the Federal Reserve may require. Company
and Bank activities are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries, or
engaging in any other activity that the Federal Reserve determines to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto.
Investments, Control, and Activities. With certain limited exceptions, the
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any
bank, (ii) acquiring direct or indirect ownership or control of any voting
shares of any bank if after such an acquisition it would own or control more
than 5% of the voting shares of such bank (unless it already owns or controls
the majority of such shares), or (iii) merging or consolidating with another
bank holding company.
<page4>
In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as the Company. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. In the case of the Company, under
Federal Reserve regulations control will be rebuttably presumed to exist if
a person acquires at least 10% of the outstanding shares of any class of
voting securities once the Company's Common Stock is registered under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Company registered
the Common Stock under the Exchange Act by April 30, 1995. The regulations
provide a procedure for challenge of the rebuttable control presumption.
Under the BHCA, the Company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in, nonbanking activities, unless the Federal Reserve,
by order or regulation, has found those activities to be so closely related
to banking or managing or controlling banks as to be a proper incident
thereto. Some of the activities that the Federal Reserve has determined by
regulation to be proper incidents to the business of banking include making
or servicing loans and certain types of leases, engaging in certain
insurance and discount brokerage activities, performing certain data
processing services, acting in certain circumstances as a fiduciary or
investment or financial advisor, owning savings associations, and making
investments in certain corporations or projects designed primarily to
promote community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances in
which the Company might not otherwise do so. Under the BHCA, the Federal
Reserve may require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary
of a bank) upon the Federal Reserve's determination that such activity or
control constitutes a serious risk to the financial soundness or stability
of any subsidiary depository institution of the bank holding company.
Further, federal bank regulatory authorities have additional discretion to
require a bank holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution's financial condition. The Bank may be required to indemnify, or
cross-guarantee, the FDIC against losses it incurs with respect to any other
bank which the Company controls, which in effect makes the Company's equity
investments in healthy bank subsidiaries available to the FDIC to assist any
failing or failed bank subsidiary of the Company.
Virginia Bank Holding Company Regulation
All Virginia bank holding companies must register with the Virginia State
Corporation Commission (the "Virginia Commission") under Title 6.1 of the
Code of Virginia (the "Virginia Act"). A registered bank holding company
must provide the Virginia Commission with information with respect to the
financial condition, operations, management, and intercompany relationships
of the holding company and its subsidiaries. The Virginia Commission may
also require such other information as is necessary to keep itself informed
about whether the provisions of Virginia law and the regulations and orders
issued thereunder by the Virginia Commission have been complied with, and
may make examinations of any bank holding company and its subsidiaries.
<page5>
Under the Virginia Act, it is unlawful without prior approval of the Virginia
Commission for any company to acquire 25% or more of the voting securities of
any bank and for any Virginia bank holding company to acquire direct to
indirect ownership or control of more than 5% of the voting securities of
any bank or other bank holding company. In addition, the Virginia Act
allows regional interstate banking by permitting banking organizations in
certain Southeastern states to acquire Virginia banking organizations if
Virginia banking associations are allowed to acquire banking organizations
in their states and the Virginia banking organization to be acquired has been
in existence and continuously operated as a bank for a period of two years.
As a result of this reciprocal banking provisions, banking organizations in
other states, most significantly North Carolina, have entered the Virginia
market through acquisitions of Virginia institutions. Those acquisitions are
subject to federal and Virginia approval. Recent legislation has broadened
these statutes to permit nationwide reciprocal bank acquisitions. See "The
Bank-Branching" below.
THE BANK
General. The Company is the holding company for the bank, which is a national
banking association. The Office of Comptroller of the Currency (the "OCC")
is the primary regulator for the Bank. The OCC regulates or monitors all areas
of the Bank's operations, including security devices and procedures, adequacy
of capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securities, payment of dividends, interest rates payable
on deposits, interest rates or fees chargeable on loans, establishment of
branches, corporate reorganizations, maintenance of books and records, and
adequacy of staff training to carry on safe lending and deposit gathering
practices. The Bank must maintain certain capital ratios and is subject to
limitations on aggregate investments in real estate, bank premises, and
furniture and fixtures.
Under FDICIA, all insured institutions must undergo regular on-site
examinations by their appropriate banking agency. The cost of examinations
of insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports
to the Federal Deposit Insurance Corporation ("FDIC") and the appropriate agency
(and state supervisor when applicable). FDICIA also directs the FDIC to
develop with other appropriate agencies a method for insured depository
institutions to provide supplemental disclosure of the estimated fair market
value of assets and liabilities, to the extent feasible and practicable, in
any balance sheet, financial statement, report of condition or any other
report of any insured depository institution. FDICIA also requires the
Federal banking regulatory agencies to prescribe, by regulation, standards
for all insured depository institutions and depository institution holding
companies relating, among other things, to: (i) internal controls, in-
formation systems and audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; and (v) asset quality.
Transactions With Affiliates and Insiders. The Bank is subject to the
provisions on Section 23A of the Federal Reserve Act, which place limits on
the amount of loans or extensions of credit to, or investments in, or certain
other transactions with, affiliates and on the amount of advances to third
parties collateralized by the securities or obligations of affiliates. In
addition, most of these loans and certain other transactions must be secured
in prescribed amounts. The Bank is also subject to the provisions of Section
23B of the Federal Reserve Act that, amoung other things, prohibit an
institution from engaging in certain transactions with certain affiliates
unless the transactions are on terms substantially the same, or at least as
favorable to such institution or its subsidiaries, as those prevailing at
the time for comparable transactions with non-affiliated companies. The Bank
is subject to certain restrictions on extensions of credit to executive
officers, directors, certain principal shareholders and their related
interests. Such extensions of credit (i) must be made on substantially the
same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with third parties and (ii) must
not involve more than the normal risk of repayment or present other
unfavorable features.
<page6>
Branching. The Bank is permitted to branch freely within the state of
Virginia. The Virginia Act permits statewide branching for Virginia state
banks. As a national bank located in Virginia, these state branch banking
laws also apply to the Bank. On September 29, 1994, the federal Interstate
Banking Efficiency Act (the "Interstate Act), which expands the ability of
banks to compete interstate, was enacted. The Interstate Act permits nation-
wide interstate acquisitions of banks by bank holding companies beginning
September 29, 1995, and permits nationwide interstate mergers of banks
beginning June 1, 1997. States can legislatively opt not to permit inter-
state banks mergers or can legislatively opt to permit interstate bank
merges before the June 1, 1997, effective date. The Virginia General
Assembly has adopted legislation which opts to permit nationwide inter-
state bank mergers effective July 1, 1995.
Community Reinvestment Act. The Community Reinvestment Act (the "CRA")
requires that, in connection with examinations of financial institutions
within their respective jurisdictions, the federal regulators of financial
institutions to evaluate the record of the financial institutions in meeting
the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility. The Bank has
not yet received a CRA evaluation.
Other Regulations. Interest and certain other charges collected or contracted
by the Bank are subject to state usury laws and certain federal laws con-
cerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowed, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials
to determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it serves, the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, creed, or
other prohibited factors in extending credit, the Fair Credit Reporting Act
of 1978 governing the use and provision of information to credit reporting
agencies, the Fair Debt Collection Act governing the manner in which consumer
debts may be collected by collection agencies, and the rules and regulations
of the various federal agencies charged with the responsibility of
implementing such federal laws. The deposit operations of the Bank also are
subject to Truth-In-Savings Act, which requires detailed disclosure of the
yield and terms of deposit products, the Right to Financial Privacy Act,
which imposes a duty to maintain confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoena
of financial records, and the Electronic Funds Transfer Act and Regulation
E issued by the Federal Reserve Board to implement that act, which governs
automatic deposits to and withdrawals from deposit accounts and customers'
rights and liabilities arising from the use of automated teller machines and
other electronic banking services.
Deposit Insurance
The deposits of the Bank are currently insured to a maximum of $100,000 per
depositor, subject to certain aggregation rules. The FDIC establishes rates
for the payment of premiums by federally insured banks and thrifts for
deposit insurance. Separate insurance funds (BIF and SAIF) are maintained
for commercial banks and thrifts, with insurance premiums from the industry
used to offset losses from insurance payouts when banks and thrifts fail.
Due to the lower rate of failures in recent years, the fees
nks and thrifts pay BIF and SAIF have decreased. The FDIC has adopted a
risk-based deposit insurance premium system for all insured depository
institutions, including the Bank, which requires that a depository
institution pay to BIF or SAIF from $.04 to $.27 per $100 of insured
deposits depending on its capital levels and risk profile, as determined
by its primary federal regulator on a semiannual basis. The current
assessment rate per $100 of insured deposits of the Bank is $.04, or a
minimum of $2,000 annually. This is significantly lower than the previous
assessment rate of $.23 per $100 of insured deposits. The average rate
charged to commercial banks dropped to $.045 per $100 of insured deposits
from an average of $.235 per $100 of insured deposits under the previous
rate structure.
<page7>
Dividends
The principal source of the Company's cash revenues comes from dividends
received from the Bank. The amount of dividends that may be paid by the
Bank to the Company depends on the Bank's earnings and capital position
and is limited by federal law, regulations and policies. As a national
bank, the Bank may not pay dividends from its paid-in-capital. All
dividends must be paid out of undivided profits then on hand, after de-
ducting expenses, including reserves from losses and bad debts. In
addition, a national bank is prohibited from declaring a dividend on its
shares of common stock until its surplus equals its stated capital,
unless there has been transferred to surplus no less than one-tenth of
the bank's net profits of the preceding two consecutive half-year periods
(in the case of an annual dividend). The approval of the OCC is required
if the total of all dividends declared by a national bank in any
calendar year exceeds the total if its net profits for that year combined
with its retained net profits for the preceding two years, less any
required transfers to surplus. Under FDICIA, the Bank may not pay a
dividend if, after paying the dividend, the Bank would be undercapitalized.
See "Capital Regulations" below.
Capital Regulations
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, account for off-balance
sheet exposure, and minimize disincentives for holding liquid assets. The
resulting capital ratios represent qualifying capital as a percentage of
total risk-weighted assets and off-balance sheet items. The guidelines are
minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios well
in excess of the minimums. The current guidelines require all federally
regulated banks and bank holding companies to maintain a minimum risk-based
total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital.
Tier 1 capital includes common shareholders' equity, qualifying perpetual
preferred stock, and minority interests in equity accounts of consolidated
subsidiaries, but excludes goodwill and most other intangibles and excludes
the allowance for loan and lease losses. Tier 2 capital includes the excess
of any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate
term-preferred stock, and general reserves for loan and lease losses up to
1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are
assigned to the 100% risk category, except for first mortgage loans fully
secured by residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most investment
securities are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% rating, and direct obligations of or
obligations guaranteed by the United States Treasury of United States
Government agencies, which have a 0% rating.
The federal bank regulator authorities have also implemented a leverage ratio,
which is Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank or bank holding company may leverage its
equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an
additional cushion of at least 100 to 200 basis points.
<page8>
These guidelines apply on a consolidated basis to bank holding companies with
total consolidated assets of $150 million more. For bank holding companies
with less than $150 million in total consolidated assets (such as the
Company), the guidelines will be applied on a bank only basis unless the
bank holding company is engaged in a nonbanking activity involving
significant leverage or has a significant amount of debt outstanding that
is held by the general public.
FDICIA established a new capital-based regulatory scheme designed to promote
early intervention for troubled banks and requires the FDIC to choose the
least expensive resolution of bank failures. The new capital based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as "well capitalized" institution, a bank
must have a leverage ratio of no less the 5%, a Tier 1 risk-based ratio of
no less than 6%, and a total risk-based capital ratio of no less than 10%,
and the bank must not be under any order or directive from the appropriate
regulatory agency to meet and maintain a specific capital level. As of
December 31, 1996, the Bank qualified as "well-capitalized." See "Item 6.
Management's Discussion and Analysis or Plan of Operation."
Under the FDICIA regulations, the applicable agency can treat an institution
as if it were in the next lower category of the agency determines (after
notice and an opportunity for hearing) that the institution is in an unsafe
or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution will increase, and
the permissible activities of the institution will decrease, as it moves
downward through the capital categories. Institutions that fall into one of
the other three undercapitalized categories may be required to (i)submit a
capital restoration plan; (ii) raise additional capital; (iii) restrict their
growth, deposit interest rates, and other activities;(iv) improve their
management; (v) eliminate management fees; or (vi) divest themselves of all
or part of their operations. Bank holding companies controlling financial
institutions can be called upon to boost the institutions' capital and to
partially guarantee the institutions' performance under their capital
restoration plans.
These capital guidelines can affect the Company in several ways. Rapid
growth, poor loan portfolio performance, or poor earnings performance, or a
combination of these factors, could change the Company's capital position in
a relatively short period of time, making additional capital infusion
necessary.
FDICIA requires the federal banking regulators to revise the risk-based
capital standards to provide for explicit consideration of interest-rate
risk, concentration of credit risk, and the risks of non-traditional
activities. It is uncertain what affect these regulations, when
implemented, would have on the Company and the Bank.
Recent Legislative Developments
From time to time, various bills are introduced in the United States Congress
with respect to the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. The Company cannot predict whether any
of these proposals will be adopted or, if adopted, how these proposals would
affect the Company.
<page9>
ITEM 2. DESCRIPTION OF PROPERTY.
Company and Bank main offices are located on a 4.9 acre plot at 900 Memorial
Drive in Pulaski. The Bank opened for business on August 29, 1994, in a
temporary modular building on the site and utilized the temporary facility
for 16 months while the permanent Bank facility was constructed. The Bank
began construction on the permanent facility on March 28, 1995. Construction
was completed on December 1, 1995. The cost of the building was $933,000.
The furniture, fixtures and equipment for the facility cost $143,000. The
permanent facility is a two-story brick building and contains approximately
10,500 square feet. It features five inside teller windows, three drive-up
lanes, a drive-up night depository and a drive up automated teller machine.
The main office site was purchased from a partnership 100% owned by Jack W.
Bowling, a director of the Company, and five members of his immediate family
in an exchange transaction for 25,000 shares of common stock. See "Item 12.
Certain Relationships and Related Transactions."
In the normal course of business, the Bank invests in debt securities
collateralized by real estate mortgages on residential properties. The Bank's
policies regarding investment in mortgage-backed securities are subject to
change by the Board of Directors with out a vote of stockholders. The Bank
also originates and holds real estate mortgages. These are secured by first
and second deeds of trust on residential and commercial properties.
ITEM 3. LEGAL PRCEEDINGS.
Neither the Company nor the Bank is a party to, nor is any of their property
the subject of, any material pending legal proceedings incidental to the
business of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
_______
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's articles of incorporation authorize it to issue up to 10,000,000
shares of common stock, par value $5.00 per share (the "Common Stock"), of
which 437,225 were issued and outstanding as of March 20, 1997. There is no
established public trading market in the common stock, and one is not expected
to develop in the near future. The Company's common stock trades thinly,
primarily on the local market. However, two stock brokerage firms, Scott &
Stringfellow and Wheat First Securities, have been approved by the Company
as market makers. As of March 20, 1997, there are approximately 600 stock-
holders of record.
The Company has never paid a dividend. It is anticipated that earnings will
be retained for several years to expand the Bank's capital base to support
deposit growth and that no dividends will be paid on the Company's stock for
the next five years. Dividends might not be paid for several years thereafter
even if the Company achieves profitable operations.
<page10>
Moreover, the National Banking Act limits dividend payments by national banks,
such as the Bank, which in turn could limit the Company's ability to pay
dividends. The Bank may only pay dividends out of its net profits then on
hand, after deducting expenses, including losses and bad debts. In addition,
the Bank is prohibited from declaring a dividend on its shares of common
stock until its surplus equals its stated capital, unless there has been
transferred to this surplus no less than one-tenth of the Bank's net profits
of the preceding two consecutive half-year periods (in the case of an annual
dividend). The approval of the OCC will be required if the total of all
dividends declared in any calendar year by the Bank exceeds the Banks' net
profits to date, as defined, for that year combined with its retained net
profits for the preceding two years less any required transfers to surplus.
At December 31, 1996, the Bank was not yet cumulatively profitable, but is
expected to considerably reduce its operating loss in 1997. The OCC also
has the authority under federal law to enjoin a national bank engaging in
what in its opinion constitutes an unsafe or unsound practice in conducing
its business, including the payment of a dividend under certain circumstances.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management's Discussion and Analysis is herein incorporated by reference to
the Company's 1996 Annual Report to Stockholders, pages 23 through 38.
ITEM 7. FINANCIAL STATEMENTS.
The following consolidated financial statements of the registrant and the
independent Auditors' Report set forth on pages 2 through 20 of the Company's
1995 Annual Reports to Stockholders are incorporated herein by reference:
1. Independent Auditor's Report
2. Consolidated Balance Sheets as of December 31, 1996 and 1995
3. Consolidated Statements of Operations for the years and period
ended December 31, 1996, 1995, and 1994
4. Consolidated Statements of Stockholders' Equity for the years
and period ended December 31, 1996, 1995, and 1994
5. Consolidated Statements of Cash Flows for the years and period
ended December 31, 1996, 1995, and 1994
6. Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in accountants during the year and there were no
disagreements on accounting and financial disclosure.
PART III
________
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF EXCHANGE ACT.
Executive Officers of the Company as of December 31, 1996 are listed on page
2 of the Company's Proxy statement dated March 21, 1997 and is incorporated
herein by reference. Information with respect to the directors of the
Company is set out under the caption "Election of Directors" on page 3 of
The Company's Proxy statement dated March 21, 1997, which information is
incorporated herein by reference.
<page11>
The disclosure required by item 405 of regulation S-K is set out under the
caption "Compliance with Section 16(a) of the Securities Exchange Act" on
page 17 of the Company's Proxy Statement dated March 21, 1997, which
information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information set forth under "Executive and Board Compensation" on pages
4 through 6 of the Company's Proxy Statement dated March 21, 1997 is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under "Voting" on page 1, "Security Ownership of
Certain Beneficial Owners and Management" on pages 2 and 3 and under
"Election of Directors" on pages 3 and 4 of the Company's Proxy Statement
dated March 21, 1997 is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under "Certain Relationships and Related Trans-
actions" on page 4 of the Company's Proxy statement dated March 21, 1997 is
incorporated herein by reference.
PART IV
_______
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The following documents are filed as part of the report:
1. Financial Statements:
The following financial statements are incorporated in this report by
reference to the indicated pages of the 1996 Annual Report to Stockholder
<TABLE>
<CAPTION>
1996 Annual Report to
Stockholders page number
________________________
<S> <C>
Independent Auditor's Report 2
Consolidated Balance Sheets-December 31, 1996 and 1995 3
Consolidated Statements of Operations - Years ended
December 31, 1996, 1995 and 1994 4
Consolidated Statements of Stockholders' Equity - Years
ended December 31, 1996, 1995 and 1994 5
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994 6
Notes to Consolidated Financial Statements 7-22
Management's Discussion and Analysis 23-38
</TABLE>
2. Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the
information is presented in the Consolidated Financial Statements or related
notes.
<page12>
3. Exhibits:
The exhibits filed as part of this report and exhibits incorporated herein by
reference to other documents are listed in the Index to Exhibits to this
Annual Report on Form 10-K.
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
No. 33-69326 on Form S-1).
3.2 By-laws (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement No. 33-69326 on Form S-1).
4.1 Provisions in the Company's Articles of Incorporation and By-laws
defining the rights of holders of the Company's Common Stock
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement No. 33-69326 on Form S-1).
10.1 Employment Agreement dated June 21, 1993, by and between Wayne L.
Carpenter and the Company incorporated by reference to Exhibit 3.2
to the Company's Registration Statement No. 33-69326 on Form S-1).
10.2 Construction Agreement dated February 2, 1995, by and between the
Bank and Turn-Key Financial Builders, Inc. (incorporated by reference
to Exhibit 10.2 to the Company's 1995 Form 10-KSB).
10.3 Security Equipment Purchase Agreement dated February 15, 1995, by
and between the Bank and Security Corporation (incorporated by
reference to Exhibit 10.3 to the Company's 1995 Form 10-KSB).
10.4 CNB Holdings, Inc. 1995 Stock Option Plan (incorporated by reference
to Exhibit 10.4 to the Company's 1995 Form 10-KSB).
12.1 1996 Report to Stockholders.
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit
10.4 to the Company's 1995 Form 10-KSB).
22.1 1996 Proxy Statement.
<page13>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CNB HOLDINGS, INC.
Date: March 25, 1997 By: s/Wayne L. Carpenter
_____________________
Wayne L. Carpenter
President
In accordance with the Exchange Act, this report has to be signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
_________ _____ ____
s/Sybil S. Atkinson
_________________________ Director March 26, 1997
Sybil S. Atkinson
s/Jack W. Bowling
_________________________ Director March 26, 1997
Jack W. Bowling
s/Jackson M. Bruce
_________________________ Director March 26, 1997
Jackson M. Bruce
Director, President
and Chief Executive
Officer (principal
s/Wayne L. Carpenter financial and
_________________________ accounting officer) March 26, 1997
Wayne L. Carpenter
s/Randolph V. Chrisley
_________________________ Director March 26, 1997
Randolph V. Chrisley
s/Hiawatha Nicely, Jr.
_________________________ Director March 26, 1997
Hiawatha Nicely, Jr.
s/A. Carole Pratt
_________________________ Director March 26, 1997
A. Carole Pratt
s/David W. Ratcliff, Jr.
_________________________ Director March 26, 1997
David W. Ratcliff, Jr.
s/Nathanial R. Tuck
_________________________ Director March 26, 1997
Nathaniel R. Tuck
s/James L. Webb, Jr.
_________________________ Director March 26, 1997
James L. Webb, Jr.
s/J. David Wine
_________________________ Director March 26, 1997
J. David Wine
<page14>
INDEX TO EXHIBITS
PAGE NO. IN
EXHIBIT NO. DESCRIPTION EQUENTIAL SYSTEM
___________ ________________________________________ _________________
3.1 Amended and Restated Articles of
Incorporation (incorporated by reference
to Exhibit 3.1 to the Company's Registration
Statement No. 33-69326 on Form S-1).
3.2 By-laws (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement No.
33-69326 on Form S-1).
4.1 Provisions in the Company's Articles of
Incorporation and By-laws defining the rights
of holders of the Company's Common Stock
(incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement No.
33-69326 on Form S-1).
10.1 Employment Agreement dated June 21, 1993, by
and between Wayne L. Carpenter and the Company
incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement No.
33-69326 on Form S-1).
10.2 Construction Agreement dated February 2, 1995,
by and between the Bank and Turn-Key Financial
Builders, Inc. (incorporated by reference to
Exhibit 10.2 to the Company's 1995 Form 10-KSB).
10.3 Security Equipment Purchase Agreement dated
February 15, 1995, by and between the Bank and
Security Corporation (incorporated by reference
to Exhibit 10.3 to the Company's 1995 Form 10-KSB).
10.4 CNB Holdings, Inc. 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the
Company's 1995 Form 10-KSB).
12.1 1996 Report to Stockholders.
21.1 Subsidiaries of the Company (incorporated by
reference to Exhibit 10.4 to the Company's 1995
Form 10-KSB).
22.1 1996 Proxy Statement.
<page15>
1996 ANNUAL REPORT
TABLE OF CONTENTS
Letter to Stockholders.......................................................1
Independent Auditor's Report.................................................2
Consolidated Balance Sheets..................................................3
Consolidated Statements of Operations........................................4
Consolidated Statements of Stockholders' Equity..............................5
Consolidated Statements of Cash Flows........................................6
Notes to Consolidated Financial Statements...................................7
Board of Directors and Officers.............................................21
Stockholder Information.....................................................22
LETTER TO STOCKHOLDERS
Dear Stockholder:
We are pleased to present our 1996 Annual Report. This report covers our first
full year of operations, a year filled with exciting and significant activity.
Community National Bank, our wholly-owned subsidiary, began the year in temp-
orary quarters and in December moved to a beautiful permanent facility on time
and on budget.
The year was highlighted by solid growth in assets, a strong base of capital-
ization and the development of new relationships with our customers. Customer
friendly hours and a unique style of doing business founded specifically on
customer service and satisfaction have been the key elements in the growth
achieved this year.
Community National Bank's brick colonial structure provides the customer with
a number of expanded services among which are safe deposit boxes, additional
drive-up lanes and a drive-up automated teller machine. The new facility and
banking services allow easy customer access to bankers ready to demonstrate
state of the art service.
Community National Bank has assembled the very best in management and staff to
fulfill the bank's mission statement and goals . . . to offer the very best in
banking to the Pulaski County service area.
The directors of Community National Bank continue to look toward the growth and
expansion of the bank. We pledge our best efforts to the continued growth, suc-
cess and profitability of CNB Holdings, Inc. and its subsidiary, Community
National Bank.
s/Hiawatha Nicely, Jr. s/Wayne L. Carpenter
______________________ ___________________
Hiawatha Nicely, Jr. Wayne L. Carpenter
Chairman of the Board President and CEO
<Page 1>
LARROWE, CARDWELL AND COMPANY, LC
POST OFFICE BOX 2108
PULASKI, VIRGINIA 24301
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 sub-
sidiary (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 signifi-
cant 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.
LARROWE, CARDWELL & COMPANY, LC
Pulaski, Virginia
January 17, 1997
<Page 2>
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995
___________ ___________
<S> <C> <C>
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
____________ _____________
</TABLE>
See Notes to Consolidated Financial Statements
<Page 3>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1996, 1995 and 1994
_______________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
__________ _________ _________
<S> <C> <C> <C>
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
__________ __________ __________
</TABLE>
See Notes to Consolidated Financial Statements
<Page4>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
________________________________________________________________________________
<TABLE>
<CAPTION>
Unrealized
Retained Appreciation
Common Stock Earnings (Depreciation)
on
Shares Amount Surplus (Deficit) Securities Total
________ __________ __________ __________ __________ ___________
<S> <C> <C> <C> <C> <C> <C>
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
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) (47,869)
_______ __________ _________ ________ __________ __________
DECEMBER
31, 1994 437,042 2,185,210 2,155,867 (445,496) (47,769) 3,847,812
Net loss - - - (331,582) - (185,645)
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
_______ __________ __________ _________ __________ __________
</TABLE>
See Notes to Consolidated Financial Statements
<page5>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
____________ ____________ ____________
<S> <C> <C> <C>
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 $ -
___________ ___________ ___________
</TABLE>
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
<PAGE6>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
CNB Holdings, Inc. (the Company) is a bank holding company incorporated under
the laws of Virginia on April 29, 1993. 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 gener-
ally 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, regu-
latory 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".
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.
<PAGE7>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
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 individuals securities to fair value. Related write-downs
are included in earnings as realized losses.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans are reported at their outstanding balance principal reduced by an al-
lowance 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 out-
standing. 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 ade-
quacy of the allowance is based on the Bank's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
PROPERTY AND EQUIPMENT
Land is carried at cost. Bank premises, furniture and equipment are carried at
cost, less accumulated depreciation computed by the straight-line method over
the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
_____
<S> <C>
Building and land improvements 20-40
Furniture and equipment 5-10
</TABLE>
<PAGE8>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ORGANIZATION AND STOCK ISSUANCE COSTS
Costs incurred for the organization of the Company and the Bank were capi-
talized and are being amortized over five years. Costs incurred in con-
nection 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 ac-
counting 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 differ-
ences 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.
EARNING 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.
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 com-
mercial 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
futured 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 tech-
niques 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 non financial instruments from its disclosure requirements. Ac-
cordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
<page9>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT
FAIR VALUE OF FINANCIAL INSTRUMENTS, CONT.
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-save and held-to-maturity securities: Fair values for securi-
ties, 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 esti-
mates include judgments regarding future expected loss experience and risk
characteristics. Fair values for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values, where applicable. The
carrying amount of accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting
date. The fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities on
such time deposits. The carrying amount of accrued interest payable approxi-
mates 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.
<page10>
NOTES TO CONSOLIDATED STATEMENTS
_______________________________________________________________________________
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:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
___________ __________ _________ ____________
<S> <C> <C> <C> <C>
1996
____
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
____________ __________ _________ ____________
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
________ ________ _______
<S> <C> <C> <C>
Realized gains $ 33,265 $ 11,832 $ -
Realized losses (16,715) (1,400) -
________ ________ _______
$ 16,550 $ 10,432 $ -
________ ________ _______
</TABLE>
The amortized cost and approximate market value at December 31, 1996 of in-
vestment securities by scheduled maturity are shown below.
<TABLE>
<CAPTION>
Available for Sale
__________________________
Amortized Fair
Cost Value
_____________ ____________
<S> <C> <C>
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
_____________ ____________
</TABLE>
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.
<PAGE11>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 4. LOANS RECEIVABLE
The major components of loans in the consolidated balance sheets at December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1966 1995
____________ ____________
<S> <C> <C>
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 2,699,628 1,148,781
States and political subdivisions 343,057 422,396
Other 372,119 457,236
___________ ___________
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
___________ ____________
</TABLE>
Nonperforming assets at December 31, 1996 and 1995 are detailed as follows:
<TABLE>
<CAPTION>
1996 1995
____________ ____________
<S> <C> <C>
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
____________ ____________
</TABLE>
Gross interest income that would have been recognized for each year if the non-
accrual loans and restructured loans had been current in accordance with their
original terms and had been outstanding throughout the period or since origi-
nation, or if held part of the period, is detailed below. Applicable inter-
est income that was actually collected and included in net income for each
year is also summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
____________ ____________ ____________
<S> <C> <C> <C>
NONACCRUAL LOANS:
Interest income, original terms $ 4,789 $ - $ -
____________ ____________ ____________
Interest income, recognized $ 2,784 $ - $ -
____________ ____________ ____________
The Bank has no restructured loans during the years ended December 31, 1996,
1995 or 1994.
</TABLE>
<page12>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 4. LOANS RECEIVABLE, CONTINUED
An allowance determined in accordance with SFAS No. 114 and No. 118 is pro-
vided for all impaired loans. The total recorded investment in impaired
loans and the related allowance for loan losses at December 31, the average
annual recorded investment in impaired loans and interest income recognized
on impaired loans for the year (all approximate) are summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
____________ ____________ ____________
<S> <C> <C> <C>
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 $ - $ -
____________ ____________ ____________
</TABLE>
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
NOTE 5. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
____________ ____________ ____________
<S> <C> <C> <C>
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
____________ ____________ ____________
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
Components of property and equipment and total accumulated depreciation at
December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
____________ ____________
<S> <C> <C>
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
____________ ____________
</TABLE>
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.
<page13>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
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 out-
standing 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):
<TABLE>
<CAPTION>
December 31, 1996
Decem
ber 31, 1995
___________________ ___________________
Carrying Fair Carrying Fair
Amount Value Amount Value
_________ _________ _________ _________
<S> <C> <C> <C> <C>
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 - - - -
</TABLE>
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.
<page14>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 9. COMMON STOCK, CONTINUED
Activity under the plan during the years ended December 31, 1996 and 1995 is
summarized below:
<TABLE>
<CAPTION>
Granted
_______________________________________
Non-
Available Incentive Incentive Exercise
for Stock Stock Restricted (1)
Grant Options Options Stock Price Exercised
_______ ________ _______ _______ _______ _________
<S> <C> <C> <C> <C> <C> <C>
Plan adopted $275,000 - - - - -
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 -
_______ ________ _______ _______ _______
</TABLE>
Additional information relating to the plan is listed below:
<TABLE>
<CAPTION>
1996 1995 1994
____________ ____________ ____________
<S> <C> <C> <C>
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.
</TABLE>
<page15>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
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 previ-
ously 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:
<TABLE>
<CAPTION>
1996 1995 1994
____________ ____________ ____________
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred (67,750) (111,968) (109,565)
Deferred tax asset valuation 67,750 111,968 109,565
____________ ____________ ____________
$ - $ - $ -
____________ ____________ ____________
</TABLE>
RATE RECONCILIATION
A reconciliation of income tax expense (benefit) computed at the statutory
federal income tax rate expense included in the consolidated statement of
operations follows:
<TABLE>
<CAPTION>
1996 1995 1994
____________ ____________ ____________
<S> <C> <C> <C>
Tax at statutory federal rate $ (63,119) $ (112,738) $ (110,756)
Others (4,631) 770 1,191
Deferred tax asset valuation allowance 67,750 111,968 109,565
____________ ____________ ____________
$ - $ - $ -
____________ ____________ ____________
</TABLE>
DEFERRED TAX ANALYSIS
The components of net deferred tax assets (all Federal) at December 31, 1996
and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
____________ ____________
<S> <C> <C>
Deferred tax assets $ 354,588 $ 282,007
Deferred tax liabilities (25,332) (20,501)
Deferred tax asset valuation allowance (329,256) (261,506)
____________ ____________
$ - $ -
____________ ____________
</TABLE>
<page16>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 11. INCOME TAXES, CONTINUED
Tax effects of each significant item creating deferred taxes are summarized
below:
<TABLE>
<CAPTION>
1996 1995
____________ ____________
<S> <C> <C>
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
____________ ____________
</TABLE>
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 instru-
ments. The Bank uses the same credit policies in making commitments and con-
ditional obligations as for on-balance-sheet instruments.
A summary of the Bank's commitments at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
____________ ____________
<S> <C> <C>
Commitments to extend credit $ 3,921,000 $ 2,590,000
Standby letters of credit - 60,000
____________ ____________
$ 3,921,000 $ 2,650,000
____________ ____________
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Com-
mitments 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 neces-
sarily 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 manage-
ment's credit evaluation of the party. Collateral held varies, but may in-
clude 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.
<page17>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
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 signifi-
cant 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.
<page18>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 13. REGULATORY RESTRICTIONS, CONTINUED
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
_________________ __________________ ___________________
Amount Ratio Amount Ratio Amount Ratio
__________ _____ ___________ _____ ___________ ______
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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 19>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 14. TRANSACTIONS WITH RELATED PARTIES
The Bank has entered into transactions with its directors, significant share-
holders 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:
<TABLE>
<CAPTION>
1996 1995
____________ ____________
<S> <C> <C>
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
____________ ____________
</TABLE>
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 sub-
scriptions. 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 con-
sideration was determined by negotiation after appraisals of the property
were obtained.
<page20>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of CNB Holdings, Inc. is presented as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
____________ ____________
<S> <C> <C>
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
____________ ____________
$ 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
____________ ____________ ____________
<S> <C> <C> <C>
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)
____________ ____________ ____________
<page21>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
____________ ____________ ____________
<S> <C> <C> <C>
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>
<page22>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
________________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Management's Discussion and Analysis is provided to assist in the understanding
and evaluation of the Company's financial condition and its results of oper-
ations. The following discussion should be read in conjunction with the
Company's consolidated financial statements and related notes.
OVERVIEW
The Company commenced operations on March 8, 1993. Community National Bank,
the Company's only subsidiary, began operations on August 29, 1994. The
Company expects it will experience losses until the Bank grows its assets to
a point where the assets generate revenue from operations which exceeds the
Bank's fixed costs. These costs, which include salaries and employee benefits,
occupancy expense, furniture and equipment expense, and other noninterest
expense, can be covered by the Bank's net interest income if the Bank is able
to leverage its capital with a sufficient volume of assets. However, manage-
ment of the Company is not willing to sacrifice asset quality in order to
achieve this asset growth.
The economy of the area has improved over the last two years. Unemployment
continues to be slightly above the state average, but down from 1994. Future
economic growth appears to be stable and improving.
The earnings position of the Company continues to improve. The net loss for
1996 was $186,000 compared to $332,000 for 1995 and $327,000 in 1994. Return
on average assets was (.81)% compared to (2.87)% for 1995 and (10.77)% for 1994.
Average equity to average assets shows the Bank in a strong capital position
with a ratio of 13.71%.
The total assets of the Company grew to $27.4 million from $15.6 million, a
75.64% increase, continuing our strategy to grow the bank while continuing
asset quality.
Management continues to look at increasing market share by expanding to
contiguous markets as it becomes feasible.
<page23>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
_____________________________________________________________________________
TABLE 1. NET INTEREST INCOME AND AVERAGE BALANCES (THOUSANDS)
_____________________________________________________________________________
<TABLE>
<CAPTION>
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> <C> <C> <C> <C> <C> <C> <C> <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 non-
interest-
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 on 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 non-
interest-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 stock-
holders'
equity $22,978 $11,564 $3,034
_______ _______ ______
Net interest
income $ 721 $ 465 $ 112
______ ______ ______
Net yield on
interest-
earning
assets 3.63% 4.68% 4.69%
____ _____ ____
</TABLE>
<page24>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
TABLE 2. RATE/VOLUME VARIANCE ANALYSIS (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
________________________ _________________________
Interest Variance Interest Variance
Income/ Attributable To Income/ Attributable To
Expense _______________ _______________
Variance Rate Volume Variance Rate Volume
________ ______ ______ ________ ______ _______
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Deposits in other bank $ - $ - $ - $ (23) $ - $ (23)
Taxable investment
securities 200 (55) 255 325 49 276
Federal funds sold 15 3 12 22 8 14
Loans 549 (83) 632 349 58 291
________ ______ _____ ________ ______ _______
Total 764 (135) 899 673 115 558
________ ______ _____ ________ ______ _______
Interest-bearing liabilities
Demand deposits 158 - 158 31 8 23
Savings deposits 58 15 43 25 (2) 27
Time deposits 292 (31) 323 264 11 253
________ ______ _____ ________ ______ ______
Total 508 (16) 524 320 17 303
________ ______ _____ ________ ______ ______
Net interest income $ 256 $(119) $ 375 $ 353 $ 98 $ 255
________ ______ _____ ________ ______ ______
</TABLE>
________________________________________________________________________________
NET INTEREST INCOME
Net interest income, the principal source of bank earnings, 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). Table 1 summarizes the major components
of net interest income for the past three years and also provides yields and
average balances.
Net interest income in 1996 increased by 55.1% to $721,000 from $465,000 in
1995 and $112,000 in 1994. The increase in net interest income realized in
1996 was the result of an increase in the volume of net average earning assets
which was offset by an 105 basis point decrease in net interest margin. The
net interest margin for 1995 was 4.68% compared to 4.69% for 1994. Net
interest income in 1995 increased by $353,000, or 315.2%, over 1994. The
increase in net interest income realized in 1995 was the result of an in-
crease in net average earning assets of $7.5 million. The effects of changes
in volumes and rates on net interest income in 1996 compared to 1995, and 1995
compared to 1994 are shown in Table 2.
Interest income for 1996 increased $764,000 to $1.58 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 $9.89 million 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 $7.54 million combined with an increase in yields on earning assets
of 240 basis points from 5.76% in 1994 to 8.16% in 1995.
<page25>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
Interest expense increased by $508,000 in 1996 to $854,000 from $346,000 in
1995 and $26,000 in 1994. The increase from 1995 to 1996 was due to an in-
crease in average interest bearing liabilities of $11.44 million to $18.3
million in 1996 offset by a decrease in the rate paid of 37 basis points
compared to 1995. Interest expense increased by $320,000 from 1994 to 1995.
The increase was due to the average interest bearing liabilities increasing
by $6.3 million while the average rate paid on interest bearing liabilities
increased by 46 basis points.
PROVISION FOR LOAN LOSSES
The allowance for loan losses is established to provide for expected losses
in the Bank's loan portfolio. Loan losses and recoveries are charged or
credited directly to the allowance. Management determines the provision for
credit losses required to maintain an allowance adequate to provide for
probable losses. The factors considered in making this decision are the
collectibility of past due loans, volume of new loans, composition of the
loan portfolio, and general economic outlook.
In 1996, 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. The Bank's allowance for loan losses as a
percentage of total gross loans at the end of 1996 and 1995 was 1.2%, and
2.4% in 1994.
Additional information is contained in Tables 12, 13 and 14, and is discussed
in Nonperforming and Problem Assets.
OTHER INCOME
Noninterest income consists of revenues generated from a broad range of fi-
nancial services and activities. The majority of noninterest income is a
result of service charges on deposit accounts including charges for insuf-
ficient funds checks and fees charged for nondeposit services. Noninterest
income totaled $127,000 in 1996, a significant increase of $67,000 from the
$60,000 recorded in 1995. Noninterest income in 1994 totaled $3,000. The
majority of the increases in noninterest income from 1995 to 1996 and from
1994 to 1995 are explained by increases in the number of deposit accounts
upon which fees are based. Increases in gains on sales of investment se-
curities also contributed to the increase. The primary sources of non-
interest income for the past three years are summarized in Table 3.
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. Another review of the deposit and service fees will
be made in mid-1997.
Although the Bank generally follows a buy and hold philosophy with respect
to investment securities, occasionally the need to sell some investment se-
curities 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 letters of credit
fees.
OTHER EXPENSE
Noninterest expense for 1996 rose $140,000 or 17.7% to $929,000. Noninterest
expense in 1995 was $789,000 and $412,000 in 1994 (see Table 4). The overhead
ratio of noninterest expense to adjusted total revenues (net interest income
plus noninterest income excluding securities transactions) was 112% in 1996,
153% in 1995 and 358% in 1994. Although noninterest expense has risen over
the past two years and will most likely continue to do so as the Bank grows,
management believes the Bank's overhead ratio will continue to improve.
<page26>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
Total personnel expenses, the largest component of noninterest expense, in-
creased $59,000 or 17.9% to $388,000 in 1996. The personnel expenses for 1995
amounted to $329,000, an increase of $130,000 or 65.3%, from the 1994 level of
$199,000. These increases were attributable to normal increase in the number
of full time equivalent employees that have been required due to the high
growth rate the Bank has experienced since opening.
_______________________________________________________________________________
TABLE 3. SOURCES OF NONINTEREST INCOME (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Service charges on deposit accounts $ 93 $ 41 $ 3
Gain on sale of investment securities 17 10 -
Other 17 9 -
______ ______ _____
Total noninterest income $ 127 $ 60 3
______ ______ _____
________________________________________________________________________________
</TABLE>
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 only four months
the previous year during which operations commenced.
Professional services expense, fees paid to attorneys, independent auditors,
and state examiners decreased $14,000 or 23.3%, to $46,000 during 1996. Pro-
fessional 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 that were required subsequent to the initial opening. Most of
these were incurred in 1995.
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 the bank services and transactions
processed. Management expects these expenses to continue to increase as the
Bank grows.
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 (discussed above) in loss carryforwards, provisions for
loan losses, valuation reserves, depreciation, deferred income, and investment
security discount accretion.
Net deferred income tax assets of $329,000, $261,000 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.
<page27>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
______________________________________________________________________________
TABLE 4. SOURCES OF NONINTEREST EXPENSE (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
______ ______ ______
<S> <C> <C> <C>
Salaries and wages $ 335 $ 285 $ 180
Employee benefits 53 44 19
______ ______ ______
Total personnel expense $ 388 $ 329 $ 199
Occupancy expense 77 67 30
Furniture and equipment 62 40 10
Printing and supplies 48 37 39
Professional services 46 60 25
Postage 25 18 6
Telephone 9 8 7
Dues and subscriptions 12 8 6
Education and seminars 11 19 8
Advertising and public relations 38 30 11
Insurance expense 26 30 13
Capital Stock Tax 15 7 -
Outside services 99 74 19
Amortization of organizational cost 37 37 10
Other operating expense 36 25 29
______ ______ ______
Total other expenses $ 929 $ 789 $ 412
______ ______ ______
________________________________________________________________________________
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS
Average earning assets increased $9.89 million, or 99.57% over the past
twelve months. 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 42.19% of
total average assets while average investment securities represented 38.98%
of total average assets. For 1995, average net loans represented 31.30% of
average assets and average investments securities represented 46.26% of
average assets. A summary of average assets for the past three years is
shown in Table 5.
<page28>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
TABLE 5. AVERAGE ASSET MIX (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
________________ _________________ ________________
Average Average Average
Balance Percent Balance Percent Balance Percent
________ _______ _________ _______ _______ _______
<S> <C> <C> <C> <C> <C> <C>
Earnings assets:
Loans, net $ 9,695 42.19% $ 3,620 31.30% $ 317 10.45%
Investment securities 8,957 38.98 5,350 46.26 863 28.44
Federal funds sold 1,179 5.13 967 8.36 689 22.71
Interest-bearing bank
balances - - - - 528 17.40
________ ______ ________ ______ _______ ______
Total earning assets $ 19,831 86.30 9,937 85.92 2,397 79.00
Nonearning assets:
Cash and due from banks
banks 1,465 6.38 660 5.71 217 7.15
Premises and equipment 1,410 6.14 718 6.21 227 7.48
Other assets 272 1.18 249 2.16 193 6.37
________ ______ _________ ______ _______ ______
Total nonearning
assets 3,147 13.70 1,627 14.08 637 21.00
________ ______ _________ ______ _______ ______
Total assets $ 22,978 100.00% $ 11,564 100.00% $ 3,034 100.00%
________ ______ _________ ______ _______ ______
_______________________________________________________________________________
</TABLE>
LOANS
Average net loans totaled $9.7 million during 1996 an increase of $6.1 million
or 167.9% more than 1995. The increase in average loans outstanding during the
past year is due to increases in loan demand and to the Banks presence in the
community.
A significant portion of the loan portfolio, $5 million or 38.82%, is made up
of loans secured by various types of real estate. Total loans secured by 1-4
family residential properties represented 36.21% of total loans at the end of
1996. During 1996, the Bank also experienced growth in loans for commercial
and business purposes. These loans increased by 106.19% during 1996 to a total
of $4.3 million, or 33.64% of total loans outstanding compared to a total of
$2.1 million at the end of 1995.
The Bank makes both consumer and commercial loans to all neighborhoods within
its market area, including the low-and moderate-income areas. The market area
is generally defined to be all or portions of the Pulaski, Giles, Wythe and
Montgomery Counties of Virginia and the City of Radford, Virginia. The Bank
places emphasis on consumer based installment loans, commercial loans to small
and medium sized businesses and real estate loans. The amounts of loans out-
standing by type at year-end 1996 and 1995, and the maturity distribution of
variable and fixed rate loans as of year-end 1996 are presented in Table 6 and
Table 7, respectively.
<page29>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
The economic outlook appears positive for the year ahead. Volvo-GM Heavy
Truck, Renfro Corporation, Jefferson Mills and Pulaski Furniture Corporation,
four of the area's largest employers have undergone significant capital ex-
pansions during the past two years. Pulaski County and the Towns of Pulaski
and Dublin all have extremely active Economic Development Departments that
have been successful in attracting a wide range of new industry to the area.
Pulaski County has three Enterprise Zones established for the continued de-
velopment of the area. Management feels that economic growth in the Bank's
market area will continue at a sustainable pace through 1997.
________________________________________________________________________________
TABLE 6. LOAN PORTFOLIO SUMMARY (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
December 3, 1996 December 31, 1995
_________________ _________________
Amount % Amount %
______ _____ ______ _____
<S> <C> <C> <C> <C>
Construction and development $ 235 1.82% $ 580 8.54%
Farmland - - - -
1-4 family residential 4,676 36.21 1,980 29.17
Multifamily residential - - - -
Nonfarm, nonresidential 102 .79 - -
________ ______ ________ _______
Total real estate 5,013 38.82 2,560 37.71
Agricultural 8 .05 - -
Commercial and industrial 4,344 33.64 2,107 31.04
Credit cards 135 1.05 93 1.37
Other consumer 2,564 19.85 1,149 16.93
State and political subdivisions 343 2.66 422 6.22
Other 507 3.93 457 6.73
________ ______ ________ ______
Total $ 12,914 100.00% $ 6,788 100.00%
________ ______ ________ ______
________________________________________________________________________________
</TABLE>
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.
<page30>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
Table 7. MATURITY SCHEDULE OF LOANS (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
Commercial Total
Financial and Real _______________
Agriculture Estate Others Amount %
_____________ ______ ______ ______ ___
<S> <C> <C> <C> <C> <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%
_______ _______ _______ _______ ______
_______________________________________________________________________________
</TABLE>
The interest rate environment in 1996 caused the average yield of the in-
vestment 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, repre-
senting a $56,000 depreciation below amortized cost. This compared to a
market value of $5.5 million and a $59,000 appreciation above amortized cost
a year earlier.
<page31>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
TABLE 8. INVESTMENT SECURITIES (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
DECEMBER 31, 1996, AVAILABLE FOR SALE
Amortized Cost Due
________________________________
After After
In One Five After
One Yr. Through Through Ten Equity Fair
or Less Five Yrs. Ten Yrs. Yrs. Security Total Value
_______ _________ ________ ____ ________ ________ _______
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,302 $ 2,691 $ - $ - $ - $ 3,993 $ 4,013
U. S. Government
agencies and Mortgage-
Backed Securities 748 2,673 3,621 - - 7,042 6,962
State and political
subs. - 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
subs. - 6.54 - - 6.54
Equity Securities - - - - -
_______ _______ _______ _____ ________
Consolidated 5.35% 6.29% 6.38% -% 6.15%
_______ _______ _______ _____ ________
DECEMBER 31, 1995, AVAILABLE FOR SALE
Amortized Fair
Cost Value
_________ _______
<S> <C> <C>
U.S. Treasury $ 389 $ 400
U.S. Government agencies 4,892 4,940
Equity Securities 125 125
_________ _______
Total $ 5,406 $ 5,465
_________ _______
________________________________________________________________________________
</TABLE>
INVESTMENT SECURITIES
The Bank uses its investment portfolio to provide liquidity for unexpected
deposit decreases or loan generation, to meet the Bank's interest rate sensi-
tivity goals, and to generate income.
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 agencies 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. Table 8 presents the investment portfolio at the end of 1996 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 con-
tractual maturity.
Average federal funds sold totaled $1.2 million in 1996 which represented a
21.9% increase from the $967,000 in 1995. 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 these
funds at the lowest level possible consistent with prudent rate risk management
strategies. During 1996, average federal funds represented 5.13% of average
earning assets, down from the 8.36% during 1995 (See Table 5).
<page32>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
DEPOSITS
The Bank relies on deposits generated in its market area to provide the ma-
jority 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 deposit rates more than in the past. An increased customer awareness of
interest rates adds to the importance of rate management. The Bank's manage-
ment must continuously monitor market pricing, competitor's rates, and internal
interest rate spreads to maintain the Bank's growth and profitability. The
Bank attempts to structure rates so as to promote deposit and asset growth
while at the same time increasing overall profitability of the Bank.
Average total deposits for the year ended December 31, 1996 amounted to $18.3
million which was an increase of $10.3 million, or 159.9% over 1995. Average
core deposits totaled $16.7 million in 1996 an increase of $9.9 million, or
188.6% over 1995. The percentage of the Bank's average deposits that are
interest-bearing increased to 92.46% in 1996 from 85.56% in 1995. Average
demand deposits which earn no interest increased $334,000 in 1996 as compared
to 1995. Average deposits for the past three years are summarized in Table 9.
______________________________________________________________________________
TABLE 9. DEPOSIT MIX (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
_________________ _________________ _________________
Average Average Average
Balance Percent Balance Percent Balance Percent
_______ _______ _______ _______ _______ _______
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Now accounts $ 5,304 26.79% $ 917 11.43% $ 72 6.16%
Money market 982 4.96 687 8.56 111 9.50
Savings 1,294 6.54 253 3.15 35 2.99
Small denomination
certificates 7,642 38.60 3,417 42.59 41 3.51
Large denomination
certificates 3,083 15.57 1,591 19.83 308 26.35
_______ ______ _______ ______ _______ ______
Total interest
bearing deposits 18,305 92.46 6,865 85.56 567 48.51
Noninterest bearing deposits:
Demand deposits 1,492 7.54 1,158 14.44 602 51.49
_______ ______ _______ ______ _______ ______
Total deposits $19,797 100.00% $ 8,023 100.00% $ 1,169 100.00%
_______ ______ _______ ______ _______ ______
______________________________________________________________________________
</TABLE>
The average balance of certificates of deposit issued in denominations of
$100,000 or more increased by $1.5 million or 93.8%, in 1996. The strategy
of management has been to support loan and investment growth with core deposits
and not to aggressively solicit the more volatile, large denomination certifi-
cates of deposit. Table 10 provides maturity information relating to time
deposits of $100,000 or more at December 31, 1996.
<page 33>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
SHORT-TERM DEBT
The Bank had no short-term debt at December 31, 1996, 1995, or 1994.
______________________________________________________________________________
TABLE 10. LARGE TIME DEPOSIT MATURITIES, (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
Analysis of time deposits of $100,000 or more at December 31, 1996:
<S> <C> <C>
Remaining maturity of three months or less $ 1,392
Remaining maturity over three through twelve months 1,155
Remaining maturity over twelve months 532
________
Total time deposits of $100,000 or more $ 3,079
________
________________________________________________________________________________
</TABLE>
CAPITAL ADEQUACY
Shareholder's equity was $3.3 million at December 31, 1996, an 8.25% decrease
from the 1995 year-end total of $3.6 million. The decrease was primarily a
result of net losses 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 amounted to 13.7% in 1996 and 30.4% in 1995.
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 1) capital (common 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) to risk-weighted assets of 8%. As of December 31, 1996 the
Bank has a ratio of Tier 1 capital to risk-weighted assets of 21.97% and a
ratio of total regulatory capital to risk-weighted assets of 23.06%.
_______________________________________________________________________________
TABLE 11. YEAR END RISK-BASED CAPITAL, (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996
_________
<S> <C>
Tier I capital $ 3,139
Qualifying allowance for loan losses(1)
(limited to 1.25% or risk weighted assets) 155
_________
Total regulatory capital $ 3,294
_________
Total risk-weighted assets $ 14,286
_________
Tier I as a percent of risk-weighted assets 21.97%
Total Tier II capital as a percent of risk-weighted assets 23.06%
Leverage ratio(2) 11.62%
_________________________________
1 Limited to 1.25% of risk-weighted assets.
2 Year end Tier I capital to adjusted average assets per quarter.
________________________________________________________________________________
</TABLE>
<page34>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
In addition, a minimum leverage ratio of Tier I capital to average total assets
for the previous quarter is required by federal bank regulators, ranging from
3% to 5%, 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%.
Table 11 sets forth summary information with respect to the Bank's capital
ratios at December 31, 1996. All capital ratio levels indicate that the Bank
is well capitalized.
At December 31, 1996 the Bank had 437,225 shares of common stock outstanding
which was held by approximately 600 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.
Nonperforming Assets at December 31, 1996 and 1995 are analyzed in Table 12.
________________________________________________________________________________
TABLE 12. NONPERFORMING ASSETS (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995
____ ____
<S> <C> <C>
Nonaccrual loans $ 17 $ -
Restructured loans - -
Foreclosed and in-substance
foreclosed properties -
8
_____ _____
$ 17 8
_____ _____
________________________________________________________________________________
</TABLE>
Nonperforming assets at year-end 1996 were .1% of loans outstanding and .1% at
year-end 1995. In addition to the nonperforming assets, loans which were 90
days and over past due amounted to $52,000 at December 31, 1996 and $18,000 at
December 31, 1995.
The allowance for loan losses is maintained at a level adequate to absorb
probable losses. Some of the factors which management considers in de-
termining the appropriate level of the allowance for credit losses are:
past loss experience, an evaluation of the current loan portfolio, identified
loan problems, the loan volume outstanding, the present and expected economic
conditions in general, 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.
<page35>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
The provision for loan losses, net charge-offs and the activity in the
allowance for credit losses is detailed in Table 13.
_______________________________________________________________________________
TABLE 13. LOAN LOSSES (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Allowance for loan losses, beginning $ 81 $ 30 $ -
Provision for loan losses, added 104 68 30
Loans charged off (43) (18) -
Recoveries of loans previously charged off 13 1 -
_____ _____ _____
Net charge-offs (30) (17) -
_____ _____ _____
Allowance for loan losses, ending $ 155 $ 81 $ 30
_____ _____ _____
________________________________________________________________________________
</TABLE>
Net loan charge-offs as a percentage of average loans were 0.31%, and .47% in
1996 and 1995, respectively. There were no charge-offs during 1994.
The loan portfolio also included loans to various borrowers (watch loans) at
year-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 in the allowance for loan losses for these
loans.
The allowance for loan losses was approximately $155,000 and $81,000 and
December 31, 1996 and 1995, respectively, or 1.2% of total gross outstanding
for both years. Management realizes that general economic trends greatly
affect credit losses and no assurances can be made about future losses.
Management does, however, consider the allowance for credit losses to be
adequate at December 31, 1996. The allocation of the reserve for credit
losses is detailed in Table 14 below:
________________________________________________________________________________
TABLE 14. ALLOCATION OF THE RESERVE FOR LOAN LOSSES (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
________________ ________________ ________________
Balance at end of
period applicable to Amount Percent1 Amount Percent1 Amount Percent1
____________________ ______ ________ ______ ________ ______ ________
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 85 33.73% $ 26 24.71% $ 6 36.44%
Real estate,
construction - - - - - -
Real estate,
mortgage 23 38.13 16 44.41 8 24.18
Installment loans to
individuals, other 47 28.14 39 30.88 16 39.38
______ ______ ______ ______ ______ ______
Total $ 155 100.00% $ 81 100.00% $ 30 100.00%
______ ______ ______ ______ ______ ______
_________________________
1 Percent of loans in each category to total loans.
________________________________________________________________________________
</TABLE>
<page36>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
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 or liabilities on which interest is paid, to protect the Bank from
wide fluctuations in its net interest income which could result from interest
rates 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 corre-
spondent banks, borrowings from the Federal Reserve Bank, as well as the
ability to generate funds through the issuance of long-term debt and equity.
The liquidity ratio (the level of liquid assets divided by total deposits plus
short-term liabilities) was 47.06% at December 31, 1996 compared to 61.18% at
December 31, 1995. These ratios are considered to be adequate by management.
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 main-
tain 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. Table 15 shows the sensitivity of the Bank's balance sheet
on December 31, 1996. This table reflects the sensitivity of the balance
sheet as of that specific date and is not necessarily indicative of the
position on other dates. At December 31, 1996, the Bank appeared to be
cumulatively asset-sensitive (earning assets subject to interest rate changes
exceeding interest-bearing liabilities subject to changes in interest rates).
Included in the interest-bearing liabilities subject to interest rate changes
within three months are NOW accounts and savings accounts totaling 9.6 which
historically have not been as interest-sensitive as other types of interest-
bearing deposits. Removing the impacts of NOW and savings 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.
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.
<page37>
MANAGEMENT'S DISCUSSION AND ANALYSIS
________________________________________________________________________________
________________________________________________________________________________
TABLE 15. INTEREST RATE SENSITIVITY (THOUSANDS)
________________________________________________________________________________
<TABLE>
<CAPTION>
December 31, 1996
Maturities/Repricing
____________________________________________________
1-3 4-12 13-60 Over 60
Months Months Months Months Total
_______ _______ _______ _______ ________
<S> <C> <C> <C> <C> <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 DEPOSITS:
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 earnings assets (34.14)% (5.76)% 36.80% 16.36% 13.26%
Cumulative ratio of
sensitivity gap to total
earnings assets (34.14)% (39.90)% (3.10)% 13.26% -
________________________________________________________________________________
</TABLE>
________________________________________________________________________________
TABLE 16. KEY FINANCIAL RATIOS
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995 1994
____ ____ ____
<S> <C> <C> <C>
Return on average assets (.81)% (2.87)% (10.77)%
Return on average equity (5.89)% (9.44)% (17.52)%
Average equity to average assets 13.71 % 30.39 % 61.47 %
_______________________________________________________________________________
</TABLE>
<Page38>
BOARD OF DIRECTORS AND OFFICERS
_______________________________________________________________________________
BOARD OF DIRECTORS
Wayne L. Carpenter..............CNB Holdings, Inc. and Community National Bank
Sybil S. Atkinson.....................................Mediaid of America, Inc.
Jack W. Bowling.....................................H.T. Bowling, Incorporated
Jackson M. Bruce...................Gilmer, Sadler, Ingram, Sutherland & Hutton
Randolph V. Chrisley.............................Pulaski Furniture Corporation
Hiawatha Nicely, Jr..........Columbia Healthcare/New Century Consultants, Inc.
A. Carole Pratt...........................................Pratt & Mansell, DDS
David W. Ratcliff, Jr................................Alliant TechSystems, Inc.
Nathaniel R. Tuck............................Tuck Clinic of Chiropractic, P.C.
James L. Webb, Jr........................Old Dominion Insurance Services, Inc.
J. David Wine..............................Advanced Health-Care Services, Inc.
OFFICERS
Wayne L. Carpenter.............................................President & CEO
Clinton C. Ison...........................................Vice President-Loans
Deborah Boyd......................................................Loan Officer
Madonna L. Gwinn.......................................................Cashier
Michael D. Ware...................................................Loan Officer
<page39>
STOCKHOLDER INFORMATION
________________________________________________________________________________
ANNUAL MEETING
______________
The annual meeting of stockholders will be held at 10:00 a.m. on April 17, 1997
in Room 206 of Edwards Hall at New River Community College, Dublin, Virginia.
____________________
REQUESTS FOR INFORMATION
________________________
Requests for information should be directed to Wayne L. Carpenter, President
& CEO, at Community National Bank, Post Office Box 1060, Pulaski, Virginia,
24301; Telephone (540) 994-0831. A copy of the Company's Form 10-KSB for 1996
will be furnished, without charge, after March 31, 1997 upon written request.
____________________
COMMON STOCK MARKET INFORMATION
_______________________________
Scott & Stringfellow
Post Office Box 198
Blacksburg, Virginia 24063
STOCK TRANSFER AGENT
___________________
First Citizens Bank & Trust
Post Office Box 29522
Raleigh, North Carolina 2762
____________________
INDEPENDENT AUDITORS
____________________
Larrowe, Cardwell & Company, LC
Certified Public Accountants
Post Office Box 2108
Pulaski, Virginia 24301
LEGAL COUNSEL
____________
Mays & Valentine
NationsBank Center
Post Office Box 1122
Richmond, Virginia 23208-1122
____________________
<page40>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CNB
HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,188,999
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 402,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,312,764
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 12,877,865
<ALLOWANCE> 155,000
<TOTAL-ASSETS> 27,417,323
<DEPOSITS> 24,040,702
<SHORT-TERM> 0
<LIABILITIES-OTHER> 53,100
<LONG-TERM> 0
0
0
<COMMON> 2,186,125
<OTHER-SE> 1,137,396
<TOTAL-LIABILITIES-AND-EQUITY> 27,417,323
<INTEREST-LOAN> 926,222
<INTEREST-INVEST> 578,359
<INTEREST-OTHER> 70,412
<INTEREST-TOTAL> 1,574,993
<INTEREST-DEPOSIT> 853,867
<INTEREST-EXPENSE> 853,867
<INTEREST-INCOME-NET> 721,126
<LOAN-LOSSES> 103,947
<SECURITIES-GAINS> 16,550
<EXPENSE-OTHER> 929,370
<INCOME-PRETAX> (185,645)
<INCOME-PRE-EXTRAORDINARY> (185,645)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (185,645)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
<YIELD-ACTUAL> 3.63
<LOANS-NON> 17,459
<LOANS-PAST> 52,268
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 81,202
<CHARGE-OFFS> 43,291
<RECOVERIES> 13,142
<ALLOWANCE-CLOSE> 155,000
<ALLOWANCE-DOMESTIC> 155,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
