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, 1997
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 $2,606,442.
The aggregate market value of the voting stock as of March 16, 1998, 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 $8,337,591.
926,399 shares of the Issuer's common stock were issued and outstanding as
of March 16, 1998.
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, 1997
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 February 26,1998 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.
During 1997, the Board of Directors approved a 25% stock dividend for
shareholders of record as of May 1, 1997. Also during 1997, the Company
filed for and received approval from the SEC for a secondary stock offering
of up to 380,000 shares of its common stock, $5.00 par value per share (the
"Common Stock"), at a price of $9.00 per share, pursuant to its Prospectus
dated December 11, 1997. All 380,000 shares were sold during the first quarter
of 1998. Net proceeds were approximately $3.2 million and will be used
for general purposes and to fund future growth.
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 (2,000 employees), Pulaski Furniture
(1,500 employees), Renfro Corporation (a textile manufacturer with 1,200
employees) and Jefferson Mills, Inc. (350 employees). Agricultural
production, consisting primarily of beef cattle and dairy farming,
contributes over $12 million per year to the county's economy. Claytor Lake
State Park, located in the county, attracts over 800,000 visitors each year,
offering swimming, boating, fishing, hiking and other outdoor sports.
<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 16, 1998, there were seven commercial banks operating a total of
eleven offices in Pulaski County, Virginia. The Bank is the only one of these
institutions that is locally owned and operated. First Virginia Bank is an
in-state bank with three offices in Pulaski County, but is headquartered in
Northern Virginia. Crestar Bank and Signet Bank with one office each
in the county, are statewide banks which are based in Richmond. First Union
Bank, a Charlotte, North Carolina based regional bank has acquired Signet Bank
and began operating the Pulaski County branch on March 20, 1998. NationsBank,
with 2 offices in Pulaski County, is an affiliate bank of southeast regional
bank holding company also headquartered in Charlotte, North Carolina. First
Citizens Bank, a regional bank with offices in North Carolina and Virginia,
headquartered in Raleigh, began operating a branch in Pulaski County in the
first quarter of 1998. First National Bank of Christiansburg, a community bank
which is headquartered in nearby Montgomery County, operates a branch in
Pulaski County.
<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 25 full-time employees and 9 part-time employees for a
total of 30 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 $.00 to $.27 per $100 of insured
deposits depending on its capital levels and risk profile, as determined
by its primary federal regulator on a semiannual basis. The current
assessment rate per $100 of insured deposits of the Bank is $.00, or a
minimum of $2,000 annually.
<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 or more. For bank holding companies
with less than $150 million in total consolidated assets (such as the
Company), the guidelines will be applied on a bank only basis unless the
bank holding company is engaged in a nonbanking activity involving
significant leverage or has a significant amount of debt outstanding that
is held by the general public.
FDICIA established a new capital-based regulatory scheme designed to promote
early intervention for troubled banks and requires the FDIC to choose the
least expensive resolution of bank failures. The new capital based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as "well capitalized" institution, a bank
must have a leverage ratio of no less the 5%, a Tier 1 risk-based ratio of
no less than 6%, and a total risk-based capital ratio of no less than 10%,
and the bank must not be under any order or directive from the appropriate
regulatory agency to meet and maintain a specific capital level. As of
December 31, 1996, the Bank qualified as "well-capitalized." See "Item 6.
Management's Discussion and Analysis or Plan of Operation."
Under the FDICIA regulations, the applicable agency can treat an institution
as if it were in the next lower category of the agency determines (after
notice and an opportunity for hearing) that the institution is in an unsafe
or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution will increase, and
the permissible activities of the institution will decrease, as it moves
downward through the capital categories. Institutions that fall into one of
the other three undercapitalized categories may be required to (i)submit a
capital restoration plan; (ii) raise additional capital; (iii) restrict their
growth, deposit interest rates, and other activities;(iv) improve their
management; (v) eliminate management fees; or (vi) divest themselves of all
or part of their operations. Bank holding companies controlling financial
institutions can be called upon to boost the institutions' capital and to
partially guarantee the institutions' performance under their capital
restoration plans.
These capital guidelines can affect the Company in several ways. Rapid
growth, poor loan portfolio performance, or poor earnings performance, or a
combination of these factors, could change the Company's capital position in
a relatively short period of time, making additional capital infusion
necessary.
FDICIA requires the federal banking regulators to revise the risk-based
capital standards to provide for explicit consideration of interest-rate
risk, concentration of credit risk, and the risks of non-traditional
activities. It is uncertain what affect these regulations, when
implemented, would have on the Company and the Bank.
Recent Legislative Developments
From time to time, various bills are introduced in the United States Congress
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."
The second branch office of the Bank, which opened October 4, 1997, is located
at One Main Street, Pulaski, Virginia at the site of a regional bank's former
branch office. It is a full-service branch, with three inside teller windows,
a drive-up lane, a night depository, an automated teller machine, and safety
deposit boxes. The property is subject to a lease which terminates on July 31,
1999, and the Bank has a right of first refusal to continue leasing the property
after that date on terms mutually agreeable between the parties. The owner of
that property is a limited liability company in which Mr. James L. Webb, a
director of the Company and the Bank, is an investor. See "Certain
Relationships and Related Transactions." The Bank believes that it is leasing
that property at or below applicable market rates. The Bank also recently
installed a stand-alone automated teller machine on the campus of the New River
Community College in Dublin, Virginia.
During 1997 the Bank purchased a former bank office of NationsBank at 202
Washington Avenue in downtown Pulaski, for $187,000. This three story building
has approximately 20,000 square feet and will house the Bank's operations
department. In addition, there are opportunities for leasing part of the
building to third parties, and the Bank plans to move its downtown branch into
that building in the future.
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 926,399 were issued and outstanding as of March 16, 1998. There is no
established public trading market in the common stock, and one is not expected
to develop in the near future. The Company's common stock trades thinly,
primarily on the local market. However, three stock brokerage firms, Davenport
& Company, Scott & Stringfellow and Wheat First Securities, have been approved
by the Company as market makers. As of March 16, 1998, there are approximately
654 stockholders of record.
The Company has never paid a dividend. It is anticipated that earnings will
be retained for several years to expand the Bank's capital base to support
deposit growth and that no dividends will be paid on the Company's stock for
the next five years. Dividends might not be paid for several years thereafter
even 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, 1997, the Bank was not yet cumulatively profitable, but is
expected to considerably reduce its operating loss in 1998. 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 1997 Annual Report to Stockholders, pages 24 through 39.
ITEM 7. FINANCIAL STATEMENTS.
The following consolidated financial statements of the registrant and the
Independent Auditors' Report set forth on pages 2 through 23 of the Company's
1997 Annual Reports to Stockholders are incorporated herein by reference:
1. Independent Auditor's Report
2. Consolidated Balance Sheets as of December 31, 1997 and 1996
3. Consolidated Statements of Operations for the years and period
ended December 31, 1997, 1996, and 1995
4. Consolidated Statements of Stockholders' Equity for the years
and period ended December 31, 1997, 1996, and 1995
5. Consolidated Statements of Cash Flows for the years and period
ended December 31, 1997, 1996, and 1995
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, 1997 are listed on page
2 of the Company's Proxy statement dated February 26, 1998 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 February 26, 1998 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 of the Securities Exchange Act" on
page 7 of the Company's Proxy Statement dated February 26, 1998, which
information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information set forth under "Executive and Board Compensation" on pages
5 through 6 of the Company's Proxy Statement dated February 26, 1998, 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 February 26, 1998, 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 February 26, 1998,
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>
1997 Annual Report to
Stockholders page number
________________________
<S> <C>
Independent Auditor's Report 2
Consolidated Balance Sheets-December 31, 1997 and 1996 3
Consolidated Statements of Operations - Years ended
December 31, 1997, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity - Years
ended December 31, 1997, 1996 and 1995 5
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-23
Management's Discussion and Analysis 24-39
</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 1997 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 1997 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 27, 1998 By: s/Wayne L. Carpenter
_____________________
Wayne L. Carpenter
Chief Financial Officer
In accordance with the Exchange Act, this report has to be signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
_________ _____ ____
s/Sybil S. Atkinson
_________________________ Director March 27, 1998
Sybil S. Atkinson
s/Jack W. Bowling
_________________________ Director March 27, 1998
Jack W. Bowling
s/Jackson M. Bruce
_________________________ Director March 27, 1998
Jackson M. Bruce
Director, Chief
Financial Officer
(principal financial
s/Wayne L. Carpenter and accounting
_________________________ officer) March 27, 1998
Wayne L. Carpenter
s/Randolph V. Chrisley
_________________________ Director March 27, 1998
Randolph V. Chrisley
Chairman,
President and
s/Hiawatha Nicely, Jr. Chief Executive
_________________________ Officer March 27, 1998
Hiawatha Nicely, Jr.
s/A. Carole Pratt
_________________________ Director March 27, 1998
A. Carole Pratt
s/David W. Ratcliff, Jr.
_________________________ Director March 27, 1998
David W. Ratcliff, Jr.
s/Nathanial R. Tuck
_________________________ Director March 27, 1998
Nathaniel R. Tuck
s/James L. Webb, Jr.
_________________________ Director March 27, 1998
James L. Webb, Jr.
s/J. David Wine
_________________________ Director March 27, 1998
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 1997 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 1997 Proxy Statement.
<page15>
________________________________________________________________________________
1997 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
Management's Discussion and Analysis 24
Board of Directors and Officers 40
Stockholder Information 41
<PAGE>
CNB Holdings, Inc.
900 Memorial Drive
Post Office Box 1060
Pulaski, Virginia 24301
February 19, 1998
CNB Holdings, Inc.
Shareholders
Dear Shareholder:
You are cordially invited to attend the annual shareholders meeting of
CNB Holdings Inc., to be held Thursday April 9, 1998 at 10:00a.m., local time
at New River Community College's, Edwards Hall, room 206, Dublin, Virginia at
which time you will be asked to consider and vote on the nominees for election
as directors to serve until 2001. Additionally we will review the results of
1997 and the future growth plans for CNB Holdings Inc., along with other
business as may properly come before the meeting.
CNB Holdings Inc., and Community National Bank has been successful in
receiving approval and opening the first branch in downtown Pulaski, Virginia
during 1997. The SEC approved a secondary stock offering of 380,000 shares
of the company common stock. CNB Holdings Inc., purchased a 20,000 square
foot building from Nationsbank for expansion of operations facilities and
branch.
1998 will offer CNB Holdings Inc., and it's banking operations new
opportunities for continued growth. The company is well positioned we believe
to take advantage of these opportunities as we move to the new millenium.
Hiawatha Nicely, Jr. Wayne L. Carpenter
Chairman, President, CEO Chairman, President, CEO
CNB Holdings, Inc. Community National Bank
<PAGE>1
Larrowe, Cardwell & Company, LC
Post Office Box 760
Galax, Virginia 24333
Independent Auditor's Report
Board of Directors and Stockholders
CNB Holdings, Inc.
Pulaski, Virginia
We have audited the consolidated balance sheets of CNB Holdings,
Inc. and subsidiary (Community National Bank) as of December 31,
1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of CNB Holdings, Inc. and subsidiary as of December 31,
1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting
principles.
Larrowe, Cardwell & Company, LC
Pulaski, Virginia
January 16, 1998, except for Note 10, as
to which the date is February 10, 1998
<PAGE>2
Consolidated Balance Sheets
December 31, 1997 and 1996
________________________________________________________________________________
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S>
Assets <C> <C>
Cash and due from banks $ 2,290,840 $ 1,188,999
Federal funds sold 1,021,000 402,000
Investment securities available
for sale 11,736,737 11,312,764
Loans, net of allowance for
loan losses of $270,000 in 1997
and $155,000 in 1996 22,395,227 12,722,865
Property and equipment, net 1,853,855 1,408,596
Accrued income 241,318 261,548
Other asset 244,089 120,551
___________ ___________
Total assets $39,783,066 $27,417,323
___________ ___________
Liabilities
Demand deposits $ 3,581,386 $ 2,629,100
Interest-bearing demand deposits 11,192,361 8,266,172
Savings deposits 3,770,237 2,339,408
Large denomination time deposits 4,442,410 3,079,169
Other time deposits 13,607,494 7,726,853
___________ ___________
Total deposits 36,593,888 24,040,702
Accrued interest payable 55,448 36,612
Other liabilities 23,111 16,488
___________ ___________
Total liabilities 36,672,447 24,093,802
___________ ___________
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value;
1,000,000 shares authorized;
none outstanding - -
Common stock, $5 par value;
10,000,000 shares authorized;
546,399 and 437,225 shares
outstanding in 1997 and 1996,
respectively 2,731,995 2,186,125
Surplus 1,609,748 2,156,782
Retained deficit (1,209,973) (962,723)
Unrealized depreciation on
investment securities available
for sale (21,151) (56,663)
___________ ___________
Total stockholders' equity 3,110,619 3,323,521
___________ ___________
Total liabilities and
stockholders' equity $39,783,066 $27,417,323
___________ ___________
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>3
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Interest income:
Loans and fees on loans $1,668,116 $ 926,222 $ 377,130
Federal funds sold 40,131 70,412 56,610
Taxable investment securities 745,596 578,359 377,641
__________ __________ __________
Total interest income 2,453,843 1,574,993 811,381
__________ __________ __________
Interest expense:
Deposits 1,353,521 853,867 346,213
Federal funds purchased 17,166 - -
__________ __________ __________
Total interest expense 1,370,687 853,867 346,213
__________ __________ __________
Net interest income 1,083,156 721,126 465,168
Provision for loan losses 185,943 103,947 68,089
__________ __________ __________
Net interest income after
provision for loan losses 897,213 617,179 397,079
__________ __________ __________
Noninterest income:
Service charges on deposit
accounts 112,405 92,806 40,886
Net realized gains on sales
of securities 2,662 16,550 10,432
Other income 37,532 17,190 8,570
__________ __________ __________
Total noninterest income 152,599 126,546 59,888
Noninterest expense:
Salaries and employee benefits 584,633 387,712 328,559
Occupancy expense 79,983 76,543 67,469
Equipment expense 92,028 62,109 39,776
Other expense 540,418 403,006 352,745
__________ __________ __________
Total noninterest expense 1,297,062 929,370 788,549
__________ __________ __________
Net loss $ (247,250) $ (185,645) $ (331,582)
__________ __________ __________
Basic earnings per share $ (.45) $ (.34) $ (.61)
__________ __________ __________
Diluted earnings per share $ (.45) $ (.34) $ (.61)
__________ __________ __________
Weighted average shares outstanding 546,453 546,531 546,303
__________ __________ __________
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>4
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Retained Comprehen-
_____________________________ Earnings sive Income
Shares Amount Surplus (Deficit) (Loss) Total
______ ______ _______ _________ ______ _____
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Dec. 31, 1994 437,042 $2,185,210 $2,155,867 $ (445,496) $(47,769) $3,847,812
Comprehensive
income
Net loss - - - (331,582) - (331,582)
Net change
in unrealized
depreciation
on investment
securities
available for
sale - - - - 106,572 106,572
Total __________
comprehensive
income (225,010)
_______ __________ __________ ___________ ________ __________
Dec. 31, 1995 437,042 2,185,210 2,155,867 (777,078) 58,803 3,622,802
Comprehensive
income
Net loss - - - (185,645) - (185,645)
Net change in
unrealized
depreciation
on investment
securities
available for
sale - - - - (115,466) (115,466)
Total __________
comprehensive
income (301,111)
Common stock
issued 183 915 915 - - 1,830
_______ __________ __________ ___________ ________ __________
Dec. 31, 1996 437,225 2,186,125 2,156,782 (962,723) (56,663) 3,323,521
Comprehensive
income
Net loss - - - (247,250) - (247,250)
Net change in
unrealized
depreciation
on investment
securities
available for
sale - - - - 35,512 35,512
Total __________
comprehensive
income (211,738)
Stock dividend 109,306 546,530 (546,530) - - -
Redemption of
fractional
shares (132) (660) (504) - - (1,164)
_______ __________ __________ ___________ ________ __________
Dec. 31, 1997 546,399 $2,731,995 $1,609,748 $(1,209,973) $(21,151) $3,110,619
_______ __________ __________ ___________ ________ __________
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 5
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (247,250) $ (185,645) $ (331,582)
Adjustments to reconcile net loss
to net cash used by operations:
Depreciation and amortization 105,660 128,833 65,629
Provision for loan losses 185,943 103,947 68,089
Net realized gains on securities (2,662) (16,550) (10,432)
Accretion of discount on
securities, net (44,809) (10,637) (20,588)
Changes in assets and liabilities:
Accrued income 20,230 (145,449) (55,054)
Other assets (19,739) (15,806) 3,124
Accrued interest payable 18,836 12,414 17,623
Other liabilities 6,623 (930) 12,263
Net cash used by operating ____________ ____________ ____________
activities 22,832 (129,823) (250,928)
____________ ____________ ____________
Cash flows from investing activities:
Net (increase) decrease in
federal funds sold (619,000) 292,000 184,000
Purchases of investment securities (16,010,481) (15,818,430) (4,455,033)
Sales of investment securities 4,276,997 8,977,234 2,015,393
Maturities of investment securities 11,392,494 905,416 1,500,000
Net increase in loans (9,916,792) (6,136,861) (5,538,966)
Purchases of property and equipment (528,763) (148,022) (917,126)
Net cash used in investing ____________ ____________ ____________
activities (11,405,545) (11,928,663) (7,211,732)
____________ ____________ ____________
Cash flows from financing activities:
Net increase in demand, NOW, and
savings deposits 5,309,304 8,447,530 2,972,125
Net increase in time deposits 7,243,882 3,656,477 5,243,323
Stock issuance costs (67,468) - -
Redemption of fractional shares (1,164) - -
Net cash provided by financing ____________ ____________ ____________
activities 12,484,554 12,104,007 8,215,448
Net increase in cash and cash
equivalents 1,101,841 45,521 752,788
Cash and cash equivalents, beginning 1,188,999 1,143,478 390,690
____________ ____________ ____________
Cash and cash equivalents, ending $ 2,290,840 $ 1,188,999 $ 1,143,478
____________ ____________ ____________
Supplemental disclosure of cash
flow information:
Interest paid $ 1,351,851 $ 841,453 $ 328,590
____________ ____________ ____________
Income taxes paid $ - $ - $ 209
____________ ____________ ____________
Supplemental disclosure of noncash
investing activities:
Other real estate acquired in
settlement of loans $ 58,487 $ - $ -
____________ ____________ ____________
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>6
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 1. Organization and Summary of Significant Accounting
Policies
Organization
CNB Holdings, Inc. (the Company) is a bank holding company
incorporated under the laws of Virginia on April 29, 1993. On
August 29, 1994, the Company's wholly owned subsidiary, Community
National Bank (the Bank), was chartered under the laws of the
United States and the Bank opened for business in Pulaski,
Virginia. As an FDIC insured National Banking Association, the
Bank operates two banking offices and is subject to regulation by
the Comptroller of the Currency. The Company is regulated by the
Federal Reserve.
The accounting and reporting policies of the Company and the Bank
follow generally accepted accounting principles and general
practices within the financial services industry. Following is a
summary of the more significant policies.
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and the Bank. All significant intercompany transactions
and balances have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance
for loan losses. In connection with the determination of the
allowance for loan losses, management obtains independent
appraisals for significant properties.
Substantially all of the Bank's loan portfolio consists of loans
in the New River Valley area of Southwest Virginia. Accordingly,
the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion
of the carrying amount of foreclosed real estate are susceptible
to changes in local market conditions. The regional economy is
diverse, but influenced to an extent by the manufacturing
segment.
While management uses available information to recognize loan and
foreclosed real estate losses, future additions to the allowances
may be necessary based on changes in local economic conditions.
In addition, regulatory agencies, as a part of their routine
examination process, periodically review the Bank's allowances
for loan and foreclosed real estate losses. Such agencies may
require the Bank to recognize additions to the allowances based
on their judgments about information available to them the time
for their examinations. Because of these factors, it is
reasonably possible that the allowances for loan and foreclosed
real estate losses may change materially in the near term.
Cash and cash equivalents
For purposes presenting in the consolidated statement of cash
flows, cash and cash equivalents are defined as those amounts
included in the balance sheet caption "cash and due from banks".
Trading securities
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.
<PAGE>7
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 1. Organization and Summary of Significant Accounting
Policies, continued
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 allowance for loan losses and adjusted for net unamortized
origination fees and costs.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan. Discounts and premiums on any purchased
residential real estate loans are amortized to income using the
interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments. Discounts and
premiums on any purchased consumer loans are recognized over the
expected lives of the loans using methods that approximate the
interest method.
Interest is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on impaired loans is
discontinued when, in management's opinion, the borrower may be
unable to meet payments as they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent
cash payments are received.
The allowance for loan losses is increased by charges to income
and decreased by charge-offs, net of recoveries. Management's
periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Property and equipment
Land is carried at cost. Bank premises, furniture and equipment
are carried at cost, less accumulated depreciation computed by
the straight-line method over the following estimated useful
lives:
Years
Buildings and land improvements 20 to 40
Furniture and equipment 5 to 10
Foreclosed properties
Real estate properties acquired through or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair
value less anticipated cost to sell at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost
to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in loss on foreclosed real
estate. The historical average holding period for such properties
is less than 12 months.
<PAGE>8
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 capitalized and are being amortized over five years. Costs
incurred in connection with the Company's stock offerings,
consisting principally of registration, direct sales and
promotional costs, are deferred and offset against the proceeds
of the stock sales as a charge to surplus.
Stock-based compensation
The Company accounts for its stock-based compensation plans using
the accounting prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. The Company is
not required to adopt the fair value based recognition provisions
prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation (issued in October 1995), but complies with the
disclosure requirements set forth in the Statement, which include
disclosing pro forma net income as if the fair value based method
of accounting has been applied.
Income taxes
Provision for income tax is based on amounts reported in the
statements of operations (after exclusion for non-taxable income
and non-deductible expenses) and consists of taxes currently due
plus deferred taxes on temporary differences in the recognition
of income and expense for tax and financial statement purposes.
Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets and liabilities are
expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes. Deferred tax
assets, net of a valuation allowance if deemed appropriate, are
recognized for operating losses that are available to offset
future taxable income.
Basic earnings per share
Basic earnings per share is computed by dividing income available
to common shareholders by the weighted average number of common
shares outstanding during the period, after giving retroactive
effect to stock splits and dividends.
Diluted earnings per share
The computation of diluted earnings per share is similar to the
computation of basic earnings per share except that the
denominator is increased to include the number of additional
common shares that would have been outstanding if potential
dilutive common shares had been issued. The numerator is adjusted
for any changes in income or loss that would result from the
assumed conversion of those potential common shares.
Comprehensive income
Annual comprehensive income reflects the change in the Company's
equity during the year arising from transactions and events other
than investments by and distributions to stockholders. It
consists of net income plus certain other changes in assets and
liabilities that are reported as separate components of
stockholders' equity rather than as income or expense.
Financial instruments
Any derivative financial instruments held or issued by the Bank
are held or issued for purposes other than trading.
In the ordinary course of business the Bank has entered into off-
balance-sheet financial instruments consisting of commitments to
extend credit and commercial standby letters of credit. Such
financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.
The Bank does not utilize interest-rate exchange agreements or
interest rate futures contracts.
<PAGE>9
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 1. Organization and Summary of Significant Accounting
Policies, continued
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments, requires disclosure of
fair value information about financial instruments, whether or
not recognized in the balance sheet. In cases where quoted
market prices are not available, fair values are based on
estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the
instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate those
assets' fair values.
Interest-bearing deposits with banks: Fair values for time
deposits are estimated using a discounted cash flow analysis that
applies interest rates currently being offered on certificates to
a schedule of aggregated contractual maturities on such time
deposits.
Available-for-sale and held-to-maturity securities: Fair values
for securities, excluding restricted equity securities, are based
on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments. The carrying values of
restricted equity securities approximate fair values.
Loans receivable: For variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are
based on carrying amounts. The fair values for other loans are
estimated using discounted cash flow analysis, based on interest
rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Loan fair value estimates
include judgments regarding future expected loss experience and
risk characteristics. Fair values for impaired loans are
estimated using discounted cash flow analysis or underlying
collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand and
savings deposits are, by definition, equal to the amount payable
on demand at the reporting date. The fair values for
certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual
maturities on such time deposits. The carrying amount of accrued
interest payable approximates fair value.
Other liabilities: For fixed-rate loan commitments, fair value
considers the difference between current levels of interest rates
and the committed rates. The carrying amount of other
liabilities approximates fair value.
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 was not affected by these reclassifications.
Note 2. Restricted Cash
To comply with banking regulations, the Bank is required to
maintain certain average cash reserve balances. The daily average
cash reserve requirement was approximately $157,000 for the
period including December 31, 1997.
<PAGE>10
Notes to Consolidated Financial 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
____ _____ ______ _____
</CAPTION>
<S> <C> <C> <C> <C>
1997
Available for sale:
U. S. Treasury
securities $ 1,699,515 $ 7,360 $ 62 $ 1,706,813
U. S. Government
agency securities 9,711,569 3,932 35,313 9,680,188
State and local
government securities 198,056 2,930 - 200,986
Restricted equity
securities 148,750 - - 148,750
____________ ________ ________ ____________
$ 11,757,890 $ 14,222 $ 35,375 $ 11,736,737
____________ ________ ________ ____________
1996
Available for sale:
U. S. Treasury
securities $ 3,992,931 $ 20,987 $ 1,265 $ 4,012,653
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
Restricted equity
securities 137,050 - - 137,050
____________ ________ ________ ____________
$ 11,369,427 $ 26,657 $ 83,320 $ 11,312,764
____________ ________ ________ ____________
</TABLE>
Investment securities with amortized costs of $8,334,288 and
$7,182,341 and market values of $8,320,478 and $7,115,039 at
December 31, 1997 and 1996, respectively, were pledged as
collateral on public deposits or for other banking purposes.
Gross realized gains and losses for the years ended December 31,
1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Realized gains $ 8,593 $ 33,265 $ 11,832
Realized losses (5,931) (16,715) (1,400)
_________ _________ _________
$ 2,662 $ 16,550 $ 10,432
_________ _________ _________
</TABLE>
The amortized cost and approximate market value at December 31,
1997 of investment securities by scheduled maturity are shown
below.
<TABLE>
<CAPTION>
Available for Sale
__________________________
Amortized Fair
Cost Value
____ _____
</CAPTION>
<S> <C> <C>
Due in one year or less $ 6,813,740 $ 6,807,482
Due in one year through five years 2,652,832 2,655,096
Due after five years 2,142,568 2,125,409
Restricted equity securities 148,750 148,750
____________ ____________
$ 11,757,890 $ 11,736,737
____________ ____________
</TABLE>
<PAGE>11
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 4. Loans Receivable
The major components of loans in the consolidated balance sheets
at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Commercial $ 8,408,795 $ 4,343,525
Real estate:
Construction and land development 635,269 235,000
Farmland - -
Residential, 1-4 families 8,231,523 4,675,681
Residential, multifamily - -
Nonfarm, nonresidential 147,738 101,804
Agricultural 100,000 7,638
Consumer:
Credit cards 185,879 135,174
Other consumer 4,207,357 2,564,454
States and political subdivisions 257,942 343,057
Other 556,206 507,293
____________ ____________
22,730,709 12,913,626
Net deferred loan fees (65,482) (35,761)
Allowance for loan losses (270,000) (155,000)
____________ ____________
$ 22,395,227 $ 12,722,865
____________ ____________
</TABLE>
Nonperforming assets at December 31, 1997 and 1996 are detailed
as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Nonaccrual loans $ - $ 17,459
Restructured loans - -
Loans past due 90 days or more - 52,258
_________ _________
Total nonperforming loans - 69,717
Foreclosed, repossessed and idled properties 35,850 -
_________ _________
Total nonperforming assets $ 35,850 $ 69,717
_________ _________
</TABLE>
<PAGE>12
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 4. Loans Receivable, continued
Gross interest income that would have been recognized for each
year if the nonaccrual loans and restructured loans had been
current in accordance with their original terms and had been
outstanding throughout the period or since origination, or if
held part of the period, is detailed below. Applicable interest
income that was actually collected and included in net income for
each year is also summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Nonaccrual loans:
Interest income, original terms $ - $ 4,789 $ -
_________ _________ _________
Interest income, recognized $ - $ 2,784 $ -
_________ _________ _________
</TABLE>
The Bank has no restructured loans during the years ended
December 31, 1997, 1996 or 1995.
An allowance determined in accordance with SFAS No. 114 and No.
118 is provided for all impaired loans. The total recorded
investment in impaired loans and the related allowance for loan
losses at December 31, the average annual recorded investment in
impaired loans and interest income recognized on impaired loans
for the year (all approximate) are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<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>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Balance, beginning $ 155,000 $ 81,202 $ 30,000
_________ _________ _________
Loans charged off (82,476) (43,291) (18,221)
Recoveries 11,533 13,142 1,334
_________ _________ _________
Net loans charged off (70,943) (30,149) (16,887)
Provision for loan losses 185,943 103,947 68,089
_________ _________ _________
Balance, ending $ 270,000 $ 155,000 $ 81,202
_________ _________ _________
</TABLE>
<PAGE> 13
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 6. Property and Equipment
Components of property and equipment and total accumulated
depreciation at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Land $ 280,000 $ 250,000
Land improvements 51,492 49,564
Leasehold improvements 14,415 -
Buildings 1,228,257 932,609
Furniture and equipment 477,693 290,921
___________ ___________
2,051,857 1,523,094
Less accumulated depreciation (198,002) (114,498)
___________ ___________
$ 1,853,855 $ 1,408,596
___________ ___________
</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
relative to this lease was approximately $33,440 for 1995.
Note 7. Short-term Debt
Short-term debt consists of federal funds purchased, which
generally mature within one to four days from the transaction
date, and other short-term borrowings. Additional information at
December 31, 1997 and 1996 and for the years then ended is
summarized below:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Outstanding balance at December 31 $ - $ -
___________ ___________
Year-end weighted averaged rate - -
___________ ___________
Daily average outstanding during the year $ 307,507 $ -
___________ ___________
Average rate for the year 5.58% -
___________ ___________
Maximum outstanding at any month-end
during the year $ 1,172,000 $ -
___________ ___________
</TABLE>
At December 31, 1997, the Bank had established lines of credit
totaling $2,000,000 with various correspondent banks to provide
additional liquidity if and as needed. There were no amounts
outstanding under these arrangements at December 31, 1997 or
1996.
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, 1997 December 31, 1996
_________________ _________________
Carrying Fair Carrying Fair
Amount Value Amount Value
______ _____ ______ _____
</CAPTION>
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,291 $ 2,291 $ 1,189 $ 1,189
Federal funds sold 1,021 1,021 402 402
Securities, available-for-sale 11,737 11,737 11,313 11,313
Loans, net of allowance
for loan losses 22,395 22,586 12,723 12,793
Financial liabilities
Deposits 36,594 36,644 24,041 24,049
Off-balance-sheet assets
(liabilities)
Commitments to extend credit and
standby letters of credit - - - -
</TABLE>
<PAGE>14
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 9. Earnings Per Share
The following table details the computation of basic and diluted
earnings per share for each year ended
December 31.
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Net income (loss)
(income available to common
shareholders) $(247,250) $(185,645) $(331,582)
_________ _________ _________
Weighted average common shares
outstanding 546,453 546,531 546,303
Effect of diluted securities, options - - -
_________ _________ _________
Weighted average common shares
outstanding, diluted 546,453 546,531 556,303
_________ _________ _________
Basic earnings per share $ (.45) $ (.34) $ (.61)
_________ _________ _________
Diluted earning per share $ (.45) $ (.34) $ (.61)
_________ _________ _________
</TABLE>
At December 31, 1997, 1996, and 1995, exercisable options were
outstanding (see Note 10) with an exercise price below the market
value of the Bank's stock at those dates. This condition placed
those options "in the money" at each respective December 31.
However, exercise of those options is not assumed in computing
diluted earnings per share for any year presented because their
exercise would reduce the annual reported diluted loss per share.
Note 10. Subsequent Event
On February 10, 1998, the Company completed sale of 380,000 shares
of common stock in a public offering. The net proceeds of the sale,
approximately $3.2 million, will be used for general purposes and
to finance future growth.
Note 11. Employee Benefit Plans
The Bank maintains a profit sharing plan pursuant to Section
401(k) of the Internal Revenue Code. The plan covers
substantially all employees who have completed one year of
service. Participants may contribute a percentage of
compensation, subject to a maximum allowed under the Code. In
addition, the Bank may make additional contributions at the
discretion of Board of Directors. The Bank made no contributions
during the years ended December 31, 1997, 1996 or 1995.
Note 12. Common Stock
During 1995 the Company adopted a stock option plan under which
up to 344,375 shares of stock may be issued. Shares subject to
the plan may be issued in any combination of incentive stock
options, non-incentive stock options, or restricted stock,
provided that the total number of shares issuable pursuant to
incentive stock options may not be more than 62,500 without
shareholder approval. Termination of restrictions on any
restricted stock granted and expiration of any non-incentive
stock options granted are controlled by the terms of each
individual grant. Incentive stock options expire no more than 10
years from the date of grant. Exercise prices of all options
are determined by
each individual grant except that incentive stock options may not
be granted at less than fair market value and non-incentive stock
options may not be granted at less than 80% of fair market value
on each option's respective date of grant. Vesting of options,
if not immediately exercisable, is determined in accordance with
the terms of each option granted.
Activity under the plan during the years ended December 31, 1997
and 1996 is summarized below (adjusted for the May 30, 1997 five-
for-four stock split):
<TABLE>
<CAPTION>
Granted and Outstanding
_________________________________________
Non-
Available Incentive incentive
for Stock Stock Restricted
Grant Options Options Stock
_____ _______ _______ _____
</CAPTION>
<S> <C> <C> <C> <C>
Balance December 31, 1995 138,125 - 206,250 -
Granted (6,534) - 6,534 -
Exercised - - - -
_______ _______ _______ _______
Balance December 31, 1996 131,591 - 212,784 -
Granted (6,470) 6,470 -
Exercised - - - -
_______ _______ _______ _______
Balance December 31, 1997 125,121 - 219,254 -
_______ _______ _______ _______
</TABLE>
<PAGE>15
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 12. Common Stock, continued
Additional information relating to the plan is listed below
(adjusted for the May 30, 1997 five-for-four stock split):
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Outstanding options at December 31:
Exercise price, beginning of
the year<F1> $ 8.00 $ 8.00 $ 8.00
Exercise price, end of the year<F1>$ 8.00 $ 8.00 $ 8.00
Range of exercise prices:
From $ 8.00 $ 8.00 $ 8.00
To $ 8.00 $ 8.00 $ 8.00
Remaining contractual life
in months<F1> 90 101 112
Exercisable options outstanding
at December 31:
Number 219,254 212,781 206,250
Exercise price $ 8.00 $ 8.00 $ 8.00
Weighted average exercise
price of options:
Granted during the year $ 8.00 $ 8.00 $ 8.00
Exercised during the year $ - $ - $ -
Forfeited during the year $ - $ - $ -
Expired during the year $ - $ - $ -
Significant assumptions used in
determining fair value:
Risk-free interest rate 6.5% 7.0% 7.0%
Expected life in years 10 10 10
Expected dividends 0.0% 0.0% 0.0%
Expected volatility 7.6% 5.0% 2.7%
Grant-date fair value:
Options granted during the year $ 27,302 $ 26,259 $ 829,234
Restricted stock awards granted
during the year $ - $ - $ -
Results of operations:
Compensation cost recognized
in income for all stock-based
compensation awards $ - $ - $ -
___________ ___________ ___________
Pro forma net income<F2> $ (274,552) $ (211,904) $(1,160,816)
___________ ___________ ___________
Pro forma earnings per
common share<F2> $ (.50) $ (.39) $ (2.12)
___________ ___________ ___________
______________________________
<FN>
<F1> Weighted average
<F2> As if the fair value based method prescribed by SFAS No. 123
has been applied.
</FN>
</TABLE>
<PAGE>16
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 13. Income Taxes
Operating loss and carryforwards
The Company has loss carryforwards of approximately $1,086,000
for Federal income tax purposes that may be used to offset future
taxable income. If not previously utilized, the Federal loss
carryforwards will expire between 2008 and 2012.
Current and deferred income tax components
The components of income tax expense (all Federal) are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred (82,364) (67,750) (111,968)
Deferred tax asset valuation
allowance change 82,364 67,750 111,968
__________ _________ _________
$ - $ - $ -
__________ _________ _________
</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>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Tax at statutory federal rate $ (84,065) $ (63,119) $(112,738)
Other 1,701 (4,631) 770
Deferred tax asset valuation
allowance change 82,364 67,750 111,968
__________ _________ _________
$ - $ - $ -
__________ _________ _________
</TABLE>
Deferred tax analysis
The components of net deferred tax assets (all Federal) at
December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Deferred tax assets $ 468,331 $ 354,588
Deferred tax liabilities (56,711) (25,332)
Deferred tax asset valuation allowance (411,620) (329,256)
__________ __________
$ - $ -
__________ __________
</TABLE>
<PAGE>17
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 13. Income Taxes, continued
Tax effects of each significant item creating deferred taxes are
summarized below:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Allowance for loan losses $ 47,001 $ 18,512
Pre-operating expenses 28,613 46,683
Net operating losses 369,331 276,242
Deferred fee income 22,264 12,159
Contributions 1,122 992
Accretion of discount on
investment securities (18,657) (1,828)
Depreciation (38,054) (23,504)
_________ __________
$ 411,620 $ 329,256
_________ __________
</TABLE>
Note 14. Commitments and Contingencies
Financial instruments with off-balance-sheet risk
The Bank is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include
commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, credit risk in
excess of the amount recognized in the consolidated balance
sheets.
The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations
as for on-balance-sheet instruments.
A summary of the Bank's commitments at December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Commitments to extend credit $ 2,863,681 $ 3,921,000
Standby letters of credit 80,250 -
___________ ___________
$ 2,943,931 $ 3,921,000
___________ ___________
</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. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation
of the party. Collateral held varies, but may include accounts
receivable, inventory, property and equipment, residential real
estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public
and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that
involved in extending other loan facilities to customers.
Collateral held varies as specified above and is required in
instances which the Bank deems necessary.
<PAGE>18
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 14. Commitments and Contingencies, continued
Concentrations of credit risk
Substantially all of the Bank's loans, commitments to extend
credit and standby letters of credit have been granted to
customers in the Bank's market area and such customers are
generally depositors of the Bank. The concentrations of credit by
type of loan are set forth in Note 4. The distribution of
commitments to extend credit approximates the distribution of
loans outstanding. Standby letters of credit were granted
primarily to commercial borrowers. The Bank's primary focus is
toward consumer oriented and small business transactions, and
accordingly, it does not have a significant number of credits to
any single borrower or group of related borrowers in excess of
$250,000. The Bank has cash and cash equivalents on deposit with
financial institutions which exceed federally-insured limits.
Other
The Company has entered a five-year employment and bonus
agreement with the Company's President, which effectively
commenced with the opening of the Bank.
Note 15. 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, 1997, the most recent notification from the
Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are
no conditions or events since that notification that management
believes have changed the institution's category.
<PAGE>19
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 15. Regulatory Restrictions, continued
The Bank's actual capital amounts and ratios are also presented
in the table.
<TABLE>
<CAPTION>
To Be Well
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
________________ _________________ __________________
Amount Ratio Amount Ratio Amount Ratio
______ _____ ______ _____ ______ _____
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Total Capital
(to Risk-Weighted
Assets) $3,223,614 13.5% > $1,916,318 > 8.0% > $2,395,398 > 10.0%
Tier I Capital - - - -
(to Risk-Weighted
Assets) $2,953,614 12.3% > $ 958,159 > 4.0% > $1,437,239 > 6.0%
Tier I Capital - - - -
(to Average
Assets) $2,953,614 7.7% > $1,528,055 > 4.0% > $1,910,069 > 5.0%
- - - -
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%
- - - -
</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 $298,000 at
December 31, 1997. One 23A transaction existed between the Bank
and the Company at December 31, 1997.
On October 31, 1997, the Company acquired a future banking site
at public auction. The Company borrowed $158,179 from the Bank
to complete the purchase.
<PAGE>20
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 16. Transactions with Related Parties
The Bank has entered into transactions with its directors,
significant shareholders and their affiliates (related parties).
Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the same time for
comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or
present other unfavorable features.
Loans
Aggregate loan transactions with related parties were as follows:
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Balance, beginning $ 1,075,994 $ 524,726
New loans and advances 959,582 867,146
Repayments (610,932) (309,392)
Change in relationship - (6,486)
___________ ___________
Balance, ending $ 1,424,644 $ 1,075,994
___________ ___________
</TABLE>
Leases
During 1997 the Company leased office space which is used as a
branch location under the terms of an agreement accounted for as
an operating lease. The lessor is a partnership in which one of
the Company directors is a partner. Rent expense recognized
under this lease in 1997 was $6,250. Future minimum lease
payments under this agreement are $15,000 and $8,750 in 1998 and
1999, respectively.
Note 17. Parent Company Financial Information
Condensed financial information of CNB Holdings, Inc. is
presented as follows:
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Assets
Cash and due from banks $ 28,836 $ 181,042
Investment in subsidiary
bank at equity 2,961,011 3,119,995
Property and equipment 190,420 -
Other assets 93,426 34,149
___________ ___________
Total assets $ 3,273,693 $ 3,335,186
___________ ___________
Liabilities
Due to subsidiary $ 158,178 $ -
Accounts payable and other liabilities 4,896 11,665
___________ ___________
Total liabilities 163,074 11,665
___________ ___________
Stockholders' equity:
Common stock 2,731,995 2,186,125
Surplus 1,609,748 2,156,782
Retained deficit (1,209,973) (962,723)
Unrealized depreciation on
subsidiary's investment
securities available for sale (21,151) (56,663)
___________ ___________
Total stockholders' equity 3,110,619 3,323,521
___________ ___________
Total liabilities and
stockholders' equity $ 3,273,693 $ 3,335,186
___________ ___________
</TABLE>
<PAGE>21
Notes to Consolidated Financial Statements
________________________________________________________________________________
Note 17. Parent Company Financial Information, continued
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Income:
Interest on deposits with banks $ 6,118 $ 7,633 $ 11,450
Other income 110 - -
_________ _________ _________
6,228 7,633 11,450
_________ _________ _________
Expenses:
Professional fees 44,199 23,381 59,326
Other expenses 14,783 26,048 23,148
_________ _________ _________
Total expenses 58,982 49,429 82,474
_________ _________ _________
Loss before tax benefit and
equity in undistributed
income of subsidiary (52,754) (41,796) (71,024)
Federal income tax benefit - - -
_________ _________ _________
Loss before equity in
undistributed income of
subsidiary (52,754) (41,796) (71,024)
Equity in undistributed loss
of subsidiary (194,496) (143,849) (260,558)
_________ _________ _________
Net loss $(247,250) $(185,645) $(331,582)
_________ _________ _________
</TABLE>
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(247,250) $(185,645) $(331,582)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Amortization 7,724 23,173 15,499
Increase in equity in
undistributed loss of
subsidiary 194,496 143,849 260,558
Increase in other assets 467 1,999 4,339
Increase (decrease) in
other liabilities (6,769) (1,985) 8,521
_________ _________ _________
Net cash provided (used)
by operating activities (51,332) (18,609) (42,665)
_________ _________ _________
Cash flows from investing
activities, purchase of property
and equipment (190,420) - -
_________ _________ _________
Cash flows from financing activities:
Net intercompany borrowings 158,178 - -
Stock issuance costs (67,468) - -
Redemption of fractional
shares (1,164) - -
_________ _________ _________
Net cash provided by
financing activities 89,546 - -
_________ _________ _________
Decrease in cash and due
from banks (152,206) (18,609) (42,665)
Cash and cash equivalents,
beginning 181,042 199,651 242,316
_________ _________ _________
Cash and cash equivalents,
ending $ 28,836 $ 181,042 $ 199,651
_________ _________ _________
</TABLE>
<PAGE>22
TITLE PAGE TO MD&A
<PAGE>23
________________________________________________________________________________
Management's Discussion and Analysis
________________________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of
the consolidated financial condition and results of operations
of the Company as of the dates and for the periods indicated.
This discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto.
The Consolidated Financial Statements include the financial
information of the Company and the Bank. As the Bank represents
substantially all of the Company's activities, comparative
discussions of consolidated versus non-consolidated financial
statements are unnecessary.
There are no current recommendations by regulatory authorities
which, if implemented, would have a material effect on its
liquidity, capital resources or results of operations. There
are no agreements between the Company and either the OCC or the
Federal Reserve Board, nor has either regulatory agency made any
recommendations concerning the operations of the Company that
could have a material effect on its liquidity, capital resources
or results of operations.
Overview
The Company commenced operations on March 8, 1993, while the
Bank began operations on August 29, 1994. Accordingly,
financial data for 1994 reflects only four months of activity.
The Company's sole subsidiary, the Bank, operates by attracting
deposits from the general public and using such deposit funds to
make commercial, consumer, and residential construction and
permanent mortgage real estate loans. Revenues are derived
principally from interest on loans and investments. Changes in
the volume and mix of these assets and liabilities, as well as
changes in the yields earned and rates paid, determine changes
in net interest income.
The Company's assets increased over 45% in 1997 and over 75% in
both 1996 and 1995. Total assets increased to $39.7 million as
compared to $27.4 million at December 31, 1996. Virtually all
of this asset growth was from increased deposits. Total
deposits were $36.6 million at December 31, 1997 compared to $24
million at December 31, 1996. The Bank used these new resources
primarily to fund new loans. The Bank's net loans increased
over 75% in 1997, and over 90% in each of 1996 and 1995. Total
net loans were $22.4 million as compared to $12.7 million at
December 31, 1996.
During 1997 the Company filed for, and received approval from
the SEC for a secondary stock offering of up to 380,000 shares
of common stock at a price of $9 per share. The stock sale was
closed February 10, 1998 after the sale of 380,000 shares for
net proceeds of approximately $3.2 million. Other significant
events that occurred during 1997 were the opening of Community
National Bank's first branch in downtown Pulaski in October and
the purchase of a 19,900 square foot, three story building to
house the branch and to provide for future growth.
<PAGE>24
Management's Discussion and Analysis
________________________________________________________________________________
Net Interest Income and Average Balances (thousands)<F1>
<TABLE>
<CAPTION>
Years Ended December 31,
_______________________________________________________________
1997 1996 1995
____________________ ____________________ _____________________
Interest Interest Interest
Average Income/Yield/Average Income/Yield/Average Income/Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
_______ _______ ____ _______ _______ ____ _______ _______ ____
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Taxable investment
securities $12,242 $ 746 6.09% $ 8,957 $ 578 6.45% $ 5,350 $378 7.07%
Federal funds
sold 691 40 5.79 1,179 71 6.02 967 56 5.79
Loans, net 17,652 1,668 9.45 9,695 926 9.55 3,620 377 10.41
_______ ______ ____ _______ ______ ____ _______ ____ _____
Total
interest-
earning
assets 30,585 2,454 19,831 1,575 9,937 811
_______ ______ _______ ______ _______ ____
Yield on average
interest-earning
assets 8.02% 7.94% 8.16%
____ ____ _____
Noninterest-earning assets:
Cash and due
from banks 2,106 1,465 660
Premises and
equipment 1,556 1,410 718
Interest
receivable
and other 430 272 249
_______ _______ _______
Total
noninterest-
earning
assets 4,092 3,147 1,627
_______ _______ _______
Total
assets $34,677 $22,978 $11,564
_______ _______ _______
Interest-bearing liabilities:
Demand
deposits $ 8,094 327 4.04% $ 5,304 191 3.60% $ 917 33 3.60%
Savings
deposits 3,501 123 3.51 2,276 88 3.87 940 30 3.19
Time deposits 16,553 904 5.46 10,725 575 5.36 5,008 283 5.65
Federal funds
purchased 308 17 5.52 - - - - - -
_______ ______ ____ _______ ______ ____ _______ ____ _____
Total interest-
bearing
liabilities 28,456 1,371 18,305 854 6,865 346
_______ ______ _______ ______ _______ ____
Cost of average
interest-bearing
liabilities 4.82% 4.67% 5.04%
____ ____ ____
Noninterest-bearing liabilities:
Demand deposits 2,909 1,492 1,158
Interest
payable and
other 122 30 27
_______ _______ _______
Total
noninterest-
bearing
liabilities 3,031 1,522 1,185
_______ _______ _______
Total
liabilities 31,487 19,827 8,050
Stockholders'
equity 3,190 3,151 3,514
_______ _______ _______
Total
liabilities
and
stockholders'
equity $34,677 $22,978 $11,564
_______ _______ _______
Net interest income $1,083 $ 721 $465
______ ______ ____
Net yield on
interest-earning assets 3.54% 3.63% 4.68%
____ ____ ____
<FN>
____________________
<F1> Income and yields are computed on a tax equivalent basis.
</FN>
</TABLE>
<PAGE>25
Management's Discussion and Analysis
________________________________________________________________________________
Net Interest Income
Net interest income, the principal source of income for the
Company and the Bank, is the amount of income generated by
earning assets (primarily loans and investment securities) less
the interest expense incurred on interest-bearing liabilities
(primarily deposits used to fund earning assets). Changes in the
volume and mix of interest-earning assets and interest-bearing
liabilities, as well as their respective yields and rates, have a
significant impact on the level of net interest income. The
preceding table presents the average balances of total interest-
earning assets and total interest-bearing liabilities for the
periods indicated, showing the average distribution of assets,
liabilities and stockholders' equity, and the related income,
expense, and corresponding weighted average yields and costs.
The average balances used for the purposes of this table and
other statistical disclosures were calculated by using the daily
average balances.
Interest income for 1997 increased to $2.5 million, a 55.8%
increase over the 1996 amount of $1.6 million. Interest income
for 1996 increased 94.2% from $811,000 in 1995. The increases in
interest income during 1997 and 1996 are due to increases in
average interest-earning assets in both years while yields on
these assets remained relatively constant. Average earning
assets were $30.6 million during 1997, an increase of $10.8
million over the 1996 average of $19.8 million. Average earning
assets increased 99.6% during 1995. Yields on interest-earning
assets during 1997, 1996 and 1995 were within a range of 22 basis
points. Those yields were 8.02%, 7.94% and 8.16%, respectively.
Interest rates charged on loans vary with the degree of risk,
maturity and amount of the loan. Competitive pressures, money
market rates, availability of funds, and government regulation
also influence interest rates. On average, loans yielded 9.45%
in 1997 compared to 9.55% in 1996 and 10.41% in 1995, reflecting
lower market interest rates and an increase in 1-4 family
residential mortgage loans as a percentage of the overall
portfolio.
Interest expense increased by 60.5% in 1997 to $1.4 million from
$854,000 in 1996. Interest expense increased by $508,000 in 1996
to $854,000 from $346,000 in 1995. These increases were due to
increases in average interest-bearing liabilities of $10.2 and
$11.4 million during 1997 and 1996, respectively. The rate paid
on interest-bearing liabilities increased 15 basis points during
1997 to 4.82%. This increase is due in part to the Bank
utilizing Federal funds to provide short-term liquidity for the
first time in 1997. The rate paid on interest-bearing
liabilities decreased 37 basis points during 1996, reflecting
decreased market rates.
Net interest income increased over 50% in 1997 and 1996. Net
interest income was $1.1 million, $721,000 and $465,000 in 1997,
1996 and 1995, respectively. These increases are due to
increases in the volume of net average earning assets in both
years. Net interest margin has decreased to 3.54% in 1997 from
3.63% in 1996, and 4.68% in 1995. Net interest margin has
declined over the past two years even though net interest income
has increased. This is because of increases in the percentage of
average interest-bearing liabilities to average interest-earning
assets to 93.0% in 1997 from 92.3% in 1996 and 69.1% in 1995, due
primarily to rapid growth combined with net losses. The effects
of changes in volumes and rates on net interest income for
various periods are shown in the following table.
<PAGE>26
Management's Discussion and Analysis
________________________________________________________________________________
Rate/Volume Variance Analysis (thousands)
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
________________________ ________________________
Variance Variance
Interst Atrributable Interest Atrributable
Income/ To Income/ To
Expense ______________ Expense ________________
Variance Rate Volume Variance Rate Volume
________ ____ ______ ________ ____ ______
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Deposits in other
banks $ - $ - $ - $ - $ - $ -
Taxable investment
securities 168 (44) 212 200 (55) 255
Federal funds sold (31) (2) (29) 15 3 12
Loans 742 (18) 760 549 (83) 632
_____ _____ _____ _____ _____ _____
Total 879 (64) 943 764 (135) 899
_____ _____ _____ _____ _____ _____
Interest-bearing
liabilities:
Demand deposits 136 36 100 158 - 158
Savings deposits 35 (13) 48 58 15 43
Time deposits 329 17 312 292 (31) 323
Federal Funds
purchased 17 17 - - - -
_____ _____ _____ _____ _____ _____
Total 517 57 460 508 (16) 524
_____ _____ _____ _____ _____ _____
Net interest
income $ 362 $(121) $ 483 $ 256 $(119) $ 375
_____ _____ _____ _____ _____ _____
</TABLE>
Provision for Loan Losses
The provision for loan losses is charged to income in an amount
necessary to maintain an allowance for loan losses adequate to
provide for expected losses in the Bank's loan portfolio. The
level of the allowance for loan losses is determined by
management's assessment of a variety of factors, including the
collectibility of past due loans, volume of new loans,
composition of the loan portfolio, and general economic outlook.
Loan losses and recoveries are charged or credited directly to
the allowance for loan losses.
Management increased the provision for loan lose expense to
$186,000 in 1997 from $104,000 in 1996 and $68,000 in 1995. The
increases in the loan loss provision were made because of the
significant growth of the loan portfolio during these periods.
The Bank's allowance for loan losses as a percentage of gross
loans was 1.2% at the end of 1997, 1996 and 1995.
Additional information regarding loan loss provisions is
discussed in "Nonperforming and Problem Assets."
Noninterest Income
Noninterest income consists of revenues generated from a variety
of financial services and activities. The majority of
noninterest income is a result of service charges on deposit
accounts including charges for insufficient funds, checks and
fees charged for nondeposit services. Noninterest income also
includes fees charged for various bank services such as safe
deposit box rental fees and letter of credit fees. A portion of
noninterest income is gain on the sale of investment securities.
Although the Bank generally follows a buy and hold philosophy
with respect to investment securities, occasionally the need to
sell some investment securities is created by changes in market
rate conditions or by efforts to restructure the portfolio to
improve the Bank's liquidity or interest rate risk positions.
Noninterest income totaled $153,000 in 1997, a increase of 20.5%
from the $127,000 recorded in 1996. Noninterest income in 1996
increased 111.7% from the 1995 amount of $60,000. The majority of
the increase in noninterest income over the last two years was
due to increased service charges on deposit accounts because of
the increased number of accounts.
The Bank's fee structure is reviewed annually to determine if
adjustments to fees are warranted. There were no changes in the
deposit account fee structure during the last three years. The
sources of noninterest income for the past three years are
summarized in the table below.
<PAGE>27
Management's Discussion and Analysis
________________________________________________________________________________
Sources of Noninterest Income (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
____________________________
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Service charges in deposit
accounts $ 112 $ 93 $ 41
Gain on sale of investment
securities 3 17 10
Other 38 17 9
_______ _______ _______
Total noninterest income $ 153 $ 127 $ 60
_______ _______ _______
</TABLE>
Noninterest Expense
Noninterest expense for 1997 rose 368,000 or 39.6% to $1.3
million. Noninterest expense in 1996 was $929,000, a $140,000
increase over the 1995 amount of $789,000. The overhead ratio of
noninterest expense to adjusted total revenues (net interest
income plus noninterest income excluding securities transactions)
was 105%, 112% and 153% in 1997, 1996 and 1995, respectively.
Total personnel expenses, the largest component of noninterest
expense, increased 197,000 or 50.8% during in 1997. Personnel
expenses for 1996 were $388,000, an increase of 17.9% over the
1995 amount of $329,000. These increases were attributable to
the increased number of full time equivalent employees required
due to the high growth rate the Bank has experienced since
opening. Total full time equivalent employees were 25, 16 and 14
at December 31, 1997, 1996 and 1995. Management expects the
number of full-time equivalent employees to increase at a slower
pace through 1998.
Combined occupancy and furniture and equipment expense increased
$33,000 or 23.7% to $172,000 in 1997. Those expenses increased
$32,000 in 1996 to $139,000 compared to $107,000, in 1995. The
reasons for the increase in 1997 are the completion of the second
floor of the Bank building to provide additional office space and
the opening of the branch in downtown Pulaski. The increase in
1996 was primarily due to the opening of the new Bank building
which resulted in increased maintenance, insurance and
depreciation.
Professional services expense, fees paid to attorneys,
independent auditors, consultants and state examiners for 1997
increased to $87,000 or 89.1% over the 1996 amount. This
increase is due primarily to the loss of the Company's senior
vice president of operations late in 1996, forcing the Company to
outsource portions of the responsibilities formerly performed by
that position. In addition, the Bank engaged a consultant to
evaluate certain bank policies. Professional services expense
decreased $14,000 or 23.3%, to $46,000 during 1996. This
fluctuation was caused by the Bank incurring significant expenses
in 1995 related to various examinations that were required
subsequent to the initial opening.
Printing and supplies expense increased $24,000 in 1997 to
$72,000. This was 50.0% more than the 1996 amount of $48,000.
This increase was due in part to expense incurred to stock the
new branch.
Outside services consisting primarily of data processing and
credit card processing fees, increased $49,000 or 49.5% during
1997 to $148,000. These expenses increased $25,000, to $99,000
in 1996 from $74,000 in 1995. These fees relate directly to the
number of accounts serviced and transactions processed.
Management expects these expenses to continue to increase as the
Bank grows.
<PAGE>28
Mangement's Discussion and Analysis
________________________________________________________________________________
Noninterest expense has increased over the past two years and
will most likely continue to increase as the Bank grows.
However, as the Bank becomes more mature, growth in net interest
income will outpace growth in noninterest expense. Accordingly,
management believes the Bank's overhead ratio will continue to
improve. The primary elements of noninterest expense for the
past three years are as summarized in the following table.
Sources of Noninterest Expense (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
___________________________
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Salaries and wages $ 515 $ 335 $ 285
Employee benefits 70 53 44
_______ _______ _______
Total personnel expense 585 388 329
Occupancy expense 80 77 67
Furniture and equipment 92 62 40
Printing and supplies 72 48 37
Professional services 87 46 60
Postage 31 25 18
Telephone 15 9 8
Dues and subscriptions 18 12 8
Education and seminars 13 11 19
Advertising and public
relations 40 38 30
Insurance expense 26 26 30
Bank franchise tax 13 15 7
Outside services 148 99 74
Stock transfer agent fees 9 - -
Amortization of 22 37 37
organizational cost
Other operating expense 46 36 25
_______ _______ _______
Total other expenses $ 1,297 $ 929 $ 789
_______ _______ _______
</TABLE>
Income Taxes
Income tax expense is based on amounts reported in the statements
of income (after adjustments for non-taxable income and non-
deductible expenses) and consists of taxes currently due plus
deferred taxes on temporary differences in the recognition of
income and expense for tax and financial statement purposes. The
deferred tax assets and liabilities represent the future Federal
income tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities
are recovered or settled.
The Company's deferred income tax benefits and liabilities are
the result of temporary differences in loss carryforwards,
provisions for loan losses, valuation reserves, depreciation,
deferred income, and investment security discount accretion.
Net deferred income tax assets of $411,000, $329,000 and $261,000
at December 31, 1997, 1996, and 1995, respectively, are offset by
a valuation allowance. Accordingly, no income tax expense or
benefit was reported during 1997, 1996 or 1995.
<PAGE>29
Management's Discussion and Analysis
________________________________________________________________________________
Earning Assets
Average earning assets increased $10.8 million, or 54.2%, during
1997 to $30.6 million. Average earning assets increased $9.89
million to $19.8 million during 1996 as compared to the 1995
average of $9.9 million. Total average earning assets
represented 88.2% of total average assets in 1997. This
increased from 86.3% of total average assets in 1996 and 85.9% in
1995. The mix of average earning assets changed during 1997 and
1996 with a larger portion of the Bank's funds being invested in
higher yielding loans. For 1997, average net loans represented
50.9% of average assets. This is a significant increase from
42.2% in 1996 and 31.3% in 1995. Average investment securities
decreased to 35.5% of total average assets. This number was down
from 39.0% in 1996 and 46.3% in 1995. Average noninterest
earning assets increased to $4.1 million from $3.1 million in
1996 and $1.6 million in 1995. In spite of these increases, the
percentage of noninterest earning assets to total average assets
decreased to 11.8% from 13.7% in 1996 and 14.1% during 1995.
This is due to interest-earning assets increasing at a faster
pace than noninterest earning assets. A summary of average
assets is shown in the following table.
Average Asset Mix (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
_________________________________________________
1997 1996 1995
________________ ________________ ________________
Average Average Average
Balance Percent Balance Percent Balance Percent
_______ _______ _______ _______ _______ _______
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Earnings assets:
Loans, net $ 17,652 50.90% $ 9,695 42.19% $ 3,620 31.30%
Investment securities 12,242 35.30 8,957 38.98 5,350 46.26
Federal funds sold 691 1.99 1,179 5.13 967 8.36
________ ______ ________ ______ ________ ______
Total earning assets 30,585 88.19 19,831 86.30 9,937 85.92
________ ______ ________ ______ ________ ______
Nonearning assets:
Cash and due from banks 2,106 6.07 1,465 6.38 660 5.71
Premises and equipment 1,556 4.49 1,410 6.14 718 6.21
Other assets 430 1.25 272 1.18 249 2.16
________ ______ ________ ______ ________ ______
Total nonearning assets 4,092 11.81 3,147 13.70 1,627 14.08
________ ______ ________ ______ ________ ______
Total assets $ 34,677 100.00% $ 22,978 100.00% $ 11,564 100.00%
________ ______ ________ ______ ________ ______
</TABLE>
Loans
The Bank makes both consumer and commercial loans to borrowers in
all neighborhoods within its market area, including the low- and
moderate-income areas. The Bank's market area is generally
defined to be all or portions of the Pulaski, Giles, Wythe,
Montgomery and Bland Counties of Virginia and the City of
Radford, Virginia. The Bank emphasizes consumer based
installment loans, commercial loans to small and medium sized
businesses and real estate loans.
Net loans consist of total loans less unearned income and the
allowance for loan losses. Average net loans increased 82.07% to
$17.7 million. This was the second consecutive year of
significant loan growth. Average net loans were increased to
$9.7 million during 1996, an increase of $6.1 million or 167.9%
over 1995. The increase in average net loans outstanding during
the past year is due to the efforts of the Bank's management,
increases in loan demand and to the Bank's growing reputation in
the community.
A significant portion of the loan portfolio, $9.0 million or
39.7%, is made up of loans secured by various types of real
estate. Total loans secured by one to four family residential
properties represented 36.2% of total loans at the end of 1997.
During 1997, the Bank also experienced growth in loans for
commercial and business purposes. These loans increased 93.6%
during 1997 to a total of $8.4 million, or 37.0% of total loans
outstanding compared to a total of $4.3 million or 33.6% at the
end of 1995.
<PAGE>30
Management's Discussion and Analysis
________________________________________________________________________________
The amounts of loans outstanding by type at December 31, 1997 and
1996 are shown in the following table.
Loan Portfolio Summary (thousands)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
__________________ __________________
Amount % Amount %
______ _ ______ _
</CAPTION>
<S> <C> <C> <C> <C>
Construction and
development $ 635 2.79% $ 235 1.82%
Farmland - - - -
1-4 family residential 8,232 36.21 4,676 36.21
Multifamily residential - - - -
Nonfarm, nonresidential 148 .66 102 .79
________ ______ ________ ______
Total real estate 9,015 39.66 5,013 38.82
Agricultural 100 .44 8 .05
Commercial and industrial 8,409 36.99 4,344 33.64
Credit cards 186 .82 135 1.05
Other consumer 4,207 18.51 2,564 19.85
State and political
subdivisions 258 1.14 343 2.66
Other 556 2.44 507 3.93
________ ______ ________ ______
Total $ 22,731 100.00% $ 12,914 100.00%
________ ______ ________ ______
</TABLE>
The maturity distribution of variable and fixed rate loans as of
December 31, 1997 are set forth in the following table.
Maturity Schedule of Loans (thousands)
<TABLE>
<CAPTION>
December 31, 1997
_________________________________________________
Commercial
Financial Total
and Real __________________
Agriculture Estate Others Amount %
___________ ______ ______ ______ _
</CAPTION>
<S> <C> <C> <C> <C> <C>
Fixed rate loans:
Three months or less $ 117 $ 59 $ 724 $ 900 3.96%
Over three months
to twelve months 355 596 429 1,380 6.07
Over one year to
five years 931 297 2,873 4,101 18.04
Over five years 674 332 312 1,318 5.80
Total fixed rate ________ ________ ________ ________ ______
loans 2,077 1,284 4,338 7,699 33.87
________ ________ ________ ________ ______
Variable rate loans:
Three months or less 3,480 773 562 4,815 21.18
Over three months to
twelve months 24 788 54 866 3.81
Over one year to five
years 2,928 6,092 253 9,273 40.79
Over five years - 78 - 78 .35
________ ________ ________ ________ ______
Total variable rate
loans 6,432 7,731 869 15,032 66.13
________ ________ ________ ________ ______
Total loans:
Three months or less 3,597 832 1,286 5,715 25.14
Over three months to
twelve months 379 1,384 483 2,246 9.88
Over one to five years 3,859 6,389 3,126 13,374 58.83
Over five years 674 410 312 1,396 6.15
________ ________ ________ ________ ______
Total loans $ 8,509 $ 9,015 $ 5,207 $ 22,731 100.00%
________ ________ ________ ________ ______
</TABLE>
<PAGE>31
Management's Discussion and Analysis
________________________________________________________________________________
Investment Securities
The Bank uses its investment portfolio to provide liquidity for
unexpected deposit decreases, to fund loans, to meet the Bank's
interest rate sensitivity goals, and to generate income.
Securities are classified as securities held to maturity when
management has the intent and the Company has the ability at the
time of purchase to hold the securities to maturity. Securities
held to maturity are carried at cost adjusted for amortization or
premiums and accretion of discounts. Securities to be held for
indefinite periods of time are classified as securities available
for sale. Unrealized gains and losses on securities available
for sale are recognized as direct increases or decreases in
shareholders' equity. Securities available for sale include
securities that may be sold in response to changes in market
interest rates, changes in the security's prepayment risk,
increases in loan demand, general liquidity needs and other
similar factors. The entire securities portfolio is classified
as available for sale.
Management of the investment portfolio has always been
conservative with virtually all investments taking the form of
purchases of U.S. Treasury, U.S. Government agency and State and
local bond issues. Management views the investment portfolio as
a source of income, and purchases securities with that in mind.
However, adjustments are necessary in the portfolio to provide an
adequate source of liquidity which can be used to meet funding
requirements for loan demand and deposit fluctuations and to
control interest rate risk. Therefore, management may sell
certain securities prior to their maturity.
The following table presents the investment portfolio at December
31, 1997 by major types of investments and maturity ranges.
Maturities may differ from scheduled maturities in mortgage-
backed securities because the mortgages underlying the securities
may be called or repaid prior to the scheduled maturity date.
Maturities on all other securities are based on the contractual
maturity.
Investment Securities (thousands)
<TABLE>
<CAPTION>
Available for sale
December 31, 1997
_______________________________________________________
Amortized Cost Due
_______________________
After After
One Five
In One Through Through After Equity
Yr.or Five Ten Ten Secur- Fair
Less Yrs. Yrs. Years ities Total Value
____ ____ ____ _____ _____ _____ _____
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,200 $ 500 $ - $ - $ - $ 1,700 $ 1,707
U. S. Government
agencies 5,614 1,955 2,142 - - 9,711 9,680
State and political
subdivisions - 198 - - - 198 201
Equity securities - - - - 149 149 149
_______ _______ _______ _______ _______ _______ _______
Total $ 6,814 $ 2,653 $ 2,142 $ - $ 149 $11,758 $11,737
_______ _______ _______ _______ _______ _______ _______
Weighted average yields:
U.S. Treasury 5.24% 6.34% -% -% 5.56%
U.S. Government
agencies 5.72 6.24 6.27 - 5.95
State and political
subdivisions - 6.45 - - 6.45
____ ____ ____ ____ ____
Consolidated 5.64% 6.27% 6.27% - % 5.90%
____ ____ ____ ____ ____
</TABLE>
The interest rate environment and the need of the Bank to improve
liquidity in 1997 caused the average yield on the investment
portfolio to decrease to 5.9% from 6.5% in 1996. At December 31,
1997, the market value of the investment portfolio was $11.7
million, representing depreciation of $21,000 below amortized
cost. This compared to a market value of $11.3 million and an
depreciation of $56,000 below amortized cost a year earlier.
<PAGE>32
Management's Discussion and Analysis
________________________________________________________________________________
Federal Funds Sold
Federal funds represent the most liquid portion of the Bank's
invested funds and generally the lowest yielding portion of
earning assets. Management has made an effort to maintain
Federal funds at the lowest level possible consistent with
prudent interest rate risk management strategies and liquidity
needs.
Average Federal funds sold totaled $691,000 in 1997, down from
$1.2 million in 1996. This change represents a 41.4% decrease
from 1996. Average Federal funds sold were $56,000 during 1995.
Average Federal funds sold were 2.0%, 5.1% and 8.4% of total
average assets in 1997, 1996 and 1995, respectively.
Deposits
The Bank relies on deposits generated in its market area to
provide the majority of funds needed to support lending
activities and for investments in liquid assets. More
specifically, core deposits (total deposits less time deposits in
denominations of $100,000 or more) are the primary funding
source.
The Bank's balance sheet growth is largely determined by the
availability of deposits in its markets, the cost of attracting
the deposits, and the prospects of profitably utilizing the
available deposits by increasing the loan or investment
portfolios. Market conditions have resulted in depositors
shopping for better deposit rates more than in the past. An
increased customer awareness of interest rates adds to the
importance of rate management. The Bank's management must
continuously monitor market pricing, competitor's rates, and
internal interest rate spreads to maintain the Bank's growth and
profitability. The Bank attempts to structure rates so as to
promote deposit and asset growth while at the same time
increasing the overall profitability of the Bank.
Average total deposits for the year ended December 31, 1997
amounted to $31.1 million which was an increase of $11.3 million,
or 56.9%, over 1996. Average core deposits totaled $25.3 million
in 1997, an increase of $8.6 million, or 51.5.8%, over 1996. The
percentage of the Bank's average deposits that are interest-
bearing decreased to 90.6% from 92.5% in 1996. Average demand
deposits which earn no interest increased $1.4 million to $2.9
million in 1997 as compared to 1996.
The average certificates of deposit issued in denominations of
$100,000 or more increased to $5.7 million in 1997. This is an
84.2% increase over the 1996 amount of $3.1 million. Even though
certificates of deposit issued in denominations of $100,000 or
more have increased significantly, average large denomination
certificates of deposit as a percentage of total average deposits
have increased only slightly. Average certificates of deposit
issued in denominations of $100,000 or more as a percentage of
total average deposits were 18.5%, 15.6% and 19.8% for the years
ended December 31, 1997, 1996 and 1995, respectively. Municipal
deposits from local governments were $11.5 million and $9.0
million at December 31, 1997 and 1996, respectively. Management
believes that the Bank is paying market rates for these deposits.
Management's strategy has been to support loan and investment
growth with core deposits and not to aggressively solicit the
more volatile, large denomination certificates of deposit. Large
denomination certificates of deposit and large municipal deposits
are particularly sensitive to changes in interest rates.
Management considers these deposits to be volatile and, in order
to minimize liquidity and interest rate risks, invests these
funds in short-term investments.
<PAGE>33
Management's Discussion and Analysis
________________________________________________________________________________
Average deposits for the three years ended December 31, 1997,
1996 and 1995 are summarized in the following table.
Deposit Mix (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
_______________________________________________
1997 1996 1995
____ ____ ____
Average Average Average
Balance Percent Balance Percent Balance Percent
_______ _______ _______ _______ _______ _______
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Now accounts $ 8,094 26.06% $ 5,304 26.79% $ 917 11.43%
Money market 1,805 5.81 982 4.96 687 8.56
Savings 1,696 5.46 1,294 6.54 253 3.15
Small denomination
certificates 10,817 34.83 7,642 38.60 3,417 42.59
Large denomination
certificates 5,736 18.47 3,083 15.57 1,591 19.83
_______ ______ _______ ______ _______ ______
Total interest
bearing deposits 28,148 90.63 18,305 92.46 6,865 85.56
Noninterest bearing
deposits:
Demand deposits 2,909 9.37 1,492 7.54 1,158 14.44
_______ ______ _______ ______ _______ ______
Total deposits $31,057 100.00% $19,797 100.00% $ 8,023 100.00%
_______ ______ _______ ______ _______ ______
</TABLE>
The following table provides maturity information relating to
time deposits of $100,000 or more at December 31, 1997 and 1996.
Large Time Deposit Maturities, (thousands)
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Remaining maturity of three months or less $ 1,839 $ 1,392
Remaining maturity over three through
twelve months 1,692 1,155
Remaining maturity over twelve months 911 532
________ _________
Total time deposits of $100,000 or more $ 4,442 $ 3,079
________ _________
</TABLE>
Short-Term Debt
The Bank had no short-term debt or other borrowed funds at
December 31, 1997, 1996, or 1995. The Bank borrowed using
Federal funds purchased for the first time during 1997, in order
to provide liquidity and reduce interest rate risk. The average
balance of Federal funds purchased was $308,000 for 1997. The
related interest expense on these borrowings was $17,000, for a
cost of funds of 5.5%.
Capital Adequacy
Regulatory guidelines relating to capital adequacy provide
minimum risk-based ratios which assess capital adequacy while
encompassing all credit risks, including those related to off-
balance sheet activities. Capital ratios under these guidelines
are computed by weighing the relative risk of each asset category
to derive risk-adjusted assets. The risk-based capital
guidelines require minimum ratios of core (Tier I) capital
(common stockholders' equity and qualifying preferred
stockholders' equity, less intangible assets) to risk-weighted
assets of 4.0% and total regulatory capital (core capital plus
allowance for loan losses up to 1.25% of risk-weighted assets and
qualifying subordinated debt) to risk-weighted assets of 8.0%.
See "Supervision and Regulation."
<PAGE>34
Management's Discussion and Analysis
________________________________________________________________________________
In addition, a minimum leverage ratio of average Tier I capital
to average total assets for the previous quarter, ranging from 3%
to 5%, is required by federal bank regulators subject to the
regulator's evaluation of the Bank's overall safety and
soundness. As of December 31, 1997, the Bank had a ratio of year-
end Tier I capital to average total assets for the fourth quarter
of 1997 of 7.7%.
The Bank exceeds all required regulatory capital ratios and is
considered well capitalized.
Shareholders' equity was $3.1 million at December 31, 1997, a
6.4% decrease from the 1996 year-end total of $3.3 million. The
decrease was primarily a result of the net loss in 1997 which was
partially off-set by an increase in the market value of
securities that are classified as available for sale. Average
shareholders' equity as a percentage of average total assets was
9.2% in 1997 and 13.7% in 1996.
At December 31, 1997 the Bank had a ratio of Tier I capital to
risk-weighted assets of 12.33% and a ratio of total regulatory
capital to risk-weighted assets of 13.46%, well above the
regulatory minimum of 4.0% and 8.0%, respectively.
The Bank's analysis of capital for the quarters December 31, 1997
and 1996 is presented in the following table.
Risk-Based Capital, (thousands)
<TABLE>
<CAPTION>
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Tier I capital $ 2,954 $ 3,139
Qualifying allowance for loan losses<F1> 270 155
_________ _________
Total regulatory capital $ 3,224 $ 3,294
_________ _________
Total risk-weighted assets $ 23,954 $ 14,286
_________ _________
Tier I as a percent of risk-weighted
assets 12.33% 21.97%
Total Tier II capital as a percent of
risk-weighted assets 13.46% 23.06%
Leverage ratio<F2> 7.73% 11.62%
<FN>
__________________________
<F1> Limited to 1.25% of risk-weighted assets.
<F2> Period end Tier I capital to adjusted average assets per quarter.
</FN>
</TABLE>
Common Stock Outstanding
At December 31, 1996 the Company had 437,225 shares of common
stock outstanding. Shareholders of record as of May 1, 1997
received a 25% stock dividend. At December 31, 1997 the Company
had 546,399 shares of common stock outstanding. These shares are
held by approximately 587 shareholders of record.
During 1997 the Company filed for, and received approval from the
SEC for a secondary stock offering of common stock at a price of
$9 per share. The stock sale began on December 10, 1997 and
closed February 10, 1998 after the sale of 380,000 shares for net
proceeds of approximately $3.2 million. Management intends to
used the proceeds for general purposes and to finance future
growth.
<PAGE>35
Management's Discussion and Analysis
________________________________________________________________________________
Nonperforming and Problem Assets
Certain credit risks are inherent in making loans, particularly
commercial and consumer loans. Management prudently assesses
these risks and attempts to manage them effectively. The Bank
also attempts to reduce repayment risks by adhering to internal
credit policies and procedures. These policies and procedures
include officer and customer limits, periodic loan documentation
review and follow up on exceptions to credit policies.
The allowance for loan losses is maintained at a level adequate
to absorb probable losses. Some of the factors which management
considers in determining the appropriate level of the allowance
for credit losses are: past loss experience, an evaluation of
the current loan portfolio, identified loan problems, the loan
volume outstanding, the present and expected economic conditions
in general, regulatory policies, and in particular, how such
conditions relate to the market areas that the Bank serves. Bank
regulators also periodically review the Bank's loans and other
assets to assess their quality. Loans deemed uncollectible are
charged to the allowance. Provisions for loan losses and
recoveries on loans previously charged off are added to the
allowance.
The accrual of interest on loans is discontinued on a loan when,
in the opinion of management, there is an indication that the
borrower may be unable to meet payments as they become due. Upon
such discontinuance, all unpaid accrued interest is reversed.
The provision for loan losses, net charge-offs and the activity
in the allowance for loan losses is detailed in the following
table.
Allowance for Loan Losses (thousands)
<TABLE>
<CAPTION>
December 31,
______________________
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Allowance for loan losses, beginning $ 155 $ 81 $ 30
Provision for loan losses, added 186 104 68
______ ______ ______
341 185 98
Loans charged off (83) (43) (18)
Recoveries of loans previously charged off 12 13 1
______ ______ ______
Net charge-offs (71) (30) (17)
______ ______ ______
Allowance for loan losses, ending $ 270 $ 155 $ 81
______ ______ ______
</TABLE>
The loan portfolio also included loans to various borrowers
(watch loans) at period-end for which management had concerns
about the ability of the borrowers to continue to comply with
present loan repayment terms, and which could result in some or
all of these loans being uncollectible. Management monitors
these loans carefully and has provided for these loans in the
allowance for loan losses.
Management realizes that general economic trends greatly affect
loan losses and no assurances can be made about future losses.
Management does, however, consider the allowance for loan losses
to be adequate at December 31, 1997.
<PAGE>36
Management's Discussion and Analysis
________________________________________________________________________________
The allocation of the reserve for loan losses is shown in the
following table.
Allocation of the Allowance for Loan Losses (thousands)
<TABLE>
<CAPTION>
December 31,
________________________________________________
1997 1996 1995
______________ ______________ ______________
Balance at end of
period applicable to: Amount Percent Amount Percent Amount Percent
<F1> <F1> <F1>
______ _______ ______ _______ ______ _______
</CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 80 37.43% $ 85 33.73% $ 26 24.71%
Real estate, construction - 2.79 - 1.82 - -
Real estate, mortgage 103 36.87 23 36.31 16 44.41
Installment loans to
individuals, other 87 22.91 47 28.14 39 30.88
_____ ______ _____ ______ _____ ______
Total $ 270 100.00% $ 155 100.00% $ 81 100.00%
_____ ______ _____ ______ _____ ______
<FN>
_____________________
<F1> Percent of loans in each category to total loans.
</FN>
</TABLE>
Nonperforming Assets at December 31, 1997 and 1996 are analyzed
in the table below.
Nonperforming Assets (thousands)
<TABLE>
<CAPTION>
December 31,
______________
1997 1996
____ ____
</CAPTION>
<S> <C> <C>
Nonaccrual loans $ - $ 17
Restructured loans - -
Foreclosed and in-substance
foreclosed properties 36 -
______ ______
$ 36 $ 17
______ ______
</TABLE>
Nonperforming assets were .2% and .1% of gross loans outstanding
at year-end 1997 and 1996, respectively. In addition to the
nonperforming assets, loans which were past due 90 days or more
amounted to $52,000 at December 31, 1996. There were no loans
past due 90 days or more at December 31, 1997. Net loan charge-
offs as a percentage of average loans were .4%, .3%, and .5% in
1997, 1996 and 1995, respectively. The allowance for loan losses
was $270,000, $155,000 and $81,000 and December 31, 1997, 1996
and 1995, respectively. This is 1.2% of total gross loans
outstanding for all three years.
Liquidity and Sensitivity
The principal goals of the Bank's asset and liability management
strategy are the maintenance of adequate liquidity and the
management of interest rate risk. Liquidity is the ability to
convert assets to cash in order to fund depositors' withdrawals
or borrowers' loans without significant loss. Interest rate risk
management balances the effects of interest rate changes on
assets that earn interest against liabilities on which interest
is paid, to protect the Bank from wide fluctuations in its net
interest income which could result from interest rate changes.
Management must insure that adequate funds are available at all
times to meet the needs of its customers. On the asset side of
the balance sheet, maturing investments, loan payments, maturing
loans, federal funds sold, and unpledged investment securities
are principal sources of liquidity. On the liability side of the
balance sheet, liquidity sources include core deposits, the
ability to increase large denomination certificates, Federal
funds lines from correspondent banks, borrowings from the Federal
Reserve Bank, as well as the ability to generate funds through
the issuance of long-term debt and equity.
Interest rate risk is the effect that changes in interest rates
would have on interest income and interest expense as interest-
sensitive assets and interest-sensitive liabilities either
reprice or mature. Management attempts to maintain the
portfolios of earning assets and interest-bearing liabilities
with maturities or repricing opportunities at levels that
<PAGE>37
Management's Discussion and Analysis
________________________________________________________________________________
will afford protection from erosion of net interest margin, to the
extent practical, from changes in interest rates. The table
below shows the sensitivity of the Bank's balance sheet at the
dates indicated, but is not necessarily indicative of the
position on other dates.
Interest Rate Sensitivity
<TABLE>
<CAPTION>
December 31, 1997
Maturities/Repricing
________________________________________________
1-3 4-12 13-60 Over 60
Months Months Months Months Total
______ ______ ______ ______ _____
</CAPTION>
<S> <C> <C> <C> <C> <C>
Earning assets:
Loans $ 6,097 $ 3,538 $ 12,545 $ 551 $ 22,731
Investments 1,689 5,118 2,655 2,275 11,737
Federal Funds Sold 1,021 - - - 1,021
________ ________ ________ ________ ________
Total 8,807 8,656 15,200 2,826 35,489
________ ________ ________ ________ ________
Interest-bearing liabilities:
Now accounts 11,192 - - - 11,192
Money market 2,356 - - - 2,356
Savings 1,414 - - - 1,414
Certificates of deposit 4,063 8,201 5,786 - 18,050
________ ________ ________ ________ ________
Total 19,025 8,201 5,786 - 33,012
________ ________ ________ ________ ________
Interest rate gap $(10,218) $ 455 $ 9,414 $ 2,826 $ 2,477
________ ________ ________ ________ ________
Cumulative interest
sensitivity gap $(10,218) $ (9,763) $ (349) $ 2,477
Ratio of sensitivity gap
to total earnings assets (28.79)% 1.28% (26.53)% 7.96% 6.98%
Cumulative ratio of
sensitivity gap to total
earnings assets (28.79)% (27.51)% (.98)% 6.98%
</TABLE>
At December 31, 1997, the Company was cumulatively asset-
sensitive (earning assets subject to interest rate changes
exceeded interest-bearing liabilities subject to changes in
interest rates). NOW and money market accounts repricing within
three months were $13.5 million, which historically have not been
as interest-sensitive as other types of interest-bearing
deposits. Removing the impact of NOW and money market accounts,
the Bank is asset sensitive in the three month or less time
period, with the four to twelve months time period being
liability-sensitive, the thirteen to sixty months time period
being asset-sensitive and the over sixty months time period being
asset-sensitive.
Certificates of deposit in denominations of $100,000 or more and
large municipal deposits are especially susceptible to interest
rate changes. These deposits are matched with short-term
investments. Matching sensitive positions alone does not ensure
that the Bank has no interest rate risk. The repricing
characteristics of assets are different from the repricing
characteristics of funding sources. Thus, net interest income
can be impacted by changes in interest rates even if the
repricing opportunities of assets and liabilities are perfectly
matched.
<PAGE>38
Management's Discussion and Analysis
________________________________________________________________________________
Effects of Inflation
Interest rates are affected by inflation, but the timing and
magnitude of the changes may not coincide with changes in the
consumer price index. Management actively monitors the Bank's
interest rate sensitivity in order to minimize the effects of
inflationary trends on the Bank's operations. Other areas of non-
interest expenses may be more directly affected by inflation.
Financial Ratios
The following table summarizes ratios considered to be
significant indicators of the Bank's operating results and
financial condition for the periods indicated.
Key Financial Ratios
<TABLE>
<CAPTION>
Years Ended December 31,
________________________
1997 1996 1995
____ ____ ____
</CAPTION>
<S> <C> <C> <C>
Return on average assets (.71%) (.81%) (2.87%)
Return on average equity (7.75%) (5.89%) (9.44%)
Average equity to average assets 9.20% 13.71% 30.39%
</TABLE>
<PAGE>39
________________________________________________________________________________
Board of Directors and Officers
________________________________________________________________________________
Board of Directors
__________________
Wayne L. Carpenter CNB Holdings, Inc. & 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. CNB Holdings, Inc. & Community National Bank
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
Hiawatha Nicely, Jr. Chief Operating Officer
Clinton C. Ison Vice President-Loans
Deborah Boyd Loan Officer
Madonna L. Gwinn Cashier
Michael D. Ware Loan Officer
<PAGE>40
________________________________________________________________________________
Stockholder Information
________________________________________________________________________________
Annual Meeting
______________
The annual meeting of stockholders will be held at 10:00 a.m. on
April 9, 1998 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 1997 will be
furnished, without charge, after March 31, 1998 upon written
request.
Common Stock Market Information Stock Transfer Agent
_______________________________ ____________________
Scott & Stringfellow First Citizens Bank & Trust
Post Office Box 198 Post Office Box 29522
Blacksburg, Virginia 24063 Raleigh, North Carolina 27626
Independent Auditors Legal Counsel
____________________ _____________
Larrowe, Cardwell & Company, LC Mays & Valentine
Certified Public Accountants NationsBank Center
Post Office Box 2108 Post Office Box 1122
Pulaski, Virginia 24301 Richmond, Virginia 23208-1122
<PAGE>41
<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, 1997
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,290,840
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,021,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,736,737
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 22,665,227
<ALLOWANCE> 270,000
<TOTAL-ASSETS> 39,783,066
<DEPOSITS> 36,593,888
<SHORT-TERM> 0
<LIABILITIES-OTHER> 78,559
<LONG-TERM> 0
0
0
<COMMON> 2,731,995
<OTHER-SE> 378,624
<TOTAL-LIABILITIES-AND-EQUITY> 39,783,066
<INTEREST-LOAN> 1,668,116
<INTEREST-INVEST> 745,596
<INTEREST-OTHER> 40,131
<INTEREST-TOTAL> 2,453,843
<INTEREST-DEPOSIT> 1,353,521
<INTEREST-EXPENSE> 1,370,687
<INTEREST-INCOME-NET> 1,083,156
<LOAN-LOSSES> 185,943
<SECURITIES-GAINS> 2,662
<EXPENSE-OTHER> 1,297,062
<INCOME-PRETAX> (247,250)
<INCOME-PRE-EXTRAORDINARY> (247,250)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (247,250)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
<YIELD-ACTUAL> 3.54
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 155,000
<CHARGE-OFFS> 82,476
<RECOVERIES> 11,533
<ALLOWANCE-CLOSE> 270,000
<ALLOWANCE-DOMESTIC> 270,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
