##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB þ
    
    Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the quarterly period ended March
31, 2004
 o
    
    Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
____________ to ____________
 Commission file number: 000-23991 CNB HOLDINGS, INC.  Georgia
(State of Incorporation)
    
    58-2362335
(I.R.S. Employer Identification No.)
 7855 North Point Parkway
Suite 200
Alpharetta, Georgia 30022-4849
(Address of principal executive offices) (770) 650-8262
(Issuers telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes þ No o State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: Class
    
    Outstanding at May 13, 2004Common Stock, $1.00 par value
    
    1,136,396
 Transitional Small Business Disclosure Format: Yes o No þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS.NOTE 3  LOANS AND LEASES RECEIVABLENOTE 4  ACCUMULATED OTHER COMPREHENSIVE LOSSNOTE 5  NEW ACCOUNTING PRONOUNCEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.PART II. OTHER INFORMATIONITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.SIGNATURESEX-31.1 302 CERTIFICATION OF CEO & CFOEX-32.1 906 CERTIFICATION OF CEO & CFO    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS. CNB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS MARCH 31,
    
    DECEMBER 31,2004
    
    2003(Unaudited)
    
    (Audited)ASSETSCash and due from banks
    
    $
    1,413,784
    
    
    $
    1,523,041Interest bearing deposits in banks
    
    
    593,523
    
    
    
    540,461Federal funds sold
    
    
    
    
    
    
    233,000Investment securities:Securities available-for-sale, at market value
    
    
    31,423,511
    
    
    
    34,229,850Securities held-to-maturity, estimated fair value of
$5,860,419 and $6,182,614, respectively
    
    
    5,765,885
    
    
    
    6,152,871Restricted
equity securities
    
    
    1,256,000
    
    
    
    1,902,300Loans net of deferred loan fees and allowance for loan losses
of $1,026,376 and $1,004,458, respectively
    
    
    104,407,690
    
    
    
    92,788,493Premises and equipment (net)
    
    
    767,804
    
    
    
    786,532Other assets
    
    
    5,439,042
    
    
    
    4,906,119TOTAL ASSETS
    
    $
    151,067,239
    
    
    $
    143,062,667LIABILITIESDeposits:Non interest-bearing demand
    
    $
    12,007,492
    
    
    $
    12,331,094Interest-bearing demand and money market
    
    
    8,693,676
    
    
    
    8,564,680Savings
    
    
    68,461
    
    
    
    81,292Time deposits of $100,000 or more
    
    
    42,450,937
    
    
    
    31,971,172Other time deposits
    
    
    53,326,198
    
    
    
    42,879,278Total Deposits
    
    
    116,546,764
    
    
    
    95,827,516Securities sold under repurchase agreements
    
    
    1,040,055
    
    
    
    1,841,302Other borrowings
    
    
    20,189,000
    
    
    
    33,025,000Other liabilities
    
    
    2,692,930
    
    
    
    2,267,846TOTAL LIABILITIES
    
    
    140,468,749
    
    
    
    132,961,664STOCKHOLDERS EQUITY:Preferred stock, par value not stated;
10,000,000 shares authorized, no
shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $1.00 per share;
10,000,000 shares authorized; 1,284,999 and 1,272,500 issued
respectively
    
    
    1,284,999
    
    
    
    1,272,500Surplus
    
    
    10,553,282
    
    
    
    10,428,140Accumulated other comprehensive (loss)-
market valuation reserve on investment
securities available-for-sale
    
    
    (130,788
    )
    
    
    (323,317
    )Treasury stock
    
    
    (1,190,536
    )
    
    
    (1,199,823
    )Unearned ESOP shares
    
    
    (399,998
    )
    
    
    (399,998
    )Retained earnings
    
    
    481,531
    
    
    
    323,501TOTAL STOCKHOLDERS EQUITY
    
    
    10,598,490
    
    
    
    10,101,003TOTAL LIABILITIES AND EQUITY
    
    $
    151,067,239
    
    
    $
    143,062,667
 See notes to the consolidated financial statements. 2




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CNB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) FOR THETHREE-MONTHPERIOD ENDEDMARCH 31,2004
    
    2003Interest income loans and leases, including fees
    
    $
    1,542,460
    
    
    $
    1,441,902Investment securities:U.S. treasury securities .
    
    
    
    
    
    
    U.S. government agencies
    
    
    383,067
    
    
    
    162,496Other investments
    
    
    42,906
    
    
    
    44,369Interest bearing deposits in banks
    
    
    5,688
    
    
    
    11,138Total interest income
    
    
    1,974,121
    
    
    
    1,659,905Interest expense:Interest bearing demand and money market
    
    
    16,730
    
    
    
    36,880Savings
    
    
    88
    
    
    
    168Time
deposits of $100,000 or more
    
    
    244,593
    
    
    
    202,567Other time deposits
    
    
    361,953
    
    
    
    381,040Other borrowings
    
    
    180,103
    
    
    
    169,754Total interest expense
    
    
    803,467
    
    
    
    790,409Net interest income
    
    
    1,170,654
    
    
    
    869,496Provision for possible loan losses
    
    
    69,000
    
    
    
    79,900Net interest income after provision for possible loan losses
    
    
    1,101,654
    
    
    
    789,596Other income:Service charges on deposit accounts
    
    
    16,510
    
    
    
    13,367Gains on the sale of loans and leases (net)
    
    
    182,113
    
    
    
    181,199Other income
    
    
    58,713
    
    
    
    138,790Total other income
    
    
    257,336
    
    
    
    333,356Other expense:Salaries and other compensation
    
    
    485,150
    
    
    
    476,420Employee benefits
    
    
    129,830
    
    
    
    106,401Net occupancy and equipment expense
    
    
    124,770
    
    
    
    133,380Professional and other outside services
    
    
    153,352
    
    
    
    79,055Other expense
    
    
    197,953
    
    
    
    178,166Total other expenses
    
    
    1,091,055
    
    
    
    973,422Net income before income taxes
    
    
    267,935
    
    
    
    149,530Income taxes
    
    
    109,906
    
    
    
    21,704Net income
    
    $
    158,029
    
    
    $
    127,826Basic earnings per share
    
    $
    0.14
    
    
    $
    0.12Diluted earnings per share
    
    $
    0.13
    
    
    $
    0.12
 See notes to the consolidated financial statements. 3




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CNB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED) FOR THETHREE-MONTHPERIOD ENDEDMARCH 31,2004
    
    2003Net income
    
    $
    158,029
    
    
    $
    127,826Other comprehensive incomeUnrealized holding gains on securities available for sale:Unrealized holding gains arising during period
net of tax of $117,547 and
$11,299, respectively .
    
    
    208,972
    
    
    
    20,088Reclassification adjustment for gains realized in net income,
net of tax of $-0- and $162, respectively
    
    
    
    
    
    
    (289
    )Unrealized gains (losses) on cash flow hedges, net of tax of $9,249
and $2,861, respectively .
    
    
    (16,443
    )
    
    
    (5,086
    )Other comprehensive income
    
    
    192,529
    
    
    
    14,713Comprehensive income
    
    $
    350,558
    
    
    $
    142,539
 See notes to the consolidated financial statements. 4




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CNB HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THETHREE-MONTHPERIOD ENDEDMARCH 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    158,029
    
    
    $
    127,826Adjustments to reconcile net income to net cash provided by (used in)
operating activities:Net amortization of investment securities
    
    
    55,507
    
    
    
    65,031Depreciation and amortization of premises and equipment
    
    
    32,862
    
    
    
    42,454Gain on sale of investment securities available-for-sale
    
    
    
    
    
    
    (451
    )Gain on sale of loans
    
    
    (182,113
    )
    
    
    (181,199
    )Loss on sale of repossessed assets.
    
    
    38,522
    
    
    
    14,046Provision for loan losses
    
    
    69,000
    
    
    
    79,900(Increase)/decrease in other assets
    
    
    (877,252
    )
    
    
    21,702Increase in other liabilities
    
    
    425,084
    
    
    
    125,831Net cash provided by (used in) operating activities
    
    
    (280,361
    )
    
    
    295,140Cash flows from investing activities:Maturities of investment securities available-for-sale
    
    
    3,107,366
    
    
    
    4,351,086Proceeds from sale of investment securities available-for-sale
    
    
    
    
    
    
    566,270Purchases of investment securities available for sale
    
    
    (4,167
    )
    
    
    Maturities of securities held to maturity
    
    
    372,739
    
    
    
    992,890Redemptions of restricted equity securities
    
    
    646,300
    
    
    
    Proceeds from sale of loans and leases
    
    
    2,851,166
    
    
    
    2,705,963Loans originated, net of principal repayments
    
    
    (14,366,250
    )
    
    
    (2,791,295
    )Proceeds from sale of repossessed assets.
    
    
    196,316
    
    
    
    34,400Purchases of premises and equipment
    
    
    (14,133
    )
    
    
    (161,845
    )Net cash used in investing activities
    
    
    (7,210,663
    )
    
    
    5,697,469Cash flows from financing activities:Sale of treasury stock
    
    
    18,119
    
    
    
    15,095Exercise of stock options
    
    
    101,709
    
    
    
    Decrease in other borrowed funds
    
    
    (12,836,000
    )
    
    
    (7,000,000
    )Increase (decrease) in deposits
    
    
    20,719,248
    
    
    
    2,930,081Increase (decrease) in securities sold under repurchase agreements
    
    
    (801,247
    )
    
    
    981,543Net cash provided by financing activities
    
    
    7,201,829
    
    
    
    (3,073,281
    )Net increase (decrease) in cash and cash equivalents
    
    
    (289,195
    )
    
    
    2,621,328Cash and cash equivalents, beginning of period
    
    
    2,296,502
    
    
    
    2,016,910Cash and cash equivalents, end of period
    
    $
    2,007,307
    
    
    $
    4,638,238
 See notes to the consolidated financial statements. 5




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CNB HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS
ENDED MARCH 31, 2004
(UNAUDITED) NOTE 1  BASIS OF PRESENTATION The accompanying unaudited financial statements for CNB Holdings, Inc.
(the Company) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-QSB. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the
three-month period ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003. For further
information, refer to the financial statements and footnotes included in the
Companys consolidated financial statements and footnotes thereto for the year
ended December 31, 2003, included in the Companys Form 10-KSB. The consolidated financial statements include the accounts of the Company
and it wholly owned subsidiary Chattahoochee National Bank (the Bank) with
all significant intercompany accounts and transactions eliminated in
consolidation. NOTE 2  EARNINGS PER COMMON SHARE Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of shares outstanding
during the period, which totaled 1,130,543 shares for the three
months ended March 31, 2004. Diluted earnings per share is
computed by dividing income available to common stockholders by the
weighted average number of shares outstanding plus common stock
equivalents during the period, which totaled 1,243,558 shares for the
three months ended March 31, 2004. STOCK COMPENSATION PLANS At March 31, 2004, the Company has stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had
an exercise price equal to the market value of the underlying stock on the date
of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation. 6




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Three Months Ended March 31,2004
    
    2003Net income, as reported
    
    $
    158,029
    
    
    $
    127,826Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards
    
    
    
    
    
    
    Pro forma net income
    
    $
    158,029
    
    
    $
    127,826Earnings per share:Basic  as reported
    
    $
    0.14
    
    
    $
    0.12Basic  pro forma
    
    $
    0.14
    
    
    $
    0.12Diluted  as reported
    
    $
    0.13
    
    
    $
    0.12Diluted  pro forma
    
    $
    0.13
    
    
    $
    0.12
 
 NOTE 3  LOANS AND LEASES RECEIVABLE Major classifications of loans and leases are as follows in thousands
(000): MARCH 31, 2004
    
    DECEMBER 31, 2003Commercial Loans
    
    $
    30,910
    
    
    $
    29,552Real Estate  construction
    
    
    8,018
    
    
    
    8,888Real Estate  mortgage
    
    
    63,485
    
    
    
    52,339Lease financing
    
    
    945
    
    
    
    1,206Installment and other loans to individuals
    
    
    2,250
    
    
    
    1,983Subtotal
    
    
    105,608
    
    
    
    93,968Less: Deferred loan fees and costs
    
    
    174
    
    
    
    176Less: Allowance for loans and lease losses
    
    
    1,026
    
    
    
    1,004Loans and leases receivable, net
    
    $
    104,408
    
    
    $
    92,788
 
 NOTE 4  ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive income-market valuation reserve on investment
securities available-for-sale and cash flow hedges is as follows: Cash FlowSecurities
    
    Hedges
    
    TotalBeginning balance  January 1, 2004
    
    $
    (288,378
    )
    
    $
    (34,939
    )
    
    $
    (323,317
    )Current  period change
    
    
    208,972
    
    
    
    (16,443
    )
    
    
    192,529Ending balance  March 31, 2004
    
    $
    (79,406
    )
    
    $
    (51,382
    )
    
    $
    (130,788
    )
 7




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NOTE 5  NEW ACCOUNTING PRONOUNCEMENTS There are no other recent accounting pronouncements that have had, or are
expected to have, a material effect on the Companys financial statements. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain of the statements made in this Quarterly Report, including matters
discussed under the caption Managements Discussion and Analysis of Financial
Condition and Results of Operations, as well as oral statements made by the
Company or its officers, directors or employees, may constitute forward-looking
statements within the meaning of the Securities Exchange Act of 1934, as
amended (the Exchange Act), as amended. Such forward-looking statements are
based on managements beliefs, current expectations, estimates and projections
about the financial services industry, the economy and about CNB Holdings, Inc.
(the Company) and its wholly-owned subsidiary, Chattahoochee National Bank
(the Bank) in general. The words expect, anticipate, intend, plan,
believe, seek, estimate and similar expressions are intended to identify
such forward-looking statements; however, this report also contains other
forward-looking statements in addition to historical information. Such
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to differ materially from
any results expressed or implied by such forward-looking statements. Such
factors include, without limitation, (i) increased competition with other
financial institutions, (ii) lack of sustained growth in the economy in Fulton
County, Georgia, (iii) the inability of the Bank to maintain regulatory capital
standards and (iv) changes in the legislative and regulatory environment.
Additionally, rapid increases or decreases in interest rates could
significantly harm the Banks non-interest income, which is the difference
between the interest income earned on its interest-earning assets (such as
loans), and the interest expense paid on its interest-bearing liabilities (such
as deposits). Because the Bank is cumulatively asset sensitive (its assets
reprice sooner that its liabilities) within the next six months, continued
decreases in interest rates could result in reduced earnings. Many of the
forgoing factors are beyond the Companys ability to control or predict, and
readers are cautioned not to put undue reliance on such forward-looking
statements. The Company disclaims any obligation to update or revise any
forward-looking statements contained in this report, whether as a result of new
information, future events or otherwise. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CNB Holdings, Inc. (the Company) was incorporated in Georgia on November
5, 1997 to become a bank holding company and to own and control all of the
outstanding shares of a de novo bank, Chattahoochee National Bank, Alpharetta,
Georgia (the Bank). In a private offering and a separate public offering
conducted during 1998, the Company sold and issued an aggregate of 1,235,000
shares of common stock, par value $1.00 per share (the Common Stock), at
$10.00 per share. Proceeds from these stock offerings amounted to an aggregate
of $11,103,625, net of selling expenses and repayment of the organizers
expense. The Company purchased 100% of the Banks common stock by injecting
approximately $9.6 million into the Banks capital accounts immediately prior
to the Banks opening on July 27, 1998. Proposed Merger with First
Capital Bancorp, Inc. On
September 24, 2003, the Company entered into a merger agreement with
First Capital Bancorp, Inc. (First Capital), for a
proposed merger of equals, whereby First Capital will merge with and
into the Company. The Company will be the surviving company after the
merger. The merger will combine the Companys and First
Capitals businesses under a single holding company named CNB
Holdings, Inc. As a result of the merger, the Company will own First
Capitals state bank subsidiary, First Capital Bank. On
April 30, 2004, the shareholders of both the Company and First
Capital approved the merger. After
the merger, our combined company will provide a full line of
commercial and consumer services and products and will operate three
bank offices located in Fulton and Gwinnett Counties. Completion of
the merger is subject to satisfaction of all conditions included
in approvals from applicable regulatory authorities. As set forth in
the Federal Reserves approval letter dated
February 23, 2004, at the consummation of the merger, the
combined company and each of its subsidiary banks must be well
capitalized. In order to enhance the Companys capital position,
the Company commenced a stock offering to First Capital and the
Companys shareholders on a pro rata basis in which we have
accepted subscriptions for $15 million of shares of the
Companys common stock at a price of $12.00 per share, which
when completed, will satisfy this requirement. The parties expect the
merger to close on May 28, 2004. 8




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FINANCIAL CONDITION Management continuously monitors the financial condition of the Bank in
order to protect depositors, increase retained earnings and protect current and
future earnings. Further discussion of significant items affecting the Banks
financial condition are discussed in detail below. Total assets increased from $143,062,667 on December 31, 2003 to
$151,067,239 on March 31, 2004, an increase of $8,004,572. This increase was
due to an $11,619,197 increase in net loans, a $3,839,625 decrease in
investment securities, and a $289,195 decrease in cash and cash equivalents.
Deposits increased $20,719, 248 to fund the balance sheet growth and to replace
the decreases in securities sold under repurchase agreements of $801,247 and
other borrowings of $12,836,000. The $20,719,248 increase in deposits resulted from an increase of
$10,479,765 in time deposits of $100,000 or more, and increase of $10,446,920
in other time deposits, an increase of $128,996 in interest-bearing demand and
money market accounts, and a decrease of $323,602 in non interest-bearing
demand accounts. Brokered deposits made up all of the increase in time deposits
of $100,000 or more. Allowance for Loan Losses The allowance for loan losses as of March 31, 2004 was $1,026,376 compared
to $1,004,458 as of December 31, 2003. The allowance for loan losses, as a
percentage of total gross loans, for March 31, 2004 was 0.97%, compared to
1.07% as of December 31, 2003. The decrease in the allowance as a percentage of
gross loans during the first quarter of 2004 was prompted by the acquisition of
$31,389,000 aggregate principal amount of an existing loan portfolio that
consists of approximately 270 commercial loans with a total aggregate principal
balance of approximately $100.1 million. The remaining approximately $68.7
million aggregate principal amount of loans in the portfolio will continue to
be held by other third party investors. Of the $31,389,000 principal amount of
loans purchased by the Bank, it sold a participation interest in the loans of
$21.4 million to First Capital Bank. The purchase price for the loans and the
servicing rights acquired equaled the principal balance of the loans acquired,
or approximately $31,389,000. Additionally, the seller was required to
establish an escrow reserve totaling approximately $4,503,003 from which funds
will be payable to the Bank, and First Capital Bank as a result of its
participation interest in the loans, to offset specified losses and collection
expenses on the loans acquired by the Bank. The escrow reserve funds in
excess of $800,000 that are not used to offset losses and pay collection
expenses will be released to the seller at various times over a five-year
period. In connection with the Banks acquisition of the loans, First Capital
Bank has agreed to extend a $5 million line of credit to the seller for the
seller to use, in part, to fund initial draws on the required escrow reserve,
if necessary. The current reserve requirements for the $31,389,000 portfolio
based on the Banks assessment is $726,099.54 and the remaining escrow reserve
balance is $4,503,003. The escrow reserve is considered adequate for the
purchased Small Business Administration Loan portfolio. Neither the purchased
portfolio or its reserves is included in the Banks allowance for loan loss
calculation since this purchased portfolios reserve cannot be utilized for the
balance of the Banks portfolio and the adequacy of the reserve precludes the
necessity for general reserves at this time. During the second quarter of
2004, a review of the Banks loan portfolio by an independent firm will be
conducted. The purpose of this review, which is conducted regularly, will be
to assess the risk in the loan portfolio and to determine the adequacy of the
allowance for loan losses. The review is expected to include analyses of
historical performance, the level of non-conforming and rated loans, loan
volume and activity, review of loan files and consideration of economic
conditions and other pertinent information. Upon completion, the report will
be reviewed by the Banks Board of Directors and management. The Bank will
continue engaging, on a biannual basis, an independent firm to review the
Banks loan portfolio. In addition to the independent reviews, the Banks
primary regulator, the OCC, also conducts an annual examination of the loan
portfolio. Upon completion, the OCC presents its report of findings to the
Banks Board of Directors and management. Information provided from the above
two independent sources, together with information provided by the management
and other information known to the Banks Board of Directors, is utilized by
the Board of Directors to monitor, on a quarterly basis, the loan portfolio.
Specifically, the Banks Board of Directors attempts to identify risks inherent
in the loan portfolio (e.g., problem loans, potential problem loans and loans
to be charged off), assess the overall quality and collectibility of the loan
portfolio, and determine amounts of the allowance for loan losses and the
provision for loan losses to be reported based on the results of their review. 9




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Management considers the allowance for loan losses to be adequate and
sufficient; however, there can be no assurance that charge-offs in future
periods will not exceed the allowance for loan losses or that additional
provisions of the allowance will not be required. Liquidity and Sources of Capital Liquidity is the Companys ability to meet all deposit withdrawals
immediately, while also providing for the credit needs of customers. The March
31, 2004 financial statements evidence a satisfactory liquidity position as
total cash and cash equivalents amounted to approximately $2.0 million,
representing 1.33% of total assets. Securities amounted to $38.5 million,
representing 25.4% of total assets; these securities provide a secondary source
of liquidity since they can be converted into cash in a timely manner. The
Companys ability to maintain and expand its deposit base and borrowing
capabilities are also a source of liquidity. For the three-month period ended
March 31, 2004, total deposits increased $20.7 million. During this quarter,
the Bank raised $10.5 million in brokered deposits with maturities of one to
two years. At the time, these brokered deposits were cheaper than raising
deposits with similar maturities in our local market. Additionally, the bank
raised $10.5 million in other time deposits. The bank used the increase in
deposits to purchase Small Business Administration loans totaling $10.0 million
and repaid other borrowings of $12.8 million. The Companys management closely
monitors and maintains appropriate levels of interest earning assets and
interest bearing liabilities so that maturities of assets are such that
adequate funds are provided to meet customer withdrawals and loan demand. There
are no trends, demands, commitments, events or uncertainties that will result
in, or are reasonably likely to result in, the Companys liquidity increasing
or decreasing in any material way. This table below illustrates the Companys regulatory capital ratios at
the date indicated: MINIMUMREGULATORYMARCH 31, 2004
    
    REQUIREMENTTier 1 Capital
    
    
    10.11
    %
    
    
    4.0
    %Tier 2 Capital
    
    
    0.93
    
    
    
    Total risk-based capital ratio
    
    
    11.04
    %
    
    
    8.0
    %Leverage ratio
    
    
    7.67
    %
    
    
    3.0
    %
 RESULTS OF OPERATIONS Three-Month Period Ended March 31, 2004 Net income for the three-month period ended March 31, 2004 was $158,029
compared to $127,826 for the same period in 2003. Earnings per share for the
three-month period ended March 31, 2004 were $0.14 basic and $0.13 diluted
compared to basic and diluted earnings per share of $0.12 for the same period
in 2003. The following is a brief discussion of the more significant components
of net income during this period:  a.
    
    Net interest income represents the difference between
interest received on interest earning assets and interest paid on
interest bearing liabilities. The following presents, in a tabular
form, the main components of interest earning assets and interest
bearing liabilities. 10




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##### Table of Contents



March 31, 2004 Interest
    
    
    
    
    
    Interest
    
    AnnualizedEarning Assets/
    
    Average
    
    Income/
    
    Yield/Bearing Liabilities
    
    Balance
    
    Cost
    
    CostInterest-bearing deposits
in banks
    
    $
    2,164,251
    
    
    $
    5,688
    
    
    
    1.06
    %Securities
    
    
    40,521,485
    
    
    
    425,973
    
    
    
    4.23
    %Loans
    
    
    98,271,325
    
    
    
    1,542,460
    
    
    
    6.32
    %Total
    
    $
    140,903,061
    
    
    $
    1,974,121
    
    
    
    5.63
    %Deposits
    
    $
    94,417,698
    
    
    $
    623,364
    
    
    
    2.66
    %Securities sold under
repurchase agreements
    
    
    1,677,125
    
    
    
    2,976
    
    
    
    0.71
    %Other borrowings
    
    
    27,224,495
    
    
    
    177,127
    
    
    
    2.62
    %Total
    
    $
    123,319,318
    
    
    $
    803,467
    
    
    
    2.62
    %Net interest income
    
    
    
    
    
    $
    1,170,654
    
    
    
    3.01
    %Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    3.34
    %
 March 31, 2003 Interest
    
    
    
    
    
    Interest
    
    AnnualizedEarning Assets/
    
    Average
    
    Income/
    
    Yield/Bearing Liabilities
    
    Balance
    
    Cost
    
    CostInterest-bearing deposits
in banks
    
    $
    3,322,526
    
    
    $
    11,138
    
    
    
    1.36
    %Securities
    
    
    27,157,436
    
    
    
    206,865
    
    
    
    3.09
    %Loans
    
    
    85,683,424
    
    
    
    1,441,902
    
    
    
    6.82
    %Total
    
    $
    116,163,386
    
    
    $
    1,659,905
    
    
    
    5.80
    %Deposits
    
    $
    77,734,265
    
    
    $
    620,655
    
    
    
    3.24
    %Securities sold under
repurchase agreements
    
    
    1,326,237
    
    
    
    4,621
    
    
    
    1.41
    %Other borrowings
    
    
    19,726,234
    
    
    
    165,133
    
    
    
    3.40
    %Total
    
    $
    98,786,736
    
    
    $
    790,409
    
    
    
    3.24
    %Net interest income
    
    
    
    
    
    $
    869,496
    
    
    
    2.56
    %Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    3.04
    %
  b.
    
    Total other income for three-month period ended March 31,
2004 amounted to $257,336 compared to $333,356 in 2003. In the first
quarter of 2004, the Bank sold loans totaling $2,851,166 without
recourse, recognizing a gain of $182,113 or 70.77% of total other
income. Loans sold in the first quarter of 2003 totaled $2,524,764,
recognizing a gain of $181,199 or 54.36% of total other income.
Service charges on deposit accounts were $16,510 or 6.42% of total
other income compared to $13,367 or 4.00% in the first quarter of
2003. Of the $58,714 of miscellaneous other income or 22.82% of
total other income, $49,428 or 84.18% of miscellaneous 11




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##### Table of Contents



other income consists of origination and fee income from mortgage
loans, which are not added to the Banks loan portfolio. For 2003,
of the $138,790 of miscellaneous other income, or 41.63% of total
other income, $106,562 or 76.78% related to mortgage origination
activity. Income from increased cash surrender values of bank owned
life insurance was $39,848 or 67.87% of miscellaneous other income
and 15.48% of total other income compared to $40,463 or 29.28% of
miscellaneous other income and 12.19% of total other income for the
period ended March 31, 2003. We had losses on the sale of
repossessed equipment of $7,200 for the three-month period ended
March 31, 2004 compared to $14,046 in 2003. We had losses on the
sale of other real estate owned of $31,322 compared to no such
losses in 2003. These losses reduced total other income for the
period just ended March 31, 2004.  c.
    
    Operating expenses for the three-month period ended March 31,
2004 amounted to $1,091,055 compared to $973,422 in 2003, with the
largest expense being related to salaries and employee benefits and
miscellaneous other expense. On an annualized basis, this
represents 2.89% of total assets in 2004 compared to 3.35% in 2003.
The increase in salaries and employee benefits was largely due to
annual salary increases and additional performance bonuses,
including an accrual for an Employee Stock Ownership Plan. The
increase in professional and other outside services were primarily
increases in loan, legal and collection costs. The increase in
miscellaneous other expense was due to costs for the repossession
and disposition of other repossessed assets and the acquisition of
other real estate owned. The Banks net interest margin has increased for the three month period
ended March 31, 2004 compared to the period. Certificates repriced to lower
rates in the third and fourth quarter of 2003 and the current period. This
repricing caused this positive variance compared to the same period in 2003. The
Company recorded income taxes of $109,906 for the first quarter of
2004 compared to $21,704 during the same period last year. Mortgage-backed
securities with a total par value of $12.4 million were sold on April
5, 2004, resulting in a pre-tax loss on sale of $296,000. These
securities are being replaced with US Agency bonds that have less
exposure to price volatility caused by changes in market rates and
more predictable cash flow streams. Prior
to the signing of the merger agreement with First Capital Bancorp,
Inc., the company entered into certain contracts with various data
processing service providers to convert to another data processing
system. Both First Capital Bancorp, Inc. and the company are
currently evaluating whether to convert to the new data processing
system. As of March 31, 2004, the company has capitalized
approximately $309,000 of costs related to the conversion. If the
company decides not to convert to the new data processing system,
these costs plus an additional estimated maximum cost of $240,000 to
cancel these contracts may be expensed in the period in which the
decision is made. ITEM 3. CONTROLS
AND PROCEDURES. Management has developed and implemented a policy and procedures for
reviewing disclosure controls and procedures and internal controls over
financial reporting on a quarterly basis. As of March 31, 2004, management,
including the Companys principal executive and financial officer, evaluated
the effectiveness of the design and operation of disclosure controls and
procedures, and, based on its evaluation, the principal executive and financial
officer has concluded that these controls and procedures are operating
effectively. There were no significant changes in the Companys internal
controls over financial reporting or in other factors that could significantly
affect these controls during the first quarter of 2004. Management noted no
significant deficiencies in the design or operation of the Companys internal
controls and the Companys auditors were so advised. Disclosure controls and procedures are the Companys controls and other
procedures that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files under the Exchange Act is accumulated and
communicated to management, including the principal executive and financial
officer, as appropriate to allow timely decisions regarding required
disclosure. 12




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##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The following exhibits are filed with this Report: Exhibit No.
    
    Description31.1
    
    Rule 13a-14(a) Certification32.1
    
    Section 1350 Certification
 (b) Reports on Form 8-K. On February 20, 2004, the Company furnished an 8-K
regarding its press release announcing financial results for the year-ended
December 31, 2003. In addition, on March 12, 2004 the Company filed an 8-K
regarding the resignation of W. David Sweatt from the Board of Directors. 13




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Date: May 13, 2004
    
    By:
    
    /s/ H. N. Padget, Jr.H. N. Padget, Jr., President and Chief Executive Officer(principal executive officer, principal financial and accountingofficer)
 14