##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB  x
    Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the quarterly period ended
September 30, 2004  o
    Transition report under Section 13 or 15(d) of the
Exchange Act for the transition period from to Commission file number: 000-23991 CNB HOLDINGS, INC.  Georgia
    
    58-2362335(State of Incorporation)
    
    (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 x 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 November 12, 2004Common Stock, $1.00 par value
    
    5,015,851
 Transitional Small Business Disclosure Format: Yes o No x




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CNB HOLDINGS, INC. TABLE OF CONTENTS Page No.PART I. FINANCIAL INFORMATIONItem 1. FINANCIAL STATEMENTSConsolidated Balance Sheet  September 30, 2004 (Unaudited)
    
    
    3Consolidated Statements of Income (Unaudited)-
Three and nine months ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Comprehensive Income (Unaudited)-
Three and nine months ended September 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows (Unaudited)-
Nine months ended September 30, 2004 and 2003
    
    
    6-7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8-11Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12-20Item 3. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 6. Exhibits
    
    
    23Signatures
    
    
    24EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO AND CFO
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS. CNB HOLDINGS, INC.
AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEET
 September 30, 2004
(Unaudited)
 ASSETSCash and due from banks
    
    $
    12,667,995Interest bearing deposits in banks
    
    
    1,350,000Federal funds sold and overnight investments
    
    
    2,872,578Investment securities:Securities available-for-sale, at market value
    
    
    143,301,247Securities held-to-maturity, estimated fair value of
$7,496,996
    
    
    7,334,837Restricted equity securities
    
    
    8,030,900Loans net of deferred loan fees and allowance for loan losses
of $5,747,513
    
    
    459,055,143Premises and equipment (net)
    
    
    816,157Goodwill
    
    
    7,199,056Core deposit intangible
    
    
    1,175,171Other assets
    
    
    11,656,878TOTAL ASSETS
    
    $
    655,459,962LIABILITIESDeposits:Non interest-bearing demand
    
    $
    67,159,927Interest-bearing demand and money market
    
    
    121,188,648Savings
    
    
    82,585Time deposits of $100,000 or more
    
    
    134,008,242Other time deposits
    
    
    121,539,076Total deposits
    
    
    443,978,478Federal funds purchased and securities sold under
repurchase agreements
    
    
    9,732,460Other borrowings
    
    
    135,514,256Other liabilities
    
    
    3,958,321Subordinated debt
    
    
    6,392,000TOTAL LIABILITIES
    
    
    599,575,515SHAREHOLDERS EQUITYPreferred stock, no par value;10,000,000 shares authorized, no shares issued
and outstanding
    
    
    Common stock, par value $1 per share;10,000,000 shares authorized; 5,160,167 issued
    
    
    5,160,167Surplus
    
    
    35,895,810Treasury stock
    
    
    (1,134,063
    )Unearned ESOP shares
    
    
    (399,998
    )Retained earnings
    
    
    16,221,134Accumulated other comprehensive income
    
    
    141,397TOTAL SHAREHOLDERS EQUITY
    
    
    55,884,447TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    655,459,962
 See notes to the consolidated financial statements. 3




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##### Table of Contents



CNB HOLDINGS, INC.
AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 FOR THE
    
    FOR THETHREE-MONTH
    
    NINE-MONTHPERIOD ENDED
    
    PERIOD ENDEDSEPTEMBER 30,
    
    SEPTEMBER 30,2004
    
    2003
    
    2004
    
    2003Interest Income:Loans and leases, including fees
    
    $
    6,600,507
    
    
    $
    3,630,235
    
    
    $
    16,231,552
    
    
    $
    11,512,439Investment securities:U.S. Treasury and government agencies
    
    
    391,377
    
    
    
    175,948
    
    
    
    827,174
    
    
    
    615,373Mortgage-backed securities
    
    
    1,065,781
    
    
    
    495,772
    
    
    
    2,685,025
    
    
    
    1,431,132Other investments
    
    
    267,255
    
    
    
    321,367
    
    
    
    855,479
    
    
    
    955,190Interest-bearing deposits in banks
    
    
    5,823
    
    
    
    
    
    
    
    11,777
    
    
    
    Federal funds sold and overnight investments
    
    
    11,263
    
    
    
    2,577
    
    
    
    36,729
    
    
    
    25,762Total interest income
    
    
    8,342,006
    
    
    
    4,625,899
    
    
    
    20,647,736
    
    
    
    14,539,896Interest expense:Interest-bearing demand, money market and savings
    
    
    229,629
    
    
    
    106,166
    
    
    
    566,478
    
    
    
    395,997Time deposits of $100,000 or more
    
    
    803,199
    
    
    
    857,646
    
    
    
    2,451,184
    
    
    
    2,703,411Other time deposits
    
    
    816,713
    
    
    
    586,194
    
    
    
    1,904,409
    
    
    
    1,882,382Federal funds purchased, securities sold under repurchase
agreements and other borrowings
    
    
    1,063,608
    
    
    
    868,307
    
    
    
    3,255,940
    
    
    
    2,982,266Total interest expense
    
    
    2,913,149
    
    
    
    2,418,313
    
    
    
    8,178,011
    
    
    
    7,964,056Net interest income
    
    
    5,428,857
    
    
    
    2,207,586
    
    
    
    12,469,725
    
    
    
    6,575,840Provision for loan losses
    
    
    175,000
    
    
    
    
    
    
    
    1,025,000
    
    
    
    100,000Net interest income after provision for loan losses
    
    
    5,253,857
    
    
    
    2,207,586
    
    
    
    11,444,725
    
    
    
    6,475,840Other income:Service charges on deposit accounts
    
    
    28,661
    
    
    
    22,773
    
    
    
    64,875
    
    
    
    60,462Loan servicing fee income
    
    
    95,425
    
    
    
    1,351
    
    
    
    185,838
    
    
    
    4,139Mortgage origination fees
    
    
    88,500
    
    
    
    
    
    
    
    130,450
    
    
    
    Gains on sale of loans (net)
    
    
    143,912
    
    
    
    
    
    
    
    176,163
    
    
    
    Gains (losses) on sale of securities available-for-sale (net)
    
    
    (32,040
    )
    
    
    20,489
    
    
    
    (32,040
    )
    
    
    (28,237
    )Other income
    
    
    92,596
    
    
    
    71,035
    
    
    
    191,349
    
    
    
    213,603Total other income
    
    
    417,054
    
    
    
    115,648
    
    
    
    716,635
    
    
    
    249,967Other expense:Salaries and other compensation
    
    
    2,399,719
    
    
    
    1,110,987
    
    
    
    5,405,898
    
    
    
    3,167,468Net occupancy and equipment expense
    
    
    384,078
    
    
    
    142,117
    
    
    
    761,705
    
    
    
    427,809Other expense
    
    
    1,173,650
    
    
    
    484,195
    
    
    
    2,673,342
    
    
    
    1,366,228Total other expenses
    
    
    3,957,447
    
    
    
    1,737,299
    
    
    
    8,840,945
    
    
    
    4,961,505Net income before income tax
    
    
    1,713,464
    
    
    
    585,935
    
    
    
    3,320,415
    
    
    
    1,764,302Income tax expense
    
    
    612,692
    
    
    
    213,290
    
    
    
    1,172,745
    
    
    
    640,563Net income
    
    $
    1,100,772
    
    
    $
    372,645
    
    
    $
    2,147,670
    
    
    $
    1,123,739Basic earnings per share
    
    $
    0.22
    
    
    $
    0.17
    
    
    $
    0.62
    
    
    $
    0.52Fully diluted earnings per share
    
    $
    0.21
    
    
    $
    0.16
    
    
    $
    0.60
    
    
    $
    0.47Cash dividends per common share
    
    $
    
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.10
 See notes to the consolidated financial statements. 4




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CNB HOLDINGS, INC.
AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 FOR THE
    
    FOR THETHREE-MONTH
    
    NINE-MONTHPERIOD ENDED
    
    PERIOD ENDEDSEPTEMBER 30,
    
    SEPTEMBER 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    1,100,772
    
    
    $
    372,645
    
    
    $
    2,147,670
    
    
    $
    1,123,739Other comprehensive income (loss):Unrealized holding gains (losses) on securities available-for-sale:Unrealized holding gains (losses) arising during
period,
net of tax
    
    
    1,508,717
    
    
    
    (867,277
    )
    
    
    201,016
    
    
    
    (615,980
    )Reclassification adjustment for (gains) losses
realized in
net income, net of tax
    
    
    20,506
    
    
    
    (13,113
    )
    
    
    20,506
    
    
    
    18,071Unrealized gains (losses) on cash flow hedges,
net of tax
    
    
    (22,142
    )
    
    
    
    
    
    
    (25,350
    )
    
    
    Other comprehensive income (loss)
    
    
    1,507,081
    
    
    
    (880,390
    )
    
    
    196,172
    
    
    
    (597,909
    )Comprehensive income (loss)
    
    $
    2,607,853
    
    
    $
    (507,745
    )
    
    $
    2,343,842
    
    
    $
    525,830
 See notes to the consolidated financial statements. 5




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##### Table of Contents



CNB HOLDINGS, INC.
AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 FOR THENINE-MONTHPERIOD ENDEDSEPTEMBER 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    2,147,670
    
    
    $
    1,123,739Adjustments to reconcile net income to net cash provided by operating activities:Net (accretion) amortization of investment securities
    
    
    (91,861
    )
    
    
    792,350Depreciation and amortization
    
    
    363,409
    
    
    
    147,395Gain on sale of other real estate
    
    
    (9,097
    )
    
    
    Net loss on sales of available-for-sale securities
    
    
    32,040
    
    
    
    28,237Net gain on sales of premises and equipment
    
    
    
    
    
    
    (9,675
    )Provision for loan losses
    
    
    1,025,000
    
    
    
    100,000Increase in other assets
    
    
    (1,247,016
    )
    
    
    (81,654
    )Decrease in other liabilities
    
    
    (2,054,676
    )
    
    
    (773,502
    )Net cash provided by operating activities
    
    
    165,469
    
    
    
    1,326,890Cash flows from investing activities:Proceeds from maturities of investment securities available-for-sale
    
    
    3,410,000
    
    
    
    29,487,500Principal repayments from mortgage-backed securities
    
    
    22,976,990
    
    
    
    31,204,580Purchases of investment securities available-for-sale
    
    
    (28,508,129
    )
    
    
    (93,710,947
    )Purchases of investment securities held-to-maturity
    
    
    
    
    
    
    (250,000
    )Purchases of restricted equity securities
    
    
    (523,000
    )
    
    
    (1,006,001
    )Proceeds from sales of investment securities available-for-sale
    
    
    1,475,437
    
    
    
    2,055,517Net (increase) decrease in loans
    
    
    (54,351,681
    )
    
    
    215,095Net cash acquired in business combination
    
    
    6,462,635
    
    
    
    Proceeds from the sale of other real estate owned
    
    
    1,085,539
    
    
    
    Purchases of premises and equipment
    
    
    (619,660
    )
    
    
    (134,741
    )Proceeds from sale of premises and equipment
    
    
    
    
    
    
    11,588Net cash used in investing activities
    
    
    (48,591,869
    )
    
    
    (32,127,409
    )Cash flows from financing activities:Net increase in deposits
    
    
    35,044,293
    
    
    
    10,430,466Net decrease in federal funds purchased and securities sold under repurchase
agreements
    
    
    (2,432,540
    )
    
    
    (15,700,000
    )Net proceeds from advances from Federal Home Loan Bank
    
    
    9,385,717
    
    
    
    35,769,800Net decrease in other borrowings
    
    
    (4,000,000
    )
    
    
    Proceeds from rights offering
    
    
    14,887,467
    
    
    
    Payment for fractional shares
    
    
    (49
    )
    
    
    Proceeds from sale of treasury stock
    
    
    56,109
    
    
    
    Proceeds from exercise of common stock options
    
    
    277,646
    
    
    
    Cash dividends paid on common stock
    
    
    
    
    
    
    (225,001
    )Net cash provided by financing activities
    
    
    53,218,643
    
    
    
    30,275,265Net increase (decrease) in cash and cash equivalents
    
    
    4,792,243
    
    
    
    (525,254
    )Cash and cash equivalents, beginning of period
    
    
    12,098,330
    
    
    
    7,754,964Cash and cash equivalents, end of period
    
    $
    16,890,573
    
    
    $
    7,229,710
 6




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##### Table of Contents



Acquisition of subsidiaryCapital stock issued
    
    $
    15,989,831Assets acquired (liabilities assumed)Cash and due from banks
    
    
    1,162,669Federal funds sold and overnight investments
    
    
    5,299,966Securities available-for-sale
    
    
    36,872,956Restricted equity securities
    
    
    1,506,000Derivative
    
    
    31,986Loans, net
    
    
    102,995,192Premises and equipment
    
    
    124,085Goodwill
    
    
    7,144,056Core deposit intangible
    
    
    1,273,676Other assets
    
    
    7,195,505Deposits
    
    
    (116,397,828
    )Other borrowings
    
    
    (26,986,639
    )Other liabilities
    
    
    (4,231,793
    )$
    15,989,831
 See notes to the consolidated financial statements. 7




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##### Table of Contents



CNB HOLDINGS, INC.
AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements for CNB Holdings,
Inc. and subsidiaries (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 nine and
three month periods ended September 30, 2004 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004. At September 30, 2004, the Company had two wholly-owned bank subsidiaries,
Chattahoochee National Bank and First Capital Bank, and two
wholly-owned non-bank subsidiaries, Capital Financial Software, LLC, a limited liability company
which markets and provides support of its software used by bankruptcy trustees
and First Capital Statutory Trust I, a grantor trust formed to issue cumulative
trust preferred securities. The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, with all significant intercompany accounts and
transactions eliminated in consolidation. NOTE 2  MERGER WITH FIRST CAPITAL BANCORP, INC. On May 28, 2004, the Company acquired all of the outstanding common stock of
First Capital Bancorp, Inc. (FCB). For accounting purposes, the acquisition
has been treated as a recapitalization of FCB with FCB as the acquirer (reverse
acquisition). The historical financial statements prior to May 28, 2004 are
those of FCB. The discussion of financial condition and results of operations
for the nine-month period ended September 30, 2004 include nine months of
operations for FCB and the two non-bank subsidiaries, and four months of
operations for CNB Holdings, Inc. The results of operations for the quarter
ended September 30, 2004 include three months of operations for FCB and the two
non-bank subsidiaries, and three months of operations for CNB Holdings, Inc.
The results of operations for the periods ended September 30, 2003 include only
the operations of FCB and the two non-bank subsidiaries. The aggregate purchase price was $15,989,831. The purchase price was
determined based on the average market price of CNB Holdings, Inc.s common
stock over the 2-day period before and after the terms of the acquisition were
agreed to and announced. The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition. While the Company obtained
third-party valuations of the core deposit intangible and other fair value
adjustments, the allocation of the purchase price is subject to adjustment
based on final valuations and the final determination of acquisition costs. 8




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##### Table of Contents



Cash, due from banks, Federal funds sold and overnight investments
    
    $
    6,462,635Securities available-for-sale
    
    
    36,872,956Restricted equity securities
    
    
    1,506,000Loans
    
    
    102,995,192Premises and equipment
    
    
    124,085Core deposit intangible
    
    
    1,273,676Goodwill
    
    
    7,144,056Other assets
    
    
    7,227,491Total assets acquired
    
    $
    163,606,091Deposits
    
    
    116,397,828Other borrowings
    
    
    26,986,639Other liabilities
    
    
    4,231,793Total liabilities assumed
    
    $
    147,616,260Net assets acquired
    
    $
    15,989,831
 The $1,273,676 core deposit intangible asset has a weighted-average life of
approximately 4.3 years. The core deposit intangible asset is being amortized
over the weighted average life using the straight-line method, which is not
materially different than the interest method. The $7,144,056 of goodwill was assigned to CNB. Of that total amount, none is
expected to be deductible for income tax purposes. 9




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##### Table of Contents



NOTE 3  EARNINGS PER COMMON SHARE Earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of shares outstanding during the
period, which totaled 4,955,270 and 3,456,015 shares for the three months and
the nine months ended September 30, 2004, respectively. The average number of
shares outstanding totaled 2,155,977 and 2,155,977 for the three months and the
nine months ended September 30, 2003, respectively. Presented below is a summary of the components used to calculate basic and diluted earnings per common share. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Basic Earnings Per Share:Weighted average common shares outstanding
    
    
    4,955,270
    
    
    
    2,155,977
    
    
    
    3,456,015
    
    
    
    2,155,977Net income
    
    $
    1,100,772
    
    
    $
    372,645
    
    
    $
    2,147,670
    
    
    $
    1,123,739Basic earnings per share
    
    $
    0.22
    
    
    $
    0.17
    
    
    $
    0.62
    
    
    $
    0.52Diluted Earnings Per Share:Weighted average common shares outstanding
    
    
    4,955,270
    
    
    
    2,155,977
    
    
    
    3,456,015
    
    
    
    2,155,977Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the year
    
    
    172,651
    
    
    
    56,838
    
    
    
    122,472
    
    
    
    54,698Shares held by rabbi trust
    
    
    10,887
    
    
    
    
    
    
    
    10,887
    
    
    
    Net effect of the assumed conversion of
subordinated convertible debentures
    
    
    
    
    
    
    332,224
    
    
    
    
    
    
    
    332,224Total weighted average common shares and
common stock equivalents outstanding
    
    
    5,138,808
    
    
    
    2,545,039
    
    
    
    3,589,374
    
    
    
    2,542,899Net income as reported
    
    $
    1,100,772
    
    
    $
    372,645
    
    
    $
    2,147,670
    
    
    $
    1,123,739Net effect of the assumed conversion of
subordinated convertible debentures
    
    
    
    
    
    
    26,907
    
    
    
    
    
    
    
    75,284Net income adjusted for the effect of the assumed
conversion of convertible subordinated debentures
    
    $
    1,100,772
    
    
    $
    399,552
    
    
    $
    2,147,670
    
    
    $
    1,199,023Diluted earnings per share
    
    $
    0.21
    
    
    $
    0.16
    
    
    $
    0.60
    
    
    $
    0.47
 10




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##### Table of Contents



NOTE 4  STOCK COMPENSATION PLANS The Company has two stock-based employee compensation plans for granting
options to directors and employees. 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. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    1,100,772
    
    
    $
    372,645
    
    
    $
    2,147,670
    
    
    $
    1,123,739Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards
    
    
    5,616
    
    
    
    5,616
    
    
    
    30,698
    
    
    
    31,689Pro forma net income
    
    $
    1,095,156
    
    
    $
    367,029
    
    
    $
    2,116,972
    
    
    $
    1,092,050Earnings per share:Basic  as reported
    
    $
    0.22
    
    
    $
    0.17
    
    
    $
    0.62
    
    
    $
    0.52Basic  pro forma
    
    
    0.22
    
    
    
    0.17
    
    
    
    0.61
    
    
    
    0.51Fully diluted  as reported
    
    
    0.21
    
    
    
    0.16
    
    
    
    0.60
    
    
    
    0.47Fully diluted  pro forma
    
    $
    0.21
    
    
    $
    0.15
    
    
    $
    0.59
    
    
    $
    0.46
 NOTE 5  RECENT ACCOUNTING STANDARDS In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51, and on December
24, 2003, the FASB issued FASB Interpretation No. 46 (Revised December 2003),
Consolidation of Variable Interest Entities which replaced FIN 46. The
Company adopted the reporting requirements of FIN 46R as of January 1, 2004.
In accordance with FIN 46R, trust preferred securities were deconsolidated as
of January 1, 2004 and reported as other liabilities on the consolidated
balance sheet. The interpretations have not had a material effect on the
Companys financial condition or results of operations. NOTE 6  RECLASSIFICATION OF CERTAIN INCOME AND EXPENSES Certain income and expenses on the statements of income for periods prior to
September 30, 2004 have been reclassified, with no effect on net income or
earnings per common share, to be consistent with the classifications adopted
for the periods ended September 30, 2004. 11




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain of the matters discussed in this Report and in documents incorporated
by reference herein, including matters discussed under the caption
Managements Discussion and Analysis of Financial Condition and Results of
Operations, as well as oral statements made by the Company or its officers,
directors or employees, may constitute forward-looking statements for the
purposes of the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended, and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. The words expect, anticipated, intend, plan, believe,
seek, estimate, and similar expressions are intended to identify such
forward-looking statements. The Companys actual results may differ materially
from the results anticipated in these forward-looking statements due to a
variety of factors, including, without limitation (a) the effects of future
economic conditions on the Company and its customers; (b) the costs and effects
of litigation and of unexpected or adverse outcomes in such litigation; (c)
governmental monetary and fiscal policies, as well as legislative and
regulatory changes; (d) the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies, as well as the
Financial Accounting Standards Board and other accounting standard setters; (e)
the risks of changes in interest rates on the level and composition of
deposits, loan demand, and the values of loan collateral, securities and
interest rate protection agreements, as well as interest rate risks; (f) the
effects of competition from other commercial banks, thrifts, mortgage banking
firms, consumer finance companies, credit unions, securities brokerage firms,
insurance companies, money market and other mutual funds and other financial
institutions operating in the Companys market area and elsewhere, including
institutions operating locally, regionally, nationally and internationally,
together with such competitors offering banking products and services by mail,
telephone, computer and the internet; (g) technological changes; (h)
acquisition and integration of acquired businesses; (i) the failure of
assumptions underlying the establishment of reserves for loan losses and
estimations of values of collateral in various financial assets and
liabilities; (j) acts of war or terrorism. All written or oral forward-looking
statements attributable to the Company are expressly qualified in their
entirety by these cautionary statements. Critical Accounting Estimates The accounting and financial reporting policies of the Company conform to
accounting principles generally accepted in the United States of America and to
general practices within the banking industry. Following is a description of
the accounting policies applied by the Company, which are deemed critical. In
determining which accounting policies are critical in nature, the Company has
identified the policies that require significant judgment or involve complex
estimates. The application of these policies has a significant impact on the
Companys financial statements. Financial results could differ significantly if
different judgments or estimates are applied. Allowance for loan losses. The allowance for loan losses is maintained at a
level, which, in managements judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
managements evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. A loan is considered impaired when
management has determined it is possible that all amounts due according to the
contractual terms of the loan agreement will not be collected. The allowance
is increased by a provision for loan losses, which is charged to expense and
reduced by charge-offs, net of recoveries. 12




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##### Table of Contents



FINANCIAL CONDITION Management continuously monitors the financial condition of the Company in
order to protect depositors, increase retained earnings and protect current and
future earnings. Further discussion of significant items affecting the
Companys financial condition is presented below. On September 30, 2004 total assets were $655.5 million, compared to $439.4
million on December 31, 2003, an increase of $216.1 million, or 49.2%. Most of
this growth occurred in loans, which increased $156.4 million, or 51.7% from
$302.7 million on December 31, 2003 to $459.1 million on September 30, 2004.
Of the increase, $102.4 million was attributable to CNB. Investment securities
increased $39.9 million, or 33.6%, from $118.8 million on December 31, 2003 to
$158.7 million on September 30, 2004. Of the increase, $38.8 million was
attributable to CNB. Goodwill and core deposit intangibles were $7.2 million
and $1.2 million, respectively, on September 30, 2004, compared to $0.1 million
and zero, respectively, on December 31, 2003. All of the growth in goodwill
and core deposits intangibles was due to the combination of FCB and CNB. On September 30, 2004 total liabilities were $599.6 million, compared to $418.8
million on December 31, 2003, an increase of $180.8 million, or 43.2%. The
majority of this growth occurred in deposits, which increased $151.5 million,
or 51.8% from $292.5 million on December 31, 2003 to $444.0 million on
September 30, 2004. Non-interest bearing demand deposits grew from $28.7
million or 9.8% of total deposits on December 30, 2003 to $67.2 million or
15.1% of total deposits on September 30, 2004. Included in the deposit growth
was $114.9 million in total deposits and $17.1 million in non-interest bearing
demand deposits that was attributable to CNB. Federal funds purchased,
securities sold under repurchase agreements and other borrowings were $145.2
million on September 30, 2004, compared to $118.0 million on December 31, 2003,
an increase of $27.2 million, or 23.1%. Included in this increase was $30.7
million attributable to CNB. On September 30, 2004, total shareholders equity was $55.9 million, compared
to $20.6 million on December 31, 2003, an increase of $35.3 million, or 171.4%.
The increase resulted primarily from the combination of FCB and CNB, the
rights offering that was completed in the second quarter of 2004, and retained
net profits. Allowance for Loan Losses The allowance for loan losses as of September 30, 2004 was $5.7 million. The
allowance for loan losses, as a percentage of total gross loans, at September
30, 2004 was 1.2%. Our provision for loan losses increased by $175,000 during
the three months ended September 30, 2004 as compared to the same period in
2003. Our provision for loan losses increased by $925,000 during the nine
months ended September 30, 2004 as compared with the same period in 2003.
These increases are attributable to the significant loan growth experienced in
2004. During the second quarter of 2004, a review of Chattahoochee National
Banks loan portfolio by an independent firm was conducted. The purpose of
this review, which is conducted regularly, was to assess the risk in the loan
portfolio and to determine the adequacy of the allowance for loan losses. The
review included 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. An
independent firm conducted a similar review of First Capital Banks loan
portfolio during the fourth quarter of 2003, and the next review is scheduled
to be conducted during the fourth quarter of 2004. The Company plans to
continue engaging, on an annual basis, an independent firm to review the
Companys loan portfolio. In addition to the independent reviews, the
Companys regulators also conduct annual examinations of the loan portfolio.
Upon completion, the regulator presents its report of findings to the Companys
Board of Directors and management. Information provided from these independent
sources, together with information provided by management and other information
known to the Companys Board of Directors, is utilized by the Board of
Directors to monitor, on a quarterly basis, the loan portfolio. Specifically,
the Company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 13




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##### Table of Contents



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. Management considers the allowance for loan losses to be adequate; 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. The following table summarizes the allowance for loan losses for the nine-month
periods ended September 30, 2004 and 2003. 2004
    
    2003(Dollars in thousands)Average amount of loans outstanding
    
    $
    392,923
    
    
    $
    274,761Allowance for loan losses balance, beginning of period
    
    $
    3,306
    
    
    $
    3,356Less charge-offsCommercial loans
    
    
    
    
    
    
    Real estate loans
    
    
    
    
    
    
    (150
    )Consumer loans
    
    
    
    
    
    
    Total charge-offs
    
    
    
    
    
    
    (150
    )Plus recoveriesCommercial loans
    
    
    
    
    
    
    Real estate loans
    
    
    
    
    
    
    Consumer loans
    
    
    
    
    
    
    Total recoveries
    
    
    
    
    
    
    Net charge-offs
    
    
    
    
    
    
    (150
    )Plus provision for loan losses
    
    
    1,025
    
    
    
    100Plus amount acquired in business combination
    
    
    1,416
    
    
    
    Allowance for loan losses balance, end of period
    
    $
    5,747
    
    
    $
    3,306Net charge-offs to average loans
    
    
    
    %
    
    
    .05
    %
 14




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##### Table of Contents



The following table is a summary of nonaccrual, past due and restructured debt. September 30, 2004Past DueNonaccrual
    
    90 Days
    
    RestructuredLoans
    
    Still Accruing
    
    Debt(Dollars in thousands)Real estate loans
    
    $
    684
    
    
    $
    
    
    
    $
    Commercial loans
    
    
    1,111
    
    
    
    
    
    
    
    Consumer loans
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,795
    
    
    $
    
    
    
    $
    
 September 30, 2003Past DueNonaccrual
    
    90 Days
    
    RestructuredLoans
    
    Still Accruing
    
    Debt(Dollars in thousands)Real estate loans
    
    $
    93
    
    
    $
    62
    
    
    $
    Commercial loans
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    93
    
    
    $
    62
    
    
    $
    
 Accrual of interest is discontinued on a loan when management determines, upon
consideration of economic and business factors affecting collection efforts,
that collection of interest is doubtful. The $1.8 million in nonaccrual loans
at September 30, 2004 included $1.5 million in SBA loans, of which SBA
guaranteed $0.9 million, and $0.2 million in loans secured by real estate.
Therefore, our exposure to losses is considered minimal. Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been included in the table above do not represent
or result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity or capital resources.
These classified loans do not represent material credits about which management
is aware of any information that causes management to have serious doubts as to
the ability of such borrowers to comply with their loan repayment terms, except
as noted above. Liquidity and Sources of Capital Liquidity involves the Companys ability to maintain adequate cash flows to
fund operations and meet obligations and other commitments on a timely and
cost-effective basis. While the desired level of liquidity will vary depending
upon a variety of factors, managements primary goal is to maintain a
sufficient level of liquidity in all expected economic environments. Daily
monitoring of the sources and uses of funds is necessary to maintain a position
that meets these requirements. The Companys primary sources of liquidity are customer deposits, other
borrowings, loan repayments and securities available for sale. If additional
funding sources are needed, the Company has access to federal fund lines at
correspondent banks and borrowings from the Federal Reserve discount window.
Additionally, First Capital Bank and Chattahoochee National Bank are members of
the Federal Home Loan Bank of Atlanta, which provides 15




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##### Table of Contents



access to FHLB lending sources. Lines of credit with the FHLB totaling $248.6
million were available on September 30, 2004, of which $135.5 million was
outstanding. The Company also had federal funds back-up lines of credit
totaling $39.0 million, of which $8.5 million was outstanding on September 30,
2004. In order to enhance the Companys capital position, the Company completed a
rights offering to CNB and FCB shareholders during the second quarter. The
Company issued 1.25 million shares of its common stock at a price of $12.00 per
share, or $15 million. As of September 30, 2004, First Capital Bank and Chattahoochee National Bank
were considered to be well capitalized as defined in the Federal Deposit
Insurance Corporation Improvement Act and based on regulatory minimum capital
requirements. The Company and its bank subsidiaries actual capital ratios are
presented in the following table. FOR CAPITAL
    
    TO BEADEQUACY
    
    WELLACTUAL
    
    PURPOSES
    
    CAPITALIZEDAs of September 30, 2004Total Capital to Risk Weighted Assets:Consolidated
    
    
    11.13
    %
    
    
    8
    %
    
    
    N/AChattahoochee National Bank
    
    
    10.39
    %
    
    
    8
    %
    
    
    10
    %First Capital Bank
    
    
    11.18
    %
    
    
    8
    %
    
    
    10
    %Tier I Capital to Risk Weighted Assets:Consolidated
    
    
    10.04
    %
    
    
    4
    %
    
    
    N/AChattahoochee National Bank
    
    
    9.14
    %
    
    
    4
    %
    
    
    6
    %First Capital Bank
    
    
    10.14
    %
    
    
    4
    %
    
    
    6
    %Tier I Capital to Average Assets:Consolidated
    
    
    8.37
    %
    
    
    4
    %
    
    
    N/AChattahoochee National Bank
    
    
    6.81
    %
    
    
    4
    %
    
    
    5
    %First Capital Bank
    
    
    8.68
    %
    
    
    4
    %
    
    
    5
    %
 We are not aware of any other known trends, events or uncertainties, other than
the effect of events as described above, that will have or that are reasonably
likely to have a material effect on our liquidity, capital resources or
operations. We are not aware of any current recommendations by the regulatory
authorities, which, if they were implemented, would have such an effect, except
as noted above. Off-Balance Sheet Arrangements The Companys financial statements do not reflect various commitments and
contingent liabilities that arise in the normal course of business. These
off-balance-sheet financial instruments include commitments to extend credit
and standby letters of credit. These financial instruments are included in the
financial statements when funds are distributed or the instruments become
payable. We use the same credit policies in making commitments as we do for
on-balance-sheet instruments. Our exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to extend credit, standby letters of credit and credit card commitments is
represented by the contractual amount of those instruments. At September 30,
2004, we had outstanding commitments to extend credit of approximately $162.7
million and outstanding standby letters of credit of approximately $4.2
million. 16




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##### Table of Contents



RESULTS OF OPERATIONS Three-Month Period Ended September 30, 2004 Net income for the quarter ended September 30, 2004 totaled $1,101,000, or
$0.22 per basic and $0.21 per fully diluted share compared to $373,000, or
$0.17 per basic and $0.16 per fully diluted share for the same period in 2003. Net interest income (the difference between the interest earned on assets and
the interest paid on deposits and other liabilities) is the single largest
component of the Companys revenue. The Company actively manages this revenue
source to provide an optimal level of revenue while balancing interest rate,
credit and liquidity risks. Since market forces and economic conditions beyond
the Companys control determine interest rates, the ability to generate net
interest income depends upon managements ability to maintain an adequate
spread between the average rate paid on interest-bearing liabilities and the
average rate earned on interest-earning assets. Presented below are various components of assets and liabilities, interest
income and expense as well as their yield/cost for the quarters ended September
30, 2004 and 2003. Three Months Ended September 30,2004
    
    2003Average
    
    
    
    
    
    
    
    
    
    AverageBalances
    
    Income/
    
    Yields/
    
    Balances
    
    Income/
    
    Yields/(1)
    
    Expense
    
    Rates
    
    (1)
    
    Expense
    
    Rates(Dollars in Thousands)Federal funds sold and
interest-bearing deposits
    
    $
    5,356
    
    
    $
    17
    
    
    
    1.26
    %
    
    $
    974
    
    
    $
    3
    
    
    
    1.22
    %Securities (2)
    
    
    155,625
    
    
    
    1,724
    
    
    
    4.40
    
    
    
    118,923
    
    
    
    993
    
    
    
    3.31Loans, net of deferred fees (3)(4)
    
    
    458,192
    
    
    
    6,601
    
    
    
    5.72
    
    
    
    268,278
    
    
    
    3,630
    
    
    
    5.37Total earning assets
    
    
    619,173
    
    
    
    8,342
    
    
    
    5.35
    %
    
    
    388,175
    
    
    
    4,626
    
    
    
    4.73
    %Unrealized gains (losses) on
securities (2)
    
    
    (936
    )
    
    
    
    
    
    
    
    
    
    
    (87
    )Allowance for loan losses
    
    
    (5,625
    )
    
    
    
    
    
    
    
    
    
    
    (3,397
    )Cash and due from banks
    
    
    10,934
    
    
    
    
    
    
    
    
    
    
    
    5,850Other assets
    
    
    19,388
    
    
    
    
    
    
    
    
    
    
    
    5,257Total
    
    $
    642,934
    
    
    
    
    
    
    
    
    
    
    $
    395,798Transaction and money market deposits
    
    $
    114,013
    
    
    $
    229
    
    
    
    .80
    %
    
    $
    69,101
    
    
    $
    106
    
    
    
    .61
    %Time deposits
    
    
    261,738
    
    
    
    1,620
    
    
    
    2.46
    
    
    
    180,055
    
    
    
    1,444
    
    
    
    3.18Other borrowings
    
    
    137,637
    
    
    
    920
    
    
    
    2.65
    
    
    
    100,610
    
    
    
    737
    
    
    
    2.91Subordinated debt
    
    
    6,392
    
    
    
    144
    
    
    
    8.94
    
    
    
    6,392
    
    
    
    131
    
    
    
    8.13Total interest-bearing liabilities
    
    
    519,780
    
    
    
    2,913
    
    
    
    2.22
    %
    
    
    356,158
    
    
    
    2,418
    
    
    
    2.69
    %Non interest-bearing demand deposits
    
    
    65,206
    
    
    
    
    
    
    
    
    
    
    
    18,849Other liabilities
    
    
    3,258
    
    
    
    
    
    
    
    
    
    
    
    1,672Shareholders equity
    
    
    54,690
    
    
    
    
    
    
    
    
    
    
    
    19,119Total
    
    $
    642,934
    
    
    
    
    
    
    
    
    
    
    $
    395,798Net interest income
    
    
    
    
    
    
    5,429
    
    
    
    
    
    
    
    
    
    
    
    2,208Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.13
    %
    
    
    
    
    
    
    
    
    
    
    2.04
    %Net yield on average
interest-earning assets
    
    
    
    
    
    
    
    
    
    
    3.48
    %
    
    
    
    
    
    
    
    
    
    
    2.26
    %
  (1)
    
    Average balances are daily averages.  (2)
    
    Securities available for sale are reported at amortized cost.  (3)
    
    Loans include non-accrual loans and are net of deferred fees.  (4)
    
    Interest and fees on loans includes fees of $407,000 and $267,000 for the quarters ended September 30, 2004 and 2003, respectively. Net interest income totaled $5,429,000 for the quarter ended September 30,
2004, an increase of $3,221,000, or 145.9% over the same period in 2003.
$1,541,000 of the increase was attributable to CNB. Average interest-earning
assets increased $231.0 million, or 59.5% over 2003, reflecting growth in both
the loan and securities portfolios. CNB contributed $148.0 million of the
total growth in interest-earning assets. Exclusive of this growth, 17




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##### Table of Contents



loans increased $87.2 million on average and securities decreased $1.4 million
on average from period to period. The significant growth in our loan portfolio
is the result of the purchase of a $20 million loan portfolio, combined with
strong loan demand in our market area. Our primary interest-earning assets are
loans, which represented 74.0% of average interest-earning assets at September
30, 2004, compared to 69.1% at September 30, 2003. The increase in interest-earning assets was funded by a combination of
interest-bearing liabilities and non interest-bearing demand deposits. Average
interest-bearing liabilities increased $163.6 million, or 45.9%, and average
non interest-bearing demand deposits increased $46.4 million, or 245.9%,
comparing the quarters ended September 30, 2003 and 2004. CNB contributed
$125.1 million of the total growth in interest-bearing liabilities and $16.3
million of the total growth in non interest-bearing demand deposits. Exclusive
of CNBs contribution, interest-bearing liabilities grew $38.5 million and non
interest-bearing demand deposits $30.1 million on average for the quarters
ended September 30, 2003 to September 30, 2004. The significant growth in
deposits was the result of our deposit gathering programs. We expect that the
growth in these deposits will continue to improve our net interest spread and
net yield on interest-earning assets. As reflected above, the net yield on average earning assets was 3.48% for the
quarter ended September 30, 2004, compared to 2.26% for the quarter ended
September 30, 2003. The rate earned on average earning assets was 5.35% for
the quarter ended September 30, 2004, compared to 4.73% for the same period in
2003, a 62 basis point improvement. Prime rate increases of 75 basis points
between July 1, 2003 and September 30, 2004 were the main factor in the
earning-asset yield increase. The average rate paid on interest-bearing
liabilities fell 47 basis points, from 2.69% for the quarter ended September
30, 2003 to 2.22% for the quarter ended September 30, 2004. For the third
quarter of 2004, 10.5% of average earning assets was funded with non
interest-bearing demand deposits, compared to 4.9% for the same period in 2003,
which contributed to the improvement in net yield on average earning assets. Total other income for the quarter ended September 30, 2004 increased $301,000,
or 259.5%, to $417,000 compared to $116,000 for the same period in 2003. Of
this increase, $272,000 was contributed by CNB. Gains on sales of loans,
mortgage origination fees and income from bank-owned life insurance were the
biggest components of this $272,000, representing $121,000, $89,000 and $36,000
of the total, respectively. Exclusive of CNBs contribution, loan-servicing
fees grew $84,000, from $1,000 in 2003 to $85,000 in 2004. Losses on sales of
securities of $32,000 were recognized in the third quarter of 2004, compared to
$20,000 in gains recognized during the same period in 2003. All gains and
losses related to sales of lower quality trust preferred issues. The main
component of other income was license fee income generated from the Companys
Capital Financial Software subsidiary. The Company recognized $42,000 in
license fee income during the three-month period in 2004, compared to $55,000
during the same period in 2003, a decrease of $13,000. The decrease in license
fee income was due to lower deposits generated by this subsidiary. Total other expenses increased $2,220,000 to $3,957,000 for the quarter ended
September 30, 2004 compared to $1,737,000 for the same period in 2003.
Salaries and benefits, which are the most significant portion of other
expenses, also represented the most significant portion of the increases,
growing by $1,289,000 to $2,400,000 for the quarter ended September 30, 2004
compared to $1,111,000 for the same period in 2003. Of this increase, $750,000
was attributable to CNB. Exclusive of CNB, salaries and benefits increased
$539,000, which mainly resulted from the addition of new employees in business
development groups. In addition, occupancy and equipment increased $242,000,
due to both the leasing of additional space in the Norcross office and the
addition of CNB. Finally, other expenses increased $690,000, or 142.6%, from
$484,000 during the three months ended September 30, 2003 to $1,174,000 for the
same period in 2004. Of this increase, $312,000 was attributable to CNB.
Expenses in support of deposit gathering initiatives, including business
development expense, professional fees, data processing fees and lockbox
processing fees, were the biggest components of the remaining $378,000,
representing $68,000, $100,000, $50,000 and $37,000 of the total, respectively. The effective tax rate was 35.8% for the three months ended September 30, 2004
and 36.4% for the three months ended September 30, 2003. The decrease in the
effective tax rate reflects the increase in non-taxable income for the three
months ended September 30, 2004. 18




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##### Table of Contents



Nine-Month Period Ended September 30, 2004 Net income for the nine-month period ended September 30, 2004 totaled
$2,148,000 or $0.62 per basic and $0.60 per fully diluted share compared to net
income of $1,124,000, or $0.52 per basic and $0.47 per fully diluted share for
the same nine-month period in 2003. Presented below are various components of assets and liabilities, interest
income and expense as well as their yield/cost for the nine months ended
September 30, 2004 and 2003. Nine-months Ended September 30,2004
    
    2003Average
    
    
    
    
    
    
    
    
    
    AverageBalances
    
    Income/
    
    Yields/
    
    Balances
    
    Income/
    
    Yields/(1)
    
    Expense
    
    Rates
    
    (1)
    
    Expense
    
    Rates(Dollars in Thousands)Federal funds sold and
interest-bearing deposits
    
    $
    6,074
    
    
    $
    48
    
    
    
    1.05
    %
    
    $
    2,971
    
    
    $
    26
    
    
    
    1.17
    %Securities (2)
    
    
    134,064
    
    
    
    4,368
    
    
    
    4.34
    
    
    
    104,687
    
    
    
    3,002
    
    
    
    3.83Loans, net of deferred fees (3)(4)
    
    
    392,923
    
    
    
    16,232
    
    
    
    5.50
    
    
    
    274,761
    
    
    
    11,512
    
    
    
    5.60Total earning assets
    
    
    533,061
    
    
    
    20,648
    
    
    
    5.16
    %
    
    
    382,419
    
    
    
    14,540
    
    
    
    5.08
    %Unrealized gains (losses) on
securities (2)
    
    
    (556
    )
    
    
    
    
    
    
    
    
    
    
    278Allowance for loan losses
    
    
    (4,362
    )
    
    
    
    
    
    
    
    
    
    
    (3,403
    )Cash and due from banks
    
    
    9,669
    
    
    
    
    
    
    
    
    
    
    
    5,594Other assets
    
    
    11,165
    
    
    
    
    
    
    
    
    
    
    
    4,611Total
    
    $
    548,977
    
    
    
    
    
    
    
    
    
    
    $
    389,499Transaction and money market deposits
    
    $
    99,474
    
    
    $
    566
    
    
    
    .76
    %
    
    $
    69,250
    
    
    $
    396
    
    
    
    .76
    %Time deposits
    
    
    222,842
    
    
    
    4,356
    
    
    
    2.60
    
    
    
    181,597
    
    
    
    4,586
    
    
    
    3.38Other borrowings
    
    
    126,078
    
    
    
    2,824
    
    
    
    2.98
    
    
    
    93,553
    
    
    
    2,564
    
    
    
    3.66Subordinated debt
    
    
    6,392
    
    
    
    432
    
    
    
    9.00
    
    
    
    6,392
    
    
    
    418
    
    
    
    8.74Total interest-bearing liabilities
    
    
    454,786
    
    
    
    8,178
    
    
    
    2.40
    %
    
    
    350,792
    
    
    
    7,964
    
    
    
    3.04
    %Non interest-bearing demand deposits
    
    
    55,880
    
    
    
    
    
    
    
    
    
    
    
    17,551Other liabilities
    
    
    2,456
    
    
    
    
    
    
    
    
    
    
    
    1,928Shareholders equity
    
    
    35,855
    
    
    
    
    
    
    
    
    
    
    
    19,228Total
    
    $
    548,977
    
    
    
    
    
    
    
    
    
    
    $
    389,499Net interest income
    
    
    
    
    
    
    12,470
    
    
    
    
    
    
    
    
    
    
    
    6,576Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.76
    %
    
    
    
    
    
    
    
    
    
    
    2.04
    %Net yield on average
interest-earning assets
    
    
    
    
    
    
    
    
    
    
    3.12
    %
    
    
    
    
    
    
    
    
    
    
    2.30
    %
  (1)
    
    Average balances are daily averages.  (2)
    
    Securities available for sale are reported at amortized cost.  (3)
    
    Loans include non-accrual loans and are net of deferred fees.  (4)
    
    Interest and fees on loans includes fees of $907,000 and $673,000 for the periods ended September 30, 2004 and 2003, respectively. Net interest income totaled $12,470,000 for the nine months ended September 30,
2004, an increase of $5,894,000, or 89.6% over the same period in 2003.
$2,124,000 of the increase was attributable to CNB. Average interest-earning
assets increased $150.6 million, or 39.4% over 2003, reflecting growth in both
the loan and securities portfolios. CNB contributed $66.0 million of the total
growth in interest-earning assets. Exclusive of this growth, loans increased
$72.1 million on average and securities increased $12.5 million on average from
period to period. The significant growth in our loan portfolio is the result
of the purchase of a $20 million loan portfolio, combined with strong loan
demand in our market area. Our primary interest-earning assets are loans,
which represented 73.7% of average interest-earning assets at September 30,
2004, compared to 71.8% at September 30, 2003. 19




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##### Table of Contents



The increase in interest-earning assets was funded by a combination of
interest-bearing liabilities and non interest-bearing demand deposits. Average
interest-bearing liabilities increased $104.0 million, or 29.6%, and average
non interest-bearing demand deposits increased $38.3 million, or 218.4%,
comparing the nine-month periods ended September 30, 2004 and 2003. CNB
contributed $56.0 million of the total growth in interest-bearing liabilities
and $7.1 million of the total growth in non interest-bearing demand deposits.
Exclusive of CNBs contribution, interest-bearing liabilities grew $48.0
million and non interest-bearing demand deposits grew $31.2 million on average
from September 30, 2003 to September 30, 2004. The significant growth in
deposits is the result of our deposit gathering programs. We expect that the
growth in these deposits will continue to improve our net interest spread and
net yield on interest-earning assets. As reflected above, the net yield on average earning assets was 3.12% for the
nine months ended September 30, 2004, compared to 2.30% for the nine months
ended September 30, 2003. The rate earned on average earning assets was 5.16%
for the nine months ended September 30, 2004, compared to 5.08% for the same
period in 2003. This eight basis point increase was coupled with a 64 basis
point decline in the average rate paid on interest-bearing liabilities. The
rate paid on average interest-bearing liabilities was 2.40% for the nine months
ended September 30, 2004, compared to 3.04% for the same period in 2003. Prime
rate increased 75 basis points during 2004, following a 25 basis point cut in
2003. For the first nine months of 2004, 10.5% of average earning assets was
funded with non interest bearing demand deposits, compared to 4.6% for the same
period in 2003, which contributed to the improvement in net yield on average
earning assets. Total other income for the nine-month period ended September 30, 2004 increased
$467,000, or 186.8%, to $717,000 compared to $250,000 for the same period in
2003. Of this increase, $337,000 was contributed by CNB. Gains on sales of
loans, mortgage origination fees and income from bank-owned life insurance were
the biggest components of this $337,000, representing $121,000, $130,000 and
$49,000 of the total, respectively. Exclusive of CNBs contribution,
loan-servicing fees grew $167,000, from $4,000 in 2003 to $171,000 in 2004 and
loan sales in the first nine months of 2004 resulted in income of $55,000,
compared to none sold during the same period in 2003. Losses on sales of
securities of $32,000 were recognized in 2004, compared to $28,000 in losses
recognized in 2003, and were related to sales of lower quality trust preferred
issues. The main component of other income was license fee income generated
from the Companys Capital Financial Software subsidiary. The Company
recognized $115,000 in license fee income during the nine-month period in 2004,
compared to $176,000 during the same period in 2003, a decrease of $61,000.
The decrease in license fee income was due to lower deposits generated by this
subsidiary. Total other expenses increased $3,879,000 to $8,841,000 for the nine-month
period ended September 30, 2004 compared to $4,962,000 for the same period in
2003. Salaries and benefits, which are the most significant portion of other
expenses, also represented the most significant portion of the increases,
growing by $2,239,000 to $5,406,000 for the nine-month period ended September
30, 2004 compared to $3,167,000 for the same period in 2003. Of this
increase, $957,000 was attributable to CNB. Exclusive of CNB, salaries and
benefits increased $1,282,000, which mainly resulted from the addition of new
employees in business development groups. Overall, the number of full-time
equivalent employees more than doubled from 51 FTEs at September 30, 2003, to
107 FTEs at September 30, 2004. In addition, occupancy and equipment
increased $334,000, due to both the leasing of additional space in the Norcross
office and the addition of CNB. Finally, other expenses increased $1,307,000,
or 95.7%, from $1,366,000 during the first nine months of 2003 to $2,673,000
for the same period in 2004. Of this increase, $371,000 was attributable to
CNB. Expenses in support of deposit gathering initiatives, including business
development expense, professional fees, data processing fees and lockbox
processing fees, were the biggest components of the remaining $936,000,
representing $245,000, $152,000, $95,000 and $124,000 of the total,
respectively. The effective tax rate was 35.3% for the nine months ended September 30,
2004 and 36.3% for the nine months ended September 30, 2003. The decrease in
the effective tax rate reflects the increase in non-taxable income for the nine
months ended September 30, 2004. 20




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##### Table of Contents



ITEM 3. CONTROLS AND PROCEDURES As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to our Company required to be included in
our periodic SEC filings. There have been no changes in our internal control over financial reporting
identified in connection with this evaluation that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting. 21




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##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS. The Company maintains a Non-Qualified Deferred Compensation Plan for its
directors, and funds it through a Rabbi Trust. During the three and nine
months ended September 30, 2004, a total of 1,355 and 4,447 common shares,
respectively, of the Company were purchased from the Company out of treasury
shares for this Plan. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Companys Annual Meeting of Shareholders (the Annual Meeting) was
held on July 21, 2004. Notice of the Annual Meeting was mailed on or about
July 1, 2004 to each shareholder of record as of June 15, 2004. At this
meeting, the Companys shareholders considered electing four persons to serve
as members of the Companys Board of Directors for a term of three years and
until their successors are duly elected and qualified. In addition, the
shareholders considered an amendment to the Companys 1998 Incentive Stock
Option Plan to increase from 115,000 to 275,000 the number of shares of common
stock issuable pursuant to options granted under the plan and an amendment to
the Companys 1998 Non-Qualified Stock Option Plan to increase from 185,000 to
498,000 the number of shares of common stock issuable pursuant to options
granted under the plan. The record shareholders of the Company voted as
follows: The proposal to elect four persons to serve as members of the Companys
Board of Directors for a term of three years and until their successors are
duly elected and qualified. The number of votes cast for and against the
election of each nominee was as follows: Votes
    
    VotesNOMINEE
    
    FOR
    
    WITHHELDC. Dan Alford
    
    
    2,638,472
    
    
    
    121,325William H. Groce
    
    
    2,636,972
    
    
    
    122,825Theodore J. LaVallee, Sr.
    
    
    2,638,472
    
    
    
    121,325Neil H. Strickland
    
    
    2,636,972
    
    
    
    122,825
 The proposal to amend the Companys 1998 Incentive Stock Option Plan to
increase from 115,000 to 275,000 the number of shares of common stock issuable
pursuant to options granted under the plan and the proposal to amend the
Companys 1998 Non-Qualified Stock Option Plan to increase from 185,000 to
498,000 the number of shares of common stock issuable pursuant to options
granted under the plan. The number of votes cast for and against the
amendments was as follows: Votes For
    
    Votes AgainstNumber
    
    % of Shares
    
    Number
    
    % of SharesShares
    
    Outstanding
    
    Shares
    
    OutstandingAmendment to 1998
Incentive Stock
Option Plan
    
    
    2,635,775
    
    
    
    56.33
    
    
    
    124,022
    
    
    
    2.65Amendment to 1998
Non-Qualified Stock
Option Plan
    
    
    2,635,575
    
    
    
    56.32
    
    
    
    124,222
    
    
    
    2.66
 No other matters were presented or voted for at the Annual Meeting. 22




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##### Table of Contents



ITEM 6. EXHIBITS Exhibit No.
    
    Description31.1
    
    Certification by H.N. Padget, Jr., principal executive officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) Certification).31.2
    
    Certification by William R. Blanton, principal financial officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) Certification).32.1
    
    Certification by H.N. Padget, Jr., principal executive officer, and William R. Blanton,
principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350
Certification).
 23




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##### Table of Contents



SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized. Date: November 12, 2004
    By:
    /s/ H. N. Padget, Jr.H. N. Padget, Jr., President and Chief Executive Officer(principal executive officer) Date: November 12, 2004
    By:
    /s/ William R. BlantonWilliam R. Blanton, Vice Chairman, Chief Operating and Financial Officer(principal financial and accounting officer) 24




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##### Table of Contents



EXHIBIT INDEX Exhibit Number
    
    Description31.1
    
    Certification by H.N. Padget, Jr., principal executive officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule
13a-14(a) Certification).31.2
    
    Certification by William R. Blanton, principal financial officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule
13a-14(a) Certification).32.1
    
    Certification by H.N. Padget, Jr., principal executive officer,
and William R. Blanton, principal financial officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350
Certification).
 25