##### 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 June
30, 2004
 [  ]
    
    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
(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 [X] No [   ] 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 August 10, 2004Common Stock, $1.00 par value
    
    5,014,504
 Transitional Small Business Disclosure Format: Yes [ ] No [X]




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##### Table of Contents



CNB HOLDINGS, INC. TABLE OF CONTENTS Page No.PART I. FINANCIAL INFORMATIONItem 1. FINANCIAL STATEMENTSConsolidated Balance Sheet  June 30, 2004 (Unaudited)
    
    
    3Consolidated Statements of Income (Unaudited)-
Three and six months ended June 30, 2004 and 2003
    
    
    4Consolidated Statements of Comprehensive Income (Unaudited)-
Three and six months ended June 30, 2004 and 2003
    
    
    5Consolidated Statements of Cash Flows (Unaudited) -
Six months ended June 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 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 6. Exhibits and Reports on Form 8-K
    
    
    22Signatures
    
    
    23EX-4.2 SUPPLEMENTAL INDENTURE, DATED MAY 28, 2004EX-4.3 INDENTURE, DATED JANUARY 17, 2002EX-10.13 LEASE AGREEMENT AS AMENDED AND RESTATED AS OF MAY 31, 2004EX-10.14 EMPLOYMENT AGREEMENT, DATED APRIL 19, 2004, WILLIAM R. BLANTONEX-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 THE 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
 June 30, 2004
(Unaudited)
 ASSETSCash and due from banks
    
    $
    14,436,505Interest bearing deposits in banks
    
    
    1,030,000Federal funds sold and overnight investments
    
    
    8,800,433Investment securities:Securities available-for-sale, at market value
    
    
    139,135,469Securities held-to-maturity, estimated fair value of
$8,051,938
    
    
    7,973,128Restricted equity securities
    
    
    7,498,500Loans net of deferred loan fees and allowance for loan losses
of $5,572,513
    
    
    457,704,831Premises and equipment (net)
    
    
    656,151Goodwill
    
    
    7,144,056Core deposit intangible
    
    
    1,249,050Other assets
    
    
    10,467,532TOTAL ASSETS
    
    $
    656,095,655LIABILITIESDeposits:Non interest-bearing demand
    
    $
    62,787,366Interest-bearing demand and money market
    
    
    118,416,009Savings
    
    
    93,227Time deposits of $100,000 or more
    
    
    143,305,043Other time deposits
    
    
    132,905,387Total deposits
    
    
    457,507,032Federal funds purchased and securities sold under
repurchase agreements
    
    
    3,853,028Other borrowings
    
    
    131,416,901Other liabilities
    
    
    3,672,566Subordinated debt
    
    
    6,392,000TOTAL LIABILITIES
    
    
    602,841,527SHAREHOLDERS EQUITYPreferred stock, no par value;10,000,000 shares authorized, no shares issued
and outstanding
    
    
    Common stock, par value $1.00 per share;10,000,000 shares authorized; 5,160,167 issued
    
    
    5,160,167Surplus
    
    
    35,884,706Treasury stock
    
    
    (1,145,425
    )Unearned ESOP shares
    
    
    (399,998
    )Retained earnings
    
    
    15,120,362Accumulated other comprehensive loss
    
    
    (1,365,684
    )TOTAL SHAREHOLDERS EQUITY
    
    
    53,254,128TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    656,095,655
 See notes to the consolidated financial statements. 3




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CNB HOLDINGS, INC.
AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
 (UNAUDITED)
 FOR THE
    
    FOR THETHREE-MONTH
    
    SIX-MONTHPERIOD ENDED
    
    PERIOD ENDEDJUNE 30,
    
    JUNE 30,2004
    
    2003
    
    2004
    
    2003Interest Income:Loans and leases, including fees
    
    $
    5,353,197
    
    
    $
    3,937,134
    
    
    $
    9,631,045
    
    
    $
    7,882,204Investment securities:U.S. Treasury and government agencies
    
    
    255,727
    
    
    
    145,492
    
    
    
    435,796
    
    
    
    439,426Mortgage-backed securities
    
    
    862,902
    
    
    
    544,128
    
    
    
    1,619,244
    
    
    
    935,360Other investments
    
    
    289,736
    
    
    
    295,901
    
    
    
    588,224
    
    
    
    642,463Interest-bearing deposits in banks
    
    
    6,461
    
    
    
    
    
    
    
    7,982
    
    
    
    Federal funds sold and overnight investments
    
    
    10,684
    
    
    
    13,487
    
    
    
    25,466
    
    
    
    23,185Total interest income
    
    
    6,778,707
    
    
    
    4,936,142
    
    
    
    12,307,757
    
    
    
    9,922,638Interest expense:Interest-bearing demand, money market and savings
    
    
    213,880
    
    
    
    150,453
    
    
    
    361,476
    
    
    
    290,831Time deposits of $100,000 or more
    
    
    827,608
    
    
    
    869,954
    
    
    
    1,647,985
    
    
    
    1,771,671Other time deposits
    
    
    606,863
    
    
    
    633,250
    
    
    
    1,087,695
    
    
    
    1,295,189Federal funds purchased, securities sold under
repurchase agreements and other borrowings
    
    
    1,294,520
    
    
    
    998,053
    
    
    
    2,194,359
    
    
    
    2,122,598Total interest expense
    
    
    2,942,871
    
    
    
    2,651,710
    
    
    
    5,291,515
    
    
    
    5,480,289Net interest income
    
    
    3,835,836
    
    
    
    2,284,432
    
    
    
    7,016,242
    
    
    
    4,442,349Provision for loan losses
    
    
    800,000
    
    
    
    40,000
    
    
    
    850,000
    
    
    
    100,000Net interest income after provision for loan losses
    
    
    3,035,836
    
    
    
    2,244,432
    
    
    
    6,166,242
    
    
    
    4,342,349Other income:Service charges on deposit accounts
    
    
    20,972
    
    
    
    18,148
    
    
    
    36,214
    
    
    
    37,690Loan servicing fee income
    
    
    117,046
    
    
    
    1,358
    
    
    
    132,363
    
    
    
    2,788Gains on sale of loans (net)
    
    
    13,233
    
    
    
    
    
    
    
    32,250
    
    
    
    Gains (losses) on sale of securities available-for-sale, net
    
    
    
    
    
    
    (12,349
    )
    
    
    
    
    
    
    (48,726
    )Other income
    
    
    57,659
    
    
    
    63,788
    
    
    
    98,754
    
    
    
    132,992Total other income
    
    
    208,910
    
    
    
    70,945
    
    
    
    299,581
    
    
    
    124,744Other expense:Salaries and other compensation
    
    
    1,722,591
    
    
    
    1,081,820
    
    
    
    3,006,180
    
    
    
    2,056,481Net occupancy and equipment expense
    
    
    214,641
    
    
    
    146,110
    
    
    
    377,626
    
    
    
    285,692Other expense
    
    
    790,252
    
    
    
    502,651
    
    
    
    1,475,066
    
    
    
    946,553Total other expenses
    
    
    2,727,484
    
    
    
    1,730,581
    
    
    
    4,858,872
    
    
    
    3,288,726Net income before income tax
    
    
    517,262
    
    
    
    584,796
    
    
    
    1,606,951
    
    
    
    1,178,367Income tax expense
    
    
    173,689
    
    
    
    211,733
    
    
    
    560,053
    
    
    
    427,273Net income
    
    $
    343,573
    
    
    $
    373,063
    
    
    $
    1,046,898
    
    
    $
    751,094Basic earnings per share
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.39
    
    
    $
    0.35Fully diluted earnings per share
    
    $
    0.10
    
    
    $
    0.16
    
    
    $
    0.38
    
    
    $
    0.32Cash dividends per common share
    
    
    
    
    
    $
    0.03
    
    
    
    
    
    
    $
    0.03
 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
    
    SIX-MONTHPERIOD ENDED
    
    PERIOD ENDEDJUNE 30,
    
    JUNE 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    343,573
    
    
    $
    373,063
    
    
    $
    1,046,898
    
    
    $
    751,094Other comprehensive income (loss):Unrealized holding gains (losses) on securities available-for-sale:Unrealized holding gains (losses) arising during period,
net of tax
    
    
    (1,231,688
    )
    
    
    235,716
    
    
    
    (1,307,701
    )
    
    
    251,297Reclassification adjustment for (gains) losses realized in
net income, net of tax
    
    
    
    
    
    
    7,903
    
    
    
    
    
    
    
    31,185Unrealized gains (losses) on cash flow hedges,
net of tax
    
    
    (3,208
    )
    
    
    
    
    
    
    (3,208
    )
    
    
    Other comprehensive income (loss)
    
    
    (1,234,896
    )
    
    
    243,619
    
    
    
    (1,310,909
    )
    
    
    282,482Comprehensive income (loss)
    
    $
    (891,323
    )
    
    $
    616,682
    
    
    $
    (264,011
    )
    
    $
    1,033,576
 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 THESIX-MONTHPERIOD ENDEDJUNE 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    1,046,898
    
    
    $
    751,094Adjustments to reconcile net income to net cash provided by operating activities:Net amortization (accretion) of investment securities
    
    
    9,660
    
    
    
    506,538Depreciation and amortization of premises and equipment
    
    
    132,031
    
    
    
    100,441Gain on sale of other real estate
    
    
    (9,097
    )
    
    
    Net loss on sales of available-for-sale securities
    
    
    
    
    
    
    48,726Net gain on sales of premises and equipment
    
    
    
    
    
    
    (9,575
    )Provision for loan losses
    
    
    850,000
    
    
    
    100,000Decrease (increase) in other assets
    
    
    837,200
    
    
    
    (1,253,717
    )Decrease in other liabilities
    
    
    (2,340,430
    )
    
    
    (572,972
    )Net cash provided by operating activities
    
    
    526,262
    
    
    
    (349,465
    )Cash flows from investing activities:Proceeds from maturities of investment securities available-for-sale
    
    
    2,020,000
    
    
    
    22,487,500Principal repayments from mortgage-backed securities
    
    
    15,326,416
    
    
    
    13,688,424Purchases of investment securities available-for-sale
    
    
    (16,856,438
    )
    
    
    (50,142,184
    )Proceeds from maturities of other investments
    
    
    9,400
    
    
    
    105,300Proceeds from sales of investment securities available-for-sale
    
    
    
    
    
    
    896,557Net increase in loans
    
    
    (52,826,370
    )
    
    
    (5,108,486
    )Net 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
    
    
    (326,780
    )
    
    
    (37,515
    )Proceeds from sale of premises and equipment
    
    
    
    
    
    
    11,488Net cash used in investing activities
    
    
    (45,105,598
    )
    
    
    (18,098,916

    )Cash flows from financing activities:Net increase in deposits
    
    
    48,572,847
    
    
    
    17,246,987Net decrease in federal funds purchased and securities sold under repurchase agreements
    
    
    (8,311,972
    )
    
    
    (9,699,699
    )Net proceeds from advances from Federal Home Loan Bank
    
    
    5,288,362
    
    
    
    17,743,700Net 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
    
    
    33,643
    
    
    
    Proceeds from exercise of common stock options
    
    
    277,646
    
    
    
    Cash dividends paid on common stock
    
    
    
    
    
    
    (150,001
    )Net cash provided by financing activities
    
    
    56,747,944
    
    
    
    25,140,987Net increase in cash and cash equivalents
    
    
    12,168,608
    
    
    
    6,692,606Cash and cash equivalents, beginning of period
    
    
    12,098,330
    
    
    
    7,754,964Cash and cash equivalents, end of period
    
    $
    24,266,938
    
    
    $
    14,447,570
 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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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 six and
three month periods ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004. At June 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 six-month period ended June 30, 2004 include six months of operations
for FCB and one month of operations for CNB Holdings, Inc. Similarly, the
results of operations for the quarter ended June 30, 2004 include three months
of operations for FCB and one month of operations for CNB Holdings, Inc. The
results of operations for the periods ended June 30, 2003 include only the
operations of FCB. 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. Unaudited pro forma consolidated results of operations for the six months ended
June 30, 2004 and 2003 as though the companies had combined as of January 1,
2004 and 2003 follow: 2004
    
    2003Net interest income
    
    $
    9,329,000
    
    
    $
    6,922,000Net income
    
    
    344,000
    
    
    
    1,245,000Basic earnings per share
    
    
    .07
    
    
    
    .28Diluted earnings per share
    
    
    .07
    
    
    
    .27
 9




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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 3,204,247 and 2,698,149 shares for the three months and
the six months ended June 30, 2004, respectively. The average number of shares
outstanding totaled 2,155,977 and 2,155,977 for the three months and the six
months ended June 30, 2003, respectively. Presented below is a summary of the components used to calculate basic and diluted earnings per common share. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Basic Earnings Per Share:Weighted average common shares outstanding
    
    
    3,204,247
    
    
    
    2,155,977
    
    
    
    2,698,149
    
    
    
    2,155,977Net income
    
    $
    343,573
    
    
    $
    373,063
    
    
    $
    1,046,898
    
    
    $
    751,094Basic earnings per share
    
    $
    0.11
    
    
    $
    0.17
    
    
    $
    0.39
    
    
    $
    0.35Diluted Earnings Per Share:Weighted average common shares outstanding
    
    
    3,204,247
    
    
    
    2,155,977
    
    
    
    2,698,149
    
    
    
    2,155,977Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market prices for the year
    
    
    59,179
    
    
    
    56,838
    
    
    
    49,866
    
    
    
    56,838Shares held by rabbi trust
    
    
    9,533
    
    
    
    
    
    
    
    9,533
    
    
    
    Net effect of the assumed conversion of
subordinated convertible debentures
    
    
    
    
    
    
    332,224
    
    
    
    
    
    
    
    332,224Total weighted average common shares and
common stock equivalents outstanding
    
    
    3,272,959
    
    
    
    2,545,039
    
    
    
    2,757,548
    
    
    
    2,545,039Net income as reported
    
    $
    343,573
    
    
    $
    373,063
    
    
    $
    1,046,898
    
    
    $
    751,094Net effect of the assumed conversion of
subordinated convertible debentures
    
    
    
    
    
    
    26,614
    
    
    
    
    
    
    
    52,281Net income adjusted for the effect of the assumed
conversion of convertible subordinated debentures
    
    $
    343,573
    
    
    $
    399,677
    
    
    $
    1,046,898
    
    
    $
    803,375Diluted earnings per share
    
    $
    .10
    
    
    $
    0.16
    
    
    $
    .38
    
    
    $
    0.32
 Diluted earnings per share were previously reported in a press release and 8-K
of $.16 and $.42 for the three and six month periods ended June 30, 2004,
respectively. The net effect of the conversion of subordinated convertible
debentures for the three- and six-month periods ended June 30, 2004 was
anti-dilutive and, therefore, should not have been included in the computation
of diluted earnings per share. 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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income, as
reported
    
    $
    343,573
    
    
    $
    373,063
    
    
    $
    1,046,898
    
    
    $
    751,094Deduct: Total
stock-based
employee
compensation
expense determined
under fair value
based method for
all awards
    
    
    9,971
    
    
    
    19,942
    
    
    
    25,082
    
    
    
    26,073Pro forma net income
    
    $
    333,602
    
    
    $
    353,121
    
    
    $
    1,021,816
    
    
    $
    725,021Earnings per share:Basic  as reported
    
    $
    .11
    
    
    $
    .17
    
    
    $
    .39
    
    
    $
    .35Basic  pro forma
    
    
    .10
    
    
    
    .16
    
    
    
    .38
    
    
    
    .34Fully diluted  as
reported
    
    
    .10
    
    
    
    .16
    
    
    
    .38
    
    
    
    .32Fully diluted  pro
forma
    
    $
    .10
    
    
    $
    .15
    
    
    $
    .37
    
    
    $
    .31
 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. 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 June 30, 2004 total assets were $656.1 million, compared to $439.4 million
on December 31, 2003, an increase of $216.7 million, or 49.3%. Most of this
growth occurred in loans, which increased $155.0 million, or 51.2% from $302.7
million on December 31, 2003 to $457.7 million on June 30 2004. The
combination of FCB and CNB accounted for $103.5 million of the increase.
Investment securities increased $35.8 million, or 30.1%, from $118.8 million on
December 31, 2003 to $154.6 million on June 30, 2004. The combination of FCB
and CNB resulted in an increase of $37.7 million. Goodwill and core deposit
intangibles were $7.1 million and $1.2 million, respectively, on June 30, 2004,
compared to zero on December 31, 2004. All of the growth in goodwill and core
deposits intangibles was due to the combination of FCB and CNB. On June 30, 2004 total liabilities were $602.8 million, compared to $418.8
million on December 31, 2003, an increase of $184.0 million, or 43.9%. The
majority of this growth occurred in deposits, which increased $165.0 million,
or 56.4% from $292.5 million on December 31, 2003 to $457.5 million on June 30,
2004. Non-interest bearing demand deposits grew from $28.7 million or 9.8% of
total deposits on December 30, 2003 to $62.9 million or 13.7% of total
deposits. Included in the deposit growth was $117.5 million in total deposits
and $15.5 million in non-interest bearing demand deposits as the result of the
combination of FCB and CNB. Federal funds purchased, securities sold under
repurchase agreements and other borrowings were $135.3 million on June 30,
2004, compared to $118.0 million on December 31, 2003, an increase of $17.3
million, or 14.7%. Included in this increase was $25.6 million from the
combination of FCB and CNB. On June 30, 2004, total shareholders equity was $53.3 million, compared to
$20.6 million on December 31, 2003, an increase of $32.7 million, or 158.7%.
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 June 30, 2004 was $5.6 million. The
allowance for loan losses, as a percentage of total gross loans, at June 30,
2004 was 1.2%. Approximately 65% of the second quarters 2004 provision for
loan losses was related to loan growth. 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. A similar review of First Capital Banks loan portfolio was
conducted by an independent firm during the fourth quarter of 2003. The
Company plans to continue engaging, on an annual basis, an independent firm to
review both Chattahoochee National Banks and First Capital Banks loan
portfolios. 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 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 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. 13




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##### Table of Contents



The following table summarizes the allowance for loan losses for the six-month
periods ended June 30, 2004 and 2003. 2004
    
    2003(Dollars in thousands)Average amount of loans outstanding
    
    $
    360,881
    
    
    $
    278,860Allowance for loan losses balance, beginning of period
    
    $
    3,306
    
    
    $
    3,356Less charge-offsCommercial loans
    
    
    
    
    
    
    Real estate loans
    
    
    
    
    
    
    Consumer loans
    
    
    
    
    
    
    Total charge-offs
    
    
    
    
    
    
    Plus recoveriesCommercial loans
    
    
    
    
    
    
    Real estate loans
    
    
    
    
    
    
    Consumer loans
    
    
    
    
    
    
    Total recoveries
    
    
    
    
    
    
    Net charge-offs
    
    
    
    
    
    
    Plus provision for loan losses
    
    
    850
    
    
    
    100Plus amount acquired in business combination
    
    
    1,416
    
    
    
    Allowance for loan losses balance, end of period
    
    $
    5,572
    
    
    $
    3,456Net charge-offs to average loans
    
    
    
    %
    
    
    
    %
 14




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##### Table of Contents



The following table is a summary of nonaccrual, past due and restructured debt. June 30, 2004Past DueNonaccrual
    
    90 Days
    
    RestructuredLoans
    
    Still Accruing
    
    Debt(Dollars in thousands)Real estate loans
    
    $
    691
    
    
    $
    
    
    
    $
    Commercial loans
    
    
    900
    
    
    
    
    
    
    
    Consumer loans
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,591
    
    
    $
    
    
    
    $
    
 June 30, 2003Past DueNonaccrual
    
    90 Days
    
    RestructuredLoans
    
    Still Accruing
    
    Debt(Dollars in thousands)Real estate loans
    
    $
    93
    
    
    $
    
    
    
    $
    Commercial loans
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    93
    
    
    $
    
    
    
    $
    
 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 $1.6 million in
nonaccrual loans at June 30, 2004 included $1.2 million of
SBA loans, of which $0.9 million was guaranteed by SBA, 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 access to FHLB lending
sources. Lines of credit with the FHLB totaling $241.2 million were available
on June 30, 15




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##### Table of Contents



2004, of which $130.0 million was outstanding.
The Company also had federal
funds back-up lines of credit totaling $39.0 million, of which $3.9 million was
outstanding on June 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 June 30, 2004, First Capital Bank was considered to be well-capitalized
as defined in the Federal Deposit Insurance Corporation Improvement Act and
based on regulatory minimum capital requirements. Chattahoochee National Bank
was considered to be adequately-capitalized. The Company and its bank
subsidiaries actual capital ratios are presented in the following table. FOR CAPITAL
    
    TO BEADEQUACY
    
    WELLACTUAL
    
    PURPOSES
    
    CAPITALIZEDAs of June 30, 2004Total Capital to Risk Weighted Assets:Consolidated
    
    
    10.88
    %
    
    
    8
    %
    
    
    N/AChattahoochee National Bank
    
    
    8.99
    %
    
    
    8
    %
    
    
    10
    %First Capital Bank
    
    
    11.05
    %
    
    
    8
    %
    
    
    10
    %Tier I Capital to Risk Weighted Assets:Consolidated
    
    
    9.82
    %
    
    
    4
    %
    
    
    N/AChattahoochee National Bank
    
    
    7.76
    %
    
    
    4
    %
    
    
    6
    %First Capital Bank
    
    
    10.07
    %
    
    
    4
    %
    
    
    6
    %Tier I Capital to Average Assets:Consolidated
    
    
    9.71
    %
    
    
    4
    %
    
    
    N/AChattahoochee National Bank
    
    
    6.20
    %
    
    
    4
    %
    
    
    5
    %First Capital Bank
    
    
    8.62
    %
    
    
    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 June 30, 2004,
we had outstanding commitments to extend credit of approximately $152.1 million
and outstanding standby letters of credit of approximately $4.1 million. 16




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##### Table of Contents



RESULTS OF OPERATIONS Three-Month Period Ended June 30, 2004 Net income for the quarter ended June 30, 2004 totaled $343,573, or $0.11 per
basic and $0.10 per fully diluted share compared to $373,063, 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 June 30,
2004 and 2003. Three Months Ended June 30,2004
    
    2003Average
    
    Income/
    
    Yields/
    
    Average
    
    Income/
    
    Yields/Balances (1)
    
    Expense
    
    Rates
    
    Balances (1)
    
    Expense
    
    Rates(Dollars in Thousands)Federal funds sold and
interest-bearing deposits
    
    $
    5,976
    
    
    $
    17
    
    
    
    1.15
    %
    
    $
    4,640
    
    
    $
    13
    
    
    
    1.17
    %Securities (2)
    
    
    130,384
    
    
    
    1,408
    
    
    
    4.33
    
    
    
    100,987
    
    
    
    986
    
    
    
    3.91Loans, net of deferred fees (3)(4)
    
    
    393,964
    
    
    
    5,353
    
    
    
    5.45
    
    
    
    279,116
    
    
    
    3,937
    
    
    
    5.66Total earning assets
    
    
    530,324
    
    
    
    6,779
    
    
    
    5.13
    %
    
    
    384,743
    
    
    
    4,936
    
    
    
    5.15
    %Unrealized gains (losses) on
securities (2)
    
    
    (841
    )
    
    
    
    
    
    
    
    
    
    
    463Allowance for loan losses
    
    
    (4,104
    )
    
    
    
    
    
    
    
    
    
    
    (3,434
    )Cash and due from banks
    
    
    10,171
    
    
    
    
    
    
    
    
    
    
    
    5,529Other assets
    
    
    9,152
    
    
    
    
    
    
    
    
    
    
    
    4,344Total
    
    $
    544,702
    
    
    
    
    
    
    
    
    
    
    $
    391,645Transaction and money market deposits
    
    $
    103,302
    
    
    $
    167
    
    
    
    .65
    %
    
    $
    72,269
    
    
    $
    150
    
    
    
    .84
    %Time deposits
    
    
    219,853
    
    
    
    1,481
    
    
    
    2.70
    
    
    
    180,568
    
    
    
    1,503
    
    
    
    3.34Other borrowings
    
    
    125,534
    
    
    
    1,151
    
    
    
    3.68
    
    
    
    92,597
    
    
    
    854
    
    
    
    3.70Subordinated debt
    
    
    6,392
    
    
    
    144
    
    
    
    9.02
    
    
    
    6,392
    
    
    
    144
    
    
    
    9.02Total interest-bearing liabilities
    
    
    455,081
    
    
    
    2,943
    
    
    
    2.59
    %
    
    
    351,827
    
    
    
    2,652
    
    
    
    3.02
    %Non interest-bearing demand deposits
    
    
    55,486
    
    
    
    
    
    
    
    
    
    
    
    18,364Other liabilities
    
    
    2,652
    
    
    
    
    
    
    
    
    
    
    
    2,120Shareholders equity
    
    
    31,483
    
    
    
    
    
    
    
    
    
    
    
    19,334Total
    
    $
    544,702
    
    
    
    
    
    
    
    
    
    
    $
    391,645Net interest income
    
    
    
    
    
    
    3,836
    
    
    
    
    
    
    
    
    
    
    
    2,284Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.54
    %
    
    
    
    
    
    
    
    
    
    
    2.13
    %Net yield on average
interest-earning assets
    
    
    
    
    
    
    
    
    
    
    2.89
    %
    
    
    
    
    
    
    
    
    
    
    2.38
    %
 (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 $253,000 and $193,000 for the quarters ended June 30, 2004 and 2003, respectively. Net interest income totaled $3,836,000 for the quarter ended June 30, 2004, an
increase of $1,552,000, or 68.0% over the same period in 2003. $558,000 of the
increase was attributable to the combination of FCB and CNB. Average
interest-earning assets increased $145.6 million, or 37.8% over 2003,
reflecting growth in both the loan and securities portfolios. The combination
of FCB and CNB contributed $49.2 million of the total growth in interest- 17




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##### Table of Contents



earning assets. Exclusive of this growth, loans increased $79.9 million on
average and securities increased $16.9 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 a strong loan demand in
our market area. Our primary interest-earning assets are loans, which
represented 74.3% of average interest-earning assets at June 30, 2004, compared
to 72.5% at June 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 $103.3 million, or 29.3%, and average
non interest-bearing demand deposits increased $37.1 million, or 202.1% over
the quarter ended June 30, 2003 and 2004. The combination of FCB and CNB
contributed $42.3 million of the total growth in interest-bearing liabilities
and $4.9 million of the total growth in non interest-bearing demand deposits.
Exclusive of the combination, interest-bearing liabilities grew $36.4 million
and non interest-bearing demand deposits $32.2 million on average from June 30,
2003 to June 30, 2004. The significant growth in deposits was the result of
our deposit gathering programs. The growth in these deposits is expected to
continually improve our net interest spread and net interest margin. As reflected above, the net yield on average earning assets was 2.89% for the
quarter ended June 30, 2004, compared to 2.38% for the quarter ended June 30,
2003. The rate earned on average earning assets was 5.13% for the quarter
ended June 30, 2004, compared to 5.15% for the same period in 2003. While the
average rate earned on interest-earning assets fell only two basis points, the
average rate paid on interest-bearing liabilities fell 43 basis points, from
3.02% for the quarter ended June 30, 2003 to 2.59% for the quarter ended June
30, 2004. Prime rate was unchanged in both periods, but assets and liabilities
that do not float with prime continued to reprice at current lower rates. For
the second quarter of 2004, 10.5% of average earning assets were funded with
non interest-bearing demand deposits, compared to 4.8% 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 June 30, 2004 increased $138,000, or
194.5%, to $209,000 compared to $71,000 for the same period in 2003. Of this
increase, $66,000 was the result of the combination of operations of FCB and
CNB. Exclusive of the combination, loan-servicing fees grew $69,000, from
$1,000 in 2003 to $70,000 in 2004. Three loans were sold in the first quarter
of 2004, resulting in income of $13,000, compared to none sold during the same
period in 2003. No gains or losses on sales of securities were recognized in
2004, compared to $12,000 in losses recognized in 2003 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 $36,000 in license fee income during the
three-month period in 2004, compared to $58,000 during the same period in 2003,
a decrease of $22,000. The decrease in license fee income was due to lower
deposits generated by this subsidiary. Total other expenses increased $997,000 to $2,727,000 for the quarter ended
June 30, 2004 compared to $1,731,000 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 $641,000 to
$1,723,000 for the quarter ended June 30, 2004 compared to $1,082,000 for the
same period in 2003. Of this increase, $208,000 was due to the combination of
FCB and CNB. Exclusive of the combination, salaries and benefits increased
$433,000, which mainly resulted from the addition of new employees in business
development groups. In addition, occupancy and equipment increased $69,000, due to both
the leasing of additional space in the Norcross office and the combination of
FCB and CNB. Finally, other expenses increased $288,000, or 57.2%, from $503,000 during
the three months ended June 30, 2003 to $790,000 for the same period in 2004.
Of this increase, $34,000 was attributable to the combination of FCB and CNB.
The rest of the increase was mainly the result of higher business development
expense, professional fees, data processing fees, lockbox processing fees and
subscriptions in support of deposit gathering and business development
initiatives. The effective tax rate was 33.6% for the three months ended June 30, 2004 and
36.2% for the three months ended June 30, 2003. The decrease in the effective
tax rate reflects the increase in non-taxable income for the three months ended
June 30, 2003. 18




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##### Table of Contents



Six-Month Period Ended June 30, 2004 Net income for the six-month period ended June 30, 2004 totaled $1,046,898 or
$0.39 per basic and $.38 per fully diluted share compared to a net income of
$751,094, or $0.35 per basic and $0.32 per fully diluted share for the same
six-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 six months ended June
30, 2004 and 2003. Six-months Ended June 30,2004
    
    2003Average
    
    Income/
    
    Yields/
    
    Average
    
    Income/
    
    Yields/Balances (1)
    
    Expense
    
    Rates
    
    Balances (1)
    
    Expense
    
    Rates(Dollars in Thousands)Federal funds sold and
interest-bearing deposits
    
    $
    6,437
    
    
    $
    33
    
    
    
    1.04
    %
    
    $
    3,985
    
    
    $
    23
    
    
    
    1.17
    %Securities (2)
    
    
    123,165
    
    
    
    2,643
    
    
    
    4.30
    
    
    
    97,452
    
    
    
    2,017
    
    
    
    4.17Loans, net of deferred fees (3)(4)
    
    
    359,929
    
    
    
    9,631
    
    
    
    5.37
    
    
    
    278,057
    
    
    
    7,882
    
    
    
    5.72Total earning assets
    
    
    489,531
    
    
    
    12,308
    
    
    
    5.04
    %
    
    
    379,494
    
    
    
    9,923
    
    
    
    5.27
    %Unrealized gains (losses) on
securities (2)
    
    
    (364
    )
    
    
    
    
    
    
    
    
    
    
    464Allowance for loan losses
    
    
    (3,722
    )
    
    
    
    
    
    
    
    
    
    
    (3,406
    )Cash and due from banks
    
    
    9,030
    
    
    
    
    
    
    
    
    
    
    
    5,464Other assets
    
    
    6,999
    
    
    
    
    
    
    
    
    
    
    
    4,281Total
    
    $
    501,474
    
    
    
    
    
    
    
    
    
    
    $
    386,297Transaction and money market deposits
    
    $
    92,125
    
    
    $
    293
    
    
    
    .64
    %
    
    $
    69,326
    
    
    $
    291
    
    
    
    .84
    %Time deposits
    
    
    203,180
    
    
    
    2,804
    
    
    
    2.77
    
    
    
    182,380
    
    
    
    3,067
    
    
    
    3.37Other borrowings
    
    
    120,235
    
    
    
    1,907
    
    
    
    3.18
    
    
    
    89,966
    
    
    
    1,835
    
    
    
    4.11Subordinated debt
    
    
    6,392
    
    
    
    288
    
    
    
    9.02
    
    
    
    6,392
    
    
    
    288
    
    
    
    9.07Total interest-bearing liabilities
    
    
    421,932
    
    
    
    5,292
    
    
    
    2.52
    %
    
    
    348,064
    
    
    
    5,480
    
    
    
    3.18
    %Non interest-bearing demand deposits
    
    
    51,166
    
    
    
    
    
    
    
    
    
    
    
    16,892Other liabilities
    
    
    2,042
    
    
    
    
    
    
    
    
    
    
    
    2,064Shareholders equity
    
    
    26,334
    
    
    
    
    
    
    
    
    
    
    
    19,277Total
    
    $
    501,474
    
    
    
    
    
    
    
    
    
    
    $
    386,297Net interest income
    
    
    
    
    
    
    7,016
    
    
    
    
    
    
    
    
    
    
    
    4,442Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.52
    %
    
    
    
    
    
    
    
    
    
    
    2.09
    %Net yield on average
interest-earning assets
    
    
    
    
    
    
    
    
    
    
    2.87
    %
    
    
    
    
    
    
    
    
    
    
    2.36
    %
 (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 $454,000 and $406,000 for the periods ended June 30, 2004 and 2003, respectively. Net interest income totaled $7,016,000 for the six months ended June 30, 2004,
an increase of $2,574,000, or 57.9% over the same period in 2003. $558,000 of
the increase was attributable to the combination of FCB and CNB. Average
interest-earning assets increased $110.0 million, or 29.0% over 2003,
reflecting growth in both the loan and securities portfolios. The combination
of FCB and CNB contributed $24.6 million of the total growth in
interest-earning assets. Exclusive of this growth, loans increased $64.4
million on average and securities increased $19.4 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 a strong loan
demand in our market area. Our primary interest-earning assets are loans,
which represented 73.5% of average interest-earning assets at June 30, 2004,
compared to 73.3% at June 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 $73.8 million, or 21.2%, and average non
interest-bearing demand deposits increased $34.3 million, or 202.9%, over the
six-month periods ended June 30, 2004 and 2003. The combination of FCB and CNB
contributed $21.1 million of the total growth in interest-bearing liabilities
and $2.5 million of the total growth in non interest-bearing demand deposits.
Exclusive of the combination, interest-bearing liabilities grew $26.6 million
and non interest- bearing demand deposits grew $31.8 million on average from
June 30, 2003 to June 30, 2004. The significant growth in deposits is the
result of our deposit gathering programs. The growth in these deposits is
expected to continually improve our net interest spread and net interest
margin. As reflected above, the net yield on average earning assets was 2.87% for the
six months ended June 30, 2004, compared to 2.36% for the six months ended June
30, 2003. The rate earned on average earning assets was 5.04% for the six
months ended June 30, 2004, compared to 5.27% for the same period in 2003.
This 23 basis point decline was outpaced by a 66 basis point decline in the
average rate paid on interest-bearing liabilities. The rate paid on average
interest-bearing liabilities was 2.52% for the six months ended June 30, 2004,
compared to 3.18% for the same period in 2003. Prime rate was unchanged in
both periods, but assets and liabilities that do not float with prime continued
to reprice at current lower rates. For the first six months of 2004, 10.5% of
average earning assets were funded with non interest bearing demand deposits,
compared to 4.5% for the same period in 2003, which contributed to the
improvement in net yield on average earning assets. Total other income for the six-month period ended June 30, 2004 increased
$175,000, or 140.2%, to $300,000 compared to $125,000 for the same period in
2003. Of this increase, $66,000 was the result of the combination of
operations of FCB and CNB. Exclusive of the combination, loan-servicing fees
grew $83,000, from $3,000 in 2003 to $86,000 in 2004. Four loans were sold in
the first six months of 2004, resulting in income of $32,000, compared to none
sold during the same period in 2003. No gains or losses on sales of securities
were recognized in 2004, compared to $49,000 in losses recognized in 2003
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 $74,000 in license fee
income during the six-month period in 2004, compared to $121,000 during the
same period in 2003, a decrease of $47,000. The decrease in license fee income
was due to lower deposits generated by this subsidiary. Total other expenses increased $1,570,000 to $4,859,000 for the six-month
period ended June 30, 2004 compared to $3,289,000 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 $950,000
to $3,006,000 for the six-month period ended June 30, 2004 compared to
$2,056,000 for the same period in 2003. Of this increase, $208,000 was due to
the combination of FCB and CNB. Exclusive of the combination, salaries and
benefits increased $742,000, which mainly resulted from the addition of new
employees in business development groups. In addition, occupancy and equipment increased
$92,000, due to both the leasing of additional space in the Norcross office and
the combination of FCB and CNB. Finally, other expenses increased $529,000, or 55.8%,
from $947,000 during the first six months of 2003 to $1,475,000 for the same
period in 2004. Of this increase, $34,000 was attributable to the combination
of FCB and CNB. The rest of the increase was mainly the result of higher
business development expense, professional fees, data processing fees, lockbox
processing fees and subscriptions in support of deposit gathering and business
development initiatives. The effective tax rate was 34.9% for the six months ended June 30, 2004
and 36.3% for the six months ended June 30, 2003. The decrease in the
effective tax rate reflects the increase in non-taxable income for the six
months ended June 30, 2003. 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. 
 PART II. OTHER INFORMATION 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A Special Meeting of Shareholders of CNB Holdings, Inc. (the Special Meeting)
was held on April 30, 2004. Notice of the Special Meeting was mailed on or
about March 23, 2004 to each shareholder of record as of March 15, 2004. At
this meeting, the Companys shareholders considered a proposal to approve the
Agreement and Plan of Merger dated as of September, 24, 2003, and as amended on
March 8, 2004, by and between CNB Holdings, Inc. and First Capital Bancorp,
Inc. (the Agreement and Plan of Merger). The Agreement and Plan of Merger
had previously been adopted and approved by the Companys Board of Directors. As of the March 15, 2004 record date, there were 1,134,296 shares of CNB
Holdings, Inc. common stock entitled to vote at the Special Meeting and
687,409, or 60.6% of such shares were present at the Special Meeting by proxy
or in person. The motion to approve the Agreement and Plan of Merger received
votes from shareholders holding a combined 601,397 shares of common stock,
representing a majority of votes cast on the matter. 85,009 votes were cast
against the matter and there were 1,003 abstentions and no broker non-votes.
The proposal to approve the Agreement and Plan of Merger was approved. No other matters were presented or voted upon at the Special Meeting. 21




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##### Table of Contents



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No.
    
    Description2.1*
    
    Agreement and Plan of Merger, dated
as of September 24, 2003, by and between CNB Holdings,
Inc. and First Capital Bancorp, Inc. (set forth as
Appendix A to the proxy statement/prospectus included in
CNB Holding, Inc.s Registration Statement No.
333-111358 on Form S-4/A, previously filed with the
Commission on March 19, 2004 and incorporated by
reference herein).2.1.1*
    
    Amendment to the Agreement and Plan of Merger, dated
as of March 8, 2004, by and between CNB Holdings, Inc.
and First Capital Bancorp, Inc. (set forth as Appendix A
to the proxy statement/prospectus included in CNB
Holding, Inc.s Registration Statement No. 333-111358 on
Form S-4/A, previously filed with the Commission on
March 19, 2004 and incorporated by reference herein).4.2
    
    Supplemental Indenture, dated
May 28, 2004, among First Capital Bancorp, Inc., CNB Holdings,
Inc. and U.S. Bank National Association.4.3
    
    Indenture, dated January 17,
2002, between First Capital Bancorp, Inc. and State Street Bank and
Trust Company of Connecticut, National Association.10.13
    
    Lease Agreement, as amended and
restated as of May 31, 2004 between First Capital Bank
and MSR Holdings, Inc.10.14
    
    Employment Agreement, dated
April 19, 2004, between William R. Blanton and CNB Holdings,
Inc.31.1
    
    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).
 * Previously filed. (b) Reports on Form 8-K On June 9, 2004, the Company filed a report on form 8-K,
Items 2 and 7. 22




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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: August 11, 2004
    
    By:
    
    /s/ H. N. Padget, Jr.H. N. Padget, Jr., President and Chief Executive Officer(principal executive officer)Date: August 11, 2004
    
    By:
    
    /s/ William R. BlantonWilliam R. Blanton, Vice Chairman, Chief Operating and Financial Officer(principal financial and accounting officer)
 23




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##### Table of Contents



EXHIBIT INDEX Exhibit Number
    
    Description4.2
    
    Supplemental Indenture, dated
May 28, 2004, among First Capital Bancorp, Inc., CNB Holdings,
Inc. and U.S. Bank National Association.4.3
    
    Indenture, dated January 17,
2002, between First Capital Bancorp, Inc. and State Street Bank and
Trust Company of Connecticut, National Association.10.13
    
    Lease Agreement, as amended and restated as of May 31, 2004
between First Capital Bank and MSR Holdings, Inc.10.14
    
    Employment Agreement, dated
April 19, 2004, between William R. Blanton and CNB Holdings,
Inc.31.1
    
    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).
 24