-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O5mVL/eaCNtd88kZdHEBB+5/uNHNtQOWwpvnX3xAnjtebmLsmkOaJ3+KMKBJt5F9 z84cixM2s3yVwbXI8hv5fQ== 0000950144-96-005016.txt : 19960820 0000950144-96-005016.hdr.sgml : 19960820 ACCESSION NUMBER: 0000950144-96-005016 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960809 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000852677 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 621626938 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28496 FILM NUMBER: 96606742 BUSINESS ADDRESS: STREET 1: 401 CHURCH ST STREET 2: PO BOX 198986 CITY: NASHVILLE STATE: TN ZIP: 37219 MAIL ADDRESS: STREET 1: PO BOX 198986 CITY: NASHVILLE STATE: TN ZIP: 37219-8986 10QSB 1 COMMUNITY FINANCIAL GROUP, INC. FORM 10QSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB X Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 - - --- For the quarterly period June 30, 1996 --------------------------------------------------------------------------------------------------- Commission File Number: 0-28496 --------------------------------------------------------------------------------------------------------- Community Financial Group, Inc. - - --------------------------------------------------------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Tennessee 62-1626938 - - --------------------------------------------------------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S Employer Identification No.) 401 Church Street, Nashville, Tennessee 37219-2213 - - --------------------------------------------------------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (615) 271-2000 (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. X Yes No --- --- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Common shares outstanding 2,200,726 as of August 6, 1996. 2 PART I FINANCIAL INFORMATION
Page(s) ------- ITEM 1. FINANCIAL STATEMENTS ------------------------------------------------------------- - Consolidated Balance Sheet June 30, 1996 ............................................. 1 - Consolidated Statement of Changes in Shareholders' Equity Six Months Ended June 30, 1996 ............................ 2 - Consolidated Statements of Income Three and Six Months Ended June 30, 1996 and 1995 ......... 3 - Consolidated Statements of Cash Flows Six Months Ended June 30, 1996 and 1995 ................... 4 - 5 - Notes to Consolidated Financial Statements - June 30, 1996 .. 6 - 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......................... 12 - 16 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..................................................... 17 - 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................ 19 - 41
3 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET JUNE 30, 1996 (IN THOUSANDS OF DOLLARS) (UNAUDITED) ASSETS Cash and due from banks $ 4,099 Federal funds sold 10,400 Securities available for sale (amortized cost $42,779) 42,593 Loans (net of unearned income of $209): Commercial 39,571 Real estate - mortgage loans 53,540 Real estate - construction 7,795 Consumer 3,070 ---------- Loans, net of unearned income 103,976 Less allowance for possible loan losses (3,176) ---------- Total Net Loans 100,800 ---------- Premises and equipment, net 602 Accrued interest and other assets 1,470 ---------- Total Assets $ 159,964 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Non-interest bearing demand deposits $ 9,172 Interest-bearing deposits: NOW accounts 5,178 Money market accounts 58,970 Time certificates less than $100,000 30,463 Time certificates $100,000 and greater 30,520 ----------- Total Deposits 134,303 ----------- Federal funds purchased 3,000 Accounts payable and accrued liabilities 1,833 ----------- Total Liabilities 139,136 ----------- Commitments and contingencies - Shareholders' equity (Note F): Common stock, $6 par value; authorized 50,000,000 shares; issued and outstanding 2,200,726 shares 13,204 Additional paid-in capital 6,671 Retained earnings 1,139 Unrealized gain on securities available for sale (186) ----------- Total Shareholders' Equity 20,828 ----------- Total Liabilities and Shareholders' Equity $ 159,964 ===========
See accompanying notes to consolidated financial statements. - 1 - 4 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS OF DOLLARS) (UNAUDITED)
Unrealized Gain on Additional Securities Common Paid-In Retained Available Stock Capital Earnings (Deficit) For Sale Total ------- ---------- ------------------ ---------- ---------- Balance, January 1, 1996 $13,149 $ 8,500 $(1,916) $ 279 $20,012 Issuance of common stock - Associates Stock Purchase and Performance Based Incentive Program Plan (9,226 shares) 55 22 - - 77 Net income - - 1,380 - 1,380 Transfers to comply with state statute regarding dividends, net (Note F) - (1,851) 1,851 - - Cash dividends - $.08 per share - - (176) - (176) Change in unrealized gain (loss) on securities available for sale - - - (465) (465) ------- ---------- ------- ----- ------- Balance, June 30, 1996 $13,204 $ 6,671 $ 1,139 $(186) $20,828 ======= ========== ======= ===== =======
See accompanying notes to consolidated financial statements. - 2 - 5 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ 1996 1995 1996 1995 --------- --------- --------- --------- Interest income: Interest and fees on loans $ 2,355 $ 2 ,143 $ 4,637 $ 4,119 Interest on federal funds sold 53 130 138 185 Interest on securities: U.S. Treasury securities 90 158 221 359 Other U.S. government agency obligations 676 644 1,286 1,254 --------- ---------- ---------- ---------- Total interest income 3,174 3,075 6,282 5,917 --------- ---------- ---------- ---------- Interest expense: Interest bearing demand deposits 690 728 1,361 1,360 Savings and time deposits less than $100,000460 549 958 1,014 Time deposits $100,000 and over 405 490 835 906 Federal funds purchased 3 - 3 - --------- ---------- ---------- ---------- Total interest expense 1,558 1,767 3,157 3,280 --------- ---------- ---------- ---------- Net interest income 1,616 1,308 3,125 2,637 Provision for possible loan losses - - - (520) --------- ---------- ---------- ---------- Net interest income after provision for possible loan losses 1,616 1,308 3,125 3,157 Non-interest income: Service fee income 40 67 75 136 Trust income 122 73 203 166 Investment Center income 21 10 33 19 Gain (loss) on sale of securities (2) 11 (2) (11) Income from foreclosed assets 6 18 121 23 Gain on sale of foreclosed assets - - 5 - Other 42 17 60 34 --------- ---------- ---------- ---------- Total non-interest income 229 196 495 367 --------- ---------- ---------- ---------- Non-interest expense: Salaries and employee benefits 611 540 1,167 1,092 Occupancy expense 118 113 231 217 FDIC insurance 1 82 2 163 Audit, tax and accounting 70 34 103 70 Data processing expense 46 28 108 90 Other operating expenses 334 248 599 500 --------- ---------- ---------- ---------- Total non-interest expense 1,180 1,045 2,210 2,132 --------- ---------- ---------- ---------- Income before income taxes 665 459 1,410 1,392 Provision for income taxes 15 - 30 - --------- ---------- ---------- ---------- Net income $ 650 $ 459 $ 1,380 $ 1,392 ========= ========== ========== ========== Earnings per share (Note F) $ .29 $ .21 $ .62 $ .63 ========= ========== ========== ========== Weighted average common shares outstanding 2,215,507 2,199,802 2,213,589 2,197,751 ========= ========== ========== ==========
See accompanying notes to consolidated financial statements. - 3 - 6 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) (UNAUDITED)
Six Months Ended June 30 1996 1995 -------------- --------------- Cash flows from operating activities: Interest received $ 6,395 $ 5,771 Fees received 498 446 Interest paid (3,360) (2,961) Cash paid to suppliers and associates (2,327) (2,312) ---------- ---------- Net cash provided by operating activities 1,206 944 ---------- ---------- Cash flows from investing activities: Maturities of securities available for sale 5,972 753 Maturities of securities held to maturity - 628 Proceeds from sales of securities available for sale 6,016 4,000 Purchases of securities available for sale (7,135) (7,871) Loans (originated) repaid by customers, net (5,494) (9,314) Capital expenditures (15) (330) ---------- ---------- Net cash used by investing activities (656) (12,134) ---------- ---------- Cash flows from financing activities: Net increase (decrease) demand deposits, NOW, money market accounts 7,361 (7,056) Net increase (decrease) in certificates of deposit (3,592) 8,763 Increase in federal funds purchased 3,000 - Proceeds from issuance of common stock 77 45 Dividends paid (176) - ---------- ---------- Net cash provided by financing activities 6,670 1,752 ---------- ---------- Net increase (decrease) in cash and cash equivalents 7,220 (9,438) Cash and cash equivalents - beginning of period 7,279 18,486 ---------- ---------- Cash and cash equivalents - end of period $ 14,499 $ 9,048 ========== ==========
See accompanying notes to consolidated financial statements. - 4 - 7 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) (UNAUDITED)
Six Months Ended June 30 ---------------------------- 1996 1995 ---------- ---------- Reconciliation of net income to net cash provided by operating activities: Net income $ 1,380 $ 1,392 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 102 65 Provision for possible loan losses - (520) Loss on sale of securities 2 11 Gain on sale of foreclosed assets (5) - Loss on disposal of equipment 3 - Changes in assets and liabilities: Increase in accrued interest and other assets 145 (406) Increase (decrease) in accounts payable and accrued liabilities (421) 402 ------ ------- Total adjustments (174) (448) ------ ------- Net cash provided by operating activities $ 1,206 $ 944 ======= ======= Supplemental Disclosure: Non Cash Transactions: Change in unrealized gain/loss on available for sale securities $ (465) $ 851 ======= =======
See accompanying notes to consolidated financial statements. - 5 - 8 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) A. HOLDING COMPANY FORMATION AND PRINCIPLES OF CONSOLIDATION On April 16, 1996, the shareholders of The Bank of Nashville (The Bank) approved the formation of a holding company. On April 30, 1996 The Bank became a wholly-owned subsidiary of the holding company, Community Financial Group, Inc. (CFGI), a Tennessee corporation. Each outstanding share of The Bank's stock was exchanged for an outstanding share of CFGI and each outstanding warrant and each option to purchase common shares of The Bank became warrants and options to purchase shares of CFGI. The accompanying unaudited consolidated financial statements include the accounts of CFGI and The Bank. Balances and activity reflected in the accompanying consolidated financial statements for the period prior to the formation of CFGI are those of The Bank only. The operations of CFGI and The Bank are collectively referred herein as the Company. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. The accompanying unaudited consolidated financial statements have been prepared in accordance with general practices within the banking industry and generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation SB. 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 accruals) considered necessary for a fair presentation have been included. Certain prior year amounts have been reclassified to conform with current year presentation. The consolidated financial statements should be read in conjunction with the Summary of Significant Accounting Policies and the Notes to the Financial Statements presented in The Bank of Nashville's 1995 Annual Report to Shareholders. The results for the interim period are not necessarily indicative of results to be expected for the complete calendar year. B. SECURITIES Securities with an aggregate amortized cost of approximately $23.4 million and a fair market value of $23.1 million at June 30, 1996, were pledged to secure public deposits and for other purposes as required or permitted by law. C. ALLOWANCE FOR POSSIBLE LOAN LOSSES An analysis of the changes in the allowance for possible loan losses follows (in thousands):
Six Months Ended Three Months Ended June 30, 1996 June 30, 1996 ---------------- ------------------ Balance, beginning of period $3,034 $3,173 Provision charged (credited) to operations - - Loans charged off (181) (181) Recoveries 323 184 ------ ------ Balance, end of period $3,176 $3,176 ====== ====== Allowance ratios are as follows: Balance, to loans outstanding end of period 3.05% 3.05% Net charge-offs (recoveries) to average loans (.14%) (.01%)
- 6 - 9 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) D. IMPAIRED LOANS The Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," as of January 1, 1995. These statements require that certain impaired loans be measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less that the recorded investment in the loan, the impairment is recorded through a valuation allowance. The adoption of these statements did not have a material impact on the Company's consolidated financial statements. At June 30, 1996, the Company recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 are $286,000 and $143,000, respectively. This valuation allowance is included in the allowance for loan losses on the consolidated balance sheet. The average recorded investment in impaired loans for the three and six months ended June 30, 1996, were $292,000 and $302,000, respectively. Interest payments received on impaired loans are recorded as reductions in principal outstanding or recoveries of principal previously charged off. Once the entire principal has been collected any additional payments received are recognized as interest income. No interest income was recognized on impaired loans in the three and six months ended June 30, 1996. E. INCOME TAXES Actual income tax expense for the three and six months ended June 30, 1996 differed from "expected" tax expense (computed by applying the U.S. Federal corporate tax rate of 34% to income before income taxes) as follows:
Six Months Ended Three Months Ended June 30, 1996 June 30, 1996 ---------------- ------------------ Computed "expected" tax expense $ 479 $ 226 Benefit of net operating loss carryforward (449) (211) ----- ----- Total Income Tax Expense $ 30 $ 15 ===== =====
The Company accounts for income taxes according to SFAS No. 109, Accounting for Income Taxes, which requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax effects attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Net deferred tax assets have been offset by recording a valuation reserve. Management will continue to evaluate the propriety of the valuation reserve based on an evaluation of the likelihood of realizing the tax benefits using the more likely than not criterion. - 7 - 10 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) E. INCOME TAXES - CONTINUED The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 1996, are presented below (in thousands):
June 30, 1996 -------- Deferred tax assets: Deferred fees, principally due to timing differences in the recognition of income $ 119 Net operating loss carryforwards 512 Unrealized loss on securities available for sale 71 Alternative minimum tax carryforwards 77 Other 15 -------- Total gross deferred tax assets 794 -------- Less valuation allowance (436) -------- Net deferred tax assets 358 -------- Deferred tax liabilities: Discount on securities deferred for tax purposes (76) Loans, principally due to provision for possible losses (211) Premises and equipment, principally due to differences in depreciation methods (62) Other (9) -------- Total gross deferred tax liabilities 358 -------- Net $ - ========
The net decrease during the six months ended June 30, 1996, in the valuation allowance for deferred tax assets was $324,000. At December 31, 1995, the Company had a net operating loss carryforward for income tax purposes of $2.3 million for federal purposes and $4.4 million for state purposes. These federal and state net operating loss carryforwards expire in the year 2007. F. SHAREHOLDERS' EQUITY The Company had outstanding stock options totaling 60,000 shares at June 30, 1996. At June 30, 1996, warrants to purchase 4,744,927 shares of the Company common stock were outstanding. The exercise price of the warrants is $12.50, and they expire on December 31, 1998. Management has used the treasury stock method to compute earnings per share since CFGI and The Bank were incorporated. CFGI options and warrants are common stock equivalents. The above mentioned warrants have not been included in CFGI's computation of earnings per share because the market price of CFGI (and previously The Bank) common stock has been less than the exercise price of the warrants since issuance. If the market price of the common stock exceeds the warrants' exercise price for substantially all of any three-month reporting period, CFGI will reflect the impact of the warrants in all - 8 - 11 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) F. SHAREHOLDERS' EQUITY - CONTINUED future earnings per share computations using the modified treasury stock method. The modified treasury stock method assumes the exercise of all outstanding warrants, the repurchase of up to 20% of CFGI's stock, the retirement of any long-term and short-term borrowings and the investment of the remaining proceeds, with appropriate recognition of any income tax effects. If CFGI's stock price had been in excess of $12.50 per share for substantially all of the three-month reporting period ending June 30, 1996, earnings per share using the modified treasury stock method for the three and six months ended June 30, 1996 would have been $.17 and $.34 respectively. On February 13, 1996 The Bank paid its first quarterly dividend to shareholders. In order to pay this dividend, in accordance with state statute, The Bank transferred $1,925,000 from Additional Paid-In Capital to Retained Earnings. In addition, in order to declare dividends in the future The Bank must transfer a minimum of ten percent of current net income from Retained Earnings to Additional Paid-In Capital until Additional Paid-In Capital equals common stock. During the quarter ended March 31, 1996 prior to the formation of CFGI, $74,000 was transferred from Retained Earnings to Additional Paid-In Capital. G. COMMITMENTS AND CONTINGENCIES In the normal course of business, there are various commitments outstanding to extend credit, such as the funding of undrawn lines of credit or standby letters of credit, which generally accepted accounting principles do not require to be recognized in the financial statements. The Company, through regular reviews of these arrangements, does not anticipate any material losses as a result of these transactions. At June 30, 1996, the Company had unfunded commitments to extend credit totaling $25,989,000 consisting of unfunded lines of credit and commitments to extend credit. Additionally, the Company had standby letters of credit of $1,871,000 as of June 30, 1996. The Bank is required to maintain average balances with the Federal Reserve Bank to meet its reserve requirements. The average amount of these balances for the three and six months ended June 30, 1996, was approximately $582,000 and $594,000, respectively. The required balance at June 30, 1996 was $869,000. H. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments for both on and off-balance sheet assets and liabilities for which it is practicable to estimate fair value. The techniques used for this valuation are significantly affected by the assumptions used, including the amount and timing of future cash flows and the discount rate. Such estimates involve uncertainties and matters of judgment and therefore cannot be determined with precision. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. Accordingly, the aggregate fair value amounts presented are not meant to represent the underlying value of the Company. - 9 - 12 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) H. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED The following table presents the carrying amounts and the estimated fair value of the Company's financial instruments at June 30, 1996.
Estimated Carrying Amount Fair Value --------------- ---------- (In Thousands) -------------- Financial assets: Cash due from banks and federal funds sold $14,499 $14,499 Investment securities 42,593 42,593 Loans, net of unearned income 103,976 103,847 Financial liabilities: Deposits 134,303 134,593 Federal funds purchased 3,000 3,000 Contractual or Estimated Notional Amounts Fair Value ---------------- ---------- (In Thousands) -------------- Off-balance items: Interest rate floors $ 8,000 $ 2 Commitments to extend credit 25,989 * Standby letters of credit 1,871 *
*The estimated fair value of these items was not significant at June 30, 1996. The following summary presents the methodologies and assumptions used to estimate the fair value of the Company's financial instruments. CASH DUE FROM BANKS AND FEDERAL FUNDS SOLD For cash due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value. These instruments expose the Company to limited credit risk and carry interest rates which approximate market. INVESTMENT SECURITIES In estimating fair values, management makes use of prices or dealer quotes for U.S. Treasury securities, other U.S. government agency securities, and mortgage-backed certificates. As required by SFAS No. 115, securities available for sale are recorded at fair value. - 10 - 13 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (UNAUDITED) H. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED LOANS The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities adjusted for differences in loan characteristics. The risk of default is measured as an adjustment to the discount rate, and no future interest income is assumed for nonaccrual loans. DEPOSIT LIABILITIES AND FEDERAL FUNDS PURCHASED The fair value of deposits with no stated maturities (which includes demand deposits, NOW accounts, and money market deposits) is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using a discounted cash flow model based on the rates currently offered for deposits of similar maturities. The fair value of federal funds purchased approximates book value due to the short maturity of such instruments. SFAS No. 107 requires deposit liabilities with no stated maturity to be reported at the amount payable on demand without regard for the inherent funding value of these instruments. CFGI believes that significant value exists in this funding source. INTEREST RATE FLOORS The fair value of interest rate floors is established by the issuer based on the market price to purchase a like instrument with comparable terms. I. DERIVATIVE FINANCIAL INSTRUMENTS The Company has entered into interest rate floor agreements for its asset/liability management program to reduce interest rate risk. These interest rate floors represent obligations by third parties whereby the Company receives payment when the underlying rate index falls below an agreed upon level. The Company paid a fee of $102,000, which is amortized as an adjustment of yield. The unamortized portion of this fee as $46,000 at June 30 1996. At June 30, 1996, the Company held interest rate floor contracts with notional amounts totaling $8.0 million which expire in 1997 and 1998, and were entered into to protect the Company from falling interest rates (See Note H). - 11 - 14 ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion addresses the financial condition of Community Financial Group, Inc., (CFGI), and its wholly-owned subsidiary the Bank of Nashville (The Bank). On April 30, 1996, following regulatory and shareholder approval, The Bank executed a plan of exchange with CFGI, whereby CFGI became the parent bank holding company of The Bank. Under the agreement, each share of common stock of The Bank was exchanged for one share of CFGI, and each outstanding warrant and each outstanding option to purchase common shares of The Bank automatically became warrants and options to purchase shares of CFGI. The balances and activity for the period prior to April 30, 1996 are those of The Bank of Nashville only. Operations of CFGI and The Bank are collectively herein referred to as the Company. The accompanying consolidated financial statements and notes are considered to be an integral part of the analysis and should be read in conjunction with the narrative. The quarterly consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for fair presentation of the results of interim periods. The results for interim periods are not necessarily indicative of results to be expected for the complete calendar year. References should also be made to The Bank of Nashville's 1995 annual report for a more complete discussion of factors that impact results of operations, liquidity and capital. This discussion is designed to assist readers in their analysis of CFGI's consolidated financial statements and related notes. OVERVIEW CFGI was formed April 30, 1996 and is the parent company of The Bank. Net income of $650,000 was reported for the second quarter of 1996 compared with net income of $459,000 for the second quarter of 1995. The Company earned $.29 per share for the second quarter of 1996, a 38% increase over the $.21 per share reported for the second quarter of 1995. As a result of management's assessment of asset quality and the level of nonperforming assets, the Company recorded no provision for possible loan losses during the second quarter of either 1996 or 1995. The Company's annualized return on average assets was 1.70% for the second quarter of 1996 and 1.22% for the second quarter of 1995. Annualized return on average equity was 12.64% for the second quarter of 1996 and 10.02% for the same period in 1995. Net income for the six month period ended June 30, 1996 was $1,380,000 and included a zero provision for possible loan losses which compares with net income of $1,392,000 during the first six months of 1995, a period in which the Company recorded a $520,000 negative provision for possible loan losses. Earnings per share were $.62 for the six months ended June 30, 1996, compared with $.63 for the same period in 1995. Net interest income increased $488,000, 18.5%, during the first six months of 1996 from the same period in 1995. Non-interest income increased $128,000, 34.9%, during the first six months of 1996 compared with the same period in 1995, primarily due to increases in Trust income, Investment Center income, and income on foreclosed assets. These increases were partially offset by a decrease in service fee income. Non-interest expense increased $78,000, 3.7%, during the first six months of 1996 compared with the same period in 1995. The Company recorded $30,000 in provision for income taxes during the first six months of 1996 while no provision was made for this period in 1995. Year to date results and forecasts by management of future results necessitated the recording of provision for income taxes as the expectation exists that net operating loss (NOL's) carryforwards will be fully utilized during 1996. It is the expectation that the last two quarters in 1996 will reflect increased tax provisions if current profit and growth trends continue and the Company's effective tax rate in 1997 will move closely reflect statutory tax rates. - 12 - 15 NET INTEREST INCOME Net interest income is the principal component of the Company's income stream and represents the difference or spread between interest generated from earning assets and interest paid on deposits. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest bearing liabilities, materially impact net income. Net interest income for the second quarter of 1996 was $1.6 million, an increase of 23.5% from $1.3 million in the second quarter of 1995. The increase in net interest income resulted from a $2.9 million increase in the average volume of earning assets and a decline of $1.2 million in the volume of average interest bearing liabilities as well as a 70 basis point decline in the interest rate paid on those liabilities. The increase in volume on average earning assets was attributed to an $11.6 million increase in average loans outstanding which was partially offset by a $4.2 million decline in average investments and a $4.5 million decline in Federal Funds sold. These changes in mix positively impacted the Company's net interest income as there was a greater concentration in loans, the Company's highest yielding asset. Net interest income was also positively impacted by a decline in the average volume of interest bearing liabilities, as well as a shift in the mix of these liabilities and a decline in the average rate paid on these liabilities. The volume of NOW Accounts increased 34.4%, and Money Market Accounts increased 10.9%, while certificates of deposit less than $100,000 decreased 13.1%, and certificates of deposit $100,000 or greater declined 11.1%. All classifications of interest bearing liabilities reflected declines in average rates paid during the second quarter of 1996 compared to the same period in 1995. The average rate paid declined 40 basis points on NOW Accounts, 90 basis points on Money Market Investment Accounts, 20 basis points on certificates of deposit less than $100,000, and 40 basis points on certificates of deposit $100,000 or greater. Net interest income for the first six months of 1996 was $3.1 million, an increase of 18.5%, compared to $2.6 million during the first six months of 1995. The increase in net interest income during the first six months of 1996 resulted from an increase of 6.4% in the volume of average earning assets, while average interest bearing liabilities only increased 3.7%. Net interest income was further impacted by average rates earned on earning assets remaining level while average rates paid on interest bearing liabilities declined 40 basis points. Net interest income was also positively impacted by the shift in the mix of earning assets which reflected loans increasing by 15.6% while investments and Federal Funds sold declined by 7.6% and 8.4%, respectively. A shift in the mix of average interest bearing liabilities also contributed to the improvement in net interest income as funds moved from higher rate certificates of deposit to lower rate Money Market Investment and NOW Accounts. This shift in mix in average interest bearing liabilities was comprised of increases of 23.9% in NOW Accounts and 13.7% in Money Market Investment Accounts, as well as decreases of 6.2% in certificates of deposit less than $100,000 and 4.2% in certificates of deposit $100,000 or greater. Although the movement of funds into more liquid transaction accounts as have occurred in the past 6 months has the effect of lowering the cost of funds, it also positions this money to reprice more rapidly in a changing interest rate environment. These shifts from CD's to more liquid deposits reflect a general expectation that interest rates will rise. The net interest margin (net interest income expressed as a percentage of average earning assets) was 4.3% and 3.6% for the quarter ended June 30, 1996 and 1995, respectively. Net interest margin was 4.1% for the six month period ended June 30, 1996, compared to 3.7% for the same period in 1995. The increase in net interest margin for the three month and six month periods ended June 30, 1996 compared to the same periods in 1995, resulted primarily from a higher volume of earning assets and the mix of those assets, as well as a shift in the mix of interest bearing liabilities and an overall decline in the average rate paid on those liabilities. A shift in the mix of the Company's earning assets, as well as differences in interest rate sensitivity of the Company's earning assets and interest bearing liabilities can affect the net interest margin. - 13 - 16 NON-INTEREST INCOME Non-interest income was $229,000 for the second quarter of 1996, compared with $196,000 for the same period in 1995. Excluding gains (losses) on sale of securities and sale of foreclosed assets, totaling ($2,000) in 1996 and $11,000 in 1995, non-interest income increased $46,000. This resulted from increases in Trust income, Investment Center income and other income which were partially offset by decreases in service fee income and income from foreclosed assets. Total non-interest income was $495,000 for the first six months of 1996, compared with $367,000 for the same period in 1995. Non-interest income, excluding gains (losses) on sale of securities and foreclosed assets of $3,000 in 1996 and ($11,000) in 1995, increased $114,000 for the first six month of 1996 compared with the same period in 1995. Increases in 1996 compared to 1995 of $37,000 in Trust income, $98,000 in income from foreclosed assets, $26,000 in other income, $14,000 in Investment Center income, and $5,000 in gains on sales of foreclosed assets were partially offset by a decrease of $61,000 in service fee income. The increase in income from foreclosed assets during 1996 was primarily a result of income received from liquidating a partnership interest which was no longer carried on the Company's balance sheet. NON-INTEREST EXPENSE Total non-interest expense increased $135,000 during the second quarter of 1996 compared with the second quarter of 1995. This increase was the result of increases of $71,000 in salaries and employee benefits, $5,000 in occupancy expense, $36,000 in audit, tax and accounting, $18,000 in data processing, and $86,000 in other operating expense which was partially offset by an $81,000 decrease in FDIC insurance expense. The decrease in FDIC premium expense was the result of premium decreases announced by the FDIC, as well as a reduction in the Company's assessment rate as a result of its overall improved condition. Total non-interest expense increased $78,000, or 3.7%, during the first six months of 1996 compared with the same period of 1995. Increases were reflected in the areas of salaries and employee benefits, occupancy expense, audit, tax and accounting, data processing, and other operating expenses, while FDIC insurance premium expense decreased $161,000 for the reasons stated above. INCOME TAXES Reported earnings have reflected the use of net operating loss carryforwards and, as such, no significant income taxes were recorded until the second quarter of 1996. It is anticipated that future periods will reflect additional income tax expense as it is management's evaluation that it is highly likely that the remaining federal NOL's will be fully utilized during 1996 placing the company in the position of incurring tax expense. Reference should be made to Note E of the consolidated financial statements. CREDIT QUALITY AND ALLOWANCE Nonperforming assets, which include nonaccrual loans, restructured loans, and foreclosed properties, were $560,000 at June 30, 1996, a decrease of $266,000 from the $451,000 reported at December 31, 1995. There were no loans 90 days or more past due and still accruing interest at June 30, 1996 or at December 31, 1995. Potential problem loans totaled approximately $510,000 at June 30, 1996, compared with $386,000 at December 31, 1995. - 14 - 17 The Company recorded no expense for provision for possible loan losses during the first six months of 1996, compared with a negative provision for possible loan losses of $520,000 during the first six months of 1995. The negative provision recorded during 1995 was primarily the result of net recoveries of $527,000 combined with management's assessment of the level of the allowance for possible loan losses. Net loan recoveries were $142,000 during the first six months of 1996 compared with $344,000 for the same period in 1995. The allowance for possible loan losses was $3.1 million at June 30, 1996 compared to $3.0 million at December 31, 1995. Loan and valuation reserves as a percentage of total nonperforming assets were 567% and 673% at June 30, 1996 and December 31, 1995, receptively. The level of the allowance and the amount of the provision are determined on a quarter-by-quarter basis and, given the inherent uncertainties involved in the estimation process, no assurance can be given as to the amount of the allowance at any future date. BALANCE SHEET The Company's total assets at June 30, 1996 were $160.0 million, an increase of $7.2 million from December 31, 1995. This increase was the result of an increase of $9.4 million in Federal Funds sold and $5.5 million in total net loans which were partially offset by decreases of $2.2 million in cash and due from banks and $5.3 million in investment securities. Total deposits at June 30, 1996 were $134.3 million, an increase of $3.8 million from the $130.5 million at December 31, 1995. The increase in deposits was primarily comprised of an $8.3 million increase in Money Market Accounts which was partially offset by declines of $.9 million in NOW Accounts and $4.1 million in time certificates less than $100,000. Shareholders' equity (adjusted for SFAS No. 115) increased $.8 million to $20.8 million at June 30, 1996, from $20.0 million at December 31, 1995. This increase was primarily the result of net income of $1.4 million during the first six months of 1996. Unrealized losses on securities available for sale were $186,000 at June 30, 1996, compared to an unrealized gain on securities available for sale of $279,000 at December 31, 1995. Changes in unrealized gains/losses on securities available for sale are the result of adjustments for SFAS No. 115 reflecting current market value on these securities. CAPITAL ADEQUACY AND LIQUIDITY Capital adequacy continued to be strong during the first six months of 1996. Shareholders' equity, excluding SFAS No. 115 adjustments, at June 30, 1996, was $21.0 million, or 13.1% of total assets, which compares with $19.7 million, or 12.9% of total assets at December 31, 1995. The increase in capital during the first six months of 1996 resulted primarily from earnings, the impact of which was partially offset by decline in the unrealized gain/loss on securities available for sale of $465,000 and the payment of dividends of $176,000. At June 30, 1996, the Company's primary and total capital ratios to adjusted assets were 13.0% and 14.7%, respectively, which are significantly in excess of the applicable regulatory requirements of the Federal Reserve Board. The Company's total risk based capital ratio was 14.1% at June 30, 1996, compared with 14.4% at December 31, 1995. All capital ratios continue to exceed regulatory requirements. The Company paid quarterly dividends of $.04 per share to shareholders during each of the first two quarters of 1996. In order to pay these dividends, in accordance with state statute, The Bank transferred $1.9 million from additional paid in capital to retained earnings and subsequently transferred $141,000 from retained earnings to additional paid in capital. Transfers will continue to be made by the Bank from retained earnings to additional paid in capital as dividends are paid, until such time as additional paid in capital equals common stock. The Bank's principal sources of asset liquidity are marketable securities available for sale and Federal Funds sold, as well as maturities of securities. The estimated average of maturity of securities was 1.5 years at June 30, 1996, compared to 10 months at December 31, 1995. Securities available for sale were $42.6 million at June 30, 1996, compared to $47.9 million at December 31, 1995. Additional liquidity was provided by net Federal Funds sold position of $7.4 million at June 30, 1996, compared to $1.0 million at December 31, 1995. Core deposits, a relatively stable funding base, comprised 77.3% of total deposits at June 30, 1996, and 77.0% at December 31, 1995. Core deposits represent total deposits excluding time certificates of deposit $100,000 or greater. - 15 - 18 PART II OTHER INFORMATION ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 30, 1996, pursuant to an Agreement and Plan of Exchange ("Agreement") among Community Financial Group, Inc. (the "Holding Company"), and The Bank of Nashville (The "Bank"), the Holding Company acquired all of the outstanding stock of The Bank as a result of the exchange of shares between the shareholders of The Bank and the Holding Company. After the share exchange, The Bank survived and continues its operations as The Bank of Nashville. Under the terms of the Agreement, each one of the existing outstanding shares of The Bank's common stock was exchanged for one of the Holding Company's common shares so that each existing shareholder of The Bank became a shareholder of the Holding Company, owing the same number and percentage of shares in the Holding Company as in The Bank. In addition, each warrant issued by The Bank and each option to purchase shares of the capital stock of The Bank became warrants and options to purchase an equivalent number of shares of the Holding Company. The shares and warrants of the Holding Company issued in connection with the transaction were not registered under the Securities Act of 1933, as amended (the "Act"), in reliance upon the exemption from registration set forth in Section 3(a)(12) of the Act. As a result of the transaction described above, the Holding Company is the successor issuer to The Bank of Nashville, pursuant to Rule 12g-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). On April 5, 1990, The Bank of Nashville filed a Form 10 for Registration of Securities of the Federal Reserve System (the "Board"), thereby registering The Bank's common stock, par value $6.00 per share and detachable warrants. The Bank has, since that time, been subject to the informational requirements of the Exchange Act and in accordance with Section 12(i) thereof has timely filed reports and other information with the Board. Such reports and other information filed by The Bank with the Board may be inspected and copied at the Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551. At The Bank annual meeting of shareholders held on Tuesday, April 16, 1996, the following items were voted on and are herein incorporated by reference to the Proxy Statement for the annual meeting of shareholders previously filed with the Federal Reserve. 1. To elect ten (10) Directors to serve until the next Annual meeting or until their successors are elected and qualified; 2. To approve the Agreement and Plan of Exchange (the "Plan"), pursuant to which: (a) Community Financial Group, Inc. (the "Holding Company"), a Tennessee corporation to be registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, would acquire all the outstanding stock of The Bank; (b) Each of the outstanding shares of Common Stock, par value $6.00 per share, of The Bank would be exchanged for one (1) share of Common Stock, par value $6.00 per share, of the Holding Company, pursuant to the provisions of and with the effect provided in Section 48-21-101 et seq. of the Tennessee Code Annotated, as amended; and (c) Each Warrant issued by The Bank and each Option to purchase shares of the capital stock of The Bank would be automatically converted to Warrants and Options to purchase an equivalent number of shares of capital stock of the Holding Company. - 16 - 19 PART II OTHER INFORMATION ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Continued 3. To adjourn the Annual meeting to a later date in the event an insufficient number of shares is present in person or by proxy at the meeting to approve the Agreement and Plan of Exchange; and 4. To transact such other business as may properly be brought before the Annual meeting or any adjournments thereof. The following reflects the vote of the shareholders of the items noted above:
Item # Affirmative Negative Abstain ------ ----------- -------- ------- 1. 1,693,265 6,320
* Included in the affirmative votes are negative votes against specific Directors disclosed as follows: J. B. Baker 0 Jo D. Federspiel 0 Richard H. Fulton 5,414 Mack S. Linebaugh, Jr. 0 Louis A. McRedmond 2,000 Leon Moore 54,482 Perry W. Moskovitz 72,267 C. Norris Nielsen 0 G. Edgar Thornton 47,894 James Stephen Turner 0 --------- 182,057 ========= 2. 1,620,573 7,800 71,212 3. 1,622,081 52,063 25,441 4. 1,613,852 60,157 25,576
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits
Exhibit No. Description - - ----------- ---------------------------------------------------------------------------- 2 Plan of acquisition, reorganization, arrangement, liquidation or succession. 3(i) Articles of Incorporation (ii) By-laws 11 Statement regarding computation of earnings per share. 27 Financial Data Schedule (for SEC use only)
- 17 - 20 (B) Reports on Form 8-K filed during the quarter ended June 30, 1996 were as follows: - April 30, 1996 reported the announcement of The Bank of Nashville shareholders' approval of the Agreement and Plan of Exchange with Community Financial Group, Inc., whereby CFGI becomes the parent bank holding company. - April 16, 1996, filed with the Federal Reserve, reported The Bank of Nashville's net income for the first quarter of 1996 and the declaration of the quarterly dividend. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMUNITY FINANCIAL GROUP, INC. ----------------------------------- Registrant August 9, 1996 /s/ Mack S. Linebaugh, Jr. - - -------------- --------------------------------- Date Mack S. Linebaugh, Jr. President, Chairman of the Board, Chief Executive Officer and Chief Financial Officer - 18 - 21 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY QUARTERLY STATEMENT ON FORM 10-QSB QUARTER ENDED JUNE 30, 1996 EXHIBITS EX-2 2 AGREEMENT AND PLAN OF EXCHANGE 1 Exhibit 2 AGREEMENT AND PLAN OF EXCHANGE THIS AGREEMENT AND PLAN OF EXCHANGE, dated as of the 19th day of December, 1995, by and between The Bank of Nashville located in Nashville, Tennessee ("Bank") and Community Financial Group, Inc. located in Nashville, Tennessee ("Holding Company"). RECITALS: The parties acknowledge the following to be true and correct: A. The Bank is a state bank duly organized under Sections 45-2-201, et seq. of the Tennessee Code Annotated and has its principal office and place of business in Nashville, Davidson County, Tennessee. B. On September 30, 1995 the Bank had outstanding capital stock of $13,147,000 divided into 2,191,097 shares of common capital stock of a par value of $6.00 each, additional paid-in capital of $8,498,000 and undivided profits of $(2,439,000) and, C. On September 30, 1995, the Bank had 4,744,927 outstanding warrants exercisable for the purchase of common capital stock at $12.50 per share until December 31, 1998, (the "Warrants"); D. The Holding Company is a corporation duly organized under the laws of the State of Tennessee, having its principal place of business in Nashville, Davidson County, Tennessee, and as of the effective date of the exchange the Holding Company will have authorized and unissued 50,000,000 shares of common stock of a par value of $6.00 each; and, E. A majority of the entire Board of Directors of the Bank and a majority of the entire Board of Directors of the Holding Company, respectively, have approved this Agreement and Plan of Exchange and authorized its execution. In consideration of the premises, the Bank and the Holding Company hereby enter into this Agreement and Plan of Exchange and prescribe the terms and conditions of the exchange (the "Exchange") of all the issued and outstanding shares of stock of the Bank for shares of stock of the Holding Company to be issued, and the change or exchange of all issued and outstanding Warrants of the Bank for Warrants of the Holding Company to be issued, and the mode of carrying it into effect as follows: ARTICLE I Section 1.0. At the time when the Exchange shall become effective each one (1) issued and outstanding share of stock of the Bank shall be exchanged for one (1) share of stock of the Holding Company, and each one (1) issued and outstanding Warrant of the Bank shall be changed or exchanged for one (1) Warrant of the Holding Company pursuant to the provisions of and with the effect provided in Sections 48-21-101 et seq. of the Tennessee Code Annotated, as amended. As a result of the Exchange, the Holding Company shall become the sole shareholder of the Bank. ARTICLE II Section 2.0. When the Exchange shall have been effected, the Bank and the Holding Company shall remain separate and distinct entities. Section 2.1. Upon the Exchange becoming effective, the name of the Bank shall remain The Bank of Nashville and the head office and established and authorized branches of the Bank shall remain as such. Section 2.2. Upon the Exchange becoming effective, all the members of the Board of Directors of the Bank shall continue to be Directors of the Bank. Such directors shall serve until the next annual meeting of the stockholders. - 1 - 2 Section 2.3. Upon the Exchange becoming effective, the Officers of the Bank shall consist of all the persons who are officers of the Bank as of the date of the execution of this Agreement and Plan of Exchange, including any changes in officers immediately before the Exchange becomes effective. Section 2.4. Upon the Exchange becoming effective, the Charter of the Bank and all amendments thereto shall be as they exist immediately prior to the Exchange becoming effective. Section 2.5. Upon the Exchange becoming effective, the Bylaws of the Bank and all amendments thereto shall be as they exist immediately prior to the Exchange becoming effective until the same shall be altered, amended, or repealed as therein provided. Section 2.6. The amount and number of shares of the authorized capital stock of the Bank, and the par value thereof outstanding immediately before the Exchange becomes effective shall remain the same after the Exchange shall become effective with the effect that the amount and number of shares of the capital stock of the Bank outstanding upon completion of the Exchange shall be equal to the amount and number of shares of the capital stock of the Bank outstanding immediately before the Exchange. No preferred stock of the Holding Company or Bank is to be issued. The additional paid-in capital and the Undivided Profits Account of the Bank as they exist immediately before the Exchange becomes effective shall remain the same after the Exchange shall become effective. Section 2.7. Any shareholder of the Bank who properly dissents from the Agreement and Plan of Exchange shall have the rights of a "dissenting stockholder" as set forth in Tennessee Code Annotated e48-23-101 et seq. ARTICLE III Section 3.0. Upon and by reason of the Exchange becoming effective: a. Each share of capital stock of the Bank shall, ipso facto and without any action on the part of the holder thereof, be converted into the right to receive one (1) share of capital stock of the Holding Company pursuant to subsection b, below. Each holder of capital stock of the Bank shall cease to be a shareholder of the Bank and the ownership of all shares of the issued and outstanding capital stock of the Bank shall thereupon vest in the Holding Company as the acquiring person automatically. b. The Holding company shall issue one (1) share of stock of the Holding Company for each one (1) share of stock of the Bank properly endorsed and surrendered to the Holding Company by each such shareholder. c. Each Warrant issued by the Bank and each option to purchase shares of the capital stock of the Bank shall, ipso facto and without any action on the part of the holder thereof, be converted to a Warrant or option, as the case may be, to purchase an equivalent number of shares of capital stock of the Holding Company. ARTICLE IV Section 4.0. If required under applicable law, this Agreement and Plan of Exchange shall be submitted to the shareholders of the Bank for approval at a meeting to be called and held in accordance with the applicable provisions of law and the Charter and Bylaws of the Bank. The Bank and the Holding Company shall proceed expeditiously and cooperate fully in the procurement of any other consents and approvals and the taking of any other action, and the satisfaction of all other requirements prescribed by law or otherwise, necessary for consummation of the Exchange at the times provided herein. - 2 - 3 ARTICLE V Section 5.0. Effectuation of the Exchange is conditioned upon: a. Approval of this Agreement and Plan of Exchange by the vote of the shareholders of the Bank if required by law; and b. Procurement of all other consents and approvals, and satisfaction of all other requirements prescribed by law which are necessary for consummation of the Exchange, specifically the approval of the Tennessee Department of Financial Institutions and any necessary approval of the Federal Reserve Board. ARTICLE VI Section 6.0. This Agreement and Plan of Exchange may be terminated at any time before the Exchange becomes effective upon the occurrence of any of the following: a. The number of shares of capital stock of the Bank voted against the Exchange shall make consummation of the Exchange contrary to the best interest of the Bank in the sole discretion of its Board of Directors; or b. Any action, suit, proceeding or claim has been instituted, made, pursued, or threatened relating to the proposed Exchange which shall make consummation of the Exchange inadvisable or impracticable in the sole discretion of the Board of Directors of the Bank; c. Any action, consent or approval, governmental or otherwise, which in the opinion of counsel for the Bank is or may be necessary to consummate the Exchange, shall not have been obtained by September 30, 1996; or d. The transaction contemplated by this Agreement shall not have been consummated by September 30, 1996; or e. For any other reason consummation of the Exchange is inadvisable in the opinion of the Board of Directors of the Bank. Section 6.1. Upon the occurrence of any events set forth in Section 6.0, this Agreement and Plan of Exchange may be terminated by the unilateral action of the Board of Directors of either the Bank or the Holding Company prior to the time this Exchange becomes effective, by giving written notice of the basis of termination to the Holding Company or Bank, at its principal office address and directed to the attention of the respective President thereof. Such termination shall be effective upon receipt. Section 6.2. Upon termination by written notice as provided in this Article VI, this Agreement and Plan of Exchange shall be void and of no further effect, and there shall be no liability by reason of this Agreement and Plan of Exchange or the termination thereof on the part of either the Bank, the Holding Company or the directors, officers, employees, agents or shareholders of either of them. ARTICLE VII Section 7.0. Subject to the terms and upon satisfaction of all the requirements of law and the conditions specified in this Agreement and Plan of Exchange, including among other conditions, if required by law, the affirmative approval by the holders of a majority of the outstanding shares of voting stock of the Bank and receipt of the requisite approvals of the Tennessee Department of Financial Institutions and the Federal Reserve Board, the Exchange shall become effective upon the filing of Articles of Exchange with the Tennessee Department of Financial Institutions. - 3 - 4 ARTICLE VIII Section 8.0. If the Exchange becomes effective, the Bank, the Holding Company, and their respective shareholders shall each pay their own expenses, if any, incurred in the proposed transaction. If the Exchange does not become effective, the Bank shall pay all reasonable and necessary expenses associated with the transaction proposed herein. - 4 - 5 IN WITNESS WHEREOF, the Bank and the Holding Company have caused this Agreement and Plan of Exchange to be executed and attested in counterparts by their duly authorized officers and directors, as of the day and year first above written. THE BANK OF NASHVILLE Attest: /s/ Joan B. Marshall By: /s/ Mack S. Linebaugh, Jr. -------------------- ------------------------------- Joan B. Marshall Mack S. Linebaugh, Jr. Secretary Chairman, President and Chief Executive Officer COMMUNITY FINANCIAL GROUP, INC. Attest: /s/ Joan B. Marshall By: /s/ Mack S. Linebaugh, Jr. -------------------- ------------------------------- Joan B. Marshall Mack S. Linebaugh, Jr. Secretary Chairman, President and Chief Executive Officer - 5 - EX-3.(I) 3 CHARTER OF COMMUNITY FINANCIAL GROUP, INC. 1 EXHIBIT 3(i) CHARTER OF COMMUNITY FINANCIAL GROUP, INC. The undersigned acting as the incorporator of a corporation under the Tennessee Business Corporation Act, adopts the following Charter for such corporation: 1. The name of the Corporation is: COMMUNITY FINANCIAL GROUP, INC. 2. The maximum number of shares which the Corporation shall have the authority to issue is 50,000,000 shares, having a par value of $6.00 per share, which shares shall contain preemptive rights. There is no preemptive right with respect to: (a) Shares issued as compensation to directors, officers, agents, employees, or vendors of the corporation, its subsidiaries or affiliates; (b) Shares issued to satisfy conversion, option, or warrant rights created to provide compensation to directors, officers, agents, employees, or vendors of the corporation, its subsidiaries or affiliates, or sold to shareholders purchasing such rights in connection with the purchase of shares from the Corporation; (c) Shares sold otherwise than for money; or (d) Shares sold to directors to meet the requirement of Article 7 below. 3. The Corporation's initial registered office is 401 Church Street, Nashville, Tennessee 37219, which is located in Davidson County, Tennessee, and its initial registered agent at that office is Anne J. Cheatham. 4. The address of the principal office of the Corporation shall be 401 Church Street, Nashville, Tennessee 37219. 5. The Corporation is for profit. 6. The purpose for which the Corporation is organized is to operate as a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and with all other corporate powers permitted to Tennessee corporations under the Tennessee Business Corporation Act not specifically prohibited to such banking corporations. 7. The property, affairs and business of the Corporation shall be managed by a Board of Directors. The number of directors shall be as specified in the Bylaws of the Corporation. The directors shall be elected by the shareholders at the annual meeting of the shareholders and each director shall be elected for a term of one (1) year or until his successor shall be elected and shall qualify. A director need not be a shareholder in order to be elected to the Board of Directors but shall purchase and continue to own at least ten (10) shares of Common Stock within 90 days of election or appointment. In furtherance and not in limitation of the powers conferred by the laws of the State of Tennessee, the Board of Directors is expressly authorized and empowered: (a) To make, alter, amend and repeal the Bylaws, subject to the power of the shareholders to alter or repeal the Bylaws made by the Board of Directors; - 1 - 2 (b) To authorize and issue, without shareholder consent, obligations of the Corporation, secured and unsecured, under such terms and conditions as the Board in its sole discretion may determine, and to pledge or mortgage as security therefor any real or personal property of the Corporation, including after acquired property; (c) To determine whether any and, if so, what part of the earned surplus of the Corporation in compliance with applicable law shall paid in dividends to the shareholders, and to direct and determine other use and disposition of any such earned surplus; (d) To establish bonus, profit sharing, stock option, or other types of incentive compensation plans for the employees, including office and directors of the Corporation; to fix the amount of profits to be shared or distributed; and to determine the persons who participate in any such plans and the amount of their respective participations; (e) To designate by resolution or resolutions passed by a majority of the whole Board one or more committees, each consisting of two (2) or more directors, which, to the extent permitted by law and authorized by the resolution or the Bylaws, shall have and may exercise the powers of the Board; (f) To elect such officers as the Board may deem necessary, who shall have such authority and perform such duties as may be prescribed from time to time by the Board; (g) To provide for the reasonable compensation of its own members in the Bylaws and to fix their terms and conditions upon which such compensation will be paid; (h) In addition to the powers and authority hereinbefore or by statute expressly conferred upon it, the Board of Directors may exercise all such powers and do all such acts and things as may be exercised done by the Corporation, subject nevertheless to the provisions of the laws of the State of Tennessee, this Charter, and the Bylaws of the Corporation. 8. The shareholders may adopt or amend a bylaw that fixes a greater quorum or voting requirement for shareholders (or voting groups of shareholders) than is required by law. 9. Liability. (a) To the fullest extent that the law of the State of Tennessee as it exists on the date hereof or as it may hereafter be amended permits the limitation or elimination of the liability of directors, no director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. (b) The Corporation shall have the power to indemnify any director, officer, employee, agent of the Corporation, or any other person who is serving at the request of the Corporation in any such capacity with another corporation, partnership, joint venture, trust, or other enterprises to the fullest extent permitted by the law of the State of Tennessee as it exists on the date hereof or as it may hereafter be amended, and any such indemnification may continue as to any person who has ceased to be a director, officer, employee, or agent and may inure to the benefit of the heirs, executors, and administrators of such a person. (c) If the Tennessee Business Corporation Act is amended after approval of the Article to authorize corporate action, further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Tennessee Business Corporation Act, as so amended. 10. Any or all of the directors of the Corporation may be removed for cause by a vote of a majority of the entire Board of Directors. "Cause" shall include, but not be limited to, a director willfully or without reasonable cause being absent from any regular or special meeting for the purpose of obstructing or hindering the business of the Corporation. - 2 - 3 11. The private property of the shareholders shall not be subject to the payment of any corporate debts to any extent whatever. 12. The Corporation's corporate existence shall begin when the Charter is filed by the Tennessee Secretary of State. 13. (a) In addition to the requirements of the provisions of any series of preferred stock which may be outstanding, and whether or not a vote of the shareholders is otherwise required, the affirmative vote of the holders of not less than seventy percent (70%) of the Voting Stock shall be required for the approval or authorization of any Business Transaction with a Related Person, or any Business Transaction in which a Related Person has an interest (other than only a proportionate interest as a shareholder of the corporation, provided, however, that the seventy percent (70%) voting requirement shall not be applicable if (i) the Business Transaction is Duly Approved by the Continuing Directors, or (ii) all of the following conditions are satisfied: (A) the aggregate amount of cash and the fair market value of the property, securities or other consideration to be received per share (on the date of effectiveness of such Business Transaction) by holders of stock of the corporation (other than such Related Person) in connection with such Business Transaction is at least equal in value to such Related Person's Highest Common Stock Purchase Price; (B) the consideration to be received by holders of stock of the corporation in connection with such Business Transaction is in (a) cash or (b) if the majority of the shares of any particular class or series of stock of the corporation as to which the Related Person is the Beneficial Owner shall have been acquired for a consideration in a form other than cash, in the same form of consideration used by the Related Person to acquire the largest number of shares of such class or series; (C) after such Related Person has become a Related Person and prior to the consummation of such Business Transaction, such Related Person shall not have become the Beneficial Owner of any additional shares of stock of the corporation or securities convertible into stock of the corporation, except (a) as a part of the transaction which resulted in such Related Person becoming a Related Person or (b) as a result of a pro rata stock dividend or stock split; (D) prior to the consummation of such Business Transaction, such Related Person shall not have, directly or indirectly, except as Duly Approved by the Continuing Directors (a) received the benefit (other than only a proportionate benefit as a shareholder of the corporation) of any loans, advances, guarantees, pledges or other financial assistance or tax credits or tax advantages provided by the corporation or any of its subsidiaries, (b) caused any material change in the corporation business or equity capital structure, including, without limitation, the issuance of shares of capital stock of the corporation or (c) caused the corporation to fail to declare and pay at the regular date therefor quarterly cash dividends on the outstanding stock on a per share basis at least equal to the cash dividends being paid thereon by the corporation immediately prior to the date on which the Related Person became a Related Person; and (E) a proxy or information statement describing the proposed Business Transaction and substantially complying with the requirements of the Securities Exchange Act of 1934, as amended (the "Act"), and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to holders of Voting Stock of the corporation at least 20 days prior to the consummation of such Business Transaction (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). - 3 - 4 (b) For the purpose of this Paragraph 13: (i) The term "Business Transaction" shall mean (A) any merger, share exchange or consolidation involving the corporation or a subsidiary of the corporation, (B) any sale, lease, exchange, transfer or other disposition (in one transaction or a series of related transactions), including, without limitation, a mortgage, pledge or any other security device, of all or any Substantial Part of the assets either of the corporation or of a subsidiary of the corporation, (C) any sale, lease, exchange, transfer or other disposition (in one transaction or a series of related transactions) of all or any Substantial Part of the assets of any entity to the corporation or a subsidiary of the corporation, (D) the issuance, sale, exchange, transfer or other disposition (in one transaction or a series of related transactions) by the corporation or a subsidiary of the corporation of any securities of the corporation or any subsidiary of the corporation in exchange for cash, securities or other property, or a combination thereof, having an aggregate fair market value of $1,000,000 or more, (E) any merger, share exchange or consolidation of the corporation with any of its subsidiaries or any similar transaction in which the corporation is not the survivor and the charter of the consolidated or surviving corporation does not contain provisions substantially similar to those in this Paragraph 13, (F) any recapitalization or reorganization of the Corporation or any reclassification of the securities of the corporation (including, without limitation, any reverse stock split) or other transaction that would have the effect of increasing the voting power of a Related Person or reducing the number of shares of each class of voting securities outstanding, (G) any liquidation, spinoff, split off, split up or dissolution of the corporation, and (H) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Business Transaction or having a similar purpose or effect. (ii) The term "Related Person" shall mean and include (A) any individual, corporation, partnership, group, association or other person or entity which, together with its Affiliates and Associates, is the Beneficial Owner of not less than twenty-five percent (25%) of the voting power of the Common Stock or was the Beneficial Owner of not less than twenty-five percent (25%) of the voting power of the Common Stock (X) at the time of the definitive agreement providing for the Business Transaction (including any amendment thereof) was entered into, (Y) at the time a resolution approving the Business Transaction was adopted by the Board of Directors of the corporation or (Z) as of the record date for the determination of shareholders entitled to notice of and to vote on, or consent to, the Business Transaction, and (B) any Affiliate or Associate of any such individual, corporation, partnership, group, association or other person or entity; provided, however, and notwithstanding anything in the foregoing to the contrary, the term "Related Person" shall not include the corporation, a wholly-owned subsidiary of the corporation, any employee stock ownership or other employee benefit plan of the corporation or any wholly-owned subsidiary of the corporation, or any trustee of, or fiduciary with respect to, any such plan when acting in such capacity. (iii) The term "Beneficial Owner" shall be defined by reference to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as of January 1, 1989; provided, however, that any individual, corporation, partnership, group, association or other person or entity which has the right to acquire any Common Stock at any time in the future, whether such right is contingent or absolute, pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed the Beneficial Owner of such Common Stock. - 4 - 5 (iv) The term "Highest Common Stock Purchase Price" shall mean the greater of the following: (A) the highest amount of consideration paid by such Related Person for a share of Common Stock of the corporation (including any brokerage commissions, transfer taxes and soliciting dealers' fees) in the transaction which resulted in such Related Person becoming a Related Person or within two years prior to the first public announcement of the Business Transaction (the "Announcement Date"), whichever is higher' provided, however, that the Highest Common Stock Purchase Price calculated under this subsection (A) shall be approximately adjusted to reflect the occurrence of any reclassification, recapitalization, stock split, reverse stock split or other similar corporate readjustment in the number of outstanding shares of common stock of the corporation between the last date upon which such Related Person paid the Highest Common Stock Purchase Price to the effective date of the merger, share exchange or consolidation or the date of distribution to shareholders of the corporation of the proceeds from the sale of substantially all of the assets of the corporation referred to in subparagraph (A) of Section (a)(ii) of this Paragraph 13; (B) the Fair Market Value per share of the respective classes and series of stock of the corporation on the Announcement Date; (C) the Fair Market Value per share of the respective classes and series of stock of the date that the Related Person becomes a Related Person; (D) if applicable, the Fair market Value per share determined pursuant to subsection (b)(iv) (B) or (C), whichever is higher, multiplied by the ration of (i) the highest price per share (including any brokerage commissions, transfer taxes or soliciting dealers' fees and adjusted for any subsequent stock dividends, splits, combinations, recapitalizations, reclassifications, or other such reorganizations) paid to acquire any shares of such respective classes and series Beneficially Owned by the Related Person within the two years prior to the Announcement Date to (ii) the Fair Market Value per share (adjusted for any subsequent stock dividends, splits, combinations, recapitalizations, reclassifications or other such reorganizations) of shares of such respective classes and series on the first day in the two-year period ending on the Announcement Date on which such shares Beneficially Owned by the Related Person were acquired; or (E) the amount per share of any preferential payment to which holders of shares of such respective classes and series are entitled in the event of liquidation, dissolution or winding up of the corporation. (v) The term "Substantial Part" shall mean more than twenty percent (20%) of the total assets of the entity in question, as reflected on the most recent consolidated balance sheet of such entity existing at the time the shareholders of the corporation would be required to approve or authorize the Business Transaction involving the assets constituting any such Substantial Part. (vi) In the event of a merger in which the corporation is the surviving corporation, for the purpose of subparagraph (A) of Section (a)(ii) of this Paragraph 13, the phrase "property, securities or other consideration to be received" shall include, without limitation, common stock of the corporation retained by its shareholders (other than such Related Person). - 5 - 6 (vii) The term "Voting Stock" shall mean all outstanding shares of capital stock of the corporation whose holders are present at a meeting of shareholders, in person or by proxy, and which entitle their holders to vote generally in the election of directors, considered for the purpose of this Paragraph 13 as one class. (viii) The term "Preferred Stock" shall mean each class or series of capital stock which may from time to time be authorized and is not designated as "Common Stock". (ix) The term "Continuing Director" shall mean a director who either was a member of the initial Board of Directors of the corporation or who became a director of the corporation subsequent to such date and whose election, or nomination for election by the corporation subsequent to such date and whose election, or nomination for election by the corporation shareholders, was Duly Approved by the Continuing Directors then on the Board, either by specific vote or by approval of the proxy statement issued by the corporation on behalf of the Board of Directors in which such person is named as nominee for director; provided, however, that in no event shall a director be considered a "Continuing Director" if such director is a Related Person and the Business Transaction to be voted upon is with such Related Person or is one in which such Related Person has an interest (other than only a proportionate interest as a shareholder of the corporation). (x) The term "Duly Approved by the Continuing Directors" shall mean an action approved by the vote of at least a majority of the Continuing Directors in favor of such action would be insufficient to constitute an act of the Board of Directors (if a vote by the entire Board of Directors were to have been taken), then such term shall mean an action approved by the unanimous vote of the Continuing Directors so long as there are at least three (3) Continuing Directors on the Board at the time of such unanimous vote. (xi) The term "Affiliate", used to indicate a relationship to a specified person, shall mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person. (xii) The term "Associate", used to indicate a relationship with a specified person, shall mean (A) any corporation, partnership or other organization of which such specified person is an officer or partner (B) any trust or other state in which such specified person has a substantial beneficial interest or as to which such specified person serves as trustee or in a similar fiduciary capacity, (C) any relative or spouse of such specified person, or any relative of such spouse, who has the same home as such specified person or who is a director or officer of the corporation or any of its subsidiaries and (D) any person who is a director, officer or partner of such specified person or of any corporation (other than the corporation or any wholly-owned subsidiary of the corporation), partnership or other entity which is an Affiliate of such specified person. (xiii) The term "Fair Market Value", in the case of stock, means the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc., Automated Quotations Systems or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith. - 6 - 7 (c) For the purpose of this Paragraph 13, so long as Continuing Directors constitute at least two-thirds (2/3) of the entire Board of Directors, the Board of Directors shall have the power to make a good faith determination, on the basis of information known to them, of: (i) the number of shares of Voting Stock of which any person is the Beneficial Owner, (ii) whether a person is a Related Person or is an Affiliate or Associate of another, (iii) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in the definition of Beneficial Owner herein, (iv) whether the assets subject to any Business Transaction constitute a Substantial Part, (v) whether any Business Transaction is with a Related Person or is one in which a Related Person has an interest (other than only a proportionate interest as a shareholder of the corporation), (vi) whether a Related Person has, directly or indirectly, received the benefits or caused any of the changes referred to in subparagraph (D) of Section (a)(ii) of this Paragraph 13, (vii) the fair market value of any consideration to be received in a Business Transaction and (viii) such other matters with respect to which a determination is required under this Paragraph 13; and such determination by the Board of Directors shall be conclusive and binding for all purposes of this Paragraph 13. (d) Nothing contained in the Paragraph 13 shall be construed to relieve any Related Person of any fiduciary obligation imposed by law. (e) The fact that any Business Transaction complies with the provisions of Section (a) of this Paragraph 13 shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Transaction or recommended its adoption or approval to the shareholders of the corporation. (f) Notwithstanding any other provisions of this Charter or the Bylaws of the corporation (and notwithstanding that a lesser percentage may be specified by law), the provisions of this Paragraph 13 may not be repealed or amended, directly or indirectly in any respect, unless such action is approved by the affirmative vote of the holders of not less than seventy percent (70%) of the Voting Stock. 14. Whenever the Board of Directors or the shareholders of the Corporation are required or permitted to take any action by vote, such action may be taken without a meeting on written consent, setting forth the action so taken, signed by all of the Directors or shareholders entitled to vote thereon. 15. The provisions of this Charter of Incorporation may be amended, altered, or repealed from time to time to the extent, and in the manner prescribed by the laws of the State of Tennessee, and any additional provisions so authorized may be added. All rights herein conferred on the directors, officers, and shareholders are granted subject to this reservation. Dated: December 13, 1995 /s/ Mack S. Linebaugh, Jr. ------------------------------------ Mack S. Linebaugh, Jr., Incorporator - 7 - EX-3.(II) 4 BYLAWS OF COMMUNITY FINANCIAL GROUP, INC. 1 Exhibit 3(ii) BYLAWS OF COMMUNITY FINANCIAL GROUP, INC. ARTICLE I OFFICES 1.01. Registered Office. The registered office of the Corporation shall be at 401 Church Street, Nashville, Tennessee 37219. 1.02. Other Offices. The Corporation may also have offices at other places in or out of the state of Tennessee as the Board of Directors may determine or as the business of the Corporation may require. ARTICLE II SHAREHOLDERS 2.01. Place of Meeting. Meetings of shareholders shall be held at the time and place, in or out of the State of Tennessee, stated in the notice of the meetings or in a waiver of notice. 2.02. Annual Meetings. An annual meeting of the shareholders shall be held each year at the registered office of the Corporation or such other place as the Board of Directors may designate at such time as may be fixed by the Board of Directors and pursuant to the provisions of law. If the day is a legal holiday, then the meeting shall be on the next business day following. At the meeting, shareholders shall elect directors and transact other business as may properly be brought before the meeting. 2.03. Voting List. A complete list of shareholders entitled to vote at a meeting of shareholders shall be maintained in accordance with applicable law. 2.04. Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Charter, or by these Bylaws, may be called by Chairman of the Board, the President, the Board of Directors, or the holders of not less than twenty percent (20%) of all the shares entitled to vote at the meeting pursuant to the provisions of the charter. Business transacted at a special meeting shall be confined to the purposes stated in the notice of the meeting. 2.05. Notice. Written or printed notice, stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) days nor more than two (2) months before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, the President, the Secretary, or the officer or person calling the meeting, to each shareholder of record entitled to vote at the meeting. 2.06. Quorum. The holders of a majority of the shares issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall constitute a quorum at meetings of the shareholders for the transaction of business except as otherwise provided by statute, by the Charter or by these Bylaws. If a quorum is not present or represented at a meeting of the shareholders, the shareholders entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented, and any business may be transacted at the reconvened meeting which might have been transacted at the meeting as originally notified. 2.07. Majority Vote. When a quorum is present at a meeting, the vote of the holders of a majority of the shares having voting power, present in person or represented by proxy, shall decide any question brought before the meeting, unless the question is the election of directors or one on which, by express provision of the statutes, the Charter, or these Bylaws, a higher vote is required, in which case the express provision shall govern. There shall be no cumulative voting by the shareholders on any matter. - 1 - 2 2.08. Method of Voting. Each outstanding share shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares are limited or denied by the Charter. At any meeting of the shareholders, every shareholder having the right to vote may vote either in person, or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Each proxy shall be filed with the Secretary of the Corporation prior to or at the time of the meeting. Voting for directors shall be in accordance with Section 3.06 of these Bylaws. Any vote may be taken by voice or by show of hands unless someone entitled to vote objects, in which case written ballots shall be used. 2.09. Record Date; Closing Transfer Books. The Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of the shareholders, the record date to be not more than seventy (70) days prior to the meeting; or the Board of Directors may close the stock transfer books for such purpose for a period of not more than seventy (70) days prior to such meeting. In the absence of any action by the Board of Directors, the date upon which the notice of the meeting is mailed shall be the record date. 2.10. Action Without Meeting. Any action required by statute to be taken at a meeting of the shareholders, or any action which may be taken at a meeting of the shareholders, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote. The affirmative vote of the number of shares that would be necessary to authorize or take such action at a meeting is the act of the shareholders. The consent may be in more than one counterpart so long as each shareholder signs one of the counterparts. The signed consent, or a signed copy shall be placed in the minute book. ARTICLE III DIRECTORS 3.01. Management. The business and affairs of the Corporation shall be managed by the Board of Directors who may exercise all powers of the Corporation and do all such lawful acts and things as are not (by statute or by the Charter or by these Bylaws) directed or required to be exercised or done by the shareholders. 3.02. Number; Qualification; Term. The Board of Directors shall consist of at least five (5) but no more than twenty-five (25) directors. The number of directors serving initially shall be nine (9). At least three-fourths (3/4) of the directors shall be citizens of the United States; at least two-thirds (2/3) shall be residents of Tennessee or reside within 25 miles of the main office of the Corporation, and a majority shall reside within 100 miles of the main office of the Corporation. Each Director elected shall hold office until his successor shall be duly elected and shall qualify. 3.03. Change in Number. The minimum or maximum number of Directors may be increased or decreased from time to time by amendment to these Bylaws (subject to any maximum number of Directors as provided by the Charter) but no decrease shall have the effect of shortening the term of any incumbent Director. 3.04. Removal. The Directors may remove one (1) or more directors for cause as provided in the Charter. 3.05. Vacancies. Any vacancy occurring in the Board of Directors, whether by death, resignation, removal, creation of new directorship, or otherwise, may be filled by an affirmative vote of a majority of the remaining Directors even though the Directors remaining in office constitute fewer than a quorum of the Board of Directors. A Director elected to fill a vacancy shall hold office until the next annual election of Directors and until his successor is duly elected and qualified. 3.06. Election of Directors. Except as otherwise provided in Sections 3.03 and 3.05, Directors shall be elected by a plurality vote at the annual meeting of the shareholders. At each such election of directors, every shareholder entitled to vote at such election shall have the right to vote, in person or by proxy the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote. - 2 - 3 3.07. Place of Meetings. Meetings of the Board of Directors, regular or special, may be held in or out of the state of incorporation. 3.08. Annual Meetings. The annual meeting of a newly elected Board shall be held without further notice immediately following the annual meeting of shareholders, and at the same place, unless the time or place is changed by the Chairman of the Board or the President with the consent of a majority of the Directors then elected and serving. 3.09. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. 3.10. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President on two (2) days' notice to each Director, either personally or by mail or by telegram. Special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of two (2) Directors. Except as otherwise expressly provided by statute, the Charter or these Bylaws, neither the business to be transacted at, nor the purpose of, any special meeting need be specified in a notice or waiver of notice. 3.11. Quorum; Majority Vote. At meetings of the Board of Directors a majority of the number of Directors then serving shall constitute a quorum for the transaction of business. The act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, except as otherwise specifically provided by statute, the Charter or these Bylaws. If a quorum is not present at a meeting of the Board of Directors, the Directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.12. Compensation. By resolution of the Board of Directors, the Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as Director, or a combination of salary and attendance fees. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. 3.13. Procedure. The Board of Directors shall keep regular minutes of its proceedings. The minutes shall be placed in the minute book of the Corporation. 3.14. Action Without Meeting. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the Board of Directors. The affirmative vote of the number of directors that would be necessary to authorize or take such action at a meeting is the act of the Board of Directors. The signed consent, or a signed copy, shall be placed in the minute book. The consent may be in more than one counterpart so long as each Director signs one of the counterparts. 3.15. Committees of the Board. There shall be an Audit Committee consisting of at least three (3) members of the Board of Directors appointed by the Board, none of whom are active officers of the Corporation. The committee shall meet once each year, or more often if required by the Chairman of the Board or President and shall examine, or cause to be examined, such books, assets and securities of the Corporation as it deems necessary or proper, or as it may be directed to examine. A record shall be kept of all such examinations, which shall be certified by the committee serving, and presented to the Board of Directors at its next meeting. The Audit Committee shall state whether the Corporation is in a sound and solvent condition, whether adequate internal audit controls and procedures are being maintained, and shall recommend to the Board such changes as shall be deemed advisable. The Audit Committee, upon its own recommendation and with the approval of the Board of Directors, may employ a qualified firm of certified public accountants to make the examination and audit of the Corporation. If such a procedure is followed, the one annual examination and audit by such firm of accountants and the presentation of its report to the Board of Directors, shall be deemed sufficient to comply with the requirements of the Audit Committee. The Board of Directors may appoint, from time-to-time, other committees, for such purposes and with such powers as the Board may determine. Unless otherwise specified by the Board or these Bylaws, a majority of the committee members will constitute a quorum of any Board appointed committee. - 3 - 4 ARTICLE IV NOTICE 4.01. Method. Whenever by statute, the Charter, these Bylaws, or otherwise, notice is required to be given to a Director, Committee Member, or Shareholder, and no provision is made as to how the notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given: (a) in writing, by mail, postage prepaid, addressed to the Director, Committee Member, or Shareholder at the address appearing on the books of the Corporation; or (b) in any other method permitted by law. Any notice required or permitted to be given by mail shall be deemed given at the time when the same is thus deposited in the United States mails. 4.02. Waiver. Whenever, by statute or the Charter or these Bylaws, notice is required to be given to a Shareholder, Committee Member, or Director, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance at a meeting shall constitute a waiver of notice of such meeting, except where a person attends for the express purpose of objecting to the transaction of any business of the ground that the meeting is not lawfully called or convened. ARTICLE V OFFICERS AND AGENTS 5.01. Number, Qualification; Election; Term. a. The Corporation shall have: (1) a Chairman of the Board, a President and a Secretary; and (2) such other officers (including additional Vice Presidents) and assistant officers and agents as the Board of Directors may deem appropriate. b. Officers of the Corporation shall not be required to be shareholders of the Corporation. Officers need not be members of the Board of Directors. c. Officers named in Bylaw 5.01(a)(1) shall be elected by the Board of Directors on the expiration of an officer's term or whenever a vacancy exists. Officers and agents named in Bylaw 5.01(a)(2) may be elected by the Board at any meeting, whether regular or special. d. Unless otherwise specified by the Board at the time of his election or appointment, or in an employment contract approved by the Board, each officer's and agent's term shall end at the first meeting of Directors after the next annual meeting of shareholders. He shall serve until the end of his term or, if earlier, his death, resignation, or removal. e. Any two (2) or more offices, other than the offices of President and Secretary, may be held by the same person. 5.02. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interest of the Corporation will be served thereby. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 5.03. Vacancies. Any vacancy occurring in any office of the Corporation (by death, resignation, removal or otherwise) may be filled by the Board of Directors. 5.04. Authority. Officers and agents shall have such authority and perform such duties in the management of the Corporation as are provided in these Bylaws or as may be determined by resolution of the Board of Directors not inconsistent with these Bylaws. 5.05. Compensation. The compensation of officers and agents shall be fixed from time to time by the Board of Directors. - 4 - 5 5.06. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders and Directors, and shall be an ex-officio member of all committees, except the audit committee. The Chairman of the Board shall be the Chief Executive officer of the Corporation. 5.07 President. If the Chairman of the Board is absent, the President shall preside at meetings of the shareholders and meetings of the Board of Directors. The President shall have general and active management of the business and affairs of the Corporation subject to the supervision of the Chief Executive Officer; and shall see that all orders and resolutions of the Board are carried into effect. He shall serve as an ex-officio member of the Board of all committees, except the audit committee, and shall perform such other duties and have such other authority and powers as the Chief Executive Officer or the Board of Directors may from time to time prescribe. 5.08. Vice Presidents. Vice Presidents may be designated as "Executive Vice President," "Senior Vice President" or such other designation as the Board of Directors may from time-to-time determine. The Vice Presidents in the order of their seniority, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the Chief Executive Officer, perform the duties and have the authority and exercise the duties and powers of the Chief Executive Officer. They shall perform such other duties and have such other authority and powers as the Board of Directors may from time to time prescribe or as the Chief Executive Officer may from time to time delegate. 5.09. Secretary. a. The Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all votes, actions and the minutes of all proceedings in a book kept for that purpose and shall perform like duties for the executive and other committees when required. b. She shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors. c. She shall be under the supervision of the Chairman of the Board and the President. She shall perform such other duties and have such other authority and powers as the Board of Directors may from time to time prescribe or as the Chairman of the Board or the President may from time to time delegate. 5.10. Assistant Secretary. The assistant Secretaries, if any, in the order of their seniority, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and have the authority and exercise the powers of the Secretary. They shall perform such other duties and have such other powers as the Board of Directors may from time to time or as the President may from time to time delegate. 5.11. Vacancies. If the office of the Chairman of the Board, President, Vice President, Secretary or Assistant Secretary becomes vacant by reason of death, resignation or removal, the Board of Directors shall elect a successor who shall hold office for the unexpired term, and until his successor is elected. ARTICLE VI CERTIFICATES AND SHAREHOLDERS 6.01. Certificates. Certificates in the form determined by the Board of Directors shall be delivered representing all shares to which shareholders are entitled. Certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued. Each certificate shall state on its face the holder's name, the number and class of shares, the par value of shares or a statement that such shares are without par value, and such other matters as may be required by law, and may be sealed with the seal of the Corporation or a facsimile thereof. 6.02. Issuance. Shares (both treasury and authorized but unissued) may be issued for such consideration (not less than par value) and to such persons, as the Board of Directors may determine from time to time. Shares may not be issued until the full amount of the consideration, fixed as provided by law, has been paid. - 5 - 6 6.03. Payment of Shares. a. Kind. The consideration for the issuance of shares shall consist of money paid, labor done (including services actually performed for the corporation) or property (tangible or intangible) actually received. Neither promissory notes nor the promise of future services shall constitute payment for shares. b. Valuation. In the absence of fraud in the transaction, the judgment of the Board of Directors as to the value of consideration received shall be conclusive. c. Effect. When consideration, fixed as provided by law, has been paid, the shares shall be deemed to have been issued and shall be considered fully paid and nonassessable. 6.04. Subscriptions. Unless otherwise provided in the subscription agreement, subscriptions for shares, whether made before or after organization of the Corporation, shall be paid in full at such time or in such installments and at such times as shall be determined by the Board of Directors. Any call made by the Board of Directors for payment on subscriptions shall be uniform as to all shares of the same series. In case of default in the payment on any installment or call when payment is due, the Corporation may proceed to collect the amount due in the same manner as any debt due to the Corporation. 6.05. Lost, Stolen or Destroyed Certificates. The Corporation shall issue a new certificate in place of any certificate for shares previously issued if the registered owner of the certificate: a. Claim. Makes proof in affidavit form that it has been lost, destroyed or wrongfully taken; and b. Timely Request. Requests the issuance of a new certificate before the Corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; and c. Bond. Gives a bond in such form, and with such surety or sureties, with fixed or open penalty, as the Corporation may direct, to indemnify the Corporation (and its transfer agent and registrar, if any) against any claim that may be made on account of the alleged loss, destruction or theft of the certificate; and d. Other Requirements. Satisfies any other reasonable requirements imposed by the Corporation. When a certificate has been lost, apparently destroyed or wrongfully taken, and the holder of record fails to notify the corporation within a reasonable time after he has notice of it, and the Corporation registers a transfer of the shares represented by the certificate before receiving such notification, the holder of record is precluded from making any claim against the Corporation for the transfer or for a new certificate. 6.06. Registration of Transfer. The Corporation shall register the transfer of a certificate for shares presented to it for transfer if: a. Endorsement. The certificate is properly endorsed by the registered owner or by his duly authorized attorney; and b. Guarantee and Effectiveness of Signature. The signature of such person has been guaranteed by a commercial bank or by the President of the Corporation, or by such other officer of the Corporation as shall have been designated by the Board of Directors, and reasonable assurance is given that such endorsements are effective. 6.07. Registered Owner. Prior to due presentment for registration of transfer of a certificate for shares, the Corporation may treat the registered owner as the person exclusively entitled to vote, to receive notices and otherwise to exercise all rights and powers of a shareholder. - 6 - 7 ARTICLE VII GENERAL PROVISIONS 7.01. Dividends and Reserves. a. Declaration and Payment. Subject to statue and the Charter, dividends may be declared by the Board of Directors at any regular or special meeting and may be paid in cash, in property, or in shares of the Corporation. The declaration and payment shall be at the discretion of the Board of Directors. b. Record Date. The Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to receive payment of any dividend. In the absence of any action by the Board of Directors, the date upon which the Board of Directors adopts the resolution declaring the dividend shall be the record date. c. Reserves. By resolution the Board of Directors may create such reserve or reserves out of available cash of the Corporation as the Directors from time to time, in their discretion, think proper to provide for contingencies, or to equalize dividends, or to repair or maintain any property of the Corporation, or for any other purpose they think beneficial to the Corporation. The Directors may modify or abolish any such reserve in the manner in which it was created. 7.02. Books and Records. The corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each. 7.03. Checks and Notes. Checks, demands for money, and notes of the Corporation shall be signed by the officer(s) or other person(s) designated from time to time by the Board of Directors. 7.04. Fiscal Year. The fiscal year of the Corporation shall be the calendar year. 7.05. Resignation. A Director, officer or agent may resign by giving written notice to the Chairman of the Board, the President or the Secretary. The resignation shall take effect at the time specified in it, or immediately if no time is specified. Unless it specifies otherwise, a resignation takes effect without being accepted. 7.06. Amendment of Bylaws. a. These Bylaws may be altered, amended, or repealed at any meeting of the Board of Directors at which a quorum is present, by the affirmative vote of a majority of the Directors of the Corporation, provided notice of the proposed alteration, amendment or repeal is contained in the notice of the meeting. b. These Bylaws may also be altered, amended or repealed at any meeting of the shareholders at which a quorum is present or represented, by the affirmative vote of the holders of two-thirds (2/3) of the shares of the Corporation entitled to vote thereon, provided notice of the proposed alteration, amendment or repeal is contained in the notice of the meeting. 7.07. Construction. Whenever the context so requires, the masculine shall include the feminine and neuter, and the singular shall include the plural, and conversely. If any portion of these Bylaws shall be invalid or inoperative, then, so far as is reasonable and possible: a. The remainder of these Bylaws shall be considered valid and operative; and b. Effect shall be given to the intent manifested by the portion held invalid or inoperative. 7.08. Table of Contents; Heading. The table of contents and headings are for organization, convenience and clarity. In interpreting these Bylaws, they shall be subordinated in importance to the other written material. 7.09. Relation to Charter. These Bylaws are subject to, and are governed by the Charter. - 7 - 8 ARTICLE VIII INDEMNITY 8.01. Liability of Officers and Directors. No person shall be liable to the Corporation for any loss or damage suffered by it on account of any action taken or omitted to be taken by him as a director or officer of the Corporation in good faith, if such person exercised or used the same degree of care and skill as a prudent man would have exercised or used in the circumstances in the conduct of his own affairs. 8.02. Indemnification of Officers and Directors. The Corporation shall indemnify to the fullest extent permitted by law any and all persons who may serve or who have served at any time as directors or officers, or who at the request of the Board of Directors of the Corporation may serve or at any time have served as directors or officers of another corporation in which the Corporation at such time owned or may own shares of stock or of which it was or may be a creditor, and their respective heirs, administrators, successors, and assigns, against any and all expenses, including amounts paid upon judgments, counsel fees, and amounts paid in settlement (before or after suit is commenced), actually and necessarily incurred by such persons in connection with the defense or settlement of any claim, action, suit, or proceeding in which they, or any of them, are made parties, or a party, or which may be asserted against them or any of them, by reason of being or having been directors or officers or a director or officer of the Corporation, or of such other corporation, except in relation to matters as to which any such director of officer or former director or officer or person shall be adjudged in any action, suit, or proceeding to be liable for his own negligence or misconduct in the performance of his duty. Such indemnification shall be in addition to any other rights to which those indemnified may be entitled under any law, bylaw, agreement, vote of shareholders, or otherwise. ARTICLE IX CONTRACTS, DEPOSITS AND PROXIES 9.01. Execution of Contracts, etc. Except as otherwise required by law or by these Bylaws, all the executive officers of the Corporation shall have power to execute and deliver any deeds, contracts, mortgages, bonds, debentures and other documents for and in the name of the Corporation. The Board may authorize any other officer or officers or agents to execute and deliver any contract or other instrument in the name and on behalf of the Corporation, and this authority may be general or confined to such specific instances as the Board may by resolution determine. 9.02. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation or otherwise as the Board or the Chief Executive Officer shall direct in such banks, trust companies, or other depositories as the Board may select or as may be selected by any executive officer. For the purpose of deposit and for the purpose of collection for the account of the Corporation, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned, and delivered by any executive officer or other officer or agent of the Corporation. 9.03. Proxies in Respect to Stock or Other Securities of Other Corporations. Unless otherwise provided by resolution adopted by the Board, the Chief Executive Officer, the President, or a Vice President may from time to time appoint an attorney or attorneys or agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation to vote or consent in respect to such stock or other securities; the Chief Executive Officer, the President, or a Vice President may instruct the person or persons so appointed as to the manner of exercising such powers and rights; and the Chief Executive Officer, the President, or a Vice President may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, all such written proxies, powers of attorney or other instruments as he may deem necessary or proper in order that the Corporation may exercise its powers and rights. - 8 - 9 CERTIFICATE OF ADOPTION The foregoing Bylaws of the Corporation have been duly adopted this 19th day of December , 1995, by action of the Board of Directors of the Corporation pursuant to the laws of this State. IN TESTIMONY THEREOF, witness the hand of the undersigned as Secretary of the Corporation on such date. /s/ Joan B. Marshall ------------------------------- Joan B. Marshall, Secretary - 9 - EX-11 5 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY STATEMENT REGARDING: COMPUTATION OF EARNINGS PER SHARE
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Income Per Common Share(1) - - -------------------------- Net income (in thousands) $ 650 $ 459 $ 1,380 $ 1,392 ========= ========= ========= ========= Net income per share $ .29 $ .21 $ .62 $ .63 ========= ========= ========= ========= Weighted average common shares outstanding 2,215,507 2,199,802 2,213,589 2,197,751 ========= ========= ========= ========= Income Per Common Share Assuming - - -------------------------------- Full Dilution(1) ---------------- Net income (in thousands) $ 650 $ 459 $ 1.38 $ 1,392 ========= ========= ========= ========= Net income per share $ .29 $ .21 $ .62 $ .63 ========= ========= ========= ========= 2,215,507 2,199,802 2,213,589 2,197,751 ========= ========= ========= =========
(1) Net income per share has been computed using the weighted average number of common shares and common share equivalents outstanding during each year presented. Common stock equivalents include stock options. Warrants have not been included in CFGI's computation of earnings per share because the market price of CFGI's common stock has been less than the exercise price of the warrants since issue. See Note F to CFGI's consolidated financial statements. EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 4,099 0 10,400 0 42,593 0 0 103,976 3,176 159,964 134,303 3,000 1,833 0 0 0 13,204 7,624 159,964 4,637 1,507 138 6,282 3,154 3,157 3,125 0 (2) 2,210 1,410 1,410 0 0 1,380 .62 .62 4.13 560 0 0 510 3,034 181 323 3,176 1,640 0 1,536
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