-----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, GgnMMnWujqv7bZpuAm7ko9oaK/0nsL54l92L2fHPzhjlQSKZFov1sJetHia6uQ+2 PmebWy0mHiihF6dAwP6sjA== 0000950144-96-007929.txt : 19961113 0000950144-96-007929.hdr.sgml : 19961113 ACCESSION NUMBER: 0000950144-96-007929 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000852677 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [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: 96659935 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 10-QSB 1 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 September 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 (I.R.S Employer Identification No.) incorporation or organization) 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 2,201,789 as of November 1, 1996. 2 PART I FINANCIAL INFORMATION
Page(s) --------- ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheet - September 30, 1996 .................................... 1 Consolidated Statement of Changes in Shareholders' Equity - Nine Months Ended September 30, 1996 .................. 2 Consolidated Statements of Income - Three and Nine Months Ended September 30, 1996 and 1995 .............................................. 3 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1996 and 1995 ......... 4 - 5 Notes to Consolidated Financial Statements - September 30, 1996 .................................... 6 - 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...................... 12 - 15 PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .................................................. 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ......................... 16 - 17
3 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1996 (IN THOUSANDS OF DOLLARS) (UNAUDITED) ASSETS Cash and due from banks $ 5,633 Federal funds sold 4,000 Securities available for sale (amortized cost $46,832) 46,649 Loans (net of unearned income of $225): Commercial 36,006 Real estate - mortgage loans 55,841 Real estate - construction 9,137 Consumer 3,669 ----------- Loans, net of unearned income 104,653 Less allowance for possible loan losses (2,971) ----------- Total Net Loans 101,682 ----------- Premises and equipment, net 588 Accrued interest and other assets 1,554 ----------- Total Assets $ 160,106 ===========
LIABILITIES AND SHAREHOLDERS' EQUITY Non-interest bearing demand deposits $ 11,455 Interest-bearing deposits: NOW accounts 4,737 Money market accounts 59,055 Time certificates less than $100,000 27,451 Time certificates $100,000 and greater 25,021 ----------- Total Deposits 127,719 ----------- Federal Home Loan Bank borrowings 9,500 Accounts payable and accrued liabilities 1,566 ----------- Total Liabilities 138,785 ----------- Commitments and contingencies - Shareholders' equity (Note F): Common stock, $6 par value; authorized 50,000,000 shares; issued and outstanding 2,201,514 shares 13,209 Additional paid-in capital 6,673 Retained earnings 1,622 Unrealized loss on securities available for sale (183) ----------- Total Shareholders' Equity 21,321 ----------- Total Liabilities and Shareholders' Equity $ 160,106 ===========
See accompanying notes to consolidated financial statements. -1- 4 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1996 (IN THOUSANDS OF DOLLARS) (UNAUDITED)
Unrealized Gain (loss) 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 (10,014 shares) 60 24 - - 84 Net income - - 1,950 - 1,950 Transfers to comply with state statute regarding dividends, net (Note F) - (1,851) 1,851 - - Cash dividends - $.12 per share - - (263) - (263) Change in unrealized gain (loss) on securities available for sale - - - (462) (462) --------- ---------- ---------- --------- --------- Balance, September 30, 1996 $ 13,209 $ 6,673 $ 1,622 $ (183) $ 21,321 ========= ========== ========== ========= =========
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 Nine Months Ended September 30 September 30 ------------------------------ ----------------------------------- 1996 1995 1996 1995 ----------- ------------ ----------- ---------- Interest income: Interest and fees on loans $ 2,402 $ 2,173 $ 7,039 $ 6,292 Interest on federal funds sold 71 91 209 275 Interest on securities: U.S. Treasury securities 72 147 293 506 Other U.S. government agency obligations 641 664 1,927 1,919 ----------- ------------ ----------- ---------- Total interest income 3,186 3,075 9,468 8,992 ----------- ------------ ----------- ---------- Interest expense: Interest bearing demand deposits 777 643 2,138 2,003 Savings and time deposits less than $100,000 438 551 1,396 1,565 Time deposits $100,000 and over 368 497 1,203 1,403 Federal Home Loan Bank borrowings 10 - 10 - Federal funds purchased 5 - 8 - ----------- ------------ ----------- ---------- Total interest expense 1,598 1,691 4,755 4,971 ----------- ------------ ----------- ---------- Net interest income 1,588 1,384 4,713 4,021 Provision for possible loan losses - - - (520) ----------- ------------ ----------- ---------- Net interest income after provision for possible loan losses 1,588 1,384 4,713 4,541 Non-interest income: Service fee income 46 41 121 177 Trust income 114 79 317 245 Investment Center income 23 21 56 40 Gain (loss) on sale of securities - - (2) (11) Income from foreclosed assets 12 9 133 32 Gain on sale of foreclosed assets - 47 5 47 Other 22 10 82 44 ----------- ------------ ----------- ---------- Total non-interest income 217 207 712 574 ----------- ------------ ----------- ---------- Non-interest expense: Salaries and employee benefits 607 557 1,774 1,649 Occupancy expense 160 99 391 316 FDIC insurance - (11) 2 152 Audit, tax and accounting 53 40 156 110 Data processing expense 51 46 159 136 Other operating expenses 302 262 901 761 ----------- ------------ ----------- ---------- Total non-interest expense 1,173 993 3,383 3,124 ----------- ------------ ----------- ---------- Income before income taxes 632 598 2,042 1,991 Provision for income taxes 62 - 92 - ----------- ------------ ----------- ---------- Net income $ 570 $ 598 $ 1,950 $ 1,991 =========== ============ =========== ========== Earnings per share (Note F) $ .26 $ .27 $ .88 $ .90 =========== ============ =========== ========== Weighted average common shares outstanding 2,219,082 2,206,085 2,216,286 2,201,135 =========== ============ =========== ==========
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)
Nine Months Ended September 30 -------------------------------- 1996 1995 -------------- ------------- Cash flows from operating activities: Interest received $ 9,579 $ 8,904 Fees received 708 653 Interest paid (5,344) ( 4,717) Cash paid to suppliers and associates (3,463) (2,959) --------- --------- Net cash provided by operating activities 1,480 1,881 --------- --------- Cash flows from investing activities: Maturities of securities available for sale 7,843 3,099 Maturities of securities held to maturity - 1,147 Proceeds from sales of securities available for sale 6,016 4,078 Purchases of securities available for sale (13,061) (9,057) Loans (originated) repaid by customers, net (6,376) (11,288) Capital expenditures (54) (380) --------- --------- Net cash used by investing activities (5,632) (12,401) --------- --------- Cash flows from financing activities: Net increase (decrease) demand deposits, NOW, money market accounts 9,288 (8,417) Net increase (decrease) in certificates of deposit (12,103) 8,176 Increase in Federal HomeLoan Bank borrowings 9,500 - Proceeds from issuance of common stock 84 50 Dividends paid (263) - --------- --------- Net cash provided by financing activities 6,506 (191) ========= ========= Net increase (decrease) in cash and cash equivalents 2,354 (10,711) Cash and cash equivalents - beginning of period 7,279 18,486 --------- --------- Cash and cash equivalents - end of period $ 9,633 $ 7,775 ========= =========
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)
Nine Months Ended September 30 ------------------------------- 1996 1995 ------------ ------------ Reconciliation of net income to net cash provided by operating activities: Net income $ 1,950 $ 1,991 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 153 138 Provision for possible loan losses - ( 520) Loss on sale of securities 2 11 Gain on sale of foreclosed assets (5) (47) Loss on disposal of equipment 3 - Changes in assets and liabilities: Decrease in other real estate - 122 Increase in accrued interest and other assets 65 (214) Increase (decrease) in accounts payable and accrued liabilities (688) 400 ------- ------- Total adjustments (470) (110) ------- ------- Net cash provided by operating activities $ 1,480 $ 1,881 ======= ======= Supplemental Disclosure: Non Cash Transactions: Change in unrealized gain/loss on available for sale securities $ (462) $ 952 ======= =======
See accompanying notes to consolidated financial statements. -5- 8 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 $28.5 million and a fair market value of $28.2 million at September 30, 1996, were pledged to secure public deposits, Federal Home Loan Bank borrowings 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):
Nine Months Ended Three Months Ended September 30, 1996 September 30, 1996 ------------------ -------------------- Balance, beginning of period $ 3,034 $ 3,176 Provision charged (credited) to operations - - Loans charged off (449) (268) Recoveries 386 63 ---------- ----------- Balance, end of period $ 2,971 $ 2,971 ========== =========== Allowance ratios are as follows: Balance, to loans outstanding end of period 2.84% 2.84% Net charge-offs (recoveries) to average loans .06% .20%
-6- 9 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 September 30, 1996, the Company recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 are $638,000 and $349,000, 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 nine months ended September 30, 1996, were $405,000 and $336,000, 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 nine months ended September 30, 1996. E. INCOME TAXES Actual income tax expense for the three and nine months ended September 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:
Nine Months Ended Three Monhs Ended September 30, 1996 September 30, 1996 ------------------ ------------------ Computed "expected" tax expense $ 695 $ 215 Benefit of net operating loss carryforward (603) (153) ------ ------ Total Income Tax Expense $ 92 $ 62 ====== ======
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 SEPTEMBER 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 September 30, 1996, are presented below (in thousands):
September 30, 1996 ------------------ Deferred tax assets: Deferred fees, principally due to timing differences in the recognition of income $ 124 Net operating loss carryforwards 310 Unrealized loss on securities available for sale 70 Alternative minimum tax carryforwards 77 Other 14 ------ Total gross deferred tax assets 595 ------ Less valuation allowance (223) ------ Net deferred tax assets 372 ------ Deferred tax liabilities: Discount on securities deferred for tax purposes (89) Loans, principally due to provision for possible losses (212) Premises and equipment, principally due to differences in depreciation methods (63) Other (8) ------ Total gross deferred tax liabilities 372 ------ Net $ - ======
The net decrease during the nine months ended September 30, 1996, in the valuation allowance for deferred tax assets was $537,000. 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 September 30, 1996. At September 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 SEPTEMBER 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 September 30, 1996, earnings per share using the modified treasury stock method for the three and nine months ended September 30, 1996 would have been $.15 and $.50 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 September 30, 1996, the Company had unfunded commitments to extend credit totaling $29,445,000 consisting of unfunded lines of credit and commitments to extend credit. Additionally, the Company had standby letters of credit of $1,818,000 as of September 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 nine months ended September 30, 1996, was approximately $733,000 and $641,000, respectively. The required balance at September 30, 1996 was $970,000. 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 SEPTEMBER 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 September 30, 1996.
Estimated Carrying Amount Fair Value --------------- ---------- (In Thousands) Financial assets: Cash due from banks and federal funds sold $ 9,633 $ 9,633 Investment securities 46,649 46,649 Loans, net of unearned income 104,653 104,693 Financial liabilities: Deposits 127,719 127,999 Federal Home Loan Bank borrowings 9,500 9,500 Contractual or Estimated Notional Amounts Fair Value ---------------- ---------- (In Thousands) Off-balance items: Interest rate floors $ 8,000 $ * Commitments to extend credit 29,445 * Standby letters of credit 1,818 * *The estimated fair value of these items was not significant at September 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 SEPTEMBER 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 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. 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 was $36,000 at September 30 1996. At September 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). CFGI is a bank holding company and the parent of the wholly-owned subsidiary, The Bank of Nashville. The acquisition of The Bank of Nashville by CFGI was consummated on April 30, 1996. The balances and activities 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 this 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 reported net income of $570,000 for the third quarter of 1996, compared with net income of $598,000 for the third quarter of 1995. The Company earned $.26 per share for the third quarter of 1996, a decline of 4% from the $.27 per share reported for the third quarter of 1995. The decline in net income was primarily the result of incurring income tax expense and costs associated with the implementation of expansion plans which included the establishment of The Bank's new mobile branch and plans to open a branch in Green Hills during the fourth quarter of 1996. 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 third quarter of either 1996 or 1995. The Company's annualized return on average assets was 1.44% for the third quarter of 1996 and 1.57% for the third quarter of 1995. Annualized return on average equity for the third quarter of 1996 and 1995 was 10.74% and 12.56%, respectively. Net income for the nine month period ended September 30, 1996 was $1,950,000 and included a zero provision for possible loan losses which compares with net income of $1,991,000 during the first nine months of 1995, a period in which The Company's earnings benefited from recording a $520,000 negative provision for possible loan losses. Earnings per share were $.88 for the nine months ended September 30, 1996, compared with $.90 for the same period in 1995. Net interest income increased $692,000, 17.2%, during the first nine months of 1996 compared to the same period in 1995. Non-interest income increased $138,000, 24.0%, during the first nine months of 1996 compared with the same period in 1995. This increase in net interest income was 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 and a decrease in gains on sale of foreclosed assets. Non-interest expense increased $259,000, 8.3%, during the first nine months of 1996 compared with the same period in 1995. This increase was primarily reflected in the area of salaries and benefits, occupancy expense, audit, tax and accounting expense, and data processing expense. The Company recorded a $92,000 provision for income taxes during the first nine months of 1996, while no provision was made for this period in 1995. Year to date results and forecasts by management of future earnings necessitated the recording of a 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 fourth quarter in 1996 will continue to reflect increased tax provisions. The Company's effective tax rate in 1997 will more 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. Fluctuation 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 third quarter of 1996 was $1.6 million, an increase of 14.7% from $1.4 million in the third quarter of 1995. The increase in net interest income resulted from a $5.3 million increase in the average volume of earning assets which was partially offset by a $2.6 million increase in the volume of average interest bearing liabilities. Net interest income also benefited from a 30 basis point decline in the interest rate paid on interest bearing liabilities. The increase in volume of average earning assets may be attributed to a $13.9 million increase in average loans outstanding which was partially offset by a $7.9 million decline in average investments and a $.6 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 shift in the mix of interest bearing liabilities. The volume of NOW Accounts increased 2.5% and Money Market Accounts increased 30.4%, while certificates of deposit less than $100,000 declined 17.4% and certificates of deposit $100,000 or greater declined 21.0%. This shift in mix positively impacted net income, as both NOW Accounts and Money Market Accounts bear lower rates of interest paid than do both classifications of certificates of deposit. All classifications of interest bearing liabilities reflected declines in average rates paid during the third quarter of 1996 compared to the same period in 1995. The average rate paid declined 20 basis points on NOW Accounts, 30 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 nine months of 1996 was $4.7 million, an increase of 17.2%, compared to $4.0 million during the first nine months of 1995. The increase in net interest income during the first nine months of 1996 resulted from an increase of 5.5% in the volume of average earning assets, while average interest bearing liabilities only increased 3.3%. Net interest income was further impacted by average rates 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 15.5%, while investments and Federal Funds sold declined by 10.4% and 8.9%, 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 liabilities was comprised of increases of 16.9% in NOW Accounts and 19.2% in Money Market Investment Accounts, as well as decreases of 10.1% in certificates of less than $100,000 and 10.1% in certificates of deposit $100,000 or greater. Although the movement of funds into more liquid transaction accounts which has occurred during the past nine months has the effect of lowering the cost of funds and benefiting the net interest margin, it also positions this money to reprice more rapidly in a changing interest rate environment. These shifts from certificates of deposit 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 4.2% and 3.7% for the quarters ended September 30, 1996 and 1995, respectively. Net interest margin was 4.1% for the nine month period ended September 30, 1996, compared to 3.7% for the same period in 1995. The increase in net interest margin for the three month and nine month periods ended September 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 rate paid on these liabilities. - 13 - 16 NON-INTEREST INCOME Non-interest income was $217,000 for the third quarter of 1996, compared with $207,000 for the same period in 1995. Excluding gains (losses) on sale of securities and sale of foreclosed assets, which were zero in the third quarter of 1996 and $47,000 for the same period in 1995, non-interest income increased $57,000. All categories of non-interest income reflected increases during the third quarter of 1996 when compared to the same period in 1995. Total non-interest income was $712,000 for the first nine months of 1996, compared with $574,000 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 $36,000 in 1995, increased $171,000 for the first nine months of 1996 compared with the same period in 1995. Increases in 1996 compared to 1995 we comprised of $72,000 in Trust income, $101,000 in income from foreclosed assets, and $38,000 in other income which were partially offset by declines of $56,000 in service fee income largely the result of decline NSF/overdraft fees and checking account activity charges and $42,000 in gains on the sale of foreclosed assets. 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 $180,000 during the third quarter of 1996 compared with the same period of 1995. This increase was the result of increases of $50,000 in salaries and employee benefits, $61,000 in occupancy expense, $13,000 in audit, tax and accounting expense, $5,000 in data processing expense, and $40,000 in other operating expense. Salaries and employee benefits, as well as occupancy expense, were impacted during the third quarter of 1996, as The Company implemented expansion plans. The Bank's new mobile branch which provides the convenience of "at your door" banking services was established in September of 1996. Also during the third quarter of 1996, The Bank received approval to open a branch in Green Hills at the Glendale Center. Although the branch is not scheduled until the fourth quarter of 1996, staffing and occupancy expense began to be incurred during the third quarter of 1996. Total non-interest expense increased $259,000, or 8.3%, during the first nine 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 expense, data processing expense, and other operating expense. These increases were partially offset by a $150,000 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. INCOME TAXES Reported earnings have reflected the use of net operating loss carryforwards and, as such, no significant income taxes were recorded during 1995. Provision for income taxes expense was $62,000 during the third quarter of 1996 and $92,000 for the nine month period ended September 30, 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 additional income tax expense in the fourth quarter of 1996 and income tax expense in 1997 which more closely reflects statutory tax rates. 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 $857,000 at September 30, 1996, an increase of $406,000 from the $451,000 reported at December 31, 1995. There were no loans 90 days or more past due and still accruing interest at September 30, 1996 or at December 31, 1995. Nonperforming assets as a percentage of total loans outstanding were .82% at September 30, 1996 compared to .46% at December 31, 1995. Potential problem loans totaled approximately $134,000 at September 30, 1996, compared with $386,000 at December 31, 1995. - 14 - 17 The Company recorded no expense for provision of possible loan losses during the first nine months of 1996, compared with a negative provision for possible loan losses of $520,000 during the first nine 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 charge-offs were $63,000 during the first nine months of 1996 compared with net loan recoveries of $488,000 during the same period in 1995. The allowance for possible loan losses was $3.0 million at September 30, 1996 and at December 31, 1995. Loan and valuation reserves as a percentage of total nonperforming assets were 347% and 673% at September 30, 1996 and December 31, 1995, respectively. 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 September 30, 1996, were $160.1 million, an increase of $7.3 million from December 31, 1995. This increase was the result of an increase of $6.4 million in total net loans and $3 million in Federal Funds sold which were partially offset by decreases of $.6 million in cash and due from banks and $1.3 million in investment securities. Total deposits at September 30, 1996, were $127.7 million, a decrease of $2.8 million, of 2.2%, from the $130.5 million at December 31, 1995. The decline in deposits resulted from a $12.1 million decline in time certificates of deposit and a $1.4 million decline in NOW Accounts. These declines were partially offset by increases of $2.3 million in non-interest bearing demand deposits and $8.4 million in Money Market Investment Accounts. At September 30, 1996, liabilities included Federal Home Loan Bank borrowings of $9.5 million, while no such borrowings were reflected at December 31, 1995. Borrowings from the Federal Home Loan Bank are utilized to both fund loan demand and to fund investment securities with similar maturities to improve overall net income. Shareholders' equity (adjusted for SFAS No. 115) increased $1.3 million to $21.3 million at September 30, 1996, from $20.0 million at December 31, 1995. This increase was primarily the result of net income of $2.0 million during the first six months of 1996. Unrealized losses on securities available for sale were $183,000 at September 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 and reflect current market value on these securities. CAPITAL ADEQUACY AND LIQUIDITY Capital adequacy remained strong during the first nine months of 1996. Shareholders' equity, excluding SFAS No. 115 adjustments at September 30, 1996, was $21.5 million, or 13.4% of total assets, which compares with $19.7 million, or 12.9%, of total assets at December 31, 1995. The increase in total capital during the first nine 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 $462,000 and the payment of dividends of $263,000. At September 30, 1996, The Company's primary and total capital ratios to adjusted assets were 13.3% and 14.9%, 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 21.2% at September 30, 1996, compared with 22.0% at December 31, 1995. All capital ratios continue to exceed regulatory guidelines. The Company paid quarterly dividends of $.04 per share to shareholders during each of the first three 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 $200,000 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 maturity of securities held was 1.4 years at September 30, 1996, compared to 10 months at December 31, 1995. Securities available for sale were $46.6 million at September 30, 1996, compared to $47.9 million at December 31, 1995. Additional liquidity was provided by a Federal Funds sold position of $4.0 million at September 30, 1996, compared to $1.0 million at December 31, 1995. Core deposits, a relatively stable funding base, comprised 80.4% of total deposits at September 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 There were not matters submitted to a vote of the Security holders during the quarter ended September, 1996. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits Exhibit No. Description - ----------- ----------------------- 11 Statement regarding computation of earnings per share. 27 Financial Data Schedule - (SEC use only) (B) There were no reports on Form 8-K filed during the quarter ended September 30, 1996. 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 November 12 , 1996 /s/ Mack S. Linebaugh, Jr. - ------------------------- -------------------------------- Date Mack S. Linebaugh, Jr. President, Chairman of the Board, Chief Executive Officer and Chief Financial Officer - 16 - EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 ---------- COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY STATEMENT REGARDING: COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Nine Months Ended September 30 September 30 -------------------------------- --------------------------------- 1996 1995 1996 1995 --------- ------------ ---------- ------------ Income Per Common Share (1) Net income (in thousands) $ 570 $ 598 $ 1,950 $ 1,991 =========== =========== ============ ============ Net income per share $ .26 $ .27 $ .88 $ .90 =========== =========== ============ ============ Weighted average common shares outstanding 2,219,082 2,206,085 2,216,286 2,201,135 =========== =========== ============ ============ Income Per Common Share, Assuming Full Dilution (1) Net income (in thousands) $ 570 $ 598 $ 1,950 $ 1,991 =========== =========== ============ =========== Net income per share $ .26 $ .27 $ .88 $ .90 =========== =========== ============ =========== 2,219,082 2,206,085 2,216,286 2,201,135 =========== =========== ============ ===========
(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 3 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 5,633 0 4,000 0 46,649 0 0 104,653 2,971 160,106 127,719 0 1,566 9,500 0 0 13,209 8,112 160,106 7,039 2,220 209 9,468 4,737 4,755 4,713 0 (2) 3,383 2,042 2,042 0 0 1,950 .88 .88 4.14 857 0 0 134 3,034 449 386 2,971 1,991 0 980
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