-----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, JBfnod1lfkh7GG7KgGzUlXR3ciuBibRhm1GSOhWPOgOKK6l6+v7qpy+XRSy0islO xJscfaYepE+aUH2ap5sciQ== 0000950144-99-003477.txt : 19990331 0000950144-99-003477.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950144-99-003477 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-28496 FILM NUMBER: 99577392 BUSINESS ADDRESS: STREET 1: 401 CHURCH ST STREET 2: PO BOX 198986 CITY: NASHVILLE STATE: TN ZIP: 37219 BUSINESS PHONE: 6152712025 MAIL ADDRESS: STREET 1: PO BOX 198986 CITY: NASHVILLE STATE: TN ZIP: 37219-8986 10KSB40 1 COMMUNITY FINANCIAL GROUP INC 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 Commission File Number 0-28496 -------------------- Community Financial Group, Inc. - -------------------------------------------------------------------------------- (Name of Small Business Issuer in its charter) Tennessee 62-1626938 -------------------------------- ------------------ (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 401 Church Street Nashville, Tennessee 37219-2213 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (615) 271-2000 -------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $6 per share - -------------------------------------------------------------------------------- (Title of Class) Warrants, exercise price $12.50 per share - -------------------------------------------------------------------------------- (Title of Class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ] State issuer's revenues for its most recent fiscal year. $18,396,000. The aggregate market value (price at which the stock sold) of Community Financial Group, Inc., voting common stock held by non-affiliates as of February 26, 1999, was $40,067,058. 2 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
Outstanding at Class March 10, 1999 ----- -------------- Common stock $6 par value 4,219,436 shares
Documents Incorporated by Reference:
Document from which portions Part of Form 10-KSB to are incorporated by reference which incorporated ----------------------------- ------------------ 1. Annual Report to Shareholders for year Part I - Item 1 ended December 31, 1998 Part II - Items 5, 6 and 7 2. Proxy Statement dated April 2, 1999 Part III - Items 9, 10, 11 and 12
-2- 3 ITEM 1 - DESCRIPTION OF BUSINESS On December 13, 1995, Community Financial Group, Inc. ("CFGI"), was incorporated as a Tennessee Corporation. CFGI also filed an application with the Board of Governors of the Federal Reserve System for prior approval to become a one bank holding company pursuant to Section 3(a)(1) of the Bank Holding Company Act of 1956, as amended. This application was filed on January 22, 1996, and approval was received on March 29, 1996. The holding company began operation April 30, 1996, following approval of a majority of the shareholders of The Bank of Nashville. As of December 31, 1998, the only subsidiary of CFGI was The Bank of Nashville (The Bank). CFGI and The Bank are collectively referred to herein as "the Company". The Bank was incorporated under the laws of the State of Tennessee, on July 10, 1989. The Bank was approved as a State Bank, is a member of the Federal Reserve System, and is insured by the Federal Deposit Insurance Corporation. The initial business day for the Bank was November 20, 1989. The Company now has a total of 61 employees. The present area and scope of the Company's activities include providing a full range of banking and related financial services, including commercial banking, consumer banking, financial and investment services, and real estate finance. The Company has three traditional branches with its main office at 401 Church Street, the Green Hills office at 3770 Hillsboro Pike and the Brentwood office at 5105 Maryland Way. Additionally, these locations are complemented by the Company's "Bank on Call" mobile branches which serve customers throughout the market area with at your office banking convenience. LM Financial Partners, Inc., a subsidiary of Legg Mason Wood Walker, Inc., operates an Investment Center in the Company's primary location which provides bank customers at all locations convenient access to a wide array of investment products and fiduciary services. The Company is well capitalized as demonstrated by a total risk-based capital ratio of 31.6%, tier 1 risk-based capital ratio of 30.3% and tier 1 leverage ratio was 23.0% at December 31, 1998. Additionally, at year end 1998, the Bank's capital ratios reflected total risk based capital ratio at 16.9%, tier 1 risk-based capital ratio at 15.6% and tier 1 leverage ratio at 11.9%. These capital ratios exceed the current regulatory minimum requirements. The Company is focused on serving small/mid-sized businesses and individuals in the middle Tennessee market, with a primary service area of the Metro Nashville-Davidson County Metropolitan Statistical Area (MSA). Nashville, located in the north central part of the State, is the State's largest MSA. Situated midway between the Mississippi delta to the west, and the Great Smokey -3- 4 Mountains to the east, Metropolitan Nashville covers 533 square miles. Over half of the population of the United States is located within a 600 mile radius of the City, and the central location has contributed to the emergence of Nashville as an important transportation, tourism, and distribution center. Diversity is a key element of the Nashville economy with printing and publishing, healthcare, automobile manufacturing, financial services, real estate development and construction, education, government, entertainment, tourism, hospitality, manufacturing, warehousing, and various service sectors, all being major contributors to the economic vitality of the area. The activities in which the Company engages are very competitive. Generally, the Company competes with other banks and nonbank financial institutions located primarily in the middle Tennessee market area. The principal methods of competition center around such aspects as interest rates on loans and deposits, decision making relationship management, customer services, and other service oriented fee based products. Most of the Company's competitors are major corporations with substantially more assets and personnel than the Company. The Company actively competes for loans and deposits with other commercial banks, brokerage firms, savings and loan associations and credit unions. Consumer finance companies, department stores, mortgage brokers, and insurance companies are also significant competitors for various types of loans. There is also active competition for various types of fiduciary and investment business from other banks, trust companies, brokerage firms, investment companies, and others. The Company is headquartered in the downtown central business district of Nashville. The Company occupies space in the lower level, the second floor, and the third floor of the L & C Tower, located at 401 Church Street, a location which serves as the Bank's main office. The Company opened its first Automated Teller Machine (ATM) in 1989 and now operates ATM's and cash dispensers in various locations throughout its market, serving local businesses and individuals as well as tourists. In 1996, the Company received regulatory approval to establish a mobile branch. The mobile branch brings traditional banking services to the Company's customers at their locations. A full service branch office, located in Green Hills, opened January 23, 1997. Another, located in Maryland Farms in Brentwood, Tennessee opened in September 1998. Construction started in October, 1998, on a full service branch to be located at 100 Maple Drive North, Hendersonville, Tennessee. If deemed appropriate, additional offices may be established subject to regulatory approval. During 1998, the Company declared dividends of $.24 per share which resulted in a dividend payout ratio of 22.22%. Other information relating to current banking issues and the regulatory environment are addressed in the 1998 Annual Report to Shareholders. -4- 5 The following schedules are provided in accordance with Guide 3 "Statistical Disclosure by Bank Holding Companies." All schedules, except those noted below, have been omitted since the required information is either not applicable or is incorporated by reference in the Company's 1998 Annual Report. - Schedule III-A - Types of Loans - Schedule III-B - Maturities and Sensitivities of Loans to Changes in Interest Rates -5- 6 III. LOAN PORTFOLIO The following table presents a summary of loan types (net of unearned income) by categories for the last five years. SCHEDULE III-A TYPES OF LOANS
December 31, -------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- ------- ------- Loans (net of unearned income of $295, $297, $256, $203 and $202 respectively) Commercial $ 51,970 $ 38,571 $ 35,721 $40,657 $35,108 Real estate - mortgage loans 79,455 71,055 58,763 48,648 41,800 Real estate - Real estate - construction 14,667 9,426 9,467 5,952 2,227 Consumer 6,583 3,697 3,937 3,083 1,950 -------- -------- -------- ------- ------- $152,675 $122,749 $107,888 $98,340 $81,085 ======== ======== ======== ======= =======
Most of the Company's business activity is with customers located in the Middle Tennessee region. Generally, loans are secured by real estate, inventory, accounts receivable, stock, time certificates, or other assets. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Real estate mortgage and construction loans reflected in the preceding schedule are comprised primarily of loans to commercial borrowers. At December 31, 1998, funded and unfunded commitments to borrowers in the real estate industry were approximately $27.2 million and $5.2 million, respectively, and loans to building contractors were approximately $8.8 million and $10.1 million, respectively. At December 31, 1997, funded and unfunded loan commitments as classified by Standard Industry Classification codes include borrowers in the real estate industry approximating $25 million and $2.2 million, respectively, and loans to building contractors approximating $7.9 million and $11.2 million, respectively. -6- 7 The following table presents the maturity distribution of loan categories at December 31, 1998 (in thousands). SCHEDULE III-B TYPES OF LOANS MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
One After One After Year But Within Five Or Less Five Years Years Total ------------------------------------------------ (Net of Unearned Income) Commercial $28,008 $21,725 $ 2,237 $ 51,970 Real estate - mortgage 20,424 26,420 32,611 79,455 Real estate - construction 8,486 6,181 -- 14,667 Consumer 4,653 1,875 55 6,583 ------- ------- -------- -------- $61,571 $56,201 $ 34,903 $152,675 ======= ======= ======== ======== For maturities over one year: Fixed $42,824 Floating 48,280
ITEM 2 - DESCRIPTION OF PROPERTY The Company, located at 401 Church Street, Nashville, Tennessee, occupies a total of 15,296 square feet on three floors of the L&C Tower, a 31-story office building. The facility has a total of 158,907 gross square footage and is located on .391 acres. The Company's space is leased from LC Tower, L.L.C. (the "Landlord"). The lease has an initial term of ten years with three five-year renewal options. The Company occupies 4,670 square feet in the Glendale Shopping Center located at 3770 Hillsboro Pike, Nashville, Tennessee. The Company's space is leased from Coleman Partners, a Tennessee Partnership, and has an initial term of five years with three five-year renewal options. The Company occupies 4,000 square feet in the newly completed The Bank of Nashville Building located at 5105 Maryland Way, Brentwood, Tennessee. The Company's space is leased from Graystone, LLC and has an initial term of ten years with three five-year renewal options. In the spring of 1999, the Company will occupy 5,008 square feet in the newly constructed building located at 100 Maple Drive North in Hendersonville, Tennessee. The company purchased the land in June, 1998. -7- 8 ITEM 3 - LEGAL PROCEEDINGS None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -8- 9 PART II ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The following portion of the Company's 1998 Annual Report to Shareholders is incorporated herein by reference: Common Stock Information Page 46 ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS The following portions of the 1998 Annual Report are herein incorporated by reference. Management's Discussion and Analysis of Results of Operations and Financial Condition on pages 6 through 23. ITEM 7 - FINANCIAL STATEMENTS The following portions of the 1998 Annual Report are incorporated herein by reference. Financial Statements and Report of Independent Auditors on pages 24 through 43 and page 44. Quarterly Results of Operations on page 45. ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors and the information regarding executive officers called for by this item is contained in the sections entitled "Election of Directors" and "Executive Officers" in the Company's proxy statement for its 1999 Annual Meeting of Shareholders, dated April 2, 1999, and is incorporated herein by reference. -9- 10 ITEM 10 - EXECUTIVE COMPENSATION The information called for by this item is contained in the section entitled "Compensation of Management and Other Information" in the Company's proxy statement for its 1999 Annual Meeting of Shareholders, dated April 2, 1999, and is incorporated herein by reference. ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is contained in the section entitled "Stock Ownership" in the Company's proxy statement for its 1999 Annual Meeting of Shareholders dated April 2, 1999, and is incorporated herein by reference. ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item is contained in the section entitled "Transactions with Directors and Executive Officers" in the Company's proxy statement for its 1999 Annual Meeting of Shareholders dated April 2, 1999, and is incorporated herein by reference. ITEM 13 - EXHIBITS, LIST AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements The following consolidated financial statements and the Report of KPMG LLP, Independent Certified Public Accountants, are on pages 24 through 43 and page 44 of the 1998 Annual Report and are incorporated herein by reference. - Consolidated Balance Sheets at December 31, 1998 and 1997 - Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 - Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996 - Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 - Notes to Consolidated Financial Statements -10- 11 (2) Exhibits 1. Not required. 2. Plan of acquisition, reorganization,arrangement, liquidation or succession. None 3. Articles of Incorporation and By-Laws, incorporated by reference to Exhibit 3 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 4. Instruments defining the rights of security holders, including debentures. 4.01 Warrant Agreement, incorporated by reference to Exhibit 4.01 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 4.02 Form of specimen Certificate of Common Stock, incorporated by reference to Exhibit 4.02 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 4.03 Form of specimen Certificate of Common Stock Purchase Warrant, incorporated by reference to Exhibit 4.03 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 4.04 Community Financial Group, Inc. and Registrar and Transfer Company, as Rights Agent, Shareholders Rights Agreement Dated as of January 21, 1998. Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-A dated January 26, 1998. 5. Not required. 6. Not required. 7. Not required. 8. Not required. 9. Voting Trust Agreement. None. 10. Material Contracts. 10.01 Employment Agreement between The Bank of Nashville and Mack S. Linebaugh, Jr. dated September 2, 1992, as amended. Incorporated by reference to Exhibit 10.01 to the Registrant's Annual Report Form 10-KSB for the year December 31, 1996. 10.02 Employment Agreement between The Bank of Nashville and Julian C. Cornett dated October 13, 1996. Incorporated by reference to Exhibit 10.02 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 10.03 Option Agreements between The Bank of Nashville and Mack S. Linebaugh, Jr. dated September 2, 1992 and July 27, 1993, and Option Agreement dated July 16, 1996 between Community Financial Group, Inc., and Mack S. Linebaugh, Jr. Incorporated by reference to Exhibit 10.03 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. -11- 12 10.04 Option Agreements between The Bank of Nashville and Julian C. Cornett dated October 13, 1992 and October 13, 1993, and Option Agreement dated July 16, 1996 between Community Financial Group, Inc., and Julian C. Cornett. Incorporated by reference to Exhibit 10.04 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 10.05 Lease Agreement dated July 19, 1989 between The Bank of Nashville and Metropolitan Life Insurance Company. Incorporated by reference to Exhibit 10.05 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. Metropolitan Life Insurance Company has been succeeded as landlord by LC Tower, L.L.C. 10.06 Lease Agreement dated August 1, 1996 between The Bank of Nashville and Coleman Partners, a Tennessee Partnership. Incorporated by reference to Exhibit 10.06 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 10.07 The Bank of Nashville Retirement Savings Plan. Incorporated by reference to Exhibit 10.07 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 10.08 Community Financial Group, Inc.'s Associates' Stock Purchase Plan. Incorporated by reference to Exhibit 10.08 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 10.09 Community Financial Group, Inc. 1997 Nonstatutory Stock Option Plan Incorporated by reference to Exhibit 10.9 to the Registrant's Form S-2 (SEC file 333-24309) dated April 1, 1997. 10.10 Lease Agreement dated August 4, 1997 between The Bank of Nashville and Graystone, LLC. Incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report Form 10KSB for the year ended December 31, 1997. 10.11 The Bank of Nashville letter of intent to purchase property from ShoLodge, Inc. dated January 23, 1998. Incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report Form 10KSB for the year ended December 31, 1997. 10.12 Financial Advisor Agreement dated May 1, 1998 between The Bank of Nashville and Harold J. Castner. 10.13 Financial Advisor Agreement dated May 1, 1998 between The Bank of Nashville and Pamela F. Morris. 10.14 Financial Advisor Promissory Note Repayment Agreement dated July 24, 1998 between The Bank of Nashville and Harold J. Castner, and Exhibit A Promissory Note. 10.15 Financial Advisor Promissory Note Repayment Agreement dated July 24, 1998 between The Bank of Nashville and Pamela F. Morris and Exhibit A Promissory Note. -12- 13 (2) Exhibits - Continued 10.16 Construction Contract between The Bank of Nashville and Ray Bell Construction Company dated October 2, 1998. 10.l7 Employment Agreement between The Bank of Nashville and Anne J. Cheatham, dated February 23, 1999. 11. Statement re computation of per share earnings. 12. Statement re computation of ratios. Not applicable. 13. 1998 Annual Report to Shareholders. 14. Not required. 15. Not required. 16. Letter re change in certifying accountant. Not applicable. 17. Not required. 18. Letter re change in accounting principles. Not applicable. 19. Not required. 20. Not required. 21. Subsidiaries of the registrant. 22. Published report regarding matters submitted to vote of security holders. None. 23. Consent of experts and counsel. None. 24. Power of Attorney. None. 25. Not required. 26. Not required. 27. Financial Data Schedule. 28. Information from reports furnished to state insurance regulatory authorities. Not applicable. 99. Additional Exhibits. None. (b) Reports on Form 8-K None -13- 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE BANK OF NASHVILLE By: /s/ Mack S. Linebaugh, Jr. Date: March 25, 1999 --------------------------- Mack S. Linebaugh, Jr. Chairman of the Board, President, Chief Executive Officer and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons or behalf of the registrant and in the capacities and on the dates indicated. /s/ Mack S. Linebaugh, Jr. /s/ L. Leon Moore - -------------------------- ----------------- Mack S. Linebaugh, Jr. L. Leon Moore Chairman of the Board, Director President, Chief Executive Officer Dated March 25,1999 and Chief Financial Officer Dated March 25, 1999 /s/ J. B. Baker, Jr. /s/ Perry W. Moskovitz - -------------------- ---------------------- J. B. Baker, Jr. Perry W. Moskovitz Director Director Dated March 25, 1999 Dated March 25, 1999 /s/ Jo D. Federspiel /s/ C. Norris Nielsen - -------------------- --------------------- Jo D. Federspiel C. Norris Nielsen Director Director Dated March 25, 1999 Dated March 25, 1999 /s/ Richard H. Fulton /s/ David M. Resha - --------------------- ------------------ Richard H. Fulton David M. Resha Director Director Dated March 25, 1999 Dated March 25, 1999 /s/ G. Edgar Thornton - ----------------------- G. Edgar Thornton Director Dated March 25, 1999 -14- EX-10.12 2 FINANCIAL ADVISOR AGREEMENT 1 EXHIBIT 10.12 FINANCIAL ADVISOR AGREEMENT THIS FINANCIAL ADVISOR AGREEMENT (the "Agreement") entered into as of the 1st day of May, 1998, by and between The Bank of Nashville, Nashville, Tennessee (the "Bank") and Harold J. Castner (the "Employee"). WHEREAS, the Bank is, contemporaneously with the Agreement, entering into a Dual Employee Program Agreement (the "Dual Employee Agreement") and a Lease Agreement (the "Lease") (collectively, the Legg Mason Agreements"), with LM Financial Partners, Inc. ("LMFP") and Legg Mason Financial Services, Inc. ("LMFS"); and WHEREAS, the Legg Mason Agreements contemplate that certain individuals shall (i) be registered and qualified as necessary with the Securities and Exchange Commission (the "SEC"), the National Association of Securities Dealers ("NASD") and appropriate state regulatory authorities, (ii) shall be employed by LMFP in addition to their employment by the Bank, and (iii) shall be licensed as insurance agents with appropriate state regulatory authorities (the "Dual Employees"); and WHEREAS, the Bank and the Employee have agreed that the Bank shall employ the Employee and the Employee shall serve as a Dual Employee. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the Bank and the Employee hereby agree as follows: 1. The Bank hereby employs the Employee as an employee-at-will and the Employee hereby accepts employment by the Bank as an employee-at-will. There is absolutely no intention that this Agreement be construed as a contract of employment for any period of time, and it is agreed and understood that the Bank may terminate the Employee at any time for any reason or for no specific reason. 2. The Employee, as a Dual Employee, shall be subject to the exclusive control of LMFP and LMFS with respect to his conduct as a registered representative of LMFP, and the Bank shall strictly honor such control relationship and shall not have any involvement whatsoever in any of the securities brokerage, investment advisory and insurance services provided by the Employee as a Dual Employee. 3. The Employee will be compensated based upon the monthly Program Payments received by the Bank under the Dual Employee Agreement and the Rent payments received by the Bank under the Lease to the extent such Program Payments and Rent payments result from LMFP Products (as defined in the Legg Mason Agreements) sold by or credited to the Employee (the "Employee's Gross Production") as follows: 1 2 A. The Employee shall be credited with an amount equal to 46% of the Employee's Gross Production for the preceding month (the Employee's Credit"). B. The Employee's Credit shall be reduced by the following: (i) the total amount paid by the Bank for any personal assistant assigned to the Employee (the "Personal Assistant") with respect to salary, employee benefits and the portion of FICA taxes and medicare taxes paid by the Bank with respect to the Personal Assistant; (ii) amounts withheld by the Bank with respect to applicable federal and state (if applicable) income, FICA, medicare and other taxes or assessments the Bank is now or in the future required to withhold; (iii) the amount the Employee is required to pay for employee benefits provided by the Bank, consistent with the Bank's policies as applicable to Bank employees generally; C. An amount equal to the Employee's Credit, reduced by the amounts in paragraph 3B hereof shall be paid to the Employee by the 10th day of each month. 4. The Employee shall be entitled to the services of one or more Personal Assistants who shall be employees of the Bank and whose compensation and benefits shall be reimbursed by the Employee to the Bank pursuant to paragraph 3B(i) above; provided, however, the terms of employment of any such Personal Assistant, including, but not limited to, salary, benefits, hours and working conditions, are subject to the prior written approval of the Bank and shall not be altered or changed without the prior written approval of the Bank. 5. The Employee shall be granted options to purchase 4,992 shares (based on 1,000 options for each $100,000 gross production generated by the Employee as an employee of Legg Mason Wood Walker Incorporated for the 12 months immediately preceding the date of this Agreement (the "LMWWI Gross Production")) of the common stock of Community Financial Group, Inc. pursuant to and on the terms and conditions of the Community Financial Group, Inc. 1997 Nonstatutory Stock Option Plan. 6. As consideration for the transfer to the Bank of accounts originated by the employee while an employee of Legg Mason Wood Walker Incorporated, the Bank will loan to the Employee, pursuant to the Promissory Note attached as Exhibit A to 2 3 the Financial Advisor Promissory Note Repayment Agreement, which is attached hereto and incorporated herein (the "Note Repayment Agreement"), $124,813.27 (an amount equal to 25% of the LMWWI Gross Production, such Promissory Note to be reduced by the Bank pursuant to the terms of the Note Repayment Agreement. 7. In the event the Employee's employment with the Bank is terminated coincident with or following a change in control (as defined in the Note Repayment Agreement), wether involuntarily by the Bank or voluntarily by the Employee for Good Reason (as defined in the Note Repayment Agreement), the Employee shall have the right, without payment to the Bank, to solicit for transfer any of the clients the Employee served while acting as a Dual Employee. 8. In connection with the Employee's application to the Bank to become an employee-at-will of the Bank, the Employee hereby certifies the following to be true: A. I am not currently subject to any state or federal administrative enforcement order or judgment entered by any state or federal securities administrator within the past five (5) years and I am not subject to any state or federal administrative enforcement order or judgment in which fraud or deceit, including, but not limited to, making untrue statements of material facts or omitting to state material facts, was found and the order or judgment was entered within the past five (5) years; B. I am not subject to any state or federal administrative enforcement order or judgment which prohibits, denies or revokes the use of any exemption from registration in connection with the offer, purchase or sale of securities; C. I am not currently subject to any order, judgment or decree of any court of competent jurisdiction temporarily or preliminarily restraining or enjoining me, and I am not subject to any jurisdiction permanently restraining or enjoining me from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with a state or federal securities administrator entered within the past five (5) years; and D. I have not been convicted within the past five (5) years of any felony or misdemeanor in connection with the offer, purchase or sale of any security or any felony involving 3 4 fraud or deceit, including, but not limited to, forgery, embezzlement, obtaining money under false pretenses, larceny or conspiracy to defraud. 9. This Agreement shall be governed, construed and enforced in accordance with the laws of the State of Tennessee. 10. The Bank's failure to enforce a breach of this Agreement will not constitute a waiver of the Bank's right to enforce any other breach of this Agreement. 11. If any part of this Agreement shall be held invalid or unenforceable, that part shall be deemed modified as necessary to make it effective, and the remaining provisions of this Agreement shall remain in effect. 12. The Employee understands that the Bank is relying on the representations and agreements evidenced herein and in the Note Repayment Agreement and the Promissory Note which, it is agreed, incorporate the entire understanding between the Employee and the Bank on the subject matter covered by this Agreement and may not be changed except by a writing signed by a duly authorized officer of the Bank and the Employee. The Bank shall have the right to assign this Agreement, the Note Repayment Agreement and/or the Promissory Note to any affiliate of the Bank. An "affiliate" of the Bank shall include any entity in control of, controlled by or under common control with the Bank. 13. The Employee acknowledges that the Employee was given the opportunity to read this Agreement and to seek the assistance of counsel before the Employee decided to accept employment by the Bank and to sign this Agreement. 4 5 IN WITNESS WHEREOF, the parties have caused this Financial Advisor Agreement to be executed as of the date first hereinabove written. /s/Pamela F. Morris /s/Harold J. Castner - -------------------------------- ------------------------------ Witness (Employee) THE BANK OF NASHVILLE ATTEST: /s/Joan B. Marshall, SVP By: /s/Mack S. Linebaugh, Jr. - -------------------------------- ------------------------------ Title: President 5 EX-10.13 3 FINANCIAL ADVISOR AGREEMENT 1 EXHIBIT 10.13 FINANCIAL ADVISOR AGREEMENT THIS FINANCIAL ADVISOR AGREEMENT (the "Agreement") entered into as of the 1st day of May, 1998, by and between The Bank of Nashville, Nashville, Tennessee (the "Bank") and Pamela F. Morris (the "Employee"). WHEREAS, the Bank is, contemporaneously with the Agreement, entering into a Dual Employee Program Agreement (the "Dual Employee Agreement") and a Lease Agreement (the "Lease") (collectively, the Legg Mason Agreements"), with LM Financial Partners, Inc. ("LMFP") and Legg Mason Financial Services, Inc. ("LMFS"); and WHEREAS, the Legg Mason Agreements contemplate that certain individuals shall (i) be registered and qualified as necessary with the Securities and Exchange Commission (the "SEC"), the National Association of Securities Dealers ("NASD") and appropriate state regulatory authorities, (ii) shall be employed by LMFP in addition to their employment by the Bank, and (iii) shall be licensed as insurance agents with appropriate state regulatory authorities (the "Dual Employees"); and WHEREAS, the Bank and the Employee have agreed that the Bank shall employ the Employee and the Employee shall serve as a Dual Employee. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the Bank and the Employee hereby agree as follows: 1. The Bank hereby employs the Employee as an employee-at-will and the Employee hereby accepts employment by the Bank as an employee-at-will. There is absolutely no intention that this Agreement be construed as a contract of employment for any period of time, and it is agreed and understood that the Bank may terminate the Employee at any time for any reason or for no specific reason. 2. The Employee, as a Dual Employee, shall be subject to the exclusive control of LMFP and LMFS with respect to his conduct as a registered representative of LMFP, and the Bank shall strictly honor such control relationship and shall not have any involvement whatsoever in any of the securities brokerage, investment advisory and insurance services provided by the Employee as a Dual Employee. 3. The Employee will be compensated based upon the monthly Program Payments received by the Bank under the Dual Employee Agreement and the Rent payments received by the Bank under the Lease to the extent such Program Payments and Rent payments result from LMFP Products (as defined in the Legg Mason Agreements) sold by or credited to the Employee (the "Employee's Gross Production") as follows: 1 2 A. The Employee shall be credited with an amount equal to 46% of the Employee's Gross Production for the preceding month (the Employee's Credit"). B. The Employee's Credit shall be reduced by the following: (i) the total amount paid by the Bank for any personal assistant assigned to the Employee (the "Personal Assistant") with respect to salary, employee benefits and the portion of FICA taxes and medicare taxes paid by the Bank with respect to the Personal Assistant; (ii) amounts withheld by the Bank with respect to applicable federal and state (if applicable) income, FICA, medicare and other taxes or assessments the Bank is now or in the future required to withhold; (iii) the amount the Employee is required to pay for employee benefits provided by the Bank, consistent with the Bank's policies as applicable to Bank employees generally; C. An amount equal to the Employee's Credit, reduced by the amounts in paragraph 3B hereof shall be paid to the Employee by the 10th day of each month. 4. The Employee shall be entitled to the services of one or more Personal Assistants who shall be employees of the Bank and whose compensation and benefits shall be reimbursed by the Employee to the Bank pursuant to paragraph 3B(i) above; provided, however, the terms of employment of any such Personal Assistant, including, but not limited to, salary, benefits, hours and working conditions, are subject to the prior written approval of the Bank and shall not be altered or changed without the prior written approval of the Bank. 5. The Employee shall be granted options to purchase 4,085 shares (based on 1,000 options for each $100,000 gross production generated by the Employee as an employee of Legg Mason Wood Walker Incorporated for the 12 months immediately preceding the date of this Agreement (the "LMWWI Gross Production")) of the common stock of Community Financial Group, Inc. pursuant to and on the terms and conditions of the Community Financial Group, Inc. 1997 Nonstatutory Stock Option Plan. 6. As consideration for the transfer to the Bank of accounts originated by the employee while an employee of Legg Mason Wood Walker Incorporated, the Bank will loan to the Employee, pursuant to the Promissory Note attached as Exhibit A to 2 3 the Financial Advisor Promissory Note Repayment Agreement, which is attached hereto and incorporated herein (the "Note Repayment Agreement"), $102,119.96 (an amount equal to 25% of the LMWWI Gross Production, such Promissory Note to be reduced by the Bank pursuant to the terms of the Note Repayment Agreement. 7. In the event the Employee's employment with the Bank is terminated coincident with or following a change in control (as defined in the Note Repayment Agreement), wether involuntarily by the Bank or voluntarily by the Employee for Good Reason (as defined in the Note Repayment Agreement), the Employee shall have the right, without payment to the Bank, to solicit for transfer any of the clients the Employee served while acting as a Dual Employee. 8. In connection with the Employee's application to the Bank to become an employee-at-will of the Bank, the Employee hereby certifies the following to be true: A. I am not currently subject to any state or federal administrative enforcement order or judgment entered by any state or federal securities administrator within the past five (5) years and I am not subject to any state or federal administrative enforcement order or judgment in which fraud or deceit, including, but not limited to, making untrue statements of material facts or omitting to state material facts, was found and the order or judgment was entered within the past five (5) years; B. I am not subject to any state or federal administrative enforcement order or judgment which prohibits, denies or revokes the use of any exemption from registration in connection with the offer, purchase or sale of securities; C. I am not currently subject to any order, judgment or decree of any court of competent jurisdiction temporarily or preliminarily restraining or enjoining me, and I am not subject to any jurisdiction permanently restraining or enjoining me from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with a state or federal securities administrator entered within the past five (5) years; and D. I have not been convicted within the past five (5) years of any felony or misdemeanor in connection with the offer, purchase or sale of any security or any felony involving 3 4 fraud or deceit, including, but not limited to, forgery, embezzlement, obtaining money under false pretenses, larceny or conspiracy to defraud. 9. This Agreement shall be governed, construed and enforced in accordance with the laws of the State of Tennessee. 10. The Bank's failure to enforce a breach of this Agreement will not constitute a waiver of the Bank's right to enforce any other breach of this Agreement. 11. If any part of this Agreement shall be held invalid or unenforceable, that part shall be deemed modified as necessary to make it effective, and the remaining provisions of this Agreement shall remain in effect. 12. The Employee understands that the Bank is relying on the representations and agreements evidenced herein and in the Note Repayment Agreement and the Promissory Note which, it is agreed, incorporate the entire understanding between the Employee and the Bank on the subject matter covered by this Agreement and may not be changed except by a writing signed by a duly authorized officer of the Bank and the Employee. The Bank shall have the right to assign this Agreement, the Note Repayment Agreement and/or the Promissory Note to any affiliate of the Bank. An "affiliate" of the Bank shall include any entity in control of, controlled by or under common control with the Bank. 13. The Employee acknowledges that the Employee was given the opportunity to read this Agreement and to seek the assistance of counsel before the Employee decided to accept employment by the Bank and to sign this Agreement. 4 5 IN WITNESS WHEREOF, the parties have caused this Financial Advisor Agreement to be executed as of the date first hereinabove written. /s/Harold J. Castner /s/Pamela F. Morris - -------------------------- ------------------------------ Witness (Employee) THE BANK OF NASHVILLE ATTEST: /s/Joan B. Marshall, SVP By: /s/Mack S. Linebaugh, Jr. - -------------------------- ------------------------------ Title: President ----------------------- 5 EX-10.14 4 FINANCIAL ADVISOR PROMISSORY NOTE 1 EXHIBIT 10.14 FINANCIAL ADVISOR PROMISSORY NOTE REPAYMENT AGREEMENT THIS FINANCIAL ADVISOR PROMISSORY NOTE REPAYMENT AGREEMENT ("Agreement") is made this 24th day of July, 1998 by and between The Bank of Nashville (the "Bank") and Harold J. Castner (the "Employee"). WHEREAS, the Employee has accepted employment by The Bank as a Financial Advisor; and WHEREAS, the Employee has executed the attached Promissory Note; and WHEREAS, The Bank and the Employee believe it to be mutually advantageous to provide for the payment of bonuses to the Employee upon the terms and conditions hereafter set forth. NOW, THEREFORE, the parties hereto agree as follows: 1. The Bank will pay bonuses to the Employee on the last business day of each calendar quarter ("Bonus Date" or "Bonus Dates"). Each bonus will be in an amount equal to the then-due principal payments under the Promissory Note (the "Promissory Note") attached hereto as Exhibit A ("Bonus Payment" or "Bonus Payments"). Bonus Payments will continue until the Promissory Note has been paid in full, subject to the other provisions of the Agreement. 2. In the event that the Employee ceases to be employed by The Bank for any reason whatsoever, or for no reason, prior to any Bonus Date, then the Employee will not be entitled to receive any Bonus Payment or partial or prorated Bonus Payment for having been employed by The Bank beyond the date of the Bonus Date. 3. Any Bonus Payment payable hereunder shall be withheld by The Bank and shall be applied to the payment of then-due principal and interest obligations pursuant to the Promissory Note. The Employee hereby consents to such withholding and application. 4. Notwithstanding any other provision herein to the contrary, in the event the Employee dies prior to the full payment of Promissory Note, The Bank will pay; as of the date preceding the Employee's death, a final Bonus Payment equal to the-outstanding principal balance and all accrued but unpaid interest under the Promissory Note. The Bank shall withhold and apply said Bonus Payment as provided in paragraph 3 above. The Employee, for himself/herself, and for his/her estate, heirs, legatees, executors and person representatives, consents to such payment, withholding and application. 5. This Agreement, and any Bonus Payment hereunder, shall not be assignable by voluntary or involuntary assignment or by operation of law, including, without 1 2 limitation, garnishment, attachment or other creditors' process, and Bonus Payments hereunder are specifically conditioned on The Bank's ability to withhold and apply each said Bonus Payment as provided in paragraph 3 above, without interference from the Employee's creditors. 6. There is absolutely no intention that this Agreement be construed as a contract of employment for any period of time. The Bank maintains an employment-at-will policy. Just as employees are free to end their employment with The Bank at any time for any reason, The Bank is free to end the employment relationship with any employee at any time for any reason. The Employee shall be an employee-at-will. 7. A. The Employee understands that in the event of the termination of the Employee's employment with The Bank, the Employee is not entitled to receive any further Bonus Payments, commissions, bonuses, overrides, trails, finder's fees, or any other compensation which would be due the Employee from prior transactions had the Employee remained in the employ of The Bank, other than such amounts as the Employee may be due on transactions that occurred during the month immediately preceding the termination of the Employee's employment. B. Notwithstanding the provisions of paragraph 7(A), in the event the Employee's employment with The Bank is terminated coincident with or following a change in control (as defined below), either involuntarily by The Bank or voluntarily by the Employee for Good Reason (as defined below), (1) The Bank will make the final Bonus Payment equal to the then outstanding principal and accrued interest on the Promissory Note, (2) the Promissory Note shall be stamped "Paid in Full:; (3) thereupon, The Bank shall have no further liability on the Promissory Note. C. "Change in Control" shall mean the closing of any transaction resulting in a majority change in control of Community Financial Group, Inc. to The Bank, including any merger, sale of assets, transfer of stock, or any reorganization as defined in Section 368 of the Internal Revenue Code of 1986, as amended. D. "Good Reason" shall mean either: (1) Failure by The Bank to comply with any material provision of the Agreement, provided that the Employee gives The Bank (as applicable) written notice of such failure and such failure is not cured within ten (10) days thereafter; (2) Any of the following which shall occur coincident with or following a Change in Control: 2 3 (a) Without the Employee's express written consent, the assignment to him or her of any duties inconsistent with and in diminution of his or her positions, duties, responsibilities and status with The Bank immediately prior to such Change in Control, or a change resulting in diminution of his reporting responsibilities, titles or offices as in effect immediately prior to such Change in Control, or any removal of him or her from or any failure to re-elect him or her to any of such positions resulting in such diminution, except in connection with the termination of his or her employment for Cause Disability or Retirement or as a result of his death or termination of employment be him other than for Good Reason; (b) A reduction by The Bank in the Employee's compensation structure as in effect on the date of the Agreement, or as the same may be increased from time to time; or (c) Without the Employee's express written consent, The Bank's requiring him or her to be based anywhere other than within twenty-five (25) miles of his primary office location immediately prior to such Change in Control, except for required travel on The Bank's business consistent with his or her business travel obligations immediately prior to such Change in Control. E. "Cause" shall mean (1) the willful and continued failure by the Employee to substantially perform his or her duties under this Agreement (other than any such failure resulting from his incapacity due to physical or mental illness), after a demand for substantial performance is delivered to him or her by the Chief Executive Officer of The Bank, which demand specifically identifies the manner in which the Employee is alleged to have not substantially performed his or her duties; or (2) the willful engaging by the Employee in misconduct which is material injurious to The Bank, monetarily or otherwise, or (3) the Employee's conviction of a felony. For purposes of this subparagraph, no act, or failure to act, on the Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission is in the best interest of The Bank. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Chief Executive Officer of The Bank, and after he has been afforded a reasonable opportunity, together with his counsel, to be heard before such Chief Executive Officer, and a written finding has been delivered to him to the effect that in the good faith opinion of such Chief Executive Officer 3 4 the Employee was guilty of conduct as set forth under clause (1), (2), or (3) of the first sentence of this subparagraph, specifying in writing the particulars thereof in detail. F. "Disability" shall mean the Employee's failure to satisfactorily perform his or her regular duties on behalf of The Bank on a full-time basis for one hundred eighty (180) consecutive days, by reason of the Employee's incapacity due to physical or mental illness, except where within thirty (30) days after notice of termination is given following such absence, the Employee shall have returned to the satisfactory, full-time performance of such duties. Any determination of Disability hereunder shall be made by the Chief Executive Officer of The Bank in good faith and on the basis of the certificates of at least three (3) qualified physicians chosen by it for such purpose, one of whom shall be the Chief Executive Officer's regular attending physician. 8. The Employee agrees that any controversy or dispute arising under this Agreement, the Promissory Note, or out of the Employee's employment by The Bank (including, but not limited to, claims arising under the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employee Act of 1967, and analogous state statues) shall be submitted for arbitration upon demand of either party in accordance with the rules of the National Association of Securities Dealers, Inc. or the New York Stock Exchange, Inc. provided, however, that in the event of a default under the provisions of the Promissory Note, The Bank shall be untitled to apply for and obtain from any state or federal court the injunctive relief provided for in paragraph 7 of the Agreement before or after the commencement of any arbitration proceeding, such relief to be afforded to The Bank pending the decision of the arbitrators. 9. The Employee agrees that in the event of any controversy or dispute arising under this Agreement, the Promissory Note, or out of the Employee's employment by The Bank is determined to be ineligible for arbitration, THE EMPLOYEE SHALL NOT EXERCISE ANY RIGHTS THE EMPLOYEE MAY HAVE TO ELECT OR DEMAND A TRAIL BY JURY. THE EMPLOYEE AND THE BANK HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY. The Employee acknowledges and agrees that this provision is a specific and material aspect of the agreement between the parties and The Bank would not enter into this Agreement with the Employee if this provision were not part of the Agreement. 10. This Agreement shall be governed, constructed and enforced in accordance with the laws of the State of Tennessee. 11. This Agreement will not be affected by the Employee's disability, incompetence, or incapacity and is binding on the Employee, the Employee's estate, and those 4 5 with authority to act on the Employee's behalf. It is also binding on any organization that may succeed The Bank's interests. 12. The Bank's failure to enforce a breach of this Agreement will not constitute a waiver of The Bank's right to enforce any other breach of this Agreement. 13. If any part of this Agreement shall be held invalid or unenforceable, that part shall be deemed modified as necessary to make it effective, and the remaining provisions of this Agreement shall remain in effect. 14. The Employee understands that The Bank is relying on the representations and agreements evidenced herein and in the Promissory Note, and that this Agreement and the Promissory Note incorporate the entire understanding between the Employee and The Bank on the subject matter covered by this Agreement and may not be changed except by a writing signed by a duly authorized officer of The Bank and the Employee. 15. The Employee acknowledges that the Employee was given the opportunity to read this Agreement and to seek the assistance of counsel before the Employee decided to accept employment by The Bank and to sign this Agreement. IN WITNESS WHEREOF, the parties have caused this Bonus Agreement to be executed as of the date first hereinabove written. /s/Pamela F. Morris /s/Harold J. Castner - ---------------------------- --------------------------------- Witness Employee ATTEST: THE BANK OF NASHVILLE /s/Joan B. Marshall, SVP By: /s/Mack S. Linebaugh, Jr. - ---------------------------- --------------------------------- Title: President ------------------------- 5 6 EXHIBIT A $124,813.29 July 24, 1998 Nashville, Tennessee PROMISSORY NOTE 1. FOR VALUE RECEIVED, Harold J. Castner promises to pay to the order of The Bank of Nashville, Nashville, Tennessee (the "Bank"), the principal sum of One Hundred Twenty Thousand Eight Hundred Thirteen and 29/100 Dollars ($124,813.29). Principal shall be due and payable in thirteen (13) equal quarterly installments of Eight Thousand Nine Hundred Fifteen and 23/100 dollars ($8,915.23)followed by one final quarterly installment of Eight Thousand Nine Hundred Fifteen and 30/100 dollars ($8,915.23), with said payments beginning on the last day of each calendar quarter beginning September 30, 1998. 2. The Maker may prepay this Promissory Note (this "Note") in whole at any time or in part from time to time without premium or penalty; provided that (a) each partial prepayment shall be in an amount not less than $500, and (b) partial prepayments of this Note shall be applied to the principal installments due in the inverse order of their maturity. 3. The occurrence of any one or more of the following events shall constitute a default under the provisions of this Note, and the term "Default" shall mean, whenever it is used in this Note, any one or more of the following events: a. The Maker's employment with the Bank terminates for any reason other than death, whether involuntary or voluntary and for whatever cause or no cause; b. If proceedings in bankruptcy, or for reorganization of the Maker, or for the readjustment of any of the Maker's debts, under the United States Bankruptcy Code (as amended) or any part thereof, or under any other applicable laws, whether state or federal, for the relief of debtors, now or hereafter existing, shall be commenced against or by the Maker and, except with respect to any such proceedings instituted by the Maker, shall not be discharged within thirty (30) days of their commencement; and/or c. A receiver or trustee shall be appointed for the Maker or for any substantial part of the Maker's assets, or any proceedings shall be instituted for the dissolution or the full or partial liquidation of the Maker and, except with respect to any such appointments requested or 6 7 instituted by the Maker, such receiver or trustee shall not be discharged within thirty (30) days of his or her appointment and, except with respect to any such proceedings instituted by the Maker, such proceedings shall not be discharged within thirty (30) days of their commencement. 4. If any Default shall occur and be continuing, the Bank may declare the unpaid principal amount of this Note, together with accrued and unpaid interest thereon, to be immediately due and payable, whereupon the same shall become and be forthwith due and payable by the Maker to the Bank, without presentment, demand, protest or notice of any kind, all of which are expressly waived by the Maker; provided, that, in the case of any Default referred to in subparts 3(b) and 3(c) above, the unpaid principal amount of this Note, together with accrued and unpaid interest thereon, shall be automatically and immediately due and payable by the Maker to the Bank without notice, presentment, demand, protest or other action of any kind, all of which are expressly waived by the Maker. Upon the occurrence and during the continuation of any Default, then, in each and every case, the Bank shall be entitled to exercise in any jurisdiction in which enforcement thereof is sought, the rights and remedies available to the Bank under the provisions of this Note and under applicable law. 5. All payments and prepayments of the unpaid balance of the principal amount of this Note, interest thereon and any other amounts payable hereunder shall be paid in lawful money of the United States of America in immediately available funds during regular business hours of the Bank at the Bank's office at 401 Church Street, Nashville, Tennessee 37219, or at such other place as the Bank or any other holder of this Note may at any time or from time to time designate in writing to the Maker. 6. In the event of a Default, the Bank shall have the right, without giving notice, to withhold from any salary, commissions or other compensation due to the Maker, or from any funds that the Maker maintains in any accounts at the Bank, any or all of the principal and interest due on this Note. If the Bank withholds salary, commissions or other compensation, or if funds are withheld from the Maker's accounts at the Bank, they shall be used to offset any amounts due the Bank under this Note. Maker shall remain liable for the balance of any amount that remains due under this Note. 7. If this Note is forwarded to an attorney for collection after maturity hereof (whether by acceleration or otherwise), the Maker shall pay to the Bank on demand all costs and expenses of collection, including attorney's fees. without limiting the foregoing, Maker's obligation to pay all costs and expenses of 7 8 collection shall include all costs and expenses incurred by the Bank if the Bank is determined to be the prevailing party with respect to any claim or counterclaim asserted by Maker against the Bank in any action involving the Bank's attempts to collect amounts due under this Note. 8. The Maker waives presentment, protest and demand, notice of protest, demand and dishonor and notice of nonpayment of this Note. The Bank may, without compromising, impairing, modifying, diminishing or in any way releasing or discharging, the Maker from the Maker's obligations hereunder and without notifying or obtaining the prior approval of the Maker at any time or from time to time: (a) grant extension of time for payment or performance by the Maker, or (b) release, substitute, exchange, impair, surrender, dispose of or add any collateral which is security for this Note. 9. No delay in the exercise of, or failure to exercise, any right, remedy or power accruing upon any Default or failure of the Maker in the performance of any obligation under this Note shall impair any such right, remedy or power or shall be construed to be a waiver thereof, but any such right, remedy or power may be exercised from time to time and as often as may be deemed by the Bank expedient. If a Default occurs under this Note, and such Default should thereafter be waived by the Bank, such waiver shall be limited to the particular Default so waived. 10. The rights and remedies of the Bank under this Note shall be cumulative and concurrent and may be pursued singularly, successively or together at the sole discretion of the Bank, and may be exercised as often as occasion therefor shall occur, and the failure to exercise any such right or remedy shall in no event be construed as a waiver or release of the same or any other right or remedy. By accepting full or partial payment after the due date of any amount of principal or of interest on this Note, the Bank shall not be deemed to have waived the right either to require prompt payment when due and payable of all other amounts of principal or of interest on this Note or to exercise any remedies available to it in order to collect all such other amounts due and payable under this Note. 11. If any provision or part of any provision of this Note shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision (or any remaining part of any provision) of this Note and this Note shall be construed as if such invalid, illegal or unenforceable provision (or part thereof) had never been contained in this Note, but only to the extent of its invalidity, illegality or unenforceability. 8 9 12. This Note is subject to the terms and conditions of that certain Financial Advisor Promissory Note Repayment Agreement between Bank and Maker to which this Note is attached as Exhibit A. 13. This Note shall be governed, construed and interpreted strictly in accordance with the laws of the State of Tennessee. The Maker agrees to stipulate in any future proceeding that this Note is to be considered for all purposes to have been executed and delivered within the geographical boundaries of the State of Tennessee, even if it was, in fact, executed and delivered elsewhere. THE MAKER ACKNOWLEDGES THAT IT HAS HAD THE ASSISTANCE OF COUNSEL IN THE REVIEW AND EXECUTION OF THIS NOTE. IN WITNESS WHEREOF, the Maker has caused this Note to be executed in his name and under his seal on the day and year first written above. WITNESS: /s/Pamela F. Morris /s/Harold J. Castner - ------------------- --------------------- (Name) 9 EX-10.15 5 FINANCIAL ADVISOR PROMISSORY NOTE 1 EXHIBIT 10.15 FINANCIAL ADVISOR PROMISSORY NOTE REPAYMENT AGREEMENT THIS FINANCIAL ADVISOR PROMISSORY NOTE REPAYMENT AGREEMENT ("Agreement") is made this 24th day of July, 1998 by and between The Bank of Nashville (the "Bank") and Pamela F. Morris (the "Employee"). WHEREAS, the Employee has accepted employment by The Bank as a Financial Advisor; and WHEREAS, the Employee has executed the attached Promissory Note; and WHEREAS, The Bank and the Employee believe it to be mutually advantageous to provide for the payment of bonuses to the Employee upon the terms and conditions hereafter set forth. NOW, THEREFORE, the parties hereto agree as follows: 1. The Bank will pay bonuses to the Employee on the last business day of each calendar quarter ("Bonus Date" or "Bonus Dates"). Each bonus will be in an amount equal to the then-due principal payments under the Promissory Note (the "Promissory Note") attached hereto as Exhibit A ("Bonus Payment" or "Bonus Payments"). Bonus Payments will continue until the Promissory Note has been paid in full, subject to the other provisions of the Agreement. 2. In the event that the Employee ceases to be employed by The Bank for any reason whatsoever, or for no reason, prior to any Bonus Date, then the Employee will not be entitled to receive any Bonus Payment or partial or prorated Bonus Payment for having been employed by The Bank beyond the date of the Bonus Date. 3. Any Bonus Payment payable hereunder shall be withheld by The Bank and shall be applied to the payment of then-due principal and interest obligations pursuant to the Promissory Note. The Employee hereby consents to such withholding and application. 4. Notwithstanding any other provision herein to the contrary, in the event the Employee dies prior to the full payment of Promissory Note, The Bank will pay; as of the date preceding the Employee's death, a final Bonus Payment equal to the-outstanding principal balance and all accrued but unpaid interest under the Promissory Note. The Bank shall withhold and apply said Bonus Payment as provided in paragraph 3 above. The Employee, for himself/herself, and for his/her estate, heirs, legatees, executors and person representatives, consents to such payment, withholding and application. 5. This Agreement, and any Bonus Payment hereunder, shall not be assignable by voluntary or involuntary assignment or by operation of law, including, without 1 2 limitation, garnishment, attachment or other creditors' process, and Bonus Payments hereunder are specifically conditioned on The Bank's ability to withhold and apply each said Bonus Payment as provided in paragraph 3 above, without interference from the Employee's creditors. 6. There is absolutely no intention that this Agreement be construed as a contract of employment for any period of time. The Bank maintains an employment-at-will policy. Just as employees are free to end their employment with The Bank at any time for any reason, The Bank is free to end the employment relationship with any employee at any time for any reason. The Employee shall be an employee-at-will. 7. A. The Employee understands that in the event of the termination of the Employee's employment with The Bank, the Employee is not entitled to receive any further Bonus Payments, commissions, bonuses, overrides, trails, finder's fees, or any other compensation which would be due the Employee from prior transactions had the Employee remained in the employ of The Bank, other than such amounts as the Employee may be due on transactions that occurred during the month immediately preceding the termination of the Employee's employment. B. Notwithstanding the provisions of paragraph 7(A), in the event the Employee's employment with The Bank is terminated coincident with or following a change in control (as defined below), either involuntarily by The Bank or voluntarily by the Employee for Good Reason (as defined below), (1) The Bank will make the final Bonus Payment equal to the then outstanding principal and accrued interest on the Promissory Note, (2) the Promissory Note shall be stamped "Paid in Full:; (3) thereupon, The Bank shall have no further liability on the Promissory Note. C. "Change in Control" shall mean the closing of any transaction resulting in a majority change in control of Community Financial Group, Inc. to The Bank, including any merger, sale of assets, transfer of stock, or any reorganization as defined in Section 368 of the Internal Revenue Code of 1986, as amended. D. "Good Reason" shall mean either: (1) Failure by The Bank to comply with any material provision of the Agreement, provided that the Employee gives The Bank (as applicable) written notice of such failure and such failure is not cured within ten (10) days thereafter; (2) Any of the following which shall occur coincident with or following a Change in Control: 2 3 (a) Without the Employee's express written consent, the assignment to him or her of any duties inconsistent with and in diminution of his or her positions, duties, responsibilities and status with The Bank immediately prior to such Change in Control, or a change resulting in diminution of his reporting responsibilities, titles or offices as in effect immediately prior to such Change in Control, or any removal of him or her from or any failure to re-elect him or her to any of such positions resulting in such diminution, except in connection with the termination of his or her employment for Cause Disability or Retirement or as a result of his death or termination of employment be him other than for Good Reason; (b) A reduction by The Bank in the Employee's compensation structure as in effect on the date of the Agreement, or as the same may be increased from time to time; or (c) Without the Employee's express written consent, The Bank's requiring him or her to be based anywhere other than within twenty-five (25) miles of his primary office location immediately prior to such Change in Control, except for required travel on The Bank's business consistent with his or her business travel obligations immediately prior to such Change in Control. E. "Cause" shall mean (1) the willful and continued failure by the Employee to substantially perform his or her duties under this Agreement (other than any such failure resulting from his incapacity due to physical or mental illness), after a demand for substantial performance is delivered to him or her by the Chief Executive Officer of The Bank, which demand specifically identifies the manner in which the Employee is alleged to have not substantially performed his or her duties; or (2) the willful engaging by the Employee in misconduct which is material injurious to The Bank, monetarily or otherwise, or (3) the Employee's conviction of a felony. For purposes of this subparagraph, no act, or failure to act, on the Employee's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission is in the best interest of The Bank. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Chief Executive Officer of The Bank, and after he has been afforded a reasonable opportunity, together with his counsel, to be heard before such Chief Executive Officer, and a written finding has been delivered to him to the effect that in the good faith opinion of such Chief Executive Officer 3 4 the Employee was guilty of conduct as set forth under clause (1), (2), or (3) of the first sentence of this subparagraph, specifying in writing the particulars thereof in detail. F. "Disability" shall mean the Employee's failure to satisfactorily perform his or her regular duties on behalf of The Bank on a full-time basis for one hundred eighty (180) consecutive days, by reason of the Employee's incapacity due to physical or mental illness, except where within thirty (30) days after notice of termination is given following such absence, the Employee shall have returned to the satisfactory, full-time performance of such duties. Any determination of Disability hereunder shall be made by the Chief Executive Officer of The Bank in good faith and on the basis of the certificates of at least three (3) qualified physicians chosen by it for such purpose, one of whom shall be the Chief Executive Officer's regular attending physician. 8. The Employee agrees that any controversy or dispute arising under this Agreement, the Promissory Note, or out of the Employee's employment by The Bank (including, but not limited to, claims arising under the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employee Act of 1967, and analogous state statues) shall be submitted for arbitration upon demand of either party in accordance with the rules of the National Association of Securities Dealers, Inc. or the New York Stock Exchange, Inc. provided, however, that in the event of a default under the provisions of the Promissory Note, The Bank shall be untitled to apply for and obtain from any state or federal court the injunctive relief provided for in paragraph 7 of the Agreement before or after the commencement of any arbitration proceeding, such relief to be afforded to The Bank pending the decision of the arbitrators. 9. The Employee agrees that in the event of any controversy or dispute arising under this Agreement, the Promissory Note, or out of the Employee's employment by The Bank is determined to be ineligible for arbitration, THE EMPLOYEE SHALL NOT EXERCISE ANY RIGHTS THE EMPLOYEE MAY HAVE TO ELECT OR DEMAND A TRAIL BY JURY. THE EMPLOYEE AND THE BANK HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY. The Employee acknowledges and agrees that this provision is a specific and material aspect of the agreement between the parties and The Bank would not enter into this Agreement with the Employee if this provision were not part of the Agreement. 10. This Agreement shall be governed, constructed and enforced in accordance with the laws of the State of Tennessee. 11. This Agreement will not be affected by the Employee's disability, incompetence, or incapacity and is binding on the Employee, the Employee's estate, and those 4 5 with authority to act on the Employee's behalf. It is also binding on any organization that may succeed The Bank's interests. 12. The Bank's failure to enforce a breach of this Agreement will not constitute a waiver of The Bank's right to enforce any other breach of this Agreement. 13. If any part of this Agreement shall be held invalid or unenforceable, that part shall be deemed modified as necessary to make it effective, and the remaining provisions of this Agreement shall remain in effect. 14. The Employee understands that The Bank is relying on the representations and agreements evidenced herein and in the Promissory Note, and that this Agreement and the Promissory Note incorporate the entire understanding between the Employee and The Bank on the subject matter covered by this Agreement and may not be changed except by a writing signed by a duly authorized officer of The Bank and the Employee. 15. The Employee acknowledges that the Employee was given the opportunity to read this Agreement and to seek the assistance of counsel before the Employee decided to accept employment by The Bank and to sign this Agreement. IN WITNESS WHEREOF, the parties have caused this Bonus Agreement to be executed as of the date first hereinabove written. /s/Harold J. Castner /s/Pamela F. Morris - ----------------------------- ----------------------------------- Witness Employee ATTEST: THE BANK OF NASHVILLE /s/Joan B. Marshall, SVP By: /s/Mack S. Linebaugh, Jr. - ----------------------------- ----------------------------------- Title: President --------------------------- 5 6 EXHIBIT A $102,119.96 July 24, 1998 Nashville, Tennessee PROMISSORY NOTE 1. FOR VALUE RECEIVED, Pamela F. Morris promises to pay to the order of The Bank of Nashville, Nashville, Tennessee (the "Bank"), the principal sum of One Hundred Two Thousand One Hundred Thirteen and 96/100 Dollars ($102,119.96). Principal shall be due and payable in thirteen (13) equal quarterly installments of Seven Thousand Two Hundred Ninety Four and 28/100 dollars ($7,294.28)followed by one final quarterly installment of Seven Thousand Two Hundred Ninety Four and 32/100 dollars ($7,294.32), with said payments beginning on the last day of each calendar quarter beginning September 30, 1998. 2. The Maker may prepay this Promissory Note (this "Note") in whole at any time or in part from time to time without premium or penalty; provided that (a) each partial prepayment shall be in an amount not less than $500, and (b) partial prepayments of this Note shall be applied to the principal installments due in the inverse order of their maturity. 3. The occurrence of any one or more of the following events shall constitute a default under the provisions of this Note, and the term "Default" shall mean, whenever it is used in this Note, any one or more of the following events: a. The Maker's employment with the Bank terminates for any reason other than death, whether involuntary or voluntary and for whatever cause or no cause; b. If proceedings in bankruptcy, or for reorganization of the Maker, or for the readjustment of any of the Maker's debts, under the United States Bankruptcy Code (as amended) or any part thereof, or under any other applicable laws, whether state or federal, for the relief of debtors, now or hereafter existing, shall be commenced against or by the Maker and, except with respect to any such proceedings instituted by the Maker, shall not be discharged within thirty (30) days of their commencement; and/or c. A receiver or trustee shall be appointed for the Maker or for any substantial part of the Maker's assets, or any proceedings shall be instituted for the dissolution or the full or partial liquidation of the Maker and, except with respect to any such appointments requested or 6 7 instituted by the Maker, such receiver or trustee shall not be discharged within thirty (30) days of his or her appointment and, except with respect to any such proceedings instituted by the Maker, such proceedings shall not be discharged within thirty (30) days of their commencement. 4. If any Default shall occur and be continuing, the Bank may declare the unpaid principal amount of this Note, together with accrued and unpaid interest thereon, to be immediately due and payable, whereupon the same shall become and be forthwith due and payable by the Maker to the Bank, without presentment, demand, protest or notice of any kind, all of which are expressly waived by the Maker; provided, that, in the case of any Default referred to in subparts 3(b) and 3(c) above, the unpaid principal amount of this Note, together with accrued and unpaid interest thereon, shall be automatically and immediately due and payable by the Maker to the Bank without notice, presentment, demand, protest or other action of any kind, all of which are expressly waived by the Maker. Upon the occurrence and during the continuation of any Default, then, in each and every case, the Bank shall be entitled to exercise in any jurisdiction in which enforcement thereof is sought, the rights and remedies available to the Bank under the provisions of this Note and under applicable law. 5. All payments and prepayments of the unpaid balance of the principal amount of this Note, interest thereon and any other amounts payable hereunder shall be paid in lawful money of the United States of America in immediately available funds during regular business hours of the Bank at the Bank's office at 401 Church Street, Nashville, Tennessee 37219, or at such other place as the Bank or any other holder of this Note may at any time or from time to time designate in writing to the Maker. 6. In the event of a Default, the Bank shall have the right, without giving notice, to withhold from any salary, commissions or other compensation due to the Maker, or from any funds that the Maker maintains in any accounts at the Bank, any or all of the principal and interest due on this Note. If the Bank withholds salary, commissions or other compensation, or if funds are withheld from the Maker's accounts at the Bank, they shall be used to offset any amounts due the Bank under this Note. Maker shall remain liable for the balance of any amount that remains due under this Note. 7. If this Note is forwarded to an attorney for collection after maturity hereof (whether by acceleration or otherwise), the Maker shall pay to the Bank on demand all costs and expenses of collection, including attorney's fees. without limiting the foregoing, Maker's obligation to pay all costs and expenses of 7 8 collection shall include all costs and expenses incurred by the Bank if the Bank is determined to be the prevailing party with respect to any claim or counterclaim asserted by Maker against the Bank in any action involving the Bank's attempts to collect amounts due under this Note. 8. The Maker waives presentment, protest and demand, notice of protest, demand and dishonor and notice of nonpayment of this Note. The Bank may, without compromising, impairing, modifying, diminishing or in any way releasing or discharging, the Maker from the Maker's obligations hereunder and without notifying or obtaining the prior approval of the Maker at any time or from time to time: (a) grant extension of time for payment or performance by the Maker, or (b) release, substitute, exchange, impair, surrender, dispose of or add any collateral which is security for this Note. 9. No delay in the exercise of, or failure to exercise, any right, remedy or power accruing upon any Default or failure of the Maker in the performance of any obligation under this Note shall impair any such right, remedy or power or shall be construed to be a waiver thereof, but any such right, remedy or power may be exercised from time to time and as often as may be deemed by the Bank expedient. If a Default occurs under this Note, and such Default should thereafter be waived by the Bank, such waiver shall be limited to the particular Default so waived. 10. The rights and remedies of the Bank under this Note shall be cumulative and concurrent and may be pursued singularly, successively or together at the sole discretion of the Bank, and may be exercised as often as occasion therefor shall occur, and the failure to exercise any such right or remedy shall in no event be construed as a waiver or release of the same or any other right or remedy. By accepting full or partial payment after the due date of any amount of principal or of interest on this Note, the Bank shall not be deemed to have waived the right either to require prompt payment when due and payable of all other amounts of principal or of interest on this Note or to exercise any remedies available to it in order to collect all such other amounts due and payable under this Note. 11. If any provision or part of any provision of this Note shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision (or any remaining part of any provision) of this Note and this Note shall be construed as if such invalid, illegal or unenforceable provision (or part thereof) had never been contained in this Note, but only to the extent of its invalidity, illegality or unenforceability. 8 9 12. This Note is subject to the terms and conditions of that certain Financial Advisor Promissory Note Repayment Agreement between Bank and Maker to which this Note is attached as Exhibit A. 13. This Note shall be governed, construed and interpreted strictly in accordance with the laws of the State of Tennessee. The Maker agrees to stipulate in any future proceeding that this Note is to be considered for all purposes to have been executed and delivered within the geographical boundaries of the State of Tennessee, even if it was, in fact, executed and delivered elsewhere. THE MAKER ACKNOWLEDGES THAT IT HAS HAD THE ASSISTANCE OF COUNSEL IN THE REVIEW AND EXECUTION OF THIS NOTE. IN WITNESS WHEREOF, the Maker has caused this Note to be executed in his name and under his seal on the day and year first written above. WITNESS: /s/Harold J. Castner /s/Pamela F. Morris - ---------------------- ---------------------- (Name) 9 EX-10.16 6 CONSTRUCTION CONTRACT 1 EXHIBIT 10.16 [THE AMERICAN INSTITUTE OF ARCHITECTS LOGO] - -------------------------------------------------------------------------------- AIA Document A101 STANDARD FORM OF AGREEMENT BETWEEN OWNER AND CONTRACTOR where the basis of payment is a STIPULATED SUM 1987 EDITION THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES; CONSULTATION WITH AN ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION The 1987 Edition of AIA Document A201, General Conditions of the Contract for Construction, is adopted in this document by reference. Do not use with other general conditions unless this document is modified. This document has been approved and endorsed by The Associated General Contractors of America. - -------------------------------------------------------------------------------- AGREEMENT made as of the Second (2nd) day of October in the year of Nineteen Hundred and Ninety-Eight (1998) BETWEEN the Owner: The Bank of Nashville (Name and address) 401 Church Street P.O. Box 198986 Nashville, TN 37219-8986 and the Contractor: Ray Bell Construction Company, Inc. (Name and address) P.O. Box 363 Brentwood, TN 37024-0363 The Project is: The Bank of Nashville (Name and location) Hendersonville Branch Hendersonville, Tennessee The Architect is: Gould Turner Group PC (Name and address) 4400 Harding Road Suite 1000 Nashville, TN 37205
The Owner and Contractor agree as set forth below. - ------------------------------------------------------------------------------- Copyright 1915, 1918, 1925, 1937, 1951, 1958, 1961, 1963, 1967, 1974, 1977, (C) 1987 by The American Institute of Architects, 1735 New York Avenue, N.W., Washington, D.C. 20006. Reproduction of the material herein or substantial quotation of its provisions without written permission of the AIA violates the copyright laws of the United States and will be subject to legal prosecution. - ------------------------------------------------------------------------------- 2 ARTICLE 1 THE CONTRACT DOCUMENTS The Contract Documents consist of this Agreement, Conditions of the Contract (General, Supplementary and other Conditions), Drawings, Specifications, Addenda issued prior to execution of this Agreement, other documents listed in this Agreement and Modifications issued after execution of this Agreement; these form the Contract, and are as fully a part of the Contract as if attached to this Agreement or repeated herein. The Contract represents the entire and integrated agreement between the parties hereto and supersedes prior negotiations, representations or agreements, either written or oral. An enumeration of the Contract Documents, other than Modifications, appears in Article 9. ARTICLE 2 THE WORK OF THIS CONTRACT The Contractor shall execute the entire Work described in the Contract Documents, except to the extent specifically indicated in the Contract Documents to be the responsibility of others, or as follows: Construction of a one-story branch bank with no sprinkler system, totaling 5,008 SF and associated site improvements. Payment and Performance Bond is included. No Builders Risk Insurance is included. ARTICLE 3 DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION 3.1 The date of commencement is the date from which the Contract Time of Paragraph 3.2 is measured, and shall be the date of this Agreement, as first written above, unless a different date is stated below or provision is made for the date to be fixed in a notice to proceed issued by the Owner. (Insert the date of commencement, if it differs from the date of this Agreement or, if applicable, state that the date will be fixed in a notice to proceed.) Two hundred twenty-six (226) days from the date stipulated in the Notice to Proceed, August 31, 1998. Unless the date of commencement is established by a notice to proceed issued by the Owner, the Contractor shall notify the Owner in writing not less than five days before commencing the Work to permit the timely filing of mortgages, mechanic's liens and other security interests. 3.2 The Contractor shall achieve Substantial Completion of the entire Work not later than (Insert the calendar date or number of calendar days after the date of commencement. Also insert any requirements for earlier Substantial Completion of certain portions of the Work, if not stated elsewhere in the Contract Documents.) April 15, 1999. , subject to adjustments of this Contract Time as provided in the Contract Documents. (Insert provisions, if any, for liquidated damages relating to failure to complete on time.) Three hundred dollars ($300.00) per calendar day liquidated damages. - ------------------------------------------------------------------------------- 3 ARTICLE 4 CONTRACT SUM 4.1 The Owner shall pay the Contractor in current funds for the Contractor's performance of the Contract the Contract Sum of One Million Twenty-Two Thousand Nine Hundred Forty and no/100-----------------------------------------Dollars ($ 1,022,940.00-------------------------------------), subject to additions and deductions as provided in the Contract Documents. 4.2 The Contractor Sum is based upon the following alternates, if any, which are described in the Contract Documents and are hereby accepted by the Owner: (State the numbers or other identification of accepted alternates. If decisions on other alternates are to be made by the Owner subsequent to the execution of this Agreement, attach a schedule of such other alternates showing the amount for each and the date until which that amount is valid.) Base Bid $1,038,000.00 Change "barrel" roof over drive-thru to flat roof (17,254.00)* Change light poles to steel in lieu of concrete (5,335.00)* Change metal ceiling to drywall (2,226.00)* Delete temporary chain link fence (3,291.00)* Concrete curb revision 7,096.00 * Add roof drains at flat roof over drive-thru 5,950.00 --------------- TOTAL $1,022,940.00
* See attached Exhibit "C" dated October 2, 1998, one (1) page. 4.3 Unit prices, if any, are as follows: Earth Excavation: Change in quantity of excavation in connection with remedial excavation: Add to/deduct from contract sum $ 6.00/CY Earth/Loose Rock Excavation: General Excavation: Add to contract sum $ 9.00/CY Trench Excavation: Add to contract sum $30.00/CY Backfilling above excavations as specified: Add to/deduct from contract sum $ 9.00/CY --------------------------------------------------------------------- 4 ARTICLE 5 PROGRESS PAYMENTS 5.1 Based upon Applications for Payment submitted to the Architect by the Contractor and Certificates for Payment issued by the Architect, the Owner shall make progress payments on account of the Contract Sum to the Contractor as provided below and elsewhere in the Contract Documents. 5.2 The period covered by each Application for Payment shall be one calendar month ending on the last day of the month, or as follows: Nothing follows. 5.3. Provided an Application for Payment is received by the Architect not later than the twenty-fifth (25th) day of a month, the Owner shall make payment to the Contractor not later than the tenth (10th) day of the following month. If an Application for Payment is received by the Architect after the application date fixed above, payment shall be made by the Owner not later than days after the Architect receives the Application for Payment. 5.4 Each Application for Payment shall be based upon the Schedule of Values submitted by the Contractor in accordance with the Contract Documents. The Schedule of Values shall allocate the entire Contract Sum among the various portions of the Work and be prepared in such form and supported by such data to substantiate its accuracy as the Architect may require. This schedule, unless objected to by the Architect, shall be used as a basis for reviewing the Contractor's Applications for Payment. 5.5 Applications for Payment shall indicate the percentage of completion of each portion of the Work as of the end of the period covered by the Application for Payment. 5.6 Subject to the provisions of the Contract Documents, the amount of each progress payment shall be computed as follows: 5.6.1 Take that portion of the Contract Sum properly allocable to completed Work as determined by multiplying the percentage completion of each portion of the Work by the share of the total Contract Sum allocated to that portion of the Work in the Schedule of Values, less retainage of ten---------------------- percent (10%). Pending final determination of cost to the Owner of changes in the Work, amounts not in dispute may be included as provided in Subparagraph 7.3.7 of the General Conditions even though the Contract Sum has not yet been adjusted by Change Order. 5.6.2 Add that portion of the Contract Sum properly allocable to materials and equipment delivered and suitably stored at the site for subsequent incorporation in the completed construction (or, if approved in advance by the Owner, suitably stored off the site at a location agreed upon in writing), less retainage of ten-----------------------------------------------------percent (10%); 5.6.3 Subtract the aggregate of previous payments made by the Owner; and 5.6.4 Subtract amounts, if any, for which the Architect has withheld or nullified a Certificate for Payment as provided in Paragraph 9.5 of the General Conditions. 5.7 The progress payment amount determined in accordance with Paragraph 5.6 shall be further modified under the following circumstances: 5.7.1 Add, upon Substantial Completion of the Work, a sum sufficient to increase the total payments to ninety-five----------------------------percent (95%) of the Contract Sum, less such amounts as the Architect shall determine for incomplete Work and unsettled claims; and 5.7.2 Add, if final completion of the Work is thereafter materially delayed through no fault of the Contractor, any additional amounts payable in accordance with Subparagraph 9.10.3 of the General Conditions. 5.8 Reduction or limitation of retainage, if any, shall be as follows: (If it is intended, prior to Substantial Completion of the entire Work, to reduce or limit the retainage resulting from the percentages inserted in Subparagraphs 5.6.1 and 5.6.2 above, and this is not explained elsewhere in the Contract Documents, insert here provisions for such reduction or limitation.) Retainage amount shall be as noted above in paragraphs 5.6.1 and 5.6.2 until fifty percent (50%) of the contractual amount is complete and zero percent (0%) retainage withheld thereafter. - -------------------------------------------------------------------------------- 5 ARTICLE 6 FINAL PAYMENT Final payment, constituting the entire unpaid balance of the Contract Sum, shall be made by the Owner to the Contractor when (1) the Contract has been fully performed by the Contractor except for the Contractor's responsibility to correct nonconforming Work as provided in Subparagraph 12.2.2 of the General Conditions and to satisfy other requirements, if any, which necessarily survive final payment; and (2) a final Certificate for Payment has been issued by the Architect; such final payments shall be made by the Owner not more than 30 days after the issuance of the Architect's final Certificate for Payment, or as follows: Nothing follows. ARTICLE 7 MISCELLANEOUS PROVISIONS 7.1 Where reference is made in this Agreement to a provision of the General Conditions or another Contract Document, the reference refers to that provision as amended or supplemented by other provisions of the Contract Documents. 7.2 Payments due and unpaid under the Contract shall bear interest from the date payment is due at the rate stated below, or in the absence thereof, at the legal rate prevailing from time to time at the place where the Project is located. Two percent (2%) over Prime Rate as published in The Tennessean. (Usury laws and requirements under the Federal Truth in Lending Act, similar state and local consumer credit laws and other regulations at the Owner's and Contractor's principal places of business, the location of the Project and elsewhere may affect the validity of this provision. Legal advice should be obtained with respect to deletions or modifications, and also regarding requirements such as written disclosures or waivers.) 7.3 Other provisions: Laws of the State of Tennessee will apply. ARTICLE 8 TERMINATION OR SUSPENSION 8.1 The Contract may be terminated by the Owner or the Contractor as provided in Article 14 of the General Conditions. 8.2 The Work may be suspended by the Owner as provided in Article 14 of the General Conditions. 6 ARTICLE 9 ENUMERATION OF CONTRACT DOCUMENTS 9.1 The Contract Documents, except for Modifications issued after execution of this Agreement, are enumerated as follows: 9.1.1 The Agreement is this executed Standard Form of Agreement Between Owner and Contractor, AIA Document A101, 1987 Edition. 9.1.2 The General Conditions are the General Conditions of the Contract for Construction, AIA Document A201, 1987 Edition. 9.1.3 The Supplementary and other Conditions of the Contract are those contained in the Project Manual dated July 17, 1998, and are as follows:
Document Title Pages Project Manual Hendersonville Branch Bank Table of Contents The Bank of Nashville attached as Exhibit "A" Hendersonville, Tennessee dated October 2, 1998.
9.1.4 The Specifications are those contained in the Project Manual dated as in Subparagraph 9.1.3, and are as follows: (Either list the Specifications here or refer to an exhibit attached to this Agreement.)
Section Title Pages
See attached Exhibit "A" dated October 2, 1998, three (3) total pages. 7 9.1.5 The Drawings are as follows, and are dated as noted in Exhibit "B" unless a different date is shown below: (Either list the Drawings here or refer to an exhibit attached to this Agreement.)
Number Title Date
See attached Exhibit "B" dated October 2, 1998. Nothing follows. 9.1.6 The Addenda, if any, are as follows:
Number Date Pages 1 July 29, 1998 7 2 August 7, 1998 6 3 August 13, 1998 17
Nothing follows. Portions of Addenda relating to bidding requirements are not part of the Contract Documents unless the bidding requirements are also enumerated in this Article 9. - -------------------------------------------------------------------------------- 8 9.1.7 Other documents, if any, forming part of the Contract Documents are as follows: (List here any additional documents which are intended to form part of the Contract Documents. The General Conditions provide that bidding requirements such as advertisement or invitation to bid, instructions to Bidders, sample forms and the Contractor's bid are not part of the Contract Documents unless enumerated in this Agreement. They should be listed here only if intended to be part of the Contract Documents.) Vendor drawings by Webster Safe and Lock Co., Inc., dated June 12, 1998, seven (7) total pages. Per Amendment 1 dated September 28, 1998, the following specification sections were added: Section 02281 Termite Control Section 07411 Preformed Metal Siding Nothing follows. This Agreement is entered into as of the day and year first written above and is executed in at least three original copies of which one is to be delivered to the Contractor, one to the Architect for use in the administration of the Contract, and the remainder to the Owner. RAY BELL OWNER THE BANK OF NASHVILLE CONTRACTOR CONSTRUCTION COMPANY, INC. /S/ Joan Marshall, SVP /S/ Donald J. Estes - ----------------------------- -------------------------------------- (Signature) (Signature) Donald J. Estes Senior Vice President - ----------------------------- -------------------------------------- (Printed name and title) (Printed name and title) - ------------------------------------------------------------------------------ 9 EXHIBIT "A" October 2, 1998 TABLE OF CONTENTS Hendersonville Branch Bank THE BANK OF NASHVILLE BIDDING REQUIREMENTS 00020...Invitation To Bid 00100...Instructions to Bidders 00220...Soil Investigation Data 00233...Property Survey 00300...Bid Form 00420...Statement Of Bidders Qualifications 00430...Subcontractor List CONTRACT FORMS 00500...Agreement Forms 00670...Waiver and Release of Lien CONDITIONS OF THE CONTRACT 00700...General Conditions of the Contract for Construction (AIA Document A201) 00800...Supplementary Conditions DIVISION 1 - GENERAL REQUIREMENTS 01010...Summary of Work 01026...Unit Prices 01027...Applications for Payment 01028...Modification Procedures 01040...Coordination Procedures 01060...Regulatory Requirements and Reference Standards 01070...Abbreviations 01200...Project Meetings 01300...Submittals 01310...Progress Schedules 01400...Quality Control 01410...Testing Agency Services 01500...Construction Facilities and Temporary Controls 01600...Material and Equipment 01650...Special Criteria for Computers and Computerized Equipment 01700...Contract Closeout DIVISION 2 - SITE WORK 02000...Items Affecting Site Work 02105...Protection 02110...Clearing and Grubbing 02151...Removal Of Structures and Obstructions 02201...General Excavation 02203...Embankment 02205...Subgrade 02220...Site Backfilling and Compacting 02221...Unclassified Excavating for Utilities 02222...Foundation Excavation and Backfilling 02260...Finish Grading 02432...Inlets 02485...Seeding 02515...Portland Cement Concrete Paving 02640...Valves, Hydrants, and Blowoffs 02713...Water Lines 02721...Storm Sewers DIVISION 3 - CONCRETE 03100...Concrete Formwork 03210...Concrete Reinforcing Steel 03300...Cast-In-Place Concrete 03301...Concrete Work 03347...Self-Levelling Underlayment 03603...Non-Shrinking Grout DIVISION 4 - MASONRY 04110...Masonry Mortar 04153...Masonry Reinforcement 04210...Brick Masonry 04220...Concrete Unit Masonry 04270...Glass Unit Masonry DIVISION 5 - METALS 05120...Structural Steel 05210...Steel Joists and Joist Girders 05310...Steel Decking 05500...Miscellaneous Steel Fabrications 05510...Metal Stairs 05515...Ladders 05750...Miscellaneous Aluminum Break Metal DIVISION 6 - WOOD AND PLASTICS 06112...Nailers and Blocking 06116...Plywood 06223...Closet and Storage Shelving 06224...Interior Wood Trim 06411...Custom Casework-Laminated Plastic Clad 06423...Wood Veneer Faced Paneling 06621...Cast Vanity Tops 10 EXHIBIT "A" October 2, 1998 DIVISION 7 - THERMAL AND MOISTURE PROTECTION 07191....Exterior Wall Vapor Retarder 07212....Insulation Under Metal Roofing 07214....Thermal Batt Insulation 07270....Firestopping 07416....Standing Seam Metal Roofing 07531....Adhered EPDM Sheet Roofing 07620....Sheet Metal Flashings 07625....Gutters and Downspouts 07651....Membrane Wall Flashing 07710....Manufactured Roof Edge Systems 07921....Sealants and Caulking DIVISION 8 - DOORS AND WINDOWS 08110....Hollow Metal Doors and Frames 08210....Wood Doors 08305....Non-Rated Access Doors 08410....Aluminum Entrances and Storefront Framing 08710....Door Hardware 08800....Glazing 08811....Unframed Glass Mirrors DIVISION 9 - FINISHES 09111....Interior Metal Stud Framing 09112....Exterior Steel Stud Framing 09121....Soffic and Drywall Ceiling Suspension Systems 09131....Non-Rated Exposed Ceiling Suspension System 09250....Gypsum Board 09251....Gypsum Sheathing 09310....Ceramic Tile Finish 09345....Window Sills 09510....Acoustical Ceiling Panels 09515....Metal Ceiling System 09650....Resilient Flooring Materials 09655....Flooring Transition Trim 09682....Carpet 09900....Painting 09921....Sealed Concrete Floor Finish 09960....Vinyl Wallcovering 09970....Fabric Wallcovering DIVISION 10 - SPECIALTIES 10165....Toilet Partitions 10810....Toilet Accessories 10875....Custodial Accessories DIVISION 11 - EQUIPMENT (Not Used) DIVISION 12 - FURNISHINGS 12350....Modular Casework DIVISION 13 - SPECIAL CONSTRUCTION (Not Used) DIVISION 14 - CONVEYING SYSTEMS (Not Used) DIVISION 15 - MECHANICAL 15010....Basic Mechanical Requirements 15050....Basic Materials and Methods 15060....Piping and Fittings 15061....Pipe Hangers 15065....Refrigerant Piping System 15100....Valves 15103....Sleeves 15170....Electric Motors and Starters 15242....Vibration Isolation 15250....Mechanical System Insulation 15400....Plumbing 15423....Water Heater - Electric 15440....Plumbing Fixtures 15515....Hydronic Specialties 15761....Unit Heaters 15781....Split System A/C Units 15791....Electric Duct Heaters 15862....Centrifugal Exhaust Fans - Roof and Wall 15886....Filters 15890....Sheet Metal Ductwork - Low Pressure 15910....Sheet Metal Accessories 15972....HVAC Controls 15990....HVAC Systems Test and Balance DIVISION 16 - ELECTRICAL 16010....Basic Electrical Requirements 16050....Basic Materials and Methods 16110....Raceways and Conduit Systems 16121....Conductors - 600 Volts and Below 16130....Outlet Boxes 16131....Pull and Junction Boxes 16134....Panelboards 16140....Wiring Devices 16141....Device Plates 16161....Cabinets 16170....Safety Switches 16190....Supporting Devices and Hangers 16403....Pad Transformer Electric Service TC-2 11 EXHIBIT "A" October 2, 1998 16421...Main Switchboard 16450...Grounding 16480...Motor Starters 16510...Interior Lighting and Lamps 16530...Exterior Lighting and Lamps 16603...Transient Voltage Surge Suppression 16610...Uninterruptible Power System 16740...Telephone System 16769...Security and Data Processing Systems END OF TABLE OF CONTENTS 12 EXHIBIT "B" October 2, 1998 INDEX OF DRAWINGS
Sheet No. Description Date - --------- ----------- ---- N/A Cover Sheet 07/17/98 N/A Index Sheet 07/17/98 C1.01 Existing Conditions/Demolition Plan 07/09/98 C2.01 Site Layout and Utility Plan 07/09/98 C3.01 Grading and Drainage Plan 09/28/98 C4.01 Site Details 09/28/98 C4.02 Site Details 09/28/98 L1.00 Landscape Plan 07/09/98 L1.01 Landscape Plan 07/09/98 L2.01 Landscape Details 05/18/98 A1.01A Floor Plan Dimensioned 09/18/98 A1.01B Floor Plan Noted 09/18/98 A1.21 Roof Plan 09/18/98 A1.31 Enlarged Plans 09/18/98 A2.01 Elevations 09/18/98 A3.21 Building Sections 09/18/98 A3.31 Wall Sections 07/17/98 A3.32 Wall Sections 07/17/98 A3.33 Wall Sections 09/18/98 A3.34 Wall Sections 09/18/98 A4.01 Details 07/17/98 A4.02 Details 07/17/98 A4.03 Details 07/17/98 A4.04 Details 07/17/98 A4.05 Details 07/17/98 A5.01 Reflected Ceiling Plan 09/18/98 A6.01 Details/Door Schedule 09/18/98 A7.01 Casework Elevations 07/17/98 A7.02 Casework Details 07/17/98 F1.01 Finish/Furniture Plan 07/17/98 F1.02 Finish Legends 07/17/98 S1.00 Structural General Notes 07/17/98 S1.01 Foundation Plans 09/18/98 S1.10 Roof Framing Plan 09/18/98 S2.01 Foundation Sections 09/18/98 S2.10 Framing Sections 07/17/98 S2.11 Framing Sections 09/18/98 S2.12 Framing Sections 09/18/98
13 PAGE TWO EXHIBIT "B" OCTOBER 2, 1998
Sheet No. Description Date - --------- ----------- ------- M1.1 HVAC Schedules 6/26/98 M2.1 HVAC Plan 6/26/98 M3.1 HVAC Details and Controls 6/26/98 P1.1 Plumbing Schedules and Details 6/26/98 P1.01 Plumbing Site Plan 6/26/98 P2.1 Plumbing Plan Underground 9/18/98 P2.2 Plumbing Plan 9/18/98 P2.3 Plumbing Roof Plan 9/18/98 E0.01 Electrical Index and Schedules 6/26/98 E1.01 Electrical Site Plan 6/26/98 EL1.01 Lighting Plan 6/26/98 EP1.01 Power Plan 6/26/98 ES1.01 Systems Plan 6/26/98
14 EXHIBIT "C" OCTOBER 2, 1998
ITEM IN ESTIMATE NEW PRICE ADD CUT - ---- ----------- --------- ------- ---------- MASONRY $ 119,467 112,263 0 7,204 ELECTRICAL $ 126,335 121,000 0 5,335 ROOFING $ 63,003 57,153 0 5,850 STRUCTURAL STEEL $ 95,000 90,800 0 4,200 DRYWALL CEILING $ 7,000 4,774 0 2,226 TEMP. FENCE $ 3,291 0 0 3,291 PLUMBING $ 29,023 34,973 5,950 0 CONCRETE CURB $ 6,210 13,306 7,096 0 ---------- -------- ------- ---------- SUB TOTALS $ 449,329 434,269 13,046 28,106 IN ESTIMATE $ 449,329 TOTAL CUT 28,106 NEW PRICE $ 434,269 TOTAL ADD 13,046 TOTAL CUT $15,060.00 RESULT $15,060.00 ORIGINAL BID $1,038,000.00 CUT AMOUNT $15,060.00 REVISED BID $1,022,940.00 $0.00 $0.00 $0.00 $0.00
EX-10.17 7 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.17 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (hereinafter referred to as the "Agreement") is dated this 23rd day of February, 1999, and is by and between THE BANK OF NASHVILLE (hereinafter referred to as the "Employer"), a corporation formed under the laws of the State of Tennessee, and ANNE J. CHEATHAM (hereinafter referred to as the "Employee"). Employer and Employee hereby agree as follows: 1. EMPLOYMENT. Employer hereby employs Employee, and Employee hereby accepts employment, upon the terms and conditions hereinafter set forth. 2. TERM. Subject to the provisions hereof, and the faithful performance by Employee of this employment, as herein defined, the term of Employee's employment hereunder shall commence on January 3, 1999, and shall continue thereafter for a period of one year. 3. COMPENSATION. (a) Base Salary. As compensation for the services to be rendered by Employee during the period of her employment hereunder, and upon the condition that Employee shall fully and faithfully keep and perform all of the terms and conditions hereof, Employer shall pay Employee a salary of $102,000.00, less income tax and social security withholdings and other deductions for employee benefits applicable to other employees of Employer ("Salary"). Such Salary shall be payable in one initial 2 installment (pro rata) and 23 equal installments paid on the 15th and last day of each month. The Salary shall be subject to periodic review and revision by the Employer but shall not be decreased during the term of employment hereunder. (b) Participation in Benefit Plans. Employee shall receive all other benefits generally offered to other employees of the Employer ("Benefits"). (c) Continuation. This Agreement shall not be deemed abrogated or terminated if the Board of Directors or shareholders of Employer shall determine to increase the compensation of Employee for any period of time. 4. DUTIES. Employee is to be engaged as Senior Vice President and head of Bank Administration to render services in such capacity which are consonant with the position of Senior Vice President - Bank Administration. In addition, Employee shall perform such other duties as are reasonably required of her by Employer in her capacity as an executive employee. The precise services of Employee may be extended or curtailed, from time to time, at the direction of Employer as long as Employee continues to serve as the Senior Vice President in Bank Administration with such duties as are consistent with that position. If Employee is elected or appointed to serve as any other officer and/or director of Employer during the term of this Agreement, Employee shall serve in such capacity or capacities without further compensation. 5. UNAUTHORIZED DISCLOSURE. During the period of her employment hereunder, Employee shall not, without the prior written consent of the Employer, disclose to any person , other than a person to whom disclosure is necessary or appropriate in connection with the performance by Employee of her duties as an officer of the employer, any confidential information obtained by her while in the employ of the Company with 2 3 respect to any of the Employer's products, improvements, designs or styles, processes, customers, methods of marketing or distribution, systems, procedures, plans, proposals, or policies the disclosure of which she knows, or should have reason to know, could be damaging to the Employer; provided, however, that confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by the Employee) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Employer. Following the termination of employment hereunder, the Employee shall not disclose any confidential information of the type described above except as may be required in the opinion of the Employee's counsel in connection with any judicial or administrative proceeding or inquiry. 6. EXPENSES. Employee is authorized to incur reasonable expenses for promoting the business of Employer. Employer shall reimburse Employee for all such expenses upon the presentation by Employee, from time to time, of an account of such expenditures, setting forth the purposes for which incurred, and the amounts thereof, together with such receipts showing payments as Employee has reasonably been able to obtain. 7. VACATIONS. Employee shall be entitled each year to a reasonable vacation or vacations, consistent with Employer's vacation policy, during which time her compensation shall be paid in full. Each such vacation shall be taken during a period mutually satisfactory to both Employer and Employee hereunder. 8. EXTENT OF SERVICES. Employee agrees to perform her services efficiently, to the best of her ability, and to Employer's reasonable satisfaction. Employee agrees that 3 4 throughout the Term of this Agreement she will not be engaged or interested in any other business activity which competes with Employer, whether or not such business activity is pursued for gain, profit or other pecuniary advantage. Employee agrees that all of her activities as Employee shall be in conformity with all present and future policies, rules, regulations and reasonable directions of Employer. 9. INTELLECTUAL PROPERTY. All right, title and interest of every kind and nature whatsoever in any to any intellectual property, including any inventions, patents, trademarks, copyrights, ideas, creations, and properties furnished to Employer during the Term, and/or used in connection with any of Employer's activities, or written or created by Employee, or with which Employee is connected in the performance of her services hereunder, shall as between the parties hereto be, become, and remain the sole and exclusive property of Employer for any and all purposes and uses whatsoever, regardless of whether the same were invented, created, written, developed, furnished, produced, or disclosed by Employee or any other party, and Employee shall have no right, title or interest of any kind or nature therein or thereto, or in any to any results and proceeds therefrom. Employee agrees, during and after the Term hereof, to execute any and all documents and agreements which Employer may deem necessary and appropriate to effectuate the provisions of this Section 9. The provisions of this Section 9 shall survive the expiration or terminations, for any reason, of this Agreement and of Employee's employment. 10. DEATH DURING EMPLOYMENT. If Employee dies during the Term of this employment, Employer shall pay to the estate of Employee the compensation which 4 5 would otherwise be payable to Employee up to the end of the month in which hers death occurs. 11. TERMINATION OF AGREEMENT. Should any of the following events occur, Employer may, at its election, terminate this Agreement by giving written notice thereof to Employee, which such notice shall be effective immediately: (a) Employee is physically or mentally incapacitated either for a period of sixty (60) consecutive days, or for a total of ninety (90) days in any twelve month period and is unable to perform the essential functions of her job with or without reasonable accommodations. (b) Employee conducts herself in a manner substantially detrimental to Employer, and constitutes on the part of the Employee personal dishonesty, willful misconducts, breach of fiduciary duty involving personal profit intentional failure to perform stated duties of the Senior Vice President of the Employer, willful violation of any law, governmental rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, or material breach of this Agreement or for any of the reasons set forth in 12 USC - 1818(e) and (g), determined on a reasonable basis. (c) Employee competes, in a manner prohibited by this Agreement, with Employer during the Term hereof. (d) Employee is convicted of a misdemeanor involving breach of trust or is convicted of any felony. (e) Employee engages in the illegal usage of any drug. 5 6 (f) Any state or federal regulatory agency or court of competent jurisdiction issues an order requiring Employee's removal from any duties or responsibilities for Employer. Termination or any other disciplinary actions for any of the reasons stated in this Section 11 shall be deemed to be "for cause." In the event Employer terminates or otherwise reduces the total value of Employee's Salary and Benefits "for cause," Employer shall pay Employee the compensation and benefits which would otherwise be payable to Employee up to the end of the month in which the termination or disciplinary action occurs. If Employer, for reasons other than cause (i) does not, at the end of the term, renew this agreement for a period of at least one year, (ii) or otherwise terminates this agreement, then the Employer shall pay Employee within 30 days of notice from Employee to the President of the Bank a lump sum equal to six (6) months Salary then being paid plus any Salary then due. Such payments will be conditioned, at the employer's option, upon the Employee's continuation of this employment for 60 days after notice with full Salary and Benefits, which shall be in addition to the lump sum payment made thereafter. Employee shall vacate the premises of the Employer the last business day of the month in which such lump sum payment is made. The Employee may terminate her employment hereunder (i) at any time if her health should become impaired to an extent that makes the continued performance of her duties hereunder hazardous to her physical or mental health, or (ii) upon sixty (60) days written notice for any other reason. 6 7 12. COMPETITION DURING AND AFTER TERM. Employee agrees that during her employment hereunder, and for a period of six (6) additional months if a payment of the lump sum amount referred to in Section 11 has been made, she will not, either separately, or in association with others, directly or indirectly, as an agent, employee, owner, partner, stockholder, or otherwise, allow her name to be used by, or establish, engage in, or become interested in any business, trade or occupation in substantial competition with the principal business being conducted by Employer, in any banking market of Employer where Employee has been principally stationed, and in which Employer's business is presently being conducted, as long as Employer, or any person, firm, or corporation deriving title to the goodwill of, or shares from it, carries on a like business therein. Employer and Employee acknowledge that during the term of the Employee's employment, Employee will acquire special knowledge and/or skill that she can effectively utilize in competition with Employer. Employee agrees that the remedy at law for any breach by her of the covenants contained herein will be inadequate, and that in the event of a violation of the covenants contained herein, in addition to any and all legal and equitable remedies which may be available, the said covenants may be enforced by an injunction in a suit in equity, without the necessity of proving actual damage, and that a temporary injunction may be granted immediately upon the commencement of any such suit, and without notice. The parties hereto intent that the covenants contained in this Section 12 shall be deemed to be a series of separate covenants, one for each county of each state where Employer does business and Employee has been stationed. If, in any judicial proceeding, a court shall refuse to enforce any or all of the separate covenants deemed included in such action, then such 7 8 unenforceable covenants shall be deemed eliminated from the provisions hereof for the purposes of such proceeding to the extent necessary to permit the remaining separate covenants to be enforced in such proceeding. Furthermore, if in any judicial proceeding a court shall refuse to enforce any covenant by reason of the duration or extent thereof, such covenant shall be construed to have only the maximum duration or extent permitted by law. 13. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing, and if sent by registered or certified mail, postage prepaid, addressed as follows: If to Employer: The Bank of Nashville 401 Church Street Nashville, Tennessee 37219 Attention: Corporate Secretary If to Employee: Anne J. Cheatham 111 Robin Springs Road Nashville, Tennessee 37220 The persons and addresses to which mailings may be made may be changed from time to time by a notice mailed as aforesaid. 14. ACKNOWLEDGMENT OF PECULIAR VALUE OF SERVICES. The Employer and Employee recognize that each party will have no adequate remedy at law for breach by the other of any of the agreements contained herein and, in the event of any such breach, the parties hereby agree and consent that the other shall be entitled to a decree of specific performance, mandamus or other appropriate remedy to enforce performance of this Agreement. 8 9 15. WAIVER OF BREACH. No provisions of this Agreement may be waived or discharged unless such waiver or discharge is agreed to in writing signed by Employee and the Employer. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 16. ASSIGNMENT. This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided for herein. Without limiting the generality of the foregoing, Employee's right to receive payments hereunder shall not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by hers will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this paragraph, the Employer shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 17. ENTIRE AGREEMENT AND MODIFICATION. This instrument contains the entire agreement of the parties hereto, and supersedes any and all prior agreements, arrangements or understandings between the parties hereto relating to the subject matter hereof. This Agreement may not be modified, changed, or terminated by the parties hereto, unless such modification, change or termination is expressly agreed in writing by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought. 18. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Tennessee. 9 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the 23rd day of February, 1999. EMPLOYER: THE BANK OF NASHVILLE By: /s/Mack S. Linebaugh, Jr. --------------------------------------------- Mack S. Linebaugh, Jr., President and CEO EMPLOYEE: /s/Anne J. Cheatham -------------------------------------------------- Anne J. Cheatham 10 EX-11 8 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS COMMUNITY FINANCIAL GROUP, INC.
Year Ended December 31, ---------------------------------------- 1998 1997 1996 --------- --------- ---------- Income Per Common Share Basic (1) Net income (in thousands) $ 2,581 $ 2,058 $ 2,547 ========= ========= ========== Net income per share 1.08 $ .93 $ 1.16 ========= ========= ========== Weighted average common shares outstanding 2,393,576 2,205,043 2,198,619 ========= ========= ========== Income Per Common Share, Diluted (2) Net income (in thousands) $ 2,581 $ 2,058 $ 2,547 ========= ========= ========== Net income per share $ .78 $ .89 $ 1.15 ========= ========= ========== Weighted average common share Outstanding 3,321,228 2,323,580 2,222,653 ========= ========= ==========
(1) Basic net income per share has been computed using the weighted average number of common shares outstanding during each year presented. See Note K to the Company's consolidated financial statements included in the Annual Report to Shareholders for the year ended December 31, 1998 incorporated herein by reference. (2) Diluted net income per share has been computed using the weighted average number of common shares outstanding and the dilutive effect of stock options and warrants outstanding during the years presented. See Note K to the Company's consolidated financial statements included in the Annual Report to Shareholders for the year ended December 31, 1998 incorporated herein by reference. EX-13 9 1998 ANNUAL REPORT 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW Community Financial Group, Inc. (CFGI) is a registered bank holding company under the Federal Bank Holding Company Act of 1956, as amended, and owns 100% of the outstanding capital stock of The Bank of Nashville (The Bank). CFGI and its subsidiary, The Bank, are collectively referred to as the Company. The Bank is a state chartered bank incorporated in 1989 under the laws of the State of Tennessee. On April 30, 1996, CFGI executed a plan of exchange with The Bank, whereby CFGI became the parent bank holding company of The Bank. Under the agreement, each share of the 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 Company experienced a significant change in its capital structure in 1998 as 2.0 million warrants, each representing the right to acquire a common share at a price of $12.50, were exercised. In 1998, proceeds generated from the exercise of the warrants totaled $25.0 million and the Company ended the year with 4.2 million common shares outstanding. All warrants expired on December 31, 1998. In January, 1998, the Company's Board of Directors adopted a Shareholder Rights Plan which authorizes the distribution of a dividend of one common share purchase right for each outstanding share of CFGI's common stock. The rights will be exercisable only if a person or group acquires 15% or more of CFGI's common stock or announces a tender offer, the consummation of which will result in ownership by a person or group of 15% or more of the common stock. The rights are designed to ensure that all of CFGI's shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers, squeeze outs, open market accumulations, and other abusive tactics to gain control of the Company without paying all shareholders an appropriate control premium. The holding company's structure, as well as the influx of additional capital that occurred in 1998, provide flexibility for expansion of the Company's banking business through acquisition of other financial institutions and/or for the addition of banking related services which traditional commercial banks are prohibited from providing under current law. The accompanying consolidated financial statements and notes are considered to be an integral part of this analysis and should be read in conjunction with the narrative. This discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and the selected financial data presented elsewhere in this report. To the extent that the statements in this discussion relate to the plans, objectives, or future performance of the Company, these statements may be deemed to be forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and the current economic environment. Actual strategies and results of future periods may differ materially from those currently expected due to various risks and uncertainties. The Company's primary base of operations is located in the L&C Tower at 401 Church Street, Nashville, Tennessee, 37219. The Bank has two full service traditional branches, one located at the Glendale Center in Green Hills, which opened in January, 1997 and the other located in Maryland Farms in Brentwood, which opened in September, 1998. Additional branch services are provided through full service mobile branching, "Bank-on-Call", which was established in September, 1996 and which has expanded in each subsequent year. Bank-on-Call provides the convenience of "at your door" banking service to customers. Additionally, the Company has expanded its delivery systems through full service ATMs, cash dispensers, cash management services, and now its soon to be introduced, "Bank-on-Line" Internet banking service. -7- 2 Additional expansion plans include a branch in Hendersonville, Tennessee currently under construction with a planned opening in the late spring of 1999. During 1998, the Company discontinued most services offered through the Trust Division while expanding the Investment Services Division provided with LM Financial Partners, Inc. The addition of two investment advisors and their support staff at the Green Hills Office to offer LM Financial Partners, Inc. investment services during the second quarter of 1998 has resulted in a net contribution to the Company's earnings. The Company offers a full array of commercial and consumer banking services, as well as investment services. The primary service area of the Company is centered around Nashville, Tennessee and encompasses an eight county area. The Company competes with existing area commercial banks and other area financial institutions, including savings and loan associations, insurance companies, consumer finance companies, brokerage firms, credit unions and other business entities which have been active in pursuing traditional banking markets. Due to the rapid economic growth in the Company's market area, additional competition is expected to continue from new entrants to the market. Although the Company has fewer physical locations than many of its competitors, it has continued its commitment to providing customers with maximum convenience by allowing them to access their accounts through competitors' ATMs throughout the State of Tennessee at no charge. This is accomplished through a program whereby the Company rebates any surcharges imposed on its customers by ATM providers within the State of Tennessee when accessed by a Bank of Nashville ATM or MasterMoney card. The Company's assets were $238.2 million at December 31, 1998, compared to $204.9 million at December 31, 1997, representing an increase of 16.3%. Shareholders' equity increased $27.1 million, an increase of 112.8% from the $24.1 million at December 31, 1997. This increase included $25.0 million in equity capital resulting from the exercise of warrants during 1998. During 1998, shareholders were paid $.24 per share through four quarterly dividends of $.06 each compared to dividends totaling $.20 per share in 1997. The Company reported earnings of $2.6 million, or basic earnings per share of $1.08 in 1998 compared to $2.1 million, or $.93 basic earnings per share in 1997. Diluted earnings per share were $.78 in 1998 compared to $.89 in 1997. The decrease in diluted earnings per share resulted from the warrants outstanding during 1998, all of which were either exercised or expired at December 31, 1998. The increased number of shares outstanding resulting from the exercise of warrants will reduce basic earnings per share on a comparative basis until the Company has the opportunity to more effectively employ the additional capital to enhance profitability. Return on average shareholders' equity (exclusive of other comprehensive income) was 9.56% in 1998 compared to 9.05% in 1997, while the return on average assets for 1998 and 1997 were 1.23% and 1.08%, respectively. During 1998, the Company continued its focus on asset quality while expanding its service locations and product lines in accordance with its long-term strategic plan. The maintenance of an adequate level for the allowance for loan losses was reflected by a provision for loan losses of $128,000 being reported in 1998, a period in which net recoveries were $390,000. This provision expense was deemed to be prudent given the Company's loan growth despite a decline of $767,000 in the level of nonperforming assets at year end 1998 when compared to the same period in 1997. The Company recorded $100,000 in 1997 for provision for loan loss, a period in which net recoveries were $150,000. During 1998, net nonperforming assets decreased $767,000, or 62.5%, to $460,000 from $1.2 million at year end 1997, while total loans increased $29.9 million, or 24.4%, from $122.7 million at December 31, 1997 to $152.7 million at year end 1998. A more detailed analysis of nonperforming assets -8- 3 and the provision for loan losses is presented under the caption, "Provision for Loan Losses" and "Nonperforming Assets and Risk Elements". During 1998, deposits declined $1.5 million, or .9%, to $162.6 million at December 31, 1998 from $164.1 million at year end 1997; however, average deposits increased $14.7 million, or 9.6%, in 1998 compared to 1997. The decline in total deposits at year-end, 1998, was reflected in higher rate time certificates and money market accounts while non-interest bearing demand deposits and NOW accounts reflected significant growth compared to year-end 1997. The net loan to deposit ratio at December 31, 1998, was 93.9% while the net loans to asset ratio was 64.1%. Additional capital generated from the exercise of warrants allowed the Company to be less aggressive in rates offered for time certificates of deposit to non-relationship customers during late 1998. NET INTEREST INCOME Fluctuations in interest rates, as well as changes in the volume or mix of earning assets and interest bearing liabilities, can materially impact net interest income. Net interest income increased 17.1% to $8.6 million in 1998 from $7.3 million in 1997. Total interest income increased $1.3 million, or 8.7%, in 1998 compared to 1997, while total interest expense increased $.1 million, or 1.0%, compared to 1997. The increase in total interest income is attributable primarily to an 8.5% increase in average earning assets and a shift in the mix of these assets as the growth was comprised primarily of an $18.8 million increase in average loans. This increase in loans was partially offset by a decline of $2.5 million in the volume of average investments and $.6 million in other earning asset categories. Additionally, the rate earned on average earning assets in 1998 increased two basis points when compared to 1997, reflecting a shift in the mix of these assets as loans, the Company's highest yielding asset, reflected an increase while other categories declined. Average interest bearing liabilities increased $11.9 million, or 7.9%, in 1998 compared to 1997. This increase in average interest bearing liabilities was comprised of a $10.8 million increase in average money market accounts, $4.3 million in average NOW accounts and $.9 million in CDs $100,000 or greater while CDs less than $100,000 declined $3.6 million and Federal Home Loan Bank and other borrowings declined $.4 million. The average rate paid on interest bearing liabilities decreased 34 basis points in 1998 compared to 1997. The decline in rates paid was reflected in all categories of interest bearing liabilities. The following two schedules present an analysis of net interest income and the detail of income due to the fluctuations in volumes and rates. -9- 4 AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
1998 1997 ------------------------------------- --------------------------------------- Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* (Dollars In Thousands) - --------------------------------------------------------------------------------------------------------------------------- ASSETS Loans (net of unearned income): Commercial $ 43,137 $ 3,983 9.23% $ 36,889 $ 3,438 9.32% Real Estate - mortgage 72,627 6,649 9.15 65,102 6,002 9.22 Real Estate - construction 12,288 1,132 9.21 9,102 849 9.33 Consumer 5,608 627 11.18 3,742 435 11.62 - --------------------------------------------------------------------------------------------------------------------------- Total loans (net of unearned income) 133,660 12,391 9.27 114,835 10,724 9.34 - --------------------------------------------------------------------------------------------------------------------------- Securities 59,117 3,833 6.48 61,587 4,128 6.70 Due from banks 163 10 5.84 333 19 5.75 Federal funds sold 7,305 374 5.13 7,772 398 5.12 - --------------------------------------------------------------------------------------------------------------------------- Total earning assets $200,245 $16,608 8.29% $184,527 $15,269 8.27% Allowance for loan losses (3,389) (3,006) Cash and due from banks 9,449 6,633 Premises and equipment, net 1,670 1,040 Accrued interest and other assets 1,526 1,572 - --------------------------------------------------------------------------------------------------------------------------- Total assets $209,501 $190,766 =========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY NOW accounts $ 11,190 $ 367 3.28% $ 6,856 $ 253 3.69% Money market accounts 77,982 3,463 4.44 67,216 3,205 4.77 Time certificates less than $100,000 31,551 1,809 5.73 35,186 2,061 5.86 Time certificates $100,000 and greater 30,162 1,692 5.61 29,294 1,693 5.78 Federal Home Loan Bank and other borrowings 12,718 704 5.54 13,124 744 5.67 - --------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $163,603 $ 8,035 4.91% $151,676 $ 7,956 5.25% Non-interest bearing demand deposits 16,409 14,088 Accounts payable and accrued liabilities 2,176 2,156 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 182,188 167,920 - --------------------------------------------------------------------------------------------------------------------------- Shareholders' equity 27,313 22,846 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $209,501 $190,766 =========================================================================================================================== Interest income/earning assets* 8.29% 8.27% Interest expense/earning assets 4.01 4.31 - --------------------------------------------------------------------------------------------------------------------------- Net interest margin* 4.28% 3.96% ===========================================================================================================================
* Fully taxable equivalent basis. Nonaccrual loans are included in average loans and average earning assets. Consequently, yields on these items are lower than they would have been if all loans had earned at their contractual rate of interest. Had nonaccrual loans earned income at the contractual rate, interest income of $29,000 and $32,000 would have been recognized during 1998 and 1997, respectively. -10- 5 ANALYSIS OF CHANGES IN NET INTEREST INCOME
1998 Compared to 1997 1997 Compared to 1996 Increase (Decrease) Due to Increase (Decrease) Due to (In Thousands)(1) Rate Volume Net Rate Volume Net - ---------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $ (78) $ 1,745 $ 1,667 $ 41 $1,114 $1,155 Securities (131) (164) (295) 5 1,107 1,112 Due from banks -- (9) (9) -- 19 19 Federal funds sold 1 (25) (24) 16 68 84 - ---------------------------------------------------------------------------------------------------------------- Total Interest Income (208) 1,547 1,339 62 2,308 2,370 - ---------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: NOW accounts (31) 145 114 77 36 113 Money market accounts (231) 489 258 12 380 392 Time certificates under $100,000 (45) (207) (252) (23) 302 279 Time certificates $100,000 and over (50) 49 (1) 22 108 130 Federal Home Loan Bank and other borrowings (22) (18) (40) 9 587 596 - ---------------------------------------------------------------------------------------------------------------- Total Interest Expense (379) 458 79 97 1,413 1,510 - ---------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $ 171 $ 1,089 $ 1,260 $(35) $ 895 $ 860 ================================================================================================================
(1) Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. These rates are calculated on a fully taxable equivalent basis. Volume change is calculated as change in volume multiplied by the old rate while rate change is change in rate multiplied by the old volume. The rate/volume change is allocated between volume change and rate change at the ratio each component bears to the absolute value of their total. Nonaccrual and 90 days or more past due loans are included in average loans for which changes due to rates and volume are computed. Trends in net interest income are commonly evaluated in terms of average rates, using the net interest margin and the net interest spread. The interest margin, or the net yield on earning assets, is computed by dividing net interest income by average earning assets. This ratio represents the difference between the average yield on average earning assets and the average rate paid for all funds used to support those earning assets, including both interest bearing and non-interest bearing sources of funds. The Company's net interest margin increased by 32 basis points to 4.28% in 1998, primarily as a result of a shift in the mix of earning assets from investments to higher yielding loans combined with an overall decrease in deposit rates paid during 1998. A higher average loan to deposit ratio also contributed to the improvement in the net interest margin in 1998 compared to 1997. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly, while the timing for repricing of both the asset and liability remain the same; both impact net interest income. It should be noted, therefore, that a matched interest sensitivity position, by itself, will not ensure maximum net interest income. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the types of investments that should be made and at what maturity. Using this analysis, management from time to time assumes calculated interest sensitivity gap positions to maximize net interest income based upon anticipated movements in the general level of interest rates. The Company's "negative gap" position in the short term (one year or less) currently positions it to benefit from a declining interest rate environment. "Negative gap" is used to describe the interest sensitivity position when a company's rate sensitive liabilities are repricing faster than its rate sensitive assets. See "Liquidity and Asset/Liability" section. -11- 6 The interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing sources of funds. The interest rate spread eliminates the impact of non-interest bearing funds and gives a direct perspective on the effect of the market interest rate movement. During 1998, the interest rate spread increased compared with 1997. The following table presents an analysis of the Company's interest rate spread and net yield on earning assets.
Years Ended December 31 1998 1997 - -------------------------------------------------------------------------------- Rate earned on interest earnings assets 8.29% 8.27% Rate paid on interest bearing liabilities 4.91% 5.25% Interest rate spread 3.38% 3.02% Net yield on earnings assets 4.28% 3.96%
The shift in mix of earning assets together with the increased level of earning assets and the decline in the average rate paid on interest bearing liabilities resulted in a higher level of net interest income. The positive impact of the increased level of earning assets particularly in the area of loans was somewhat offset by growth in interest bearing liabilities. PROVISION FOR LOAN LOSSES The Company maintains an allowance for loan losses at a level, which, in management's evaluation, is adequate to cover estimated losses on loans based on available information at the end of each reporting period. Considerations in establishing the allowance include historical net charge-offs, changes in the credit risk, mix and volume of the loan portfolio, and other relevant factors, such as the risk of loss on particular loans, the level of nonperforming assets, and current and forecasted economic conditions. A more detailed discussion of nonperforming assets is presented under the caption "Nonperforming Assets and Risk Elements". In 1998, the Company recorded $128,000 in expense for provision for loan losses, compared with $100,000 in 1997. This provision for loan losses was deemed appropriate due to the growth in the loan portfolio despite net recoveries for 1998 and a decline in nonperforming assets. Net recoveries were $390,000 in 1998 compared to $150,000 in 1997. The allowance for loan losses was 2.4% of loans at December 31, 1998, compared to 2.5% of loans at the same date in 1997. This decline in percentage resulted from a 24.4% increase in the loan portfolio. Net recoveries of $390,000 in 1998 resulted from charge-offs of $84,000 and recoveries of $474,000 reflecting continued collection efforts on loans charged off in prior periods. In 1997, net recoveries of $150,000 were the result of charge-offs of $169,000 and recoveries of $319,000. Management will continue to evaluate the level of the allowance for loan losses and will determine what additional adjustments, if any, are necessary. Continued growth in the loan portfolio will be a factor in this evaluation, as well as the quality of the loan portfolio and other external and internal factors. 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 provision and the level of the allowance at any future date. Management anticipates there will be continued provision expense in 1999; however, the specific amount will be determined on a quarter by quarter basis as all factors are evaluated. Changes in circumstances affecting the various factors considered by the Company in establishing the level of the allowance could significantly affect the amount of the provision that is deemed to be warranted. -12- 7 As a financial institution that assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, the Company consistently applies a comprehensive methodology and procedural discipline which is updated on a quarterly basis at the subsidiary bank level to determine both the adequacy of the allowance for loan losses and the necessity for charging provisions against earnings. The allowance for loan losses is based on assessments of the probable estimated losses inherent in the loan portfolio. The allowance for loan losses is comprised of an allocated and unallocated portion. Both portions of the allowance are available to support inherent losses in the portfolio. The allocated allowance is determined for each classification of both performing and nonperforming loans within the portfolio. This methodology includes: - - The application of allowance allocations for commercial loans, consumer loans, and real estate loans are calculated by using weighted-average loss rates over a defined time horizon based upon analysis of the Company's historical averages of actual net loan charge-offs incurred within the loan portfolios by loan quality grade. The Company has established minimum loss factors for certain loan grade categories. - - A detailed review of all criticized, nonperforming, and impaired loans to determine if any specific allowance allocations are required on an individual loan where management has identified significant conditions or circumstances exist that indicate the probability that a loss may be incurred in excess of the amount determined by the application of the historical loss methodology. The unallocated allowance is established for loss exposure that may exist in the remainder of the loan portfolio but has yet to be identified and to compensate for the uncertainty in estimating loan losses, including the possibility of changes in risk ratings of loans. The unallocated allowance is based upon management's evaluation of various conditions, the effects of which are not directly measured in determining the allocated allowance. The evaluation of the inherent loss related to these conditions involves a higher degree of uncertainty because they are not associated with specific problem credits or portfolio segments. The unallocated allowance represents prudent recognition of the fact that allowance estimates, by definition, lack precision. The conditions evaluated in connection with the unallocated allowance include the following conditions as of the balance sheet date: - - Changes in lending policies and procedures - - National and local economic conditions - - Trends in loan volumes and terms of loans in the portfolio - - Changes in experience of personnel - - Recent levels of, and trends in, delinquencies and non-accruals - - Loan review evaluation of the credit process - - Credit concentrations - - Competition, legal, and regulatory requirements - - Peer comparisons Management reviews these conditions quarterly in discussion with its loan officers. If any of these conditions is evidenced by a specifically identifiable problem loan or portfolio segment as of the evaluation date, management's estimate of the effect of this condition may be reflected in the allocated allowance applicable to the loan or portfolio segment. Where a specifically identifiable problem loan or portfolio segment as of the evaluation date does not evidence any of these conditions, management's evaluation of the probable loss concerning this condition is reflected in the unallocated allowance. Management believes that in most instances, the impact of these events on the collectibility of the applicable loans has not yet been reflected in the level of nonperforming loans or in the internal risk grading process regarding these loans. Accordingly, our evaluation of the probable losses related to these factors is reflected in the unallocated allowance. -13- 8 The Company does not weight the unallocated allowance among segments of the portfolio. The following specific factors are reflected in management's estimate of the unallocated allowance: - - Concentration of real estate dependent loans - - Declining performance in certain industries such as healthcare and construction While the Company's rate of charge-offs is low and net recoveries have been realized, management is aware that the Company has been operating in an extremely beneficial economic environment. Management of the Company, along with a number of economists, perceives increasing instability in the national and mid-south economies and a worldwide economic slowdown that could contribute to job losses and otherwise adversely affect a broad variety of business sectors in our markets. Also, by virtue of its increased capital levels, the Company is able to make larger loans, thereby increasing the possibility of a loan having a larger adverse impact than before. Accordingly, management believes that the maintenance of an unallocated allowance in the current amount is prudent and consistent with regulatory requirements. After completion of this process, a Board of Directors meeting is held to evaluate the adequacy of the allowance and establish the provision level for the current quarter. The Company believes that the procedural discipline, systematic methodology, and comprehensive documentation of this quarterly process is in full compliance with all regulatory requirements and provides appropriate support for accounting and reporting purposes. The Company believes that the allocation of its allowance for loan losses is reasonable. -14- 9 The following table represents a recap of activity in the allowance for loan losses during the past two years. SUMMARY OF LOAN LOSS EXPERIENCE
(In Thousands) 1998 1997 - -------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES, JANUARY 1 $ 3,128 $ 2,878 LOANS CHARGED OFF: Commercial (41) (169) Real estate (38) -- Consumer (5) -- - -------------------------------------------------------------------------------------- Total charge-offs (84) (169) - -------------------------------------------------------------------------------------- RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF: Commercial 222 317 Real estate 2 -- Consumer 250 2 - -------------------------------------------------------------------------------------- Total recoveries 474 319 - -------------------------------------------------------------------------------------- NET RECOVERIES 390 150 - -------------------------------------------------------------------------------------- PROVISION CHARGED TO OPERATIONS 128 100 - -------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES, DECEMBER 31 $ 3,646 $ 3,128 ====================================================================================== Loans, net of unearned income Year-end $152,675 $122,749 Average during year $133,660 $114,835 Allowance for loan losses to year-end loans, net of unearned income 2.4% 2.5% Provision for loan losses to average loans, net of unearned income .1% .1% Net recoveries to average loans, net of unearned income .3% .1%
The following table presents the allocation of the allowance for loan losses for the past two years. ALLOCATION OF THE ALLOWANCE LOAN FOR LOSSES
(In Thousands) 1998 1997 - -------------------------------------------------------------------------------- BALANCE APPLICABLE TO: Commercial $ 918 $ 916 Real estate - mortgage loans 1,006 967 Real estate - construction loans 133 128 Consumer 47 79 Unallocated 1,542 1,038 - -------------------------------------------------------------------------------- $ 3,646 $3,128 ================================================================================ PERCENT OF TOTAL ALLOCATION Commercial 25.2% 29.3% Real estate - mortgage loans 27.6 30.9 Real estate - construction loans 3.6 4.1 Consumer 1.3 2.5 Unallocated 42.3 33.2 - -------------------------------------------------------------------------------- 100.0% 100.0% ================================================================================
-15- 10 NON-INTEREST INCOME Total non-interest income was $1.8 million in 1998, reflecting an increase of 27.0% from $1.4 million reported in 1997. Non-interest income, less non-recurring income (gains/losses on sale of securities and other real estate), increased $311,000, or 22.0%, from 1997. Investment center income increased $555,000 as the Company expanded its arrangement with LM Financial Partners, Inc. to offer certain investment services through the addition of two investment advisors at the Green Hills Office in May, 1998. Service fee income increased $128,000 due primarily to an increased number of transaction accounts. Additionally, other income increased $49,000 in 1998 compared to 1997. These increases were partially offset by decreases of $313,000 in trust income and $108,000 in income from previously foreclosed assets. Both the increase in investment center income and the decline in trust income resulted from a decision made in late 1997 to restructure how investment services were offered by discontinuing most traditional trust services and redirecting the Company's efforts into an expanded investment services department provided in conjunction with LM Financial Partners, Inc. This decision impacted both non-interest income and non-interest expense. The Company reported a net gain on sale of securities available for sale of $52,000 in 1998 compared with $2,000 in 1997. These transactions resulted from balance sheet management strategies to adjust the estimated average maturity of the Company's securities portfolio. Gains on sale of other real estate owned were $29,000 in 1998 and $6,000 in 1997. NON-INTEREST EXPENSE A new branch location established in the Maryland Farms area of Brentwood, Tennessee, expansion of investment services provided in conjunction with LM Financial Partners, Inc., expansion of "Bank on Call" mobile branching, upgrades of the Company's computer systems and expenses related to the Company's Year 2000 project contributed to increases in non-interest expenses in 1998. Total non-interest expense increased 15.9% from $5.2 million in 1997 to $6.1 million in 1998. Non-interest expense represented 2.9% of average total assets in 1998 compared to 2.7% in 1997. The non-interest expense to assets ratio is an industry measure of the bank's ability to control its overhead. Control of non-interest expense is essential to profit maximization; therefore, all non-interest expense categories have been and will continue to be closely managed through strategic and financial planning, as well as being monitored by management through regular measurements. However, management will continue to implement its strategic plan expanding geographic locations and product lines, as appropriate, to provide greater future opportunities. Effective management of expenses while expanding and experiencing solid growth in traditional service offerings is a focus of the Company's management. During 1998, salaries and employee benefits increased $684,000, or 25.6%, primarily due to additional personnel employed to deliver investment services, staffing of the Brentwood location, expansion of the Company's mobile branch service and addition of personnel in the technology and operations area, some of whom are actively involved in the Company's Year 2000 project. Occupancy expense increased $119,000, or 16.7%, in 1998 compared to 1997 as a result of the establishment of the Company's Brentwood Office in September, 1998. Other operating expenses increased $117,000 during 1998 compared to 1997. These increases in non-interest expense were partially offset by decreases in other non-interest expense categories. Advertising and marketing expense declined $47,000, or 24.6%, in 1998 compared to 1997 as a result of less utilization of media expense related to the opening of the Brentwood Office compared to the media expense incurred with the opening of the Green Hills Office in 1997. Audit, tax and accounting expense and data processing expense declined $7,000 and $18,000, respectively, in 1998 compared to 1997 primarily as a result of the Company's decision to discontinue its trust department. Non-interest expense, other than salaries and employee benefits, increased $151,000, or 5.9%, during 1998 compared to 1997, while assets grew $33.3 million. -16- 11 During the second quarter of 1998, the Company purchased property in Hendersonville and has begun construction on a new branch office planned to open in the late spring of 1999. Other planned expenses relate to the expansion of the Company's delivery systems and service locations and include additional mobile branch service employees and equipment, an investment in an internet banking system and consulting and legal expense related to expansion of additional lines of business. Other than these planned expenses, management anticipates only minimal growth in most non-interest expense categories during 1999. During 1998, costs related to Year 2000 were approximately $115,000 and are projected to be approximately $135,000 in 1999. A more detailed discussion of Year 2000 issues is presented under the caption, "Nonperforming Assets and Risk Elements". It should be noted that economic conditions and other factors in the market could further impact non-interest expense. INCOME TAXES During 1998, the Company recorded provision for income taxes of $1.6 million compared to $1.3 million during 1997. During 1998, reported earnings were impacted by a franchise tax accrual of $63,000 resulting largely from additional capital generated by the exercise of the Company's warrants during the fourth quarter of 1998. The effective tax rate was approximately 38% for 1998 and 39% for 1997. The Company continues to explore strategies which would lower the effective tax rate while being consistent with its profits goals. EARNING ASSETS Average earning assets increased $15.7 million, or 8.5%, in 1998 from 1997. This increase was the result of a 16.4% increase in average loans, which was partially offset by decreases of 4.0% in investment securities, 6.0% in federal funds sold and 51.1% in due from banks. These changes reflected both the growth in loans and the subsequent change in the mix of average earning assets which occurred during 1998 when compared to 1997. During 1998, the mix of average earning assets reflected loans at 66.7%, investment securities at 29.5%, federal funds sold at 3.6% and due from banks at .1%. This compares with a mix in 1997 which reflected loans at 62.2%, investment securities at 33.4%, federal funds sold at 4.2% and due from banks at .2%. The shift in mix during 1998 from investments to higher yielding loans contributed to higher net interest income as the percentage of loans to total earning assets increased. The mix of earning assets is monitored on a continuous basis with adjustments made in other areas based on the availability of quality loan demand. An analysis of the 16.4% increase in average total loans outstanding in 1998 compared to 1997 reflects a 11.6% increase in average real estate mortgage and real estate construction loans and a 35.0% increase in average commercial loans. The loan portfolio table below shows the classifications of loans by major categories at December 31, 1998 and 1997. Real estate mortgage and construction loans are primarily commercial as opposed to one to four family residential. LOAN PORTFOLIO
December 31 Change from Prior Year (Dollars In Thousands) 1998 % Total 1997 % Total Amount % - ------------------------------------------------------------------------------------------------ LOAN CATEGORIES Commercial $ 51,970 34.0% $ 38,571 31.4% $13,399 34.7% Real Estate/ Mortgage Loans 79,455 52.1 71,055 57.9 8,400 11.8 Real Estate/ Construction Loans 14,667 9.6 9,426 7.7 5,241 55.6 Consumer 6,583 4.3 3,697 3.0 2,886 78.1 - ------------------------------------------------------------------------------------------------ Total Loans $152,675 100.0% $122,749 100.0% $29,926 24.4% ================================================================================================
-17- 12 The loan portfolio mix continues to reflect the Company's efforts to serve its target market of small and mid-sized businesses in its community. The condition of the economy and competitive environment of the Company's market, as well as management's focus on asset quality, impact the Company's ability to experience loan growth. Both economic conditions and loan growth remained strong during 1998; however, the market continued to be very competitive as the supply of available credit often outpaced quality loan demand. At December 31, 1998, loan demand appeared to be moderately strong; however, international economic uncertainty and concentration on Year 2000 issues have caused some businesses to be cautious in their outlook, despite the strengths of the underlying U.S. and local economies. The Company has not invested in loans which would be considered highly leveraged transactions ("HLT") as defined by the Federal Reserve Board and other regulatory agencies. Loans made by companies for recapitalization or acquisitions (including acquisitions by management or employees) which result in a material change in the borrower's financial structure to a highly leveraged condition are considered HLT loans. The Company has no foreign loans. The Company's securities are held as available for sale and provide for liquidity needs while contributing to profitability. During 1998, the Company continued utilizing a leveraging strategy begun in 1996 which was comprised of Federal Home Loan Bank secured borrowings used to fund matched investments of U.S. Government and municipal securities. Such strategies require careful monitoring and measurement of the interest rate risk, but have the potential for providing significant contributions to net interest income. See the "Liquidity and Asset/Liability Management" section. In the fourth quarter of 1998, the Company made an investment in a factoring company which was consistent with its strategic plan to invest in other lines of business. The composition of the securities portfolio reflects an investment strategy of maximizing portfolio yields commensurate with risk and liquidity considerations. The primary objectives of the Company's investment strategies are to maintain an appropriate level of liquidity and to provide a tool to assist in controlling the Company's interest rate position while, at the same time, producing adequate levels of interest income. Securities held as available for sale are carried on the Company's balance sheet at estimated fair value. As a result, the Company recognized an increase in equity of $340,000 for unrealized gains on securities held as available for sale, net of tax, at December 31, 1998, which compares with an increase of $294,000 for unrealized gains on these securities in 1997. During 1998, gross securities sales were $3,102,000 and paydowns, including prepayments, were $33,599,000, representing 5.2% and 57.3%, respectively, of the average total portfolio for the year. Net gains associated with the sale of securities available for sale during 1998 were $52,000 compared with $2,000 in 1997. Total average investments decreased $2.5 million, or 4.0%, during 1998 compared to 1997, while total securities at year end 1998 were $5.6 million, or 8.5%, greater than year end 1997 as the Company deployed funds generated from the exercise of warrants which resulted in an increase in equity. The average yield on investment securities was 6.7% in both 1998 and 1997. The following table contains the carrying amount of the securities portfolio at the end of each of the last two years. SECURITIES AVAILABLE FOR SALE
December 31, (In Thousands) 1998 1997 - -------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government agencies $35,900 $31,426 Securities of states and political subdivisions 1,309 382 Collateralized mortgage obligations 31,721 32,121 Equity securities 2,732 2,130 - -------------------------------------------------------------------------------- Total $71,662 $66,059 ================================================================================
-18- 13 The maturities and average weighted yields of the Company's investment portfolio at the end of 1998 are presented in the following table using primarily the estimated expected life. The average stated maturity of the mortgage backed securities was 1.6 years, and the estimated life was 1.1 years. At year end 1998, all securities were held as available for sale. DEBT SECURITIES AVAILABLE FOR SALE MATURITY SCHEDULE
December 31, 1998 - ------------------------------------------------------------------------------------------ Within After 1 But After 5 But 1 Year Within 5 Years Within 10 Years (Dollars In Thousands) Amount Yield Amount Yield Amount Yield - ------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of U.S. Government agencies $14,759 5.7% $21,141 7.0% $ -- --% Securities of states and political subdivisions -- -- 386 8.1 923 6.7 - ------------------------------------------------------------------------------------------ Total $14,759 5.7% $21,527 7.0% $923 6.7% ==========================================================================================
The previous table excludes collateralized mortgage obligations at an estimated fair value of $31,721,000 and investments in equity securities which have no stated maturity. Maturities of collateralized mortgage obligations can be expected to differ from scheduled maturities due to the prepayment or early call privileges of the issuer. Average federal funds sold remained relatively level during 1998 compared to 1997. However, at December 31, 1998, the Company had no federal funds sold compared to $9.4 million in federal funds sold at year end 1997. Federal funds sold represent a short-term investment used primarily for liquidity purposes in the Company's asset liability management strategy. DEPOSITS During 1998, the Company's volume and mix of liabilities shifted somewhat as average shareholders' equity increased $4.5 million and average other borrowings declined slightly by $.4 million. The portion of average liabilities and shareholders' equity represented by deposits, the primary source of funding for the Company, stood at 79.9%, a slight decrease from the 80.0% during 1997. This decrease resulted primarily from the Company's additional shareholders' equity from exercise of warrants. Average deposits increased $14.7 million, or 9.6% in 1998 compared to 1997. At December 31, 1998, total deposits were $162.6 million, a decline of .9% from the $164.1 million reflected at December 31, 1997. The slight decline in deposits at year end 1998 compared to 1997 was the result of a temporary decline in money market accounts combined with a decline in time certificates of deposit that resulted from a strategic decision to utilize additional shareholders' equity rather than higher rate certificates of deposit to fund earning assets. At December 31, 1998, compared to the same period in 1997, non-interest bearing demand deposits increased $5.4 million, or 43.0%, NOW accounts increased $4.0 million, or 43.4%, while money market accounts declined $3.8 million, or 5.0%, time certificates less than $100,000 declined $6.5 million, or 19.1%, and time certificates of $100,000 and greater declined $.7 million, or 2.1%. This shift in the mix of deposits reflected the Company's business development efforts in establishing relationship transaction accounts and becoming less reliant on higher cost certificates of deposit. With the addition of the Green Hills Office which opened in 1997 and the Brentwood Office which opened in the third quarter of 1998, together with the expansion of the Company's mobile branching service, the Company has had additional opportunities to expand its commercial and consumer relationships. The shift in the mix of deposits as well as a general decline in interest rates during 1998 contributed to a decline of 34 basis points in the average rate paid on interest bearing liabilities during 1998 compared to 1997. -19- 14 The deposit mix at December 31, 1998 reflected the changes that occurred during the year as well as temporary year-end fluctuations with non-interest bearing deposits at 11.1%, NOW accounts at 8.2%, money market accounts at 43.8%, time deposits under $100,000 at 17.1% and time deposits $100,000 or greater at 19.8%. This compares to a deposit mix at year end 1997 which reflected non-interest bearing deposits at 7.7%, NOW accounts at 5.7%, money market accounts at 45.7%, time deposits under $100,000 at 20.9% and time deposits $100,000 or greater at 20.0%. The shift in the mix of the Company's deposit base reflects its branch expansions which have resulted in additional consumer deposits in NOW accounts as well as the expansion of its commercial deposit base as reflected by the increase in non-interest bearing demand deposits. Maturities of time deposits $100,000 or more issued by the Company at December 31, 1998 are summarized in the following table. MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
(In Thousands) Three months or less $15,157 Over three through six months 8,843 Over six through twelve months 4,612 Over twelve months 3,573 - ------------------------------------------------------------------------------------------- Total $32,185 ===========================================================================================
At year-end 1998, the Company had total borrowings of $22.5 million comprised of $14.5 million in Federal Home Loan Bank borrowings and $8.0 million in federal funds purchased. The average volume of these borrowings during 1998 was $12.7 million compared to $13.1 million during 1997 with an average rate paid on borrowed funds during 1998 of 5.5% compared to 5.7% during 1997. The average rate paid on average total interest bearing liabilities was 4.9% in 1998 compared with 5.3% in 1997. The ratio of average loans, net of unearned income, to average total deposits was 79.90% in 1998, compared to 75.2% in 1997. This higher loan to deposit ratio reflected the increase in average loans which occurred in 1998. The loan to deposit ratio at December 31, 1998, was 93.9% compared to 74.8% at year-end 1997. Most financial institutions manage the loan to deposit ratio considering the capital to asset ratio. The Company's management has considered its capital ratio in conjunction with its higher loan to deposit ratio. LIQUIDITY AND ASSET/LIABILITY MANAGEMENT The Company's asset liability management process actively involves the Board of Directors and members of senior management. The Asset Liability Committee of the Board of Directors meets at least quarterly to review strategies and the volume and mix of assets as well as funding sources. Decisions relative to different types of securities are based upon the assessment of various economic and financial factors, including, but not limited to interest rate risk, liquidity, and capital adequacy. Interest rate sensitivity is a function of the repricing characteristics of the Company's portfolio of earning assets and interest bearing liabilities. These repricing characteristics are the timeframes within which interest bearing assets and liabilities are subject to a change in interest rate either by replacement, repricing or maturity of the instrument. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of change in market interest rates. Effective interest rate risk management seeks to ensure that both assets and liabilities respond to changes in interest rate movement similarly to minimize the effect on net interest income by these fluctuations. Management utilizes computer interest rate simulation models and analysis to determine the Company's interest rate sensitivity. Management also evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the appropriate mix and repricing characteristics of assets and liabilities. -20- 15 In addition to ongoing monitoring of interest rate sensitivity, the Company may enter into various interest rate contracts to augment the management of the Company's interest sensitivity. These contracts may be used to supplement the Company's objectives relating to its interest sensitivity position. The interest rate risk factor in these contracts is considered in the overall risk management strategy of the Company. The Company also utilizes certain leveraging strategies within risk tolerance guidelines established by its Board of Directors for the purpose of increasing net income. Such strategies involve the utilization of borrowings to fund investment securities with similar maturities or repricing characteristics which result in an acceptable interest rate spread. During 1998, these strategies contributed $17,000 to the Company's net income. Leveraging strategies are carefully monitored by the Company's Board of Directors who have established parameters for matching investment purchases with Federal Home Loan Bank borrowings. On a monthly basis, a matched investment income report is reviewed by the Company's Board of Directors in an effort to manage risk. Additionally, the Asset Liability Committee of the Company's Board of Directors has established a maximum level of borrowings/investments of $25 million and has implemented guidelines which require preapproval of each phase of the strategy prior to implementation. While such strategies contribute to increases in net interest income, they also have the effect of lowering the net interest margin and increasing the Company's exposure to interest rate risk. Managing and regularly monitoring interest rate risk associated with the leveraging strategy are the responsibility of both management and the Company's Board of Directors. At December 31, 1998, the Company had borrowings totaling $22.5 million compared to $14.5 million at December 31, 1997. Approximately $4.5 million of the borrowings reflected at December 31, 1998, were used to fund investment securities. The following interest rate gap table reflects the Company's rate sensitivity position at December 31, 1998. The carrying amount of interest rate sensitive assets and liabilities is presented in the periods in which they next reprice to market rates or mature and is summed to show the interest rate sensitivity gap. To reflect anticipated prepayments, certain investments are included in the table based on estimated rather than contractual maturity dates.
Expected Repricing or Maturity Date Within One Two After One to Two to Five Five Year Years Years Years Total (Dollars In Thousands) 1998 - ------------------------------------------------------------------------------------------------------- Assets Debt and equity securities $ 35,398 $22,637 $12,704 $ 923 $ 71,662 Average rate 5.85% 6.87% 6.52% 6.70% 6.30% Net loans $112,965 $ 8,854 $19,333 $11,523 $152,675 Average rate 8.28% 8.98% 8.56% 8.42% 8.37% Other $ 954 $ -- $ -- $ -- $ 954 Average rate 4.76% -- -- -- 4.76% - ------------------------------------------------------------------------------------------------------- Total interest-earning assets $149,317 $31,491 $32,037 $12,446 $225,291 Liabilities Deposits $135,489 $ 6,383 $ 2,698 $ 3 $144,573 Average rate 3.93% 5.83% 5.87% 4.95% 4.41% Federal Home Loan Bank and other borrowings $ 17,500 $ 5,000 $ -- $ -- $ 22,500 Average rate 5.21% 4.45% -- -- 5.05% - ------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $152,989 $ 11,383 $ 2,698 $ 3 $167,073 - ------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap $ (3,672) $20,108 $29,339 $12,443 $ 58,218 ======================================================================================================= Cumulative interest rate sensitivity gap $ (3,672) $16,436 $45,775 $58,218 =======================================================================================================
-21- 16 Liquidity is the ability of the financial institution to meet the needs of its customers and creditors. High levels of liquidity reduce earnings, as liquidity is normally obtained at a net interest cost as a result of generally lower yields on short term, interest earning assets and the higher interest expense usually associated with the extension of deposit maturities. The Company's principal sources of asset liquidity are marketable securities available for sale and federal funds sold, as well as maturity of securities. The estimated average maturity of securities was 7.0 years at December 31, 1998 compared to 5.1 years at December 31, 1997. Securities available for sale were $71.7 million at December 31, 1998, compared to $66.1 million at December 31, 1997. The Company had federal funds purchased of $8.0 million at December 31, 1998 compared with federal funds sold of $9.4 million at December 31, 1997. Core deposits, a relatively stable funding base, represented 80.2% of total deposits at December 31, 1998, and 80.0% of total deposits at year-end 1997. Core deposits are defined as total deposits, less time certificates of deposit $100,000 or greater. Liquidity is strengthened and reinforced by maintaining a relatively stable funding base which is achieved by providing relationship banking, extending contractual maturities of liabilities and reducing reliance on volatile short term purchased funds. Maintaining acceptable levels of liquidity has been an ongoing consideration of the Company's Asset/Liability Committee and is regularly monitored and adjusted, as appropriate. It is recognized that maintaining an acceptable level of liquidity becomes even more important during periods of economic uncertainty and volatile financial markets. Due to the commercial nature of the Company's target market, liabilities and loans are evaluated relative to industry concentration and volatility. At December 31, 1998, approximately 22.2% of deposits were related to the construction industry, 3.6% to real estate development/investment industries, while 4.0% were related to health care, 9.4% state and local government and 2.7% were related to the automotive and transportation industry. These areas are the Company's largest deposit concentrations and represent significant industries within the Nashville area. These deposits are primarily reflected in the Company's demand deposits and interest bearing money market accounts and are deposits of relationship commercial customers which, by their nature, are concentrated in a fewer number of customer relationships than would be the case for consumer deposit funding sources. At December 31, 1998 and 1997, all investment securities were classified as available for sale. MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial movement in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Company's exposure to changes in interest rates between assets and liabilities is shown in the Company's gap table under the "Liquidity and Asset/Liability Management" caption. At least quarterly, the Asset/Liability Committee (ALCO) of the Board of Directors reviews interest rate risk considering results compared to policy, current rate and economic outlooks, loan and deposit demand levels, pricing and maturity of assets and liabilities, impact on net interest income under varying rate scenarios, regulatory developments, comparison of modified duration of both assets and liabilities as well as any appropriate strategies to counteract adverse interest rate projections. The Company's imbalance between the duration of assets and liabilities is limited to under one year and generally should not exceed one-half year. -22- 17 Management recommends the appropriate levels of interest rate risk to be assumed within limits approved by the ALCO and the Board of Directors as to the maximum fluctuations acceptable in the market value of equity and in earnings assuming sudden rate movement (rising or falling) up to 200 basis points. The Company's policy establishes the maximum change in annual pre-tax interest income with a 200 basis point change in rates to 10% while establishing the maximum change allowable in pre-tax market value of capital to 12% in the same assumed rate environment. The Company's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while structuring the Company's asset/liability structure to obtain the maximum yield-cost spread. The Company relies primarily on its asset liability structure to control interest rate risk. Based on December 31, 1998 financial data, a 200 basis point change in rates would produce net interest income variations of a .5% increase assuming falling rates and a 2.7% decrease assuming rising rates. Additionally, the 200 basis point rate shock would produce changes in the market value of equity of a decrease of 6.4% assuming rising rates and a 6.1% increase assuming falling rates. The Company continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management believes that hedging instruments currently available are not cost effective to the Company, and therefore, has focused its efforts on increasing the Company's yield-cost spread through growth opportunities. -23- 18 The following table shows the Company's financial instruments that are sensitive to change in interest rates, categorized by expected maturity, and the instruments fair value at December 31, 1998. Market risk sensitive instruments are generally defined as derivatives and other financial instruments both on balance sheet and off balance sheet.
Average Expected Maturity/Principal Repayment Interest --------------------------------------------------------------------------------- Rate There- Total Fair (DOLLARS IN MILLIONS) 1999 2000 2001 2002 2003 After Balance Value - ------------------------------------------------------------------------------------------------------------------------- Interest-Sensitive Assets: Fed funds sold and other short-term investments 4.76% $ 1.0 $ -- $ -- $ -- $ -- $ -- $ 1.0 $ 1.0 Loans Receivable (1) 8.37 112.5 8.9 6.9 7.6 4.9 11.9 152.7 153.1 Investment Securities 6.30 35.3 22.6 8.1 2.0 2.7 .4 71.1 71.7 Interest-Sensitive Liabilities: Deposits 3.93 135.5 6.4 1.3 .8 .6 -- 144.6 144.9 FHLB and other borrowings 5.05 17.5 5.0 -- -- -- -- 22.5 22.7 Interest-Sensitive Off balance sheet Items: (2) Commitments to extend credit 8.31 58.2 * Unused lines of credit 11.76 4.8 * ==========================================================================================================================
(1) Loans are not reduced for the allowance for loan losses. (2) Total balance equals the notional amount of off-balance sheet items and interest rates are the weighted average interest rates of the underlying loans or commitments. * The estimated fair value of these items was not significant. Expected maturities are contractual maturities adjusted for prepayments of principal. The Company uses certain assumptions to estimate fair values and expected maturities. For assets, expected maturities are based upon contractual maturity, projected repayments, and estimated prepayments of principal. The actual maturities of these instruments could vary substantially if future prepayments differ from the Company's historical experience. -24- 19 NONPERFORMING ASSETS AND RISK ELEMENTS Nonperforming assets, which include nonaccrual loans, restructured loans, and other real estate owned, were $460,000 at December 31, 1998, compared with $1,227,000 at December 31, 1997. The following table represents the composition of nonperforming assets at December 31, 1998 and 1997. NONPERFORMING ASSETS
December 31 (Dollars In Thousands) 1998 1997 - ----------------------------------------------------------------- NONPERFORMING ASSETS: Nonaccrual loans $408 $1,094 Restructured loans -- -- Other real estate owned 52 133 - ----------------------------------------------------------------- Total $460 $1,227 ================================================================= Nonperforming assets as a percent of total loans plus other real estate owned 0.3% 1.0% =================================================================
There were no loans ninety days or more past due at December 31, 1998 and 1997 that were not included in the nonaccrual category. During 1998, $925,000 of loans were transferred from earnings status to nonaccrual status and there were no advances on nonaccrual loans. This compares to $976,000 of loans transferred from earnings status to nonaccrual status in 1997. In 1998 and 1997 there were $1,611,000 and $461,000, respectively of loans transferred from nonaccrual status primarily due to the repayment of principal. In 1998, there was one loan removed from nonaccrual status and placed in other real estate owned reflecting a balance of $52,000 at December 31, 1998. The Company had $133,000 in other real estate owned at December 31, 1997. During 1998, loans totaling $84,000 were charged-off with recoveries reported of $474,000 compared to charge-offs of $169,000 and recoveries of $319,000 in 1997. These charge-offs and recoveries resulted in net recoveries during 1998 of $390,000 compared to net recoveries in 1997 of $150,000. The Company evaluates the credit risk of each customer on an individual and on-going basis and, where deemed appropriate, obtains collateral. Collateral values are monitored to ensure that they are maintained at appropriate levels. The largest component of the Company's credit risk relates to the loan portfolio. During 1998, the Company continued its emphasis on underwriting standards and loan review procedures. As discussed in the section, "Provision for Loan Losses", asset quality and loan charge-off and recovery experience impact the level of the allowance for loan losses maintained. At December 31, 1998 and 1997, other potential problem loans totaled $256,000 and $177,000, respectively. Other potential problem loans consist of loans that are currently not considered nonperforming, but where information about possible credit problems has caused the Company to have serious doubts as to the ability of the borrower to fully comply with present repayment terms. Depending on economic changes and future events, these loans and others, which may not be presently identified, could become future nonperforming assets. The composition of nonperforming assets at December 31, 1998 was 11.3% in other real estate owned and 88.7% in nonaccrual loans which compares to 10.8% in other real estate owned and 89.2% in nonaccrual loans at December 31, 1997. The largest nonaccrual loan at December 31, 1998 was $242,000. At December 31, 1998, the Company's allowance for loan losses was $3.6 million, or 2.4%, of total loans compared with $3.1 million, or 2.5%, at December 31, 1997. The level of the allowance for loan losses is monitored regularly by management and the Company's Board of Directors. -25- 20 During 1998, management and the Board of Directors continued its emphasis on the Year 2000 implementing a comprehensive project plan, adopting a test plan and establishing contingency plans, where appropriate. Year 2000 (Y2K) represents an issue which refers to the process of converting computer programs to recognize more than two digits identifying a year in any date field. The Company recognizes the technology and financial risks to both the Company and its customers as the new millennium approaches and is taking appropriate steps as outlined in the Company's "Year 2000 Readiness Disclosure Statement" to combat these risks. The Company completed assessments of all systems and completed remediation and/or testing of all internal systems by December 31, 1998. The software system utilized for the Company's primary core applications processing is fully warranted by a financially strong, publicly traded company that supplies this software to over 200 financial institutions nationwide. The Company has no internally developed systems. Additionally, the Company has actively participated in proxy testing with external vendors upon whom the Company is reliant and has carefully reviewed the results of all tests to ensure these systems are Y2K compliant. Testing or reviewing test scripts with other external vendors on whom the Company is less dependent but with whom there is some interaction, will continue through the first two quarters of 1999 with completion planned prior to June 30, 1999. The costs related to this project were projected and totaled approximately $115,000 in 1998 and are not expected to exceed $135,000 in 1999. In addition to testing, renovating and/or replacing systems, as appropriate, the Company is cognizant of the potential impact of Y2K on its borrowing customers and large depositors and has, therefore, established a system for monitoring the Y2K compliance of these customers. The Company has also assessed its investment portfolio relative to Y2K risk exposure. Additionally, the Company's Y2K Task Force has established a date of June 30, 1999 on which no further changes will be made to technology systems except as necessary due to changes in regulatory requirements. Both a contingency and a liquidity plan have been prepared and will be implemented, as appropriate, during 1999 to ensure the Company is prepared to serve its customers. In an effort to communicate with customers, the Company has published and distributed a "Year 2000 Readiness Disclosure Statement" in addition to a series of newsletter articles. Y2K credit risk continues to be assessed on all loans above a predetermined amount, Y2K language is being incorporated into contracts and loan agreements, and the Company continues to educate all officers to be attuned to the potential risks associated with the Year 2000. During 1998, the Company sponsored a seminar to increase customer awareness of Y2K risks and solutions. Management and the Board of Directors remain committed to ensuring that the Company's customers and shareholders will not be impacted by the Y2K issue. CAPITAL STRENGTH The Company experienced a material change its capital structure in 1998 as 2.0 million warrants, each representing the right to acquire a common share at a price of $12.50, were exercised resulting in the addition of $25.0 million in new equity capital. Since all warrants had an expiration date of December 31, 1998, there are no remaining warrants outstanding. Management and the Board of Directors had previously recognized the potential for additional capital and had reviewed both long-term and short-term strategies considering the appropriate deployment of additional capital. The majority of the additional capital was received during the last week of 1998; therefore, management implemented its short-term investment strategy and together with the Board of Directors is now actively evaluating appropriate longer-term business opportunities. SHAREHOLDERS EQUITY Shareholders' equity (excluding other comprehensive income) at December 31, 1998, was $50.8 million, or 21.3% of total assets, which compares with $23.8 million, or 11.6% of total assets at December 31, 1997. This calculation, when considered after the effect of the Company's adoption of Statement of Financial Accounting Standards (SFAS) No. 115, was $51.2 million, or 21.5%, at December 31, 1998, which compares with $24.1 million, or 11.7%, of total assets at December 31, 1997. The increase in total equity during 1998 primarily resulted from the proceeds ($25.0 million) from the issuance of common stock as warrants were exercised; however, 1998 earnings net of dividends paid as well as a slight increase ($46,000) in the unrealized gain on securities available for sale at year end 1998 compared with year end 1997 further contributed to the increase in total equity. Certain capital statistics are shown in the following chart: -26- 21 CAPITAL STATISTICS
December 31 (Dollars In Thousands) 1998 1997 - ----------------------------------------------------------------------- Total assets $238,185 $204,887 - ----------------------------------------------------------------------- Total shareholders' equity 51,171 24,052 - ----------------------------------------------------------------------- Total shareholders' equity to total assets 21.5% 11.7% - -----------------------------------------------------------------------
Management and the Board of Directors recognized in 1998 the opportunities that would be provided by an influx of capital. It is further recognized that the increased number of shares outstanding (1,996,807) in 1999 will reduce basic earnings per share on a comparative basis until the Company has the opportunity to more effectively deploy the additional capital. While, in the past, the Company's capital ratios have exceeded all regulatory requirements, currently its ratios indicate a significant amount of excess capital based on industry standards and Federal Deposit Insurance Corporation Improvement Act ("FDICIA") minimum ratios, resulting from the addition of $25.0 million in new capital, primarily in the last week of 1998. The Company reported dividend payments in 1998 of $569,000 which compares with dividend payments in 1997 of $441,000. Each quarterly dividend payment made in 1998 was made at $.06 per share. The Company announced an increase in the quarterly dividend payment per share of $.01 to $.07 a share during the first quarter of 1999. It should be noted that this increase in the dividend payment amount per share combined with the approximately 2.0 million additional outstanding shares in 1999 will significantly increase the total amount of dividend payments. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Gains or losses resulting from changes in the valuation of derivatives will be accounted for based upon the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 could increase volatility in earnings and other comprehensive income. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be redesignated and documented pursuant to the provisions of this statement. Earlier application of this statement is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement and should not be applied retroactively to financial statements of prior periods. The Company has not yet determined when it will adopt SFAS No. 133. The Company does not extensively utilize derivatives, thus the impact of SFAS No. 133 is not expected to be material. -27- 22 MANAGEMENT'S DISCUSSION AND ANALYSIS 1997 VS. 1996 The narrative which follows is management's discussion and analysis of 1997 results of operations of the company compared to 1996. Net income for 1997 was $2.1 million, or $.93 basic earnings per share, compared with net income of $2.5 million, or $1.16 per share in 1996. Diluted earnings per share were $.89 and $1.15 for the years ended December 31, 1997 and 1996, respectively. The decline in earnings was the result of having fully utilized all federal and state net operating loss carry forwards in prior periods, thus the Company became fully taxable in 1997. Income before taxes increased $674,000, or 24.8%, to $3.4 million in 1997 compared to $2.7 million in 1996. Return on average shareholder's equity (exclusive of SFAS No. 115 adjustments) was 9.05% in 1997 compared to 12.18% in 1996, while return on average assets for 1997 and 1996 were 1.08% and 1.61%, respectively. During 1997, the Company expanded service locations and product lines in accordance with its long-term strategic plan as it continued its focus on asset quality. Income tax expense of $1.3 million was recorded during 1997 compared to only $168,000 in 1996, a period in which the Company continued to benefit from the use of net operating loss carry forwards. Both federal and state net operating loss carry forwards were fully utilized resulting in the increased income tax expense for 1997. The maintenance of an adequate level for the allowance for loan losses was reflected by a provision for loan losses of $100,000 being recorded in 1997, a period in which net recoveries were $150,000. There was no provision for loan loss expense recorded in 1996, a period in which net charge-offs were $156,000. Total assets were $204.9 million at December 31, 1997, compared to $166.7 million at December 31, 1996 representing an increase of 23%. Loans, net of unearned income, increased $14.9 million, or 13.8%, at year end 1997 compared to the same period in 1996. Deposits increased $30.8 million, or 23.1% from $133.3 million at year end 1996 to $164.1 million at year-end 1997. This significant increase in total deposits resulted from the successful opening of the Company's Green Hills Office in early 1997, as well as other business development efforts. The loan to deposit ratio reflected the increase in total deposits which occurred during 1997 with this ratio being 74.8% at December 31, 1997 compared to 81.0% at year-end 1996. NET INTEREST INCOME Net interest income for 1997 increased 13.2% from 1996. Total interest income increased $2.4 million, or 18.3%, in 1997 as compared to 1996, while total interest expense increased $1.5 million, or 23.4%, as compared to 1996. The increase in total interest income was attributable to a 19.4% increase in average earning assets comprised primarily of increases of $16.4 million in average investments and $11.9 million in average loans outstanding. Average interest bearing liabilities increased $26.7 million, or 21.4%, in 1997, compared to 1996. This increase in interest bearing liabilities resulted primarily from the opening of the Company's Green Hills Office and focused business development efforts. In addition to the increase in the volume of deposit accounts, Federal Home Loan Bank and other borrowings increased $10.4 million as the Company continued to utilize a leveraging strategy begun in the third quarter of 1996 which consisted of matching Federal Home Loan Bank borrowings to fund the purchase of additional investment securities. The average rate paid on interest bearing liabilities increased 9 basis points in 1997 compared to 1996. Total interest expense increased $1.5 million, or 23.4%, in 1997 compared to 1996 due primarily to an increase of 21.4% in average interest bearing liabilities as well as the increase of 9 basis points in the average rate paid on interest bearing liabilities during 1997 compared to 1996. The opening of the Company's Green Hills Office and related promotional activities contributed to the large increase in interest bearing liabilities as well as to the increase in the average rate paid on these liabilities during 1997 compared to 1996. -28- 23 The Company's net interest margin decreased by 22 basis points to 3.96% in 1997, primarily as a result of an increase in deposit rates associated with introductory deposit specials offered with the opening of the Green Hills Office and the utilization of planned investment leveraging strategies. The net interest margin was further impacted by a lower loan to deposit ratio and a shift in the mix of earning assets from higher yielding loans to investment securities. The interest rate spread declined from 3.19% in 1996 to 3.02% in 1997. The increased level of earning assets combined with the shift in the mix of earning assets and interest bearing liabilities resulted in a higher level of net interest income. The positive impact of increased levels of earning assets was somewhat offset by growth in interest bearing liabilities and an increase in the average rate paid on those liabilities as well as a decline in the average rate earned on earning assets during 1997 compared to 1996. PROVISION FOR LOAN LOSSES In 1997, the Company recorded $100,000 in expense for loan losses, compared with no provision expense in 1996. This provision for loan losses was deemed appropriate due to the growth in the loan portfolio and an increase in nonperforming assets. Net recoveries were $150,000 in 1997 compared to net charge-offs of $156,000 in 1996. The allowance for loan losses was 2.5% of loans at December 31, 1997, compared to 2.7% of loans at the same time in 1996. This decline in percentage resulted from growth in the loan portfolio of 13.8%. Net recoveries of $150,000 in 1997 resulted from charge-offs of $169,000 and recoveries of $319,000 reflecting continued collection efforts on loans charged off in prior periods. In 1996, net charge-offs of $156,000 resulted from $697,000 in loan charge-offs and $541,000 in recoveries. 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 provision or the level of the allowance at any future date. NON-INTEREST INCOME Total non-interest income was $1.4 million in 1997, reflecting an increase of 53.3% in comparison with $927,000 reported in 1996. Non-interest income, less non-recurring income (gains/losses on sale of securities and other real estate), increased $495,000, or 53.9% from 1996. Service fee income increased $228,000 due to an increased number of customers and pricing changes reflected in service charges and NSF and overdraft charges. Trust income increased $138,000 while the Company's arrangement with LM Financial Partners, Inc. to offer certain investment services resulted in an increase of $35,000 in income from investment services. It was announced in late 1997 that the Company planned to restructure how investment services were offered by discontinuing most traditional Trust Services and redirecting its efforts to an expanded Investment Services Department provided in conjunction with LM Financial Partners, Inc. This change in strategy would impact both non-interest income and non-interest expense. Other income increased $116,000 during 1997 compared to 1996. These increases in non-interest income were partially offset by a decline in income from foreclosed assets of $22,000 in 1997 compared to 1996. NON-INTEREST EXPENSE Total non-interest expense increased to $5.2 million in 1997 from $4.7 million in 1996. Non-interest expense represented 2.7% of average total assets in 1997 compared to 2.9% in 1996. During 1997, salaries and employee benefits increased $236,000, or 9.7%, primarily due to additional personnel employed at the Green Hills location and in the Company's "Bank-on-Call" mobile branch service. Occupancy expense increased $149,000, or 26.5%, in 1997 compared to 1996 as a result of the establishment of the Company's Green Hills Office in January, 1997. Marketing and advertising expense increased $61,000, or 46.9%, in 1997 from the prior year primarily due to expenses related to advertising and promoting the Company's new branch. FDIC insurance expense increased $13,000 in 1997 compared to the prior year primarily as a result of the growth in deposits which occurred during 1997. These increases in non-interest expense were partially offset by decreases in legal expense of $15,000, data processing expense of $4,000 and in audit, tax and accounting expense of $2,000. Non-interest expense other than salaries and employee benefits, increased $335,000 during 1997 compared to 1996, while assets grew $38.2 million. -29- 24 INCOME TAXES During 1997, the Company recorded provision for income taxes of $1.3 million, compared to $168,000 during the same period in 1996. During 1996, reported earnings benefited from tax loss carry forwards which were fully utilized during that year. As a result of having fully utilized these net operating loss carry forwards, the 1997 effective tax rate more closely approximated the applicable statutory income tax rate. CAPITAL STRENGTH Total shareholders' equity (excluding other comprehensive income) at December 31, 1997 was $23.8 million, or 11.6% of total assets, which compares with $22.0 million, or 13.2% of total assets at December 31, 1996. The increase in total equity resulted primarily from 1997 earnings net of dividends paid. -30- 25 CONSOLIDATED BALANCE SHEETS
December 31 (Dollars In Thousands) 1998 1997 - --------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 13,243 $ 7,191 Federal funds sold -- 9,400 Securities: Available for sale (amortized cost of $71,113 and $65,585, respectively) 71,662 66,059 Loans (net of unearned income of $295 and $297, respectively): Commercial 51,970 38,571 Real estate - mortgage loans 79,455 71,055 Real estate - construction loans 14,667 9,426 Consumer 6,583 3,697 - --------------------------------------------------------------------------------- Loans, net of unearned income 152,675 122,749 Less allowance for loan losses (3,646) (3,128) - --------------------------------------------------------------------------------- Total net loans 149,029 119,621 - --------------------------------------------------------------------------------- Premises and equipment, net 2,726 977 Accrued interest and other assets 1,525 1,639 - --------------------------------------------------------------------------------- Total Assets $238,185 $204,887 ================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Non-interest bearing demand deposits $ 17,980 $ 12,570 Interest-bearing deposits NOW accounts 13,368 9,319 Money market accounts 71,263 75,043 Time certificates less than $100,000 27,757 34,293 Time certificates of $100,000 and greater 32,185 32,874 - --------------------------------------------------------------------------------- Total Deposits 162,553 164,099 - --------------------------------------------------------------------------------- Federal Home Loan Bank borrowings 14,500 14,500 Federal funds purchased 8,000 -- Accounts payable and accrued liabilities 1,961 2,236 - --------------------------------------------------------------------------------- Total Liabilities 187,014 180,835 - --------------------------------------------------------------------------------- Commitments and contingencies (Notes E, H, I, L) SHAREHOLDERS' EQUITY: Common stock, $6 par value; authorized 50,000,000 shares; issued and outstanding 4,216,531 in 1998 and 2,212,420 in 1997 25,299 13,275 Additional paid-in capital 19,773 6,736 Retained earnings 5,759 3,747 Accumulated other comprehensive income, net of taxes 340 294 - --------------------------------------------------------------------------------- Total Shareholders' Equity 51,171 24,052 - --------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $238,185 $204,887 =================================================================================
See accompanying notes to consolidated financial statements. -31- 26 CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (In Thousands, Except Per Share Data) 1998 1997 1996 - -------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $12,391 $10,724 $ 9,569 Interest on federal funds sold 374 398 314 Interest on balances with banks 10 19 -- Interest on securities: U.S. Treasury securities 54 151 365 Other U.S. government agency obligations 3,557 3,825 2,583 States and political subdivisions - nontaxable 57 20 5 Other securities 148 123 63 - -------------------------------------------------------------------------------------- Total interest income 16,591 15,260 12,899 - -------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest-bearing demand deposits 3,830 3,458 2,953 Time deposits less than $100,000 1,809 2,061 1,782 Time deposits $100,000 and over 1,692 1,693 1,563 Federal funds purchased 29 26 8 Federal Home Loan Bank borrowings 675 718 140 - -------------------------------------------------------------------------------------- Total interest expense 8,035 7,956 6,446 - -------------------------------------------------------------------------------------- NET INTEREST INCOME 8,556 7,304 6,453 Provision for loan losses 128 100 -- - -------------------------------------------------------------------------------------- Net interest income after provision for loan losses 8,428 7,204 6,453 NON-INTEREST INCOME: Service fee income 549 421 193 Trust income 224 537 399 Investment Center income 662 107 72 Gain (loss) on sale of securities, net 52 2 (2) Income from foreclosed assets -- 108 130 Gain on sale of other real estate owned 29 6 11 Other 289 240 124 - -------------------------------------------------------------------------------------- Total non-interest income 1,805 1,421 927 - -------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits 3,357 2,673 2,437 Occupancy expense 830 711 562 Legal expense 36 45 60 FDIC insurance 15 19 6 Audit, tax and accounting 196 203 205 Advertising expense 144 191 130 Data processing expense 187 205 209 Other operating expenses 1,306 1,189 1,056 - -------------------------------------------------------------------------------------- Total non-interest expense 6,071 5,236 4,665 - -------------------------------------------------------------------------------------- Income before income taxes 4,162 3,389 2,715 Income tax expense 1,581 1,331 168 - -------------------------------------------------------------------------------------- NET INCOME $ 2,581 $ 2,058 $ 2,547 ====================================================================================== Net income per share Basic $ 1.08 $ .93 $ 1.16 Diluted .78 .89 1.15 ====================================================================================== Weighted average common shares outstanding Basic 2,394 2,205 2,199 Diluted 3,321 2,324 2,223 ======================================================================================
See accompanying notes to consolidated financial statements. -32- 27 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated Other Additional Retained Comprehensive Common Paid-In Earnings Income, Net Stock Capital (Deficit) Of Tax Total (Dollars In Thousands, Except Per Share Amounts) - -------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1996 $13,149 $ 8,500 $(1,916) $ 279 $20,012 Comprehensive Income: Net Income -- -- 2,547 -- Other comprehensive loss -- -- -- (215) Total Comprehensive Income -- -- -- -- 2,332 Issuance of Common Stock (10,973 shares) 66 27 -- -- 93 Transfers to comply with state statute, Net -- (1,851) 1,851 -- -- Cash dividends - $.16 per share -- -- (352) -- (352) - -------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 13,215 6,676 2,130 64 22,085 Comprehensive Income: Net Income -- -- 2,058 -- Other comprehensive income -- -- -- 230 Total Comprehensive Income -- -- -- -- 2,288 Issuance of Common Stock (9,947 shares) 60 60 -- -- 120 Cash dividends - $.20 per share -- -- (441) -- (441) - -------------------------------------------------------------------------------------------- BALANCE, December 31, 1997 13,275 6,736 3,747 294 24,052 Comprehensive Income: Net Income -- -- 2,581 -- Other comprehensive income -- -- -- 46 Total Comprehensive Income -- -- -- -- 2,627 Issuance of common stock (2,004,111 shares) 12,024 13,037 -- -- 25,061 Cash dividends - $.24 per share -- -- (569) -- (569) - -------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 $25,299 $19,773 $ 5,759 $ 340 $51,171 ============================================================================================
See accompanying notes to consolidated financial statements. -33- 28 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (In Thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $ 16,487 $ 15,020 $ 13,055 Fees received 1,805 1,419 929 Interest paid (8,476) (7,422) (6,934) Cash paid to suppliers and associates (6,982) (6,488) (4,623) - ------------------------------------------------------------------------------------- Net cash provided by operating activities 2,834 2,529 2,427 - ------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities: Available for sale 3,102 2,479 6,012 Maturities of securities: Available for sale 33,599 19,404 9,632 Purchase of securities: Available for sale (42,252) (41,235) (14,360) Loans originated to customers, net (29,484) (14,578) (9,704) Capital expenditures (2,093) (469) (310) - ------------------------------------------------------------------------------------- Net cash used by investing activities (37,128) (34,399) (8,730) - ------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand, NOW, and money market savings 5,679 15,206 15,767 Net (decrease) increase in time certificates (7,225) 15,623 (13,031) Advance from Federal Home Loan Bank 5,000 5,000 9,500 Repayment of advance from Federal Home Loan Bank (5,000) -- -- Proceeds from issuance of common stock 25,061 120 93 Dividends paid (569) (441) (352) - ------------------------------------------------------------------------------------- Net cash provided by financing activities 22,946 35,508 11,977 - ------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (11,348) 3,638 5,674 Cash and cash equivalents at beginning of year 16,591 12,953 7,279 - ------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 5,243 $ 16,591 $ 12,953 =====================================================================================
See accompanying notes to consolidated financial statements. -34- 29 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31 (In Thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------- Reconciliation of net income to net cash provided by operating activities: Net income $2,581 $2,058 $2,547 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 404 399 209 Provision for loan losses 128 100 -- Provision for deferred income taxes (15) 124 82 (Gain) loss on sale of securities (52) (2) 2 Loss on disposal of equipment 26 -- 14 Gain on sale of other real estate owned (29) (6) (11) Stock dividend income (112) (87) (20) Changes in assets and liabilities: Decrease (increase) in accrued interest and other assets 192 (508) 6 (Decrease) increase in accounts payable and accrued liabilities (289) 451 (402) - ------------------------------------------------------------------------------------- Net cash provided by operating activities $2,834 $2,529 $2,427 ===================================================================================== Supplemental disclosures of noncash investing and financing activities: Change in unrealized gain (loss) on securities available for sale, net of taxes $ 46 $ 230 $ (215) Foreclosures of loans during the year 52 133 -- Cash paid for: Income taxes $1,516 $1,211 $ 77
See accompanying notes to consolidated financial statements. -35- 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Operations 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 common stock was exchanged for an outstanding share of CFGI and each outstanding warrant and each option to purchase shares of The Bank became warrants and options to purchase shares of CFGI. The Bank primarily provides commercial banking services to small business customers located in the Metropolitan Nashville, Tennessee market. The Bank competes with numerous financial institutions within its market place. Consolidation and Basis of Presentation The consolidated financial statements include the accounts of CFGI and The Bank (collectively the Company) after elimination of material intercompany accounts and transactions. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to general practices within the banking industry. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Following is a summary of the more significant accounting policies of the Company. Cash and Cash Equivalents Cash and highly liquid investments with maturities of three months or less when purchased are considered to be cash and cash equivalents. Cash and cash equivalents consist primarily of cash and due from banks and federal funds sold net of federal funds purchased. Securities Securities are designated as held to maturity, available for sale, or trading at the time of acquisition. The Company does not have securities designated as trading securities or as held to maturity. Held to maturity securities are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using a method that approximates the level-yield method. Trading account securities are carried at fair value with gains and losses, determined using the specific identification method, recognized currently in the income statement. As of December 31, 1998 and 1997, the Company has classified its entire securities portfolio as available for sale. Available for sale securities are reported at fair value. If a decline in value is considered to be other than temporary, the securities are written down to fair value and the amount of the writedown is included in earnings. Unrealized gains and losses on securities available for sale are reflected in a separate shareholders' equity account, net of applicable income taxes, and in other comprehensive income. The adjusted cost of a specific security sold is used to compute the gain or loss on the -36- 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED sale of that security. Security purchases and sales are recorded on their trade date. Gains and losses on the sale of securities available for sale are included in non-interest income. Purchased premiums and discounts are amortized and accreted into interest income on a constant yield over the life of the securities taking into consideration current prepayment assumptions. Loans Loans are carried at the principal amount outstanding net of unearned income. Interest income on loans and amortization of unearned income is computed by methods which result in level rates of return on principal amounts outstanding. Management, considering current information and events regarding the borrowers ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to contractual terms of the loan agreement. When a loan is considered impaired, the amount of the impairment is based on the present value of the expected future cash flows at the loan's effective interest rate, at the loan's market price or fair value of collateral if the loan is collateral-dependent. Impairment losses are included in the allowance for loan losses through a charge to provision for loan losses. Interest income is accrued on loans except when doubt as to collectability exists, in which case the respective loans are placed on nonaccrual status. The decision to place a loan on nonaccrual status is based on an evaluation of the borrower's financial condition, collateral liquidation value, and other factors that affect the borrower's ability to pay. At the time a loan is placed on nonaccrual status, the accrued but unpaid interest is charged against current income. Thereafter, interest on nonaccrual loans is recognized as interest income only as received, unless the collectability of outstanding principal is doubtful, in which case such interest received is applied as a reduction of principal until the principal has been recovered, and are recognized as interest income thereafter. Loan origination, commitment fees and certain direct origination costs are deferred and amortized over the contractual life of the related loans, adjusted for prepayments, as a yield adjustment. Allowance for Loan Losses The allowance for loan losses reflects an amount which, in management's judgment, is adequate to provide for estimated loan losses. Management's evaluation of the loan portfolio consists of evaluating current delinquencies, the adequacy of underlying collateral, current economic conditions, risk characteristics, and management's internal credit review process. The allowance is established through a provision charged against earnings. Loans are charged off as soon as they are determined to be uncollectible. Recoveries of loans previously charged off are added to the allowance. While management uses available information to recognize losses on loans, future adjustments in the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as part of their examinations, periodically review the Company's allowance for loan losses. Such agencies may require the Company to adjust the allowance based on their judgment and information available to them at the time of their examinations. -37- 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Other Real Estate Owned Other real estate owned includes property acquired in situations in which the Company has physical possession of a debtor's assets (collateral). Such assets are carried at the lower of cost or fair value less estimated cost to sell and are included in other assets. Cost includes the fair value of the property at the time of foreclosure, foreclosure expense and expenditures for subsequent improvements. Losses arising from the acquisition of such property are charged against the allowance for loan losses. Declines in value subsequent to foreclosure are recorded as a valuation allowance. Provisions for subsequent declines or losses from disposition of such property are recognized in non-interest expense. Premises and Equipment Premises and equipment is stated at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization are computed using the straight-line method over the estimated lives of those assets. Leasehold improvements are amortized over the lease terms or the estimated lives, whichever is less. The estimated lives are as follows:
Years ----- Leasehold improvements 3 - 20 Furniture and equipment 3 - 10
Income Taxes The Company accounts for income taxes in accordance with the asset and liability method of accounting. Under such 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Earnings Per Common Share Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator). The denominator used in computing diluted EPS reflects the dilutive effect of options and warrants outstanding. -38- 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Business Segments The Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information" on December 31, 1998. The Statement establishes standards for the way public business enterprises report information about operating segments in annual financial statements. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and assess performance. The Company operates in one business segment, commercial banking, and has no additional individually significant business segments. Stock-Based Compensation The Company accounts for all stock-based compensation plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation cost for stock-based awards is measured by the excess, if any, of the fair market value of the stock over the amount the employee is required to pay. Compensation cost for the Company is measured at the grant date as all options are fixed awards. Financial Instruments The Company enters into interest rate floor agreements as part of its asset/liability management program. Fees paid upon inception of these agreements are deferred and amortized over the life of the agreements. Income or expense derived from these agreements is recognized in interest income during the period earned. Comprehensive Income The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on January 1, 1998. SFAS No. 130 establishes standards for reporting comprehensive income which includes net income and other comprehensive income, non-owner related transactions in equity. SFAS No. 130 requires only additional disclosures in the consolidated financial statements. During 1998, 1997 and 1996 the only component of comprehensive income, other than net income, is unrealized gains or losses on securities available for sale. Prior periods have been reclassified to conform with the provisions of the statement. Reclassifications Certain reclassifications have been made in the consolidated financial statements for prior years to conform with the 1998 presentation. B. CASH RESTRICTIONS The Company is required to maintain reserves in the form of average vault cash and balances with the Federal Reserve Bank. The average amounts of these balances maintained during the years ended December 31, 1998 and 1997, were $3,204,000 and $1,937,000, respectively. The required balance at December 31, 1998 was $3,547,000. -39- 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS C. SECURITIES The amortized cost, gross unrealized gains and losses, and estimated fair values of securities at December 31, 1998 and 1997 were as follows:
Available for Sale ------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In Thousands) 1998 --------------------------------------------------------------------------------------------------------- U.S. Treasury Securities and Obligations of U.S. Government agencies $35,356 $544 $ - $35,900 Collateralized mortgage obligations 31,758 85 122 31,721 Securities of states and political subdivisions 1,267 42 - 1,309 Equity securities 2,732 - - 2,732 -------------------------------------------------------------------------------------------------------- $71,113 $671 $122 $71,662 ========================================================================================================
Available for Sale ------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In Thousands) 1997 - ------------------------------------------------------------------------------------------------------------------ U.S. Treasury Securities and Obligations of U.S. Government agencies $30,859 $573 $ 6 $31,426 Collateralized mortgage obligations 32,236 79 194 32,121 Securities of states and political subdivisions 360 22 - 382 Equity securities 2,130 - - 2,130 - ----------------------------------------------------------------------------------------------------------------- $65,585 $674 $200 $66,059 =================================================================================================================
Proceeds from sales of debt securities during 1998, 1997, and 1996 were $3.1 million, $2.5 million and $6.0 million, respectively. Gross gains of $52 thousand, $5 thousand and $5 thousand and gross losses of zero, $3 thousand and $7 thousand were realized on those sales in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, the Company did not have any securities which it classified as held to maturity or trading. The amortized cost and fair value of debt securities by contractual maturity at December 31, 1998, are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. -40- 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS C. SECURITIES - CONTINUED Collateralized mortgage obligations with a weighted average effective yield of 6.09% are disclosed as a separate line item due to staggered maturity dates. Investments in equity securities are excluded as they have no stated maturity date.
Available for Sale --------------------------------- Estimated Amortized Fair Cost Value (In Thousands) December 31, 1998 - ----------------------------------------------------------------------------------------------------------------- Due in one year or less $ 9,990 $ 9,990 Due after one year through five years 2,032 2,064 Due after five years through ten years 457 476 Due after ten years 24,144 24,679 - ----------------------------------------------------------------------------------------------------------------- 36,623 37,209 Collateralized mortgage obligations 31,758 31,721 - ----------------------------------------------------------------------------------------------------------------- $68,381 $68,930 =================================================================================================================
Securities with an aggregate amortized cost of approximately $35.7 million and $31.3 million were pledged to secure public deposits, Federal Home Loan Bank borrowings and for other purposes as required by law at December 31, 1998 and 1997, respectively. D. LOANS AND ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses is as follows:
Year Ended December 31 (In Thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------- Balance, January 1 $3,128 $2,878 $ 3,034 Provision charged to operations 128 100 -- Loans (charged off), net of recoveries of $474, $319 and $541, in 1998, 1997, and 1996, respectively 390 150 (156) - -------------------------------------------------------------------------------------- Balance, December 31 $3,646 $3,128 $ 2,878 ======================================================================================
At December 31, 1998 and 1997, loans on nonaccrual status amounted to $408,000 and $1,094,000, respectively. The effect of nonaccrual loans was to reduce interest income by approximately $29,000 in 1998, $32,000 in 1997 and $74,000 in 1996. There were no material commitments to lend additional funds to customers whose loans were classified as nonaccrual at December 31, 1998 and 1997. The Company's recorded investment in impaired loans and the related valuation allowance are $108,000 and $17,000 and $805,000 and $359,000, at December 31, 1998 and 1997, respectively. The valuation allowance is included in the allowance for loan losses on the consolidated balance sheets. At December 31, 1998 and 1997 there were no impaired loans without an accompanying valuation allowance. -41- 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS D. LOANS AND ALLOWANCE FOR LOAN LOSSES - CONTINUED The average recorded investment in impaired loans for the years ended December 31, 1998, 1997 and 1996 was $143,000, $390,000 and $382,000, 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 1998 or 1997. In the ordinary course of business, the Company makes loans to directors, executive officers, and principal shareholders, including related interests. In management's opinion, these loans are made on substantially the same terms, including interest and collateral, as those prevailing at the time for comparable transactions with other borrowers and they did not involve more than the normal risk of uncollectability or present other unfavorable features at the time such loans were made. During 1998, $4.3 million of new loans were made while repayments and other reductions totaled $1.1 million. Outstanding loans to executive officers and directors, including their associates and affiliated companies, were $5.4 million and $2.2 million at December 31, 1998 and 1997, respectively. Unfunded lines to executive officers and directors were $4.0 and $4.1 million at December 31, 1998 and 1997, respectively. The directors, executive officers and principal shareholders also maintain deposits with the Company. The terms of these deposit contracts are comparable to those available to other depositors. The amount of these deposits totaled $2.5 million and $1.3 million at December 31, 1998 and 1997, respectively. E. PREMISES AND EQUIPMENT Premises and equipment is summarized as follows:
December 31 (In Thousands) 1998 1997 - ------------------------------------------------------------------------------------------- Land $ 638 $ -- Leasehold improvements 978 577 Furniture and equipment 2,023 1,948 Building and improvements 298 -- - ------------------------------------------------------------------------------------------- 3,937 2,525 Less accumulated depreciation and amortization (1,211) (1,548) - ------------------------------------------------------------------------------------------- Premises and equipment, net $ 2,726 $ 977 ===========================================================================================
-42- 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS E. PREMISES AND EQUIPMENT - CONTINUED The Company occupies space under noncancelable operating leases. The leases provide annual escalating rents for periods through 2003 with options for renewals. Rent expense is recognized in equal monthly amounts over the lease term. Rent expense was $357,000, $345,000 and $284,000 for 1998, 1997 and 1996, respectively. Future lease payments under noncancelable operating leases at December 31, 1998 are payable as follows:
(In Thousands) - -------------------------------------------------------------------------------- 1999 $410 2000 239 2001 171 2002 92 2003 38 - -------------------------------------------------------------------------------- $950 ================================================================================
F. INCOME TAXES Actual income tax expense for the years ended December 31, 1998, 1997 and 1996 differed from an "expected" tax expense (computed by applying the U.S. Federal corporate tax rate of 34% to income before income taxes)as follows:
(In Thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Computed "expected" tax expense $1,415 $1,152 $923 State taxes, net of federal benefit 163 135 - Benefit of net operating loss carryforward - - (755) Other 3 44 - - -------------------------------------------------------------------------------------------------------------- Total income tax expense $1,581 $1,331 $168 ==============================================================================================================
The components of income tax expense (benefit) were as follows:
(In Thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------- Current income tax expense: Federal $ 1,347 $1,107 $ 86 State 249 100 -- - -------------------------------------------------------------------------------------------- 1,596 1,207 86 - -------------------------------------------------------------------------------------------- Deferred income tax expense (benefit): Federal (13) 20 82 State (2) 104 -- - -------------------------------------------------------------------------------------------- (15) 124 82 - -------------------------------------------------------------------------------------------- Total income tax expense $ 1,581 $1,331 $168 ============================================================================================
-43- 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F. INCOME TAXES- CONTINUED Significant temporary differences and carryforwards that give rise to the deferred tax assets and liabilities are as follows:
December 31 (In Thousands) 1998 1997 - -------------------------------------------------------------------------------- Deferred tax assets: Deferred fees, principally due to timing differences in the recognition of income $141 $147 Other 4 10 - -------------------------------------------------------------------------------- Total gross deferred tax assets 145 157 - -------------------------------------------------------------------------------- Deferred tax liabilities: Unrealized gain on securities available for sale 209 180 Discount on securities deferred for tax purposes 130 108 Loans, principally due to provision for loan losses 126 174 Premises and equipment, principally due to differences in depreciation methods 17 38 Other 63 43 - -------------------------------------------------------------------------------- Total gross deferred tax liabilities 545 543 - -------------------------------------------------------------------------------- Net deferred tax liabilities $400 $386 ================================================================================
It is more likely than not that the results of the Company's future operations will generate sufficient taxable income to realize the deferred tax assets. G. LONG TERM DEBT AND LINES OF CREDIT The Bank maintains an arrangement with the Federal Home Loan Bank of Cincinnati to provide for certain borrowing needs of The Bank. The arrangement requires The Bank to hold stock in the Federal Home Loan Bank and requires The Bank to pledge investment securities or loans, to be held by the Federal Home Loan Bank, as collateral. During 1998, loans totaling $5,000,000 were advanced and repaid. During 1997, $5,000,000 was advanced under this arrangement. At December 31, 1998 and 1997 indebtedness under the arrangement totaled $14,500,000. Advances of $9,500,000 mature in September, 2001 and $5,000,000 November 2003, and are eligible for prepayment at The Bank's option beginning in September, 1998 and November, 2000. The interest rate on $9,500,000 of the advances is tied to the one-month LIBOR rate and adjusts periodically. Interest on the $5,000,000 advance is at 4.45% for two years and then adjusts quarterly to the three month LIBOR rate. Interest is payable monthly. The maximum advances outstanding were $14,500,000, the average balances outstanding were $12,144,000 and $12,651,000 and the weighted average rates were 5.56% for the years ended 1998 and 1997, respectively. The Bank has pledged investment securities with an amortized cost of approximately $15.2 million at December 31, 1998 as collateral under terms of the loan agreement. -44- 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS G. LONG TERM DEBT AND LINES OF CREDIT - CONTINUED On December 31, 1998 and 1997, the Company had available for its use $26.5 million and $19.0 million, respectively, of unsecured short-term bank lines of credit. Such short-term lines serve as backup for loan and investment needs. There are no compensating balance requirements. These lines facilitate federal funds borrowings and bear a rate equal to the current lending rate for federal funds purchased. Amounts outstanding under these lines of credit at December 31, 1998 and 1997 were $8.0 million and $0, respectively. H. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheets. The contract amounts of those instruments reflect the extent of involvement and the related credit risk the Company has in particular classes of financial instruments. The Company, through regular reviews of these arrangements, does not anticipate any material losses as a result of these transactions. At December 31, 1998 and 1997 unused lines of credit were approximately $58.2 million and $53.0 million, respectively, with the majority generally having terms at origination of one year. Additionally, the Company had standby letters of credit of $4,832,000 and $3,039,000 at December 31, 1998 and 1997, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amounts of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management's credit evaluation of the customer. Standby letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most guarantees extend from one to two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. -45- 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS I. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK Most of the Company's business activity is with customers located in the Middle Tennessee region. Generally, loans are secured by stocks, real estate, time certificates, or other assets. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. The Company grants residential, consumer, and commercial loans to customers throughout the Middle Tennessee region. Real estate mortgage and construction loans reflected in the accompanying consolidated balance sheets are comprised primarily of loans to commercial borrowers. At December 31, 1998 funded and unfunded loan commitments as classified by Standard Industry Classification codes include borrowers in the real estate industry approximating $27.2 million and $5.2 million, respectively, and loans to building contractors approximating $8.8 million and $10.1 million, respectively. At December 31, 1997, funded and unfunded commitments to borrowers in the real estate industry were approximately $25 million and $2.2 million, respectively, and to building contractors approximately $7.9 million and $11.2 million, respectively. J. EMPLOYEE BENEFITS The Company maintains for its employees an Associates Stock Purchase Plan and a Retirement Savings Plan 401(K). The Retirement Savings Plan 401(K) provides for the maximum deferral of employee compensation allowable by the IRS under provisions of Section 401(A) and 401(K). The Plan is available to all associates who meet the plan eligibility requirements. The Company provides various levels of employer matching of contributions up to 4% of the associate's compensation. Employer contributions are invested exclusively in the Company's common stock. Associates fully vest in the employer's contributions after three years of service as defined in the Plan. Total plan expense for 1998, 1997 and 1996 was approximately $88,000, $77,000, and $61,000, respectively. In 1997, the Board of Directors adopted the 1997 Nonstatutory Stock Option Plan which reserved 150,000 shares of the Company's common stock for use under the Plan (plus 10% of any additional shares of stock issued after the effective date of the Plan). Stock issued pursuant to the Plan may be either authorized but unissued shares or shares held in the treasury of the Company. Options are granted at an option price of no less than the fair market value of the stock on the date of grant. Each grant of an option shall be evidenced by a stock option agreement specifying the number of shares, the exercise price, and a vesting schedule. During 1998 and 1997, 45,177 options, and 23,000 options, respectively, were granted under the Plan. The Associates Stock Purchase Plan (ASPP), under which 100,000 shares of the Company's common stock may be issued, allows associates to purchase the Company's common stock through payroll deductions at 84% of the existing market value, not to fall below par value. The difference between the purchase price and the market value on the date of issue is recorded as compensation expense. Compensation expense of $16,000, $9,000 and $2,000 was recorded in 1998, 1997 and 1996, respectively. Incidental expenses regarding the administration of the plan are paid by the Company. -46- 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS J. EMPLOYEE BENEFITS - CONTINUED As of December 31, 1998, the Company's Board of Directors had approved the issuance of stock options to purchase 142,627 shares of the Company's common stock. Compensation expense was not recorded in connection with the issuance of these options as the option price was equal to or exceeded the market price of the Company's common stock at the date of grant. The following table presents information on stock options:
Weighted Total Exercisable Option Average Option Shares Options Options Price Range Price - ------------------------------------------------------------------------------------------------------ Options outstanding at January 1, 1996 65,000 51,000 $ 6.00-7.125 $ 6.59 Granted 15,000 3,000 $ 10.125 $10.125 Options that became exercisable -- 8,000 $ 6.00-7.125 $ 6.813 Options exercised (5,000) (5,000) $ 7.125 $ 7.125 - ------------------------------------------------------------------------------------------------------ Options outstanding at December 31, 1996 75,000 57,000 $ 6.00-10.125 $ 7.26 Granted 22,450 4,490 $ 11.625 $11.625 Options that became exercisable -- 9,000 $ 7.00-10.125 $ 8.10 - ------------------------------------------------------------------------------------------------------ Options outstanding at December 31, 1997 97,450 70,490 $ 6.00-11.625 $ 8.28 Granted 45,177 9,035 $ 14.75 $14.75 Options that became exercisable -- 7,490 $7.125-11.625 $11.02 - ------------------------------------------------------------------------------------------------------ Options outstanding at December 31, 1998 142,627 87,015 $ 6.00-14.75 $10.32 - -----------------------------------------------------------------------------------------------------
The stock options have five year vesting schedules and become exercisable in full in the event of a merger, sale or change in majority control of the Company. The options expire during the years 2002 through 2007. The weighted average price of the options at December 31, 1998 was $10.32 and the weighted average remaining life was approximately 7.3 years. The Company accounts for its stock option plan and ASPP in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense related to stock options would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Had the Company used the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company would have recognized, as expense over the vesting period, the fair value of all stock-based awards on the date of grant. The Company has elected to continue to apply the provisions of APB No. 25. As such, proforma disclosures of net income and earnings per share as if the fair value based method of SFAS No. 123 had been used, are as follows: -47- 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS J. EMPLOYEE BENEFITS - CONTINUED
1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Net income - as reported $2,581,000 $2,058,000 $2,547,000 Net income - proforma $2,543,000 $2,045,000 $2,543,000 Earnings per share: Basic As reported $ 1.08 $ .93 $ 1.16 Proforma $ 1.06 $ .93 $ 1.16 Diluted As reported $ .78 $ .89 $ 1.15 Proforma $ .77 $ .88 $ 1.14 ==============================================================================================================
The weighted average fair values of options granted during 1998, 1997 and 1996 were $5.79, $3.95 and $2.97 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Expected dividend yield 2.13% 1.78% 1.42% Expected stock price volatility 22% 20% 19% Risk-free interest rate 5.66% 6.64% 6.61% Expected life of options(years) 5 5 5 ==============================================================================================================
K. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE The Company can issue common stock pursuant to various plans such as employee stock purchase, contributions to the 401(K) plan, and payment of directors' fees. Under these plans, 7,304, 4,417 and 5,973 shares were issued during 1998, 1997 and 1996, respectively. The Company had outstanding stock options totaling 142,627 and 97,450 shares at December 31, 1998 and 1997, respectively. Options totaling 45,177 shares were issued during 1998. Options totaling 22,450 shares were issued during 1997. At December 31, 1997, warrants to purchase 4,739,397, shares of CFGI's common stock at a price of $12.50 per share were outstanding. During 1998 and 1997, warrants for 1,996,807 shares and 5,530 shares were exercised with proceeds of $24,960,087 and $69,125, respectively. The unexercised warrants expired on December 31, 1998. -48- 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS K. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE - CONTINUED The following table is a reconciliation of net income and average shares outstanding used in calculating basic and diluted earnings per share.
Year Ended December 31 (Dollars in Thousands, Except Per Share Data) 1998 1997 1996 - -------------------------------------------------------------------------------- Net income available to common shareholders $ 2,581 $ 2,058 $ 2,547 - -------------------------------------------------------------------------------- Weighted average common shares outstanding Basic 2,393,576 2,205,043 2,198,619 Dilutive effect of: Options 40,090 30,687 24,034 Warrants 887,562 87,850 -- - -------------------------------------------------------------------------------- Weighted average common shares outstanding Diluted 3,321,228 2,323,580 2,222,653 - -------------------------------------------------------------------------------- Antidilutive securities: Warrants -- * 4,744,927 - -------------------------------------------------------------------------------- Net income per share: Basic $ 1.08 $ .93 $ 1.16 Diluted $ .78 $ .89 $ 1.15 - --------------------------------------------------------------------------------
* The warrants were dilutive beginning in the fourth quarter of 1997. In January, 1998, the Company's Board of Directors adopted a Shareholder Rights Plan which authorizes the distribution of a dividend of one common share purchase right for each outstanding share of CFGI's common stock. The rights will be exercisable only if a person or group acquires 15% or more of CFGI's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15% or more of the common stock. The rights are designed to assure that all of CFGI's shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender takeovers, squeeze outs, open market accumulations and other abusive tactics to gain control of the Company without paying all shareholders an appropriate control premium. If the Company were acquired in a merger or other business combination transaction, each right would entitle its holder to purchase, at the right's then current exercise price, a number of the acquiring company's common shares having a market value of twice such a price. In addition, if a person or group acquires 15% or more of CFGI's common stock, each right would entitle its holder (other than the acquiring person or members of the acquiring group) to purchase, at the rights then current exercise price, a number of CFGI's common shares having a market value of twice that price. After a person or group acquires beneficial ownership of 15% or more of CFGI's common stock and before an acquisition of 50% or more of the common stock, the Board of Directors would exchange the rights (other than rights owned by the acquiring person or group), in whole or in part, at an exchange ratio of one share of common stock per right. -49- 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS K. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE - CONTINUED Until a person or group has acquired beneficial ownership of 15% or more of CFGI's common stock, the rights will be redeemable for $.01 per right at the option of the Board of Directors. The rights are intended to enable all CFGI's shareholders to realize the long-term value of their investment in the Company. The Company believes they will not prevent a takeover, but should encourage anyone seeking to acquire the Company to negotiate with the Board prior to attempting a takeover. L. RESTRICTIONS ON RETAINED EARNINGS, REGULATORY MATTERS AND LITIGATION In order to declare dividends 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. At December 31, 1998, approximately $5.7 million of The Bank's retained earnings were available for dividend declaration and payment to its shareholder CFGI (parent company), without regulatory approval. The Bank transferred $258,000 and $147,000 from retained earnings to surplus during 1998 and 1997, respectively. Additionally, during 1996, The Bank transferred a net of $1,851,000 from additional paid-in capital to retained earnings. The Bank transferred $187,000 from retained earnings to additional paid-in capital, subsequent to, its acquisition by CFGI. CFGI and The Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and The Bank must meet specific capital guidelines that involve quantitative measures of the Company's and The Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and The Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes the Company and The Bank meet all capital adequacy requirements to which it is subject as of December 31, 1998. As of December 31, 1998, the most recent notification from the Federal Reserve Bank categorized The Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, The Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed The Bank's category. -50- 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS L. RESTRICTIONS ON RETAINED EARNINGS, REGULATORY MATTERS AND LITIGATION - CONTINUED The Company's and The Bank's actual capital amounts and ratios are also presented in the table. CAPITAL RATIOS
CFGI The Bank December 31 December 31 (Dollars In Thousands) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------- CAPITAL COMPONENTS TIER 1 CAPITAL: Shareholders' equity $ 51,171 $ 24,052 $ 26,474 $ 23,865 Unrealized gain on securities (340) (294) (340) (294) - ---------------------------------------------------------------------------------------------------- Total Tier 1 capital 50,831 23,758 26,134 23,571 TIER 2 CAPITAL: Allowable allowance for loan losses 2,113 1,714 2,107 1,713 Total capital $ 52,944 $ 25,472 $ 28,241 $ 25,284 - ---------------------------------------------------------------------------------------------------- Risk-adjusted assets $ 167,527 $ 135,674 $ 166,997 $135,639 Quarterly average assets $ 220,645 $ 200,594 $ 220,398 $200,560
Regulatory Minimum CFGI The Bank Ratios December 31 December 31 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------- CAPITAL RATIOS Total risk-based capital ratio 8% 31.6% 18.8% 16.9% 18.6% Tier 1 risk-based capital ratio 4% 30.3% 17.5% 15.6% 17.4% Tier 1 leverage ratio 4% 23.0% 11.8% 11.9% 11.8%
There are from time to time legal proceedings pending against the Company. In the opinion of management, liabilities, if any, arising from such proceedings presently pending would not have a material adverse effect on the consolidated financial statements of the Company. -51- 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS M. 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. The following table presents the carrying amounts and the estimated fair value of the Company's financial instruments at December 31:
Estimated Estimated Carrying Fair Carrying Fair Amount Value Value Value (In Thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Financial assets: Cash, due from banks, and federal funds sold $ 13,243 $ 13,243 $16,591 $ 16,591 Investment securities 71,662 71,662 66,059 66,059 Loans, net of unearned income 152,675 153,113 122,749 122,646 Financial liabilities: Deposits 162,553 162,893 164,099 164,564 Federal Home Loan Bank and other borrowings 22,500 22,676 14,500 14,503 - -------------------------------------------------------------------------------------------------------------------
Contractual Contractual or Estimated or Estimated Notional Fair Notional Fair Amounts Value Amounts Value (In Thousands) 1998 1997 Off-balance items: Interest rate floors $ -- $ * 8,000 $ * Commitments to extend credit 58,207 * 53,023 * Standby letters of credit 4,832 * 3,039 * - ------------------------------------------------------------------------------------------------------------------- * The estimated fair value of these items was not significant at December 31, 1998 or 1997.
-52- 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS M. FAIR VALUE OF FINANCIAL INSTRUMENTS The following summary presents the methodologies and assumptions used to estimate the fair value of the Company's financial instruments presented above. 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 collateralized mortgage obligations, securities of states and political subdivisions, and equity securities. As required, securities available for sale are recorded at fair value. 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. The fair value of loans does not include the value of the customer relationship or the right to fees generated by the account. 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. The Company believes that significant value exists in this funding source. Federal Home Loan Bank and Other Borrowings The fair value of Federal Home Loan Bank borrowings is estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. -53- 48 N. OTHER COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income" was adopted by the Company on January 1, 1998. SFAS No. 130 establishes standards for reporting comprehensive income. Comprehensive income includes net income and other comprehensive income which is defined as nonowner related transactions in equity. Prior periods have been reclassified to reflect the provisions of SFAS No. 130. The statement requires the Company's unrealized gains and losses (net of tax) on securities available for sale to be included in other comprehensive income. The amounts of other comprehensive income included in equity along with the related tax effect are set forth in the table below:
Gain (Loss) Tax Net of (Dollars In Thousands) Before Tax Expense Tax Year ended December 31, 1998 Net unrealized gain on securities available for sale arising during 1998 $127 $49 $78 Less: Reclassification adjustment for net gains included in net income 52 20 32 - ------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ 75 $29 $46 =================================================================================================================== Year ended December 31, 1997 Net unrealized gain on securities available for sale arising during 1997 $373 $142 $231 Less: Reclassification adjustment for net gains included in net income 2 1 1 - ------------------------------------------------------------------------------------------------------------------- Other comprehensive income $371 $141 $230 =================================================================================================================== Year ended December 31, 1996 Net unrealized loss on securities available for sale arising during 1996 $(178) $38 $(216) Less: Reclassification adjustment for net losses included in net income (2) 1 (1) - ------------------------------------------------------------------------------------------------------------------- Other comprehensive income $(176) $39 $(215) ===================================================================================================================
-54- 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS O. PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for Community Financial Group, Inc., (Parent Company only) as of December 31, 1998 and 1997, for the years ended December 31, 1998 and 1997 and the period from May 1, 1996 to December 31, 1996 was as follows: Condensed Balance Sheets
December 31 (In thousands) 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Assets Cash $ 14,229 $ 155 Investment in bank subsidiary, at cost adjusted for equity in earnings 26,474 23,865 Securities available for sale (Amortized cost of $10,490) 10,490 - Other assets 24 33 - ---------------------------------------------------------------------------------------------------------------- Total Assets $51,217 $24,053 ================================================================================================================ Liabilities and Shareholders' Equity Other liabilities $ 46 $ 1 - ---------------------------------------------------------------------------------------------------------------- Total Liabilities 46 1 Total Shareholders' Equity 51,171 24,052 - ---------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $51,217 $24,053 ================================================================================================================
Condensed Income Statements
Eight Month Year Ended Year Ended Period Ended December 31 December 31 December 31 (In Thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Income Dividends from bank subsidiary $ 133 $ 530 $ 231 Interest income 1 - - - ---------------------------------------------------------------------------------------------------------------- Total income 134 530 231 - ---------------------------------------------------------------------------------------------------------------- Expenses Interest expense on short-term borrowings - - 1 Other expenses 186 165 50 - ---------------------------------------------------------------------------------------------------------------- Total expenses 186 165 51 - ---------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (52) 365 180 Increase to consolidated income taxes arising from parent company taxable income 70 63 19 Equity in undistributed earnings of subsidiary bank 2,563 1,630 2,348 - ---------------------------------------------------------------------------------------------------------------- Net income $2,581 $2,058 $2,547 ================================================================================================================
-55- 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS O. PARENT COMPANY FINANCIAL INFORMATION - CONTINUED Statements of Cash Flows
Eight Month Year Ended Year Ended Period Ended December 31, December 31, December 31 (In Thousands) 1998 1997 1996 Operating activities Net income $ 2,581 $2,058 $2,547 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of bank subsidiary (2,563) (1,630) (2,348) Decrease (increase) in other assets 9 28 (43) Increase (decrease) in other liabilities 45 (17) 18 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 72 439 174 - --------------------------------------------------------------------------------------------------------------- Investment activities Purchases of securities (10,490) - - - --------------------------------------------------------------------------------------------------------------- Cash used by investing activities (10,490) - - - --------------------------------------------------------------------------------------------------------------- Financing activities Repayment of short-term borrowing - - (20) Proceeds from issuance of common stock 25,061 120 56 Cash dividends paid (569) (441) (176) - --------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 24,492 (321) (140) - --------------------------------------------------------------------------------------------------------------- Increase in cash 14,074 118 34 Cash beginning of period 155 37 3 - --------------------------------------------------------------------------------------------------------------- Cash end of year $14,229 $ 155 $ 37 - ---------------------------------------------------------------------------------------------------------------
-56- 51 REPORT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Community Financial Group, Inc. and subsidiary (the Company) is responsible for preparing the accompanying consolidated financial statements in accordance with generally accepted accounting principles. The amounts therein are based on management's best estimates and judgments. Management has also prepared other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. The Company maintains a system of internal accounting control which it believes, taken as a whole, is sufficient to provide reasonable assurance that assets are properly safeguarded and that transactions are executed in accordance with proper authorization and are recorded and reported properly. In establishing and maintaining any system of internal accounting control, estimates and judgments are required to assess the relative costs and expected benefits. The Company also maintains a program that independently assesses the effectiveness of their internal controls. The Company's consolidated financial statements have been audited by independent certified public accountants. Their Independent Auditors' Report, which follows, is based on an audit made in accordance with generally accepted auditing standards and expresses an opinion as to the fair presentation of the Company's consolidated financial statements. In performing their audit, the Company's independent certified public accountants consider the Company's internal control to the extent they deem necessary in order to issue their opinion on the consolidated financial statements. The Board of Directors pursues its oversight role for the consolidated financial statements through the Audit Committee, which consists solely of outside directors. The Audit Committee meets periodically with both management and the independent auditors to assure that each is carrying out its responsibilities. /s/ Mack S. Linebaugh, Jr. - ---------------------------------- Mack S. Linebaugh, Jr. Chairman of the Board President and CEO -57- 52 Independent Auditors' Report The Board of Directors and Shareholders Community Financial Group, Inc.: We have audited the accompanying consolidated balance sheets of Community Financial Group, Inc. and subsidiary (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community Financial Group, Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ KPMG LLP Nashville, Tennessee January 26, 1999 -58- 53 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY (UNAUDITED) CONSOLIDATED QUARTERLY FINANCIAL DATA
1998 Three Months Ended (In Thousands, except per share data) December 31 September 30 June 30 March 31 - -------------------------------------------------------------------------------------------- Interest income $4,251 $4,162 $4,132 $4,046 Interest expense 1,981 1,973 2,063 2,018 - -------------------------------------------------------------------------------------------- Net interest income 2,270 2,189 2,069 2,028 Provision for loan losses 25 25 39 39 Non-interest income 572 578 359 296 Non-interest expense 1,687 1,695 1,444 1,245 - -------------------------------------------------------------------------------------------- Income before income taxes 1,130 1,047 945 1,040 Provision for income taxes 422 403 356 400 - -------------------------------------------------------------------------------------------- Net income $ 708 $ 644 $ 589 $ 640 ============================================================================================ Income per share: Basic $ .28 $ .26 $ .25 $ .29 Diluted .17 .23 .17 .22 ============================================================================================ Weighted Average Common Shares Outstanding Basic 2,540 2,457 2,363 2,214 Diluted 4,250 2,754 3,414 2,867 ============================================================================================
-59- 54 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY (UNAUDITED) CONSOLIDATED QUARTERLY FINANCIAL DATA
1997 Three Months Ended (In Thousands, except per share data) December 31 September 30 June 30 March 31 - ------------------------------------------------------------------------------------------- Interest income $4,006 $3,984 $3,821 $3,449 Interest expense 2,107 2,084 1,984 1,781 - ------------------------------------------------------------------------------------------- Net interest income 1,899 1,900 1,837 1,668 Provision for loan losses 25 25 25 25 Non-interest income 388 435 312 286 Non-interest expense 1,186 1,309 1,309 1,432 - ------------------------------------------------------------------------------------------- Income before income taxes 1,076 1,001 815 497 Provision for income taxes 439 420 277 195 - ------------------------------------------------------------------------------------------- Net income $ 637 $ 581 $ 538 $ 302 =========================================================================================== Income per share: Basic $ .29 $ .26 $ .24 $ .14 Diluted .25 .26 .24 .14 =========================================================================================== Weighted Average Common Shares Outstanding Basic 2,207 2,205 2,204 2,203 Diluted 2,597 2,234 2,233 2,231 ===========================================================================================
-60- 55 COMMON STOCK INFORMATION The common stock of Community Financial Group, Inc., is traded on Nasdaq Stock Market(R) under the symbol CFGI. As of December 31, 1998, there were 466 shareholders of record of CFGI common stock. The following table sets forth the Company's high and low prices during each quarter for the past two years.
Market Price Dividends 1998 High Low First quarter $15.00 $13.69 $.06 Second quarter 17.06 14.00 .06 Third quarter 15.00 12.06 .06 Fourth quarter 12.88 11.81 .06 Market Price Dividends 1997 High Low First quarter $12.75 $10.75 $.05 Second quarter 12.25 11.00 .05 Third quarter 12.13 11.25 .05 Fourth quarter 15.13 11.75 .05
Quarterly stock price quotations were provided by the Nasdaq Stock Market(R), and reflect prices without retail markup, markdown or commissions and may not reflect actual transactions. -61- EX-21 10 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
STATE OF NAME UNDER WHICH SUBSIDIARY INCORPORATION DOES BUSINESS ---------- ------------- ------------- The Bank of Nashville Tennessee The Bank of Nashville
EX-27 11 FINANCIAL DATA SCHEDULE
9 1000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 13,243 954 0 0 71,662 0 0 152,675 3,646 238,185 162,553 0 1,961 14,500 0 0 25,299 25,872 238,185 12,391 3,816 384 16,591 7,331 8,035 8,556 128 52 6,071 4,162 4,162 0 0 2,581 1.08 .78 4.28 408 0 0 256 3,128 84 474 3,646 2,104 0 1,542
-----END PRIVACY-ENHANCED MESSAGE-----