<PAGE> 1
WASHINGTON, D.C. 20549
FORM 10-QSB
X Quarterly Report under Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the quarterly period September 30, 1996
---------------------------------------------
Commission File Number: 0-28496
-------------------------------------------------------
Community Financial Group, Inc.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Tennessee 62-1626938
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(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
401 Church Street, Nashville, Tennessee 37219-2213
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(615) 271-2000 (Issuer's telephone number, including area code)
- --------------------------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
X Yes No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common shares outstanding 2,201,789 as of November 1, 1996.
<PAGE> 2
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page(s)
---------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet
- September 30, 1996 .................................... 1
Consolidated Statement of Changes in Shareholders' Equity
- Nine Months Ended September 30, 1996 .................. 2
Consolidated Statements of Income
- Three and Nine Months Ended September 30, 1996
and 1995 .............................................. 3
Consolidated Statements of Cash Flows
- Nine Months Ended September 30, 1996 and 1995 ......... 4 - 5
Notes to Consolidated Financial Statements
- September 30, 1996 .................................... 6 - 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................... 12 - 15
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS .................................................. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ......................... 16 - 17
</TABLE>
<PAGE> 3
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Cash and due from banks $ 5,633
Federal funds sold 4,000
Securities available for sale (amortized cost $46,832) 46,649
Loans (net of unearned income of $225):
Commercial 36,006
Real estate - mortgage loans 55,841
Real estate - construction 9,137
Consumer 3,669
-----------
Loans, net of unearned income 104,653
Less allowance for possible loan losses (2,971)
-----------
Total Net Loans 101,682
-----------
Premises and equipment, net 588
Accrued interest and other assets 1,554
-----------
Total Assets $ 160,106
===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C>
Non-interest bearing demand deposits $ 11,455
Interest-bearing deposits:
NOW accounts 4,737
Money market accounts 59,055
Time certificates less than $100,000 27,451
Time certificates $100,000 and greater 25,021
-----------
Total Deposits 127,719
-----------
Federal Home Loan Bank borrowings 9,500
Accounts payable and accrued liabilities 1,566
-----------
Total Liabilities 138,785
-----------
Commitments and contingencies -
Shareholders' equity (Note F):
Common stock, $6 par value; authorized 50,000,000 shares; issued and
outstanding 2,201,514 shares 13,209
Additional paid-in capital 6,673
Retained earnings 1,622
Unrealized loss on securities available for sale (183)
-----------
Total Shareholders' Equity 21,321
-----------
Total Liabilities and Shareholders' Equity $ 160,106
===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Gain (loss) on
Additional Securities
Common Paid-In Retained Available
Stock Capital Earnings (Deficit) For Sale Total
----------- ------------- ------------------ ---------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 13,149 $ 8,500 $ (1,916) $ 279 $ 20,012
Issuance of common stock -
Associates Stock Purchase and
Performance Based Incentive
Program Plan (10,014 shares) 60 24 - - 84
Net income - - 1,950 - 1,950
Transfers to comply with state
statute regarding dividends, net
(Note F) - (1,851) 1,851 - -
Cash dividends - $.12 per share - - (263) - (263)
Change in unrealized
gain (loss) on securities
available for sale - - - (462) (462)
--------- ---------- ---------- --------- ---------
Balance, September 30, 1996 $ 13,209 $ 6,673 $ 1,622 $ (183) $ 21,321
========= ========== ========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE> 5
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ -----------------------------------
1996 1995 1996 1995
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 2,402 $ 2,173 $ 7,039 $ 6,292
Interest on federal funds sold 71 91 209 275
Interest on securities:
U.S. Treasury securities 72 147 293 506
Other U.S. government agency obligations 641 664 1,927 1,919
----------- ------------ ----------- ----------
Total interest income 3,186 3,075 9,468 8,992
----------- ------------ ----------- ----------
Interest expense:
Interest bearing demand deposits 777 643 2,138 2,003
Savings and time deposits less than $100,000 438 551 1,396 1,565
Time deposits $100,000 and over 368 497 1,203 1,403
Federal Home Loan Bank borrowings 10 - 10 -
Federal funds purchased 5 - 8 -
----------- ------------ ----------- ----------
Total interest expense 1,598 1,691 4,755 4,971
----------- ------------ ----------- ----------
Net interest income 1,588 1,384 4,713 4,021
Provision for possible loan losses - - - (520)
----------- ------------ ----------- ----------
Net interest income after provision for
possible loan losses 1,588 1,384 4,713 4,541
Non-interest income:
Service fee income 46 41 121 177
Trust income 114 79 317 245
Investment Center income 23 21 56 40
Gain (loss) on sale of securities - - (2) (11)
Income from foreclosed assets 12 9 133 32
Gain on sale of foreclosed assets - 47 5 47
Other 22 10 82 44
----------- ------------ ----------- ----------
Total non-interest income 217 207 712 574
----------- ------------ ----------- ----------
Non-interest expense:
Salaries and employee benefits 607 557 1,774 1,649
Occupancy expense 160 99 391 316
FDIC insurance - (11) 2 152
Audit, tax and accounting 53 40 156 110
Data processing expense 51 46 159 136
Other operating expenses 302 262 901 761
----------- ------------ ----------- ----------
Total non-interest expense 1,173 993 3,383 3,124
----------- ------------ ----------- ----------
Income before income taxes 632 598 2,042 1,991
Provision for income taxes 62 - 92 -
----------- ------------ ----------- ----------
Net income $ 570 $ 598 $ 1,950 $ 1,991
=========== ============ =========== ==========
Earnings per share (Note F) $ .26 $ .27 $ .88 $ .90
=========== ============ =========== ==========
Weighted average common shares outstanding 2,219,082 2,206,085 2,216,286 2,201,135
=========== ============ =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 6
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30
--------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 9,579 $ 8,904
Fees received 708 653
Interest paid (5,344) ( 4,717)
Cash paid to suppliers and associates (3,463) (2,959)
--------- ---------
Net cash provided by operating activities 1,480 1,881
--------- ---------
Cash flows from investing activities:
Maturities of securities available for sale 7,843 3,099
Maturities of securities held to maturity - 1,147
Proceeds from sales of securities available for sale 6,016 4,078
Purchases of securities available for sale (13,061) (9,057)
Loans (originated) repaid by customers, net (6,376) (11,288)
Capital expenditures (54) (380)
--------- ---------
Net cash used by investing activities (5,632) (12,401)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) demand deposits, NOW, money market accounts 9,288 (8,417)
Net increase (decrease) in certificates of deposit (12,103) 8,176
Increase in Federal HomeLoan Bank borrowings 9,500 -
Proceeds from issuance of common stock 84 50
Dividends paid (263) -
--------- ---------
Net cash provided by financing activities 6,506 (191)
========= =========
Net increase (decrease) in cash and cash equivalents 2,354 (10,711)
Cash and cash equivalents - beginning of period 7,279 18,486
--------- ---------
Cash and cash equivalents - end of period $ 9,633 $ 7,775
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 7
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30
-------------------------------
1996 1995
------------ ------------
Reconciliation of net income to net cash provided by operating activities:
<S> <C> <C>
Net income $ 1,950 $ 1,991
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 153 138
Provision for possible loan losses - ( 520)
Loss on sale of securities 2 11
Gain on sale of foreclosed assets (5) (47)
Loss on disposal of equipment 3 -
Changes in assets and liabilities:
Decrease in other real estate - 122
Increase in accrued interest and other assets 65 (214)
Increase (decrease) in accounts payable and accrued liabilities (688) 400
------- -------
Total adjustments (470) (110)
------- -------
Net cash provided by operating activities $ 1,480 $ 1,881
======= =======
Supplemental Disclosure:
Non Cash Transactions:
Change in unrealized gain/loss on available for sale securities $ (462) $ 952
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 8
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
A. HOLDING COMPANY FORMATION AND PRINCIPLES OF CONSOLIDATION
On April 16, 1996, the shareholders of The Bank of Nashville (The
Bank) approved the formation of a holding company. On April 30, 1996
The Bank became a wholly-owned subsidiary of the holding company,
Community Financial Group, Inc. (CFGI), a Tennessee corporation. Each
outstanding share of The Bank's stock was exchanged for an outstanding
share of CFGI and each outstanding warrant and each option to purchase
common shares of The Bank became warrants and options to purchase
shares of CFGI.
The accompanying unaudited consolidated financial statements include
the accounts of CFGI and The Bank. Balances and activity reflected in
the accompanying consolidated financial statements for the period prior
to the formation of CFGI are those of The Bank only. The operations of
CFGI and The Bank are collectively referred herein as the Company. All
significant intercompany balances and transactions have been eliminated
in the accompanying consolidated financial statements.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with general practices within the banking
industry and generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and
Regulation SB. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.
Certain prior year amounts have been reclassified to conform with
current year presentation.
The consolidated financial statements should be read in conjunction
with the Summary of Significant Accounting Policies and the Notes to
the Financial Statements presented in The Bank of Nashville's 1995
Annual Report to Shareholders. The results for the interim period are
not necessarily indicative of results to be expected for the complete
calendar year.
B. SECURITIES
Securities with an aggregate amortized cost of approximately $28.5
million and a fair market value of $28.2 million at September 30, 1996,
were pledged to secure public deposits, Federal Home Loan Bank
borrowings and for other purposes as required or permitted by law.
C. ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the changes in the allowance for possible loan losses
follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, 1996 September 30, 1996
------------------ --------------------
<S> <C> <C>
Balance, beginning of period $ 3,034 $ 3,176
Provision charged (credited) to operations - -
Loans charged off (449) (268)
Recoveries 386 63
---------- -----------
Balance, end of period $ 2,971 $ 2,971
========== ===========
Allowance ratios are as follows:
Balance, to loans outstanding end of period 2.84% 2.84%
Net charge-offs (recoveries) to average loans .06% .20%
</TABLE>
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<PAGE> 9
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
D. IMPAIRED LOANS
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures," as of January 1, 1995. These statements
require that certain impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's original
effective interest rate. As a practical expedient, impairment may be
measured based on the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. When the
measure of the impaired loan is less that the recorded investment in
the loan, the impairment is recorded through a valuation allowance.
The adoption of these statements did not have a material impact on the
Company's consolidated financial statements.
At September 30, 1996, the Company recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114
are $638,000 and $349,000, respectively. This valuation allowance is
included in the allowance for loan losses on the consolidated balance
sheet.
The average recorded investment in impaired loans for the three and
nine months ended September 30, 1996, were $405,000 and $336,000,
respectively.
Interest payments received on impaired loans are recorded as
reductions in principal outstanding or recoveries of principal
previously charged off. Once the entire principal has been collected
any additional payments received are recognized as interest income. No
interest income was recognized on impaired loans in the three and nine
months ended September 30, 1996.
E. INCOME TAXES
Actual income tax expense for the three and nine months ended
September 30, 1996 differed from "expected" tax expense (computed by
applying the U.S. Federal corporate tax rate of 34% to income before
income taxes) as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Monhs Ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Computed "expected" tax expense $ 695 $ 215
Benefit of net operating loss carryforward (603) (153)
------ ------
Total Income Tax Expense $ 92 $ 62
====== ======
</TABLE>
The Company accounts for income taxes according to SFAS No. 109,
Accounting for Income Taxes, which requires the use of the asset and
liability method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are recognized
for the estimated future tax effects attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date. Net
deferred tax assets have been offset by recording a valuation reserve.
Management will continue to evaluate the propriety of the valuation
reserve based on an evaluation of the likelihood of realizing the tax
benefits using the more likely than not criterion.
-7-
<PAGE> 10
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
E. INCOME TAXES - CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1996, are presented below (in thousands):
<TABLE>
<CAPTION>
September 30,
1996
------------------
<S> <C>
Deferred tax assets:
Deferred fees, principally due to timing differences in the recognition of income $ 124
Net operating loss carryforwards 310
Unrealized loss on securities available for sale 70
Alternative minimum tax carryforwards 77
Other 14
------
Total gross deferred tax assets 595
------
Less valuation allowance (223)
------
Net deferred tax assets 372
------
Deferred tax liabilities:
Discount on securities deferred for tax purposes (89)
Loans, principally due to provision for possible losses (212)
Premises and equipment, principally due to differences in depreciation methods (63)
Other (8)
------
Total gross deferred tax liabilities 372
------
Net $ -
======
</TABLE>
The net decrease during the nine months ended September 30, 1996, in
the valuation allowance for deferred tax assets was $537,000.
At December 31, 1995, the Company had a net operating loss
carryforward for income tax purposes of $2.3 million for federal
purposes and $4.4 million for state purposes. These federal and
state net operating loss carryforwards expire in the year 2007.
F. SHAREHOLDERS' EQUITY
The Company had outstanding stock options totaling 60,000 shares at
September 30, 1996.
At September 30, 1996, warrants to purchase 4,744,927 shares of the
Company common stock were outstanding. The exercise price of the
warrants is $12.50, and they expire on December 31, 1998.
Management has used the treasury stock method to compute earnings per
share since CFGI and The Bank were incorporated. CFGI options and
warrants are common stock equivalents. The above mentioned warrants
have not been included in CFGI's computation of earnings per share
because the market price of CFGI (and previously The Bank) common stock
has been less than the exercise price of the warrants since issuance.
If the market price of the common stock exceeds the warrants'exercise
price for substantially all of any three-month reporting period, CFGI
will reflect the impact of the warrants in all
-8-
<PAGE> 11
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
F. SHAREHOLDERS' EQUITY - CONTINUED
future earnings per share computations using the modified treasury
stock method. The modified treasury stock method assumes the exercise
of all outstanding warrants, the repurchase of up to 20% of CFGI's
stock, the retirement of any long-term and short-term borrowings and
the investment of the remaining proceeds, with appropriate recognition
of any income tax effects. If CFGI's stock price had been in excess of
$12.50 per share for substantially all of the three-month reporting
period ending September 30, 1996, earnings per share using the modified
treasury stock method for the three and nine months ended September 30,
1996 would have been $.15 and $.50 respectively.
On February 13, 1996 The Bank paid its first quarterly dividend to
shareholders. In order to pay this dividend, in accordance with state
statute, The Bank transferred $1,925,000 from Additional Paid-In
Capital to Retained Earnings. In addition, in order to declare
dividends in the future The Bank must transfer a minimum of ten percent
of current net income from Retained Earnings to Additional Paid-In
Capital until Additional Paid-In Capital equals common stock. During
the quarter ended March 31, 1996 prior to the formation of CFGI,
$74,000 was transferred from Retained Earnings to Additional Paid-In
Capital.
G. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various commitments
outstanding to extend credit, such as the funding of undrawn lines of
credit or standby letters of credit, which generally accepted
accounting principles do not require to be recognized in the financial
statements. The Company, through regular reviews of these
arrangements, does not anticipate any material losses as a result of
these transactions. At September 30, 1996, the Company had unfunded
commitments to extend credit totaling $29,445,000 consisting of
unfunded lines of credit and commitments to extend credit.
Additionally, the Company had standby letters of credit of $1,818,000
as of September 30, 1996.
The Bank is required to maintain average balances with the Federal
Reserve Bank to meet its reserve requirements. The average amount of
these balances for the three and nine months ended September 30, 1996,
was approximately $733,000 and $641,000, respectively. The required
balance at September 30, 1996 was $970,000.
H. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial
instruments for both on and off-balance sheet assets and liabilities
for which it is practicable to estimate fair value. The techniques
used for this valuation are significantly affected by the assumptions
used, including the amount and timing of future cash flows and the
discount rate. Such estimates involve uncertainties and matters of
judgment and therefore cannot be determined with precision. In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets. Accordingly, the aggregate fair
value amounts presented are not meant to represent the underlying value
of the Company.
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<PAGE> 12
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
H. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The following table presents the carrying amounts and the estimated
fair value of the Company's financial instruments at September 30,
1996.
<TABLE>
<CAPTION>
Estimated
Carrying Amount Fair Value
--------------- ----------
(In Thousands)
<S> <C> <C>
Financial assets:
Cash due from banks and federal funds sold $ 9,633 $ 9,633
Investment securities 46,649 46,649
Loans, net of unearned income 104,653 104,693
Financial liabilities:
Deposits 127,719 127,999
Federal Home Loan Bank borrowings 9,500 9,500
<CAPTION>
Contractual or Estimated
Notional Amounts Fair Value
---------------- ----------
(In Thousands)
<S> <C> <C>
Off-balance items:
Interest rate floors $ 8,000 $ *
Commitments to extend credit 29,445 *
Standby letters of credit 1,818 *
*The estimated fair value of these items was not significant at September 30, 1996.
</TABLE>
The following summary presents the methodologies and assumptions used
to estimate the fair value of the Company's financial instruments:
CASH DUE FROM BANKS AND FEDERAL FUNDS SOLD
For cash due from banks and federal funds sold, the carrying
amount is a reasonable estimate of fair value. These
instruments expose the Company to limited credit risk and
carry interest rates which approximate market.
INVESTMENT SECURITIES
In estimating fair values, management makes use of prices or
dealer quotes for U.S. Treasury securities, other U.S.
government agency securities, and mortgage-backed
certificates. As required by SFAS No. 115, securities
available for sale are recorded at fair value.
- 10 -
<PAGE> 13
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
H. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
LOANS
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings for the same remaining maturities
adjusted for differences in loan characteristics. The risk of default
is measured as an adjustment to the discount rate, and no future
interest income is assumed for nonaccrual loans.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturities (which includes
demand deposits, NOW accounts, and money market deposits) is the amount
payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using a discounted
cash flow model based on the rates currently offered for deposits of
similar maturities.
SFAS No. 107 requires deposit liabilities with no stated maturity to
be reported at the amount payable on demand without regard for the
inherent funding value of these instruments. CFGI believes that
significant value exists in this funding source.
INTEREST RATE FLOORS
The fair value of interest rate floors is established by the issuer
based on the market price to purchase a like instrument with
comparable terms.
I. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into interest rate floor agreements for its
asset/liability management program to reduce interest rate risk. These
interest rate floors represent obligations by third parties whereby
the Company receives payment when the underlying rate index falls below
an agreed upon level. The Company paid a fee of $102,000, which is
amortized as an adjustment of yield. The unamortized portion of this
fee was $36,000 at September 30 1996. At September 30, 1996, the
Company held interest rate floor contracts with notional amounts
totaling $8.0 million which expire in 1997 and 1998, and were entered
into to protect the Company from falling interest rates (See Note H).
- 11 -
<PAGE> 14
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion addresses the financial condition of
Community Financial Group, Inc. (CFGI), and its wholly- owned
subsidiary, The Bank of Nashville (The Bank). CFGI is a bank holding
company and the parent of the wholly-owned subsidiary, The Bank of
Nashville. The acquisition of The Bank of Nashville by CFGI was
consummated on April 30, 1996. The balances and activities for the
period prior to April 30, 1996, are those of The Bank of Nashville
only. Operations of CFGI and The Bank are collectively herein referred
to as The Company. The accompanying consolidated financial statements
and notes are considered to be an integral part of the analysis and
should be read in conjunction with this narrative. The quarterly
consolidated financial statements reflect all adjustments which are, in
the opinion of management, necessary for fair presentation of the
results of interim periods. The results for interim periods are not
necessarily indicative of results to be expected for the complete
calendar year. References should also be made to The Bank of
Nashville's 1995 annual report for a more complete discussion of
factors that impact results of operations, liquidity and capital.
This discussion is designed to assist readers in their analysis of
CFGI's consolidated financial statements and related notes.
OVERVIEW
CFGI reported net income of $570,000 for the third quarter of 1996,
compared with net income of $598,000 for the third quarter of 1995.
The Company earned $.26 per share for the third quarter of 1996, a
decline of 4% from the $.27 per share reported for the third quarter of
1995. The decline in net income was primarily the result of incurring
income tax expense and costs associated with the implementation of
expansion plans which included the establishment of The Bank's new
mobile branch and plans to open a branch in Green Hills during the
fourth quarter of 1996. As a result of management's assessment of
asset quality and the level of nonperforming assets, The Company
recorded no provision for possible loan losses during the third quarter
of either 1996 or 1995. The Company's annualized return on average
assets was 1.44% for the third quarter of 1996 and 1.57% for the third
quarter of 1995. Annualized return on average equity for the third
quarter of 1996 and 1995 was 10.74% and 12.56%, respectively.
Net income for the nine month period ended September 30, 1996 was
$1,950,000 and included a zero provision for possible loan losses which
compares with net income of $1,991,000 during the first nine months of
1995, a period in which The Company's earnings benefited from recording
a $520,000 negative provision for possible loan losses. Earnings per
share were $.88 for the nine months ended September 30, 1996, compared
with $.90 for the same period in 1995. Net interest income increased
$692,000, 17.2%, during the first nine months of 1996 compared to the
same period in 1995. Non-interest income increased $138,000, 24.0%,
during the first nine months of 1996 compared with the same period in
1995. This increase in net interest income was primarily due to
increases in Trust income, Investment Center income, and income on
foreclosed assets. These increases were partially offset by a decrease
in service fee income and a decrease in gains on sale of foreclosed
assets. Non-interest expense increased $259,000, 8.3%, during the
first nine months of 1996 compared with the same period in 1995. This
increase was primarily reflected in the area of salaries and benefits,
occupancy expense, audit, tax and accounting expense, and data
processing expense. The Company recorded a $92,000 provision for
income taxes during the first nine months of 1996, while no provision
was made for this period in 1995. Year to date results and forecasts
by management of future earnings necessitated the recording of a
provision for income taxes as the expectation exists that net operating
loss (NOL's) carryforwards will be fully utilized during 1996. It is
the expectation that the fourth quarter in 1996 will continue to
reflect increased tax provisions. The Company's effective tax rate in
1997 will more closely reflect statutory tax rates.
- 12 -
<PAGE> 15
NET INTEREST INCOME
Net interest income is the principal component of The Company's income
stream and represents the difference or spread between interest
generated from earning assets and interest paid on deposits.
Fluctuation in interest rates, as well as volume and mix changes in
earning assets and interest bearing liabilities, materially impact net
income. Net interest income for the third quarter of 1996 was $1.6
million, an increase of 14.7% from $1.4 million in the third quarter of
1995. The increase in net interest income resulted from a $5.3 million
increase in the average volume of earning assets which was partially
offset by a $2.6 million increase in the volume of average interest
bearing liabilities. Net interest income also benefited from a 30
basis point decline in the interest rate paid on interest bearing
liabilities. The increase in volume of average earning assets may be
attributed to a $13.9 million increase in average loans outstanding
which was partially offset by a $7.9 million decline in average
investments and a $.6 million decline in Federal Funds sold. These
changes in mix positively impacted The Company's net interest income,
as there was a greater concentration in loans, The Company's highest
yielding asset. Net interest income was also positively impacted by a
shift in the mix of interest bearing liabilities. The volume of NOW
Accounts increased 2.5% and Money Market Accounts increased 30.4%,
while certificates of deposit less than $100,000 declined 17.4% and
certificates of deposit $100,000 or greater declined 21.0%. This shift
in mix positively impacted net income, as both NOW Accounts and Money
Market Accounts bear lower rates of interest paid than do both
classifications of certificates of deposit. All classifications of
interest bearing liabilities reflected declines in average rates paid
during the third quarter of 1996 compared to the same period in 1995.
The average rate paid declined 20 basis points on NOW Accounts, 30
basis points on Money Market Investment Accounts, 20 basis points on
certificates of deposit less than $100,000, and 40 basis points on
certificates of deposit $100,000 or greater.
Net interest income for the first nine months of 1996 was $4.7
million, an increase of 17.2%, compared to $4.0 million during the
first nine months of 1995. The increase in net interest income during
the first nine months of 1996 resulted from an increase of 5.5% in the
volume of average earning assets, while average interest bearing
liabilities only increased 3.3%. Net interest income was further
impacted by average rates on earning assets remaining level while
average rates paid on interest bearing liabilities declined 40 basis
points. Net interest income was also positively impacted by the shift
in the mix of earning assets which reflected loans increasing by 15.5%,
while investments and Federal Funds sold declined by 10.4% and 8.9%,
respectively. A shift in the mix of average interest bearing
liabilities also contributed to the improvement in net interest income
as funds moved from higher rate certificates of deposit to lower rate
Money Market Investment and NOW Accounts. This shift in mix in average
interest liabilities was comprised of increases of 16.9% in NOW
Accounts and 19.2% in Money Market Investment Accounts, as well as
decreases of 10.1% in certificates of less than $100,000 and 10.1% in
certificates of deposit $100,000 or greater. Although the movement of
funds into more liquid transaction accounts which has occurred during
the past nine months has the effect of lowering the cost of funds and
benefiting the net interest margin, it also positions this money to
reprice more rapidly in a changing interest rate environment. These
shifts from certificates of deposit to more liquid deposits reflect a
general expectation that interest rates will rise.
The net interest margin (net interest income expressed as a percentage
of average earning assets) was 4.2% and 3.7% for the quarters ended
September 30, 1996 and 1995, respectively. Net interest margin was
4.1% for the nine month period ended September 30, 1996, compared to
3.7% for the same period in 1995. The increase in net interest margin
for the three month and nine month periods ended September 30, 1996,
compared to the same periods in 1995, resulted primarily from a higher
volume of earning assets and the mix of those assets, as well as a
shift in the mix of interest bearing liabilities and an overall decline
in the rate paid on these liabilities.
- 13 -
<PAGE> 16
NON-INTEREST INCOME
Non-interest income was $217,000 for the third quarter of 1996,
compared with $207,000 for the same period in 1995. Excluding gains
(losses) on sale of securities and sale of foreclosed assets, which
were zero in the third quarter of 1996 and $47,000 for the same period
in 1995, non-interest income increased $57,000. All categories of
non-interest income reflected increases during the third quarter of
1996 when compared to the same period in 1995.
Total non-interest income was $712,000 for the first nine months of
1996, compared with $574,000 for the same period in 1995. Non-interest
income, excluding gains (losses) on sale of securities and foreclosed
assets of $3,000 in 1996 and $36,000 in 1995, increased $171,000 for
the first nine months of 1996 compared with the same period in 1995.
Increases in 1996 compared to 1995 we comprised of $72,000 in Trust
income, $101,000 in income from foreclosed assets, and $38,000 in other
income which were partially offset by declines of $56,000 in service
fee income largely the result of decline NSF/overdraft fees and
checking account activity charges and $42,000 in gains on the sale of
foreclosed assets. The increase in income from foreclosed assets
during 1996 was primarily a result of income received from liquidating
a partnership interest which was no longer carried on The Company's
balance sheet.
NON-INTEREST EXPENSE
Total non-interest expense increased $180,000 during the third quarter
of 1996 compared with the same period of 1995. This increase was the
result of increases of $50,000 in salaries and employee benefits,
$61,000 in occupancy expense, $13,000 in audit, tax and accounting
expense, $5,000 in data processing expense, and $40,000 in other
operating expense. Salaries and employee benefits, as well as
occupancy expense, were impacted during the third quarter of 1996, as
The Company implemented expansion plans. The Bank's new mobile branch
which provides the convenience of "at your door" banking services was
established in September of 1996. Also during the third quarter of
1996, The Bank received approval to open a branch in Green Hills at the
Glendale Center. Although the branch is not scheduled until the fourth
quarter of 1996, staffing and occupancy expense began to be incurred
during the third quarter of 1996.
Total non-interest expense increased $259,000, or 8.3%, during the
first nine months of 1996 compared with the same period of 1995.
Increases were reflected in the areas of salaries and employee
benefits, occupancy expense, audit, tax and accounting expense, data
processing expense, and other operating expense. These increases were
partially offset by a $150,000 decrease in FDIC insurance expense. The
decrease in FDIC premium expense was the result of premium decreases
announced by the FDIC, as well as a reduction in The Company's
assessment rate as a result of its overall improved condition.
INCOME TAXES
Reported earnings have reflected the use of net operating loss
carryforwards and, as such, no significant income taxes were recorded
during 1995. Provision for income taxes expense was $62,000 during the
third quarter of 1996 and $92,000 for the nine month period ended
September 30, 1996. It is anticipated that future periods will reflect
additional income tax expense, as it is management's evaluation that it
is highly likely that the remaining Federal NOL's will be fully
utilized during 1996 placing The Company in the position of incurring
additional income tax expense in the fourth quarter of 1996 and income
tax expense in 1997 which more closely reflects statutory tax rates.
Reference should be made to Note E of the consolidated financial
statements.
CREDIT QUALITY AND ALLOWANCE
Nonperforming assets, which include nonaccrual loans, restructured
loans, and foreclosed properties, were $857,000 at September 30, 1996,
an increase of $406,000 from the $451,000 reported at December 31,
1995. There were no loans 90 days or more past due and still accruing
interest at September 30, 1996 or at December 31, 1995. Nonperforming
assets as a percentage of total loans outstanding were .82% at
September 30, 1996 compared to .46% at December 31, 1995. Potential
problem loans totaled approximately $134,000 at September 30, 1996,
compared with $386,000 at December 31, 1995.
- 14 -
<PAGE> 17
The Company recorded no expense for provision of possible loan losses
during the first nine months of 1996, compared with a negative
provision for possible loan losses of $520,000 during the first nine
months of 1995. The negative provision recorded during 1995 was
primarily the result of net recoveries of $527,000 combined with
management's assessment of the level of the allowance for possible loan
losses. Net charge-offs were $63,000 during the first nine months of
1996 compared with net loan recoveries of $488,000 during the same
period in 1995. The allowance for possible loan losses was $3.0
million at September 30, 1996 and at December 31, 1995. Loan and
valuation reserves as a percentage of total nonperforming assets were
347% and 673% at September 30, 1996 and December 31, 1995,
respectively. The level of the allowance and the amount of the
provision are determined on a quarter by quarter basis and, given the
inherent uncertainties involved in the estimation process, no assurance
can be given as to the amount of the allowance at any future date.
BALANCE SHEET
The Company's total assets at September 30, 1996, were $160.1
million, an increase of $7.3 million from December 31, 1995. This
increase was the result of an increase of $6.4 million in total net
loans and $3 million in Federal Funds sold which were partially offset
by decreases of $.6 million in cash and due from banks and $1.3 million
in investment securities. Total deposits at September 30, 1996, were
$127.7 million, a decrease of $2.8 million, of 2.2%, from the $130.5
million at December 31, 1995. The decline in deposits resulted from a
$12.1 million decline in time certificates of deposit and a $1.4
million decline in NOW Accounts. These declines were partially offset
by increases of $2.3 million in non-interest bearing demand deposits
and $8.4 million in Money Market Investment Accounts. At September 30,
1996, liabilities included Federal Home Loan Bank borrowings of $9.5
million, while no such borrowings were reflected at December 31, 1995.
Borrowings from the Federal Home Loan Bank are utilized to both fund
loan demand and to fund investment securities with similar maturities
to improve overall net income. Shareholders' equity (adjusted for SFAS
No. 115) increased $1.3 million to $21.3 million at September 30, 1996,
from $20.0 million at December 31, 1995. This increase was primarily
the result of net income of $2.0 million during the first six months of
1996. Unrealized losses on securities available for sale were $183,000
at September 30, 1996, compared to an unrealized gain on securities
available for sale of $279,000 at December 31, 1995. Changes in
unrealized gains/losses on securities available for sale are the result
of adjustments for SFAS No. 115 and reflect current market value on
these securities.
CAPITAL ADEQUACY AND LIQUIDITY
Capital adequacy remained strong during the first nine months of 1996.
Shareholders' equity, excluding SFAS No. 115 adjustments at September
30, 1996, was $21.5 million, or 13.4% of total assets, which compares
with $19.7 million, or 12.9%, of total assets at December 31, 1995.
The increase in total capital during the first nine months of 1996
resulted primarily from earnings, the impact of which was partially
offset by decline in the unrealized gain/loss on securities available
for sale of $462,000 and the payment of dividends of $263,000. At
September 30, 1996, The Company's primary and total capital ratios to
adjusted assets were 13.3% and 14.9%, respectively, which are
significantly in excess of the applicable regulatory requirements of
the Federal Reserve Board. The Company's total risk based capital
ratio was 21.2% at September 30, 1996, compared with 22.0% at December
31, 1995. All capital ratios continue to exceed regulatory guidelines.
The Company paid quarterly dividends of $.04 per share to shareholders
during each of the first three quarters of 1996. In order to pay these
dividends, in accordance with state statute, The Bank transferred $1.9
million from additional paid in capital to retained earnings and
subsequently transferred $200,000 from retained earnings to additional
paid in capital. Transfers will continue to be made by The Bank from
retained earnings to additional paid in capital as dividends are paid,
until such time as additional paid in capital equals common stock.
The Bank's principal sources of asset liquidity are marketable
securities available for sale and Federal Funds sold, as well as
maturities of securities. The estimated average maturity of securities
held was 1.4 years at September 30, 1996, compared to 10 months at
December 31, 1995. Securities available for sale were $46.6 million at
September 30, 1996, compared to $47.9 million at December 31, 1995.
Additional liquidity was provided by a Federal Funds sold position of
$4.0 million at September 30, 1996, compared to $1.0 million at
December 31, 1995. Core deposits, a relatively stable funding base,
comprised 80.4% of total deposits at September 30, 1996 and 77.0% at
December 31, 1995. Core deposits represent total deposits excluding
time certificates of deposit $100,000 or greater.
- 15 -
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were not matters submitted to a vote of the Security holders during the
quarter ended September, 1996.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. Description
- ----------- -----------------------
11 Statement regarding computation of earnings per share.
27 Financial Data Schedule - (SEC use only)
(B) There were no reports on Form 8-K filed during the quarter ended
September 30, 1996.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY FINANCIAL GROUP, INC.
--------------------------------
Registrant
November 12 , 1996 /s/ Mack S. Linebaugh, Jr.
- ------------------------- --------------------------------
Date Mack S. Linebaugh, Jr.
President, Chairman of the Board,
Chief Executive Officer and Chief
Financial Officer
- 16 -
<PAGE> 1
EXHIBIT 11
----------
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
STATEMENT REGARDING: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------- ---------------------------------
1996 1995 1996 1995
--------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Income Per Common Share (1)
Net income (in thousands) $ 570 $ 598 $ 1,950 $ 1,991
=========== =========== ============ ============
Net income per share $ .26 $ .27 $ .88 $ .90
=========== =========== ============ ============
Weighted average common shares outstanding 2,219,082 2,206,085 2,216,286 2,201,135
=========== =========== ============ ============
Income Per Common Share, Assuming
Full Dilution (1)
Net income (in thousands) $ 570 $ 598 $ 1,950 $ 1,991
=========== =========== ============ ===========
Net income per share $ .26 $ .27 $ .88 $ .90
=========== =========== ============ ===========
2,219,082 2,206,085 2,216,286 2,201,135
=========== =========== ============ ===========
</TABLE>
(1) Net income per share has been computed using the weighted average
number of common shares and common share equivalents outstanding
during each year presented. Common stock equivalents include stock
options. Warrants have not been included in CFGI's computation of
earnings per share because the market price of CFGI's common stock has
been less than the exercise price of the warrants since issue. See
Note F to CFGI's consolidated financial statements.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,633
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,649
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 104,653
<ALLOWANCE> 2,971
<TOTAL-ASSETS> 160,106
<DEPOSITS> 127,719
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,566
<LONG-TERM> 9,500
0
0
<COMMON> 13,209
<OTHER-SE> 8,112
<TOTAL-LIABILITIES-AND-EQUITY> 160,106
<INTEREST-LOAN> 7,039
<INTEREST-INVEST> 2,220
<INTEREST-OTHER> 209
<INTEREST-TOTAL> 9,468
<INTEREST-DEPOSIT> 4,737
<INTEREST-EXPENSE> 4,755
<INTEREST-INCOME-NET> 4,713
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 3,383
<INCOME-PRETAX> 2,042
<INCOME-PRE-EXTRAORDINARY> 2,042
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,950
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
<YIELD-ACTUAL> 4.14
<LOANS-NON> 857
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 134
<ALLOWANCE-OPEN> 3,034
<CHARGE-OFFS> 449
<RECOVERIES> 386
<ALLOWANCE-CLOSE> 2,971
<ALLOWANCE-DOMESTIC> 1,991
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 980
</TABLE>
