<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X Quarterly Report under Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the quarterly period September 30, 1997
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Commission File Number: 0-28496
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Community Financial Group, Inc.
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(Exact name of small business issuer as specified in its charter)
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<S> <C>
Tennessee 62-1626938
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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401 Church Street, Nashville, Tennessee 37219-2213
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(Address of principal executive offices) (Zip Code)
(615) 271-2000 (Issuer's telephone number, including area code)
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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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 2,206,457 as of October 31, 1997.
<PAGE> 2
PART I
FINANCIAL INFORMATION
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Page(s)
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ITEM 1. FINANCIAL STATEMENTS
- Consolidated Balance Sheet - September 30, 1997...................... 1
Consolidated Statement of Changes in Shareholders' Equity
- -Nine Months Ended September 30, 1997................................ 2
Consolidated Statements of Income
- -Three and Nine Months Ended September 30, 1997 and 1996............. 3
Consolidated Statements of Cash Flows
- -Nine Months Ended September 30, 1997 and 1996....................... 4 - 5
- Notes to Consolidated Financial Statements - September 30, 1997...... 6 - 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................. 10 - 14
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.............................................................. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................... 15 - 17
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<PAGE> 3
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
ASSETS
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<S> <C>
Cash and due from banks $ 6,317
Interest-bearing balances with banks 170
Federal funds sold 14,800
Securities available for sale (amortized cost $61,967) 62,401
Loans (net of unearned income of $266):
Commercial 36,304
Real estate - mortgage loans 68,468
Real estate - construction loans 9,091
Consumer 3,210
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Loans, net of unearned income 117,073
Less allowance for possible loan losses (3,020)
---------
Total Net Loans 114,053
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Premises and equipment, net 1,050
Accrued interest and other assets 1,632
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Total Assets $ 200,423
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits $ 18,476
Interest-bearing deposits:
NOW accounts 7,632
Money market accounts 66,968
Time certificates less than $100,000 36,349
Time certificates $100,000 and greater 30,821
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Total Deposits 160,246
Federal Home Loan Bank borrowings 14,500
Accounts payable and accrued liabilities 2,258
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Total Liabilities 177,004
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Commitments and contingencies -
Shareholders' equity (Note F):
Common stock, $6 par value; authorized 50,000,000 shares; issued and
outstanding 2,205,908 shares 13,235
Additional paid-in capital 6,694
Retained earnings 3,220
Unrealized gain on securities available for sale, net of tax 270
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Total Shareholders' Equity 23,419
---------
Total Liabilities and Shareholders' Equity $ 200,423
=========
</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, 1997
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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<CAPTION>
Unrealized
Gain on
Securities
Additional Available
Common Paid-In Retained For Sale, Net
Stock Capital Earnings of Tax Total
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<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $13,215 $6,676 $ 2,130 $ 64 $ 22,085
Issuance of common stock -
(3,435 shares) 20 18 - - 38
Net income - - 1,421 - 1,421
Cash dividends - $.15 per share - - (331) - (331)
Change in unrealized gain on
securities available for sale,
net of tax - - - 206 206
------- ------ ------- ---- --------
Balance, September 30, 1997 $13,235 $6,694 $ 3,220 $270 $ 23,419
======= ====== ======= ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- ------------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 2,807 $ 2,402 $ 7,936 $ 7,039
Interest on federal funds sold 122 71 269 209
Interest on balances in banks 8 - 17 -
Interest on securities:
U.S. Treasury securities 32 72 121 293
Other U.S. government agency obligations 987 632 2,818 1,889
States and political subdivisions 5 - 15 -
Other securities 23 9 78 38
---------- ---------- ---------- -----------
Total interest income 3,984 3,186 11,254 9,468
---------- ---------- ---------- -----------
Interest expense:
Interest bearing demand deposits 894 777 2,505 2,138
Savings and time deposits less than $100,000 547 438 1,534 1,396
Time deposits $100,000 and over 439 368 1,277 1,203
Interest on Federal Home Loan Bank borrowings 204 10 507 10
Federal funds purchased - 5 26 8
---------- ---------- ---------- -----------
Total interest expense 2,084 1,598 5,849 4,755
---------- ---------- ---------- -----------
Net interest income 1,900 1,588 5,405 4,713
Provision for possible loan losses 25 - 75 -
---------- ---------- ---------- -----------
Net interest income after provision for
possible loan losses 1,875 1,588 5,330 4,713
Non-interest income:
Service fee income 106 46 302 121
Trust income 139 114 359 317
Investment Center income 27 23 78 56
Gain (loss) on sale of securities - - 2 (2)
Income from foreclosed assets 90 12 105 133
Gain on sale of foreclosed assets 1 - 3 5
Other 72 22 184 82
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Total non-interest income 435 217 1,033 712
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Non-interest expense:
Salaries and employee benefits 685 607 2,033 1,774
Occupancy expense 186 160 553 391
FDIC insurance 5 - 14 2
Advertising 31 22 156 91
Audit, tax and accounting 52 53 168 156
Data processing expense 54 51 173 159
Other operating expenses 296 280 953 810
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Total non-interest expense 1,309 1,173 4,050 3,383
---------- ---------- ---------- -----------
Income before income taxes 1,001 632 2,313 2,042
Provision for income taxes 420 62 892 92
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Net income $ 581 $ 570 $ 1,421 $ 1,950
========== ========== ========== ===========
Earnings per share (Note F) $ .26 $ .26 $ .64 $ .88
========== ========== ========== ===========
Weighted average common shares outstanding 2,231,770 2,219,082 2,230,609 2,216,286
========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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Nine Months Ended September 30,
-------------------------------
1997 1996
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Cash flows from operating activities:
Interest received $ 11,026 $ 9,579
Fees received 1,031 708
Interest paid (5,259) (5,344)
Cash paid to suppliers and associates (4,779) (3,483)
-------- --------
Net cash provided by operating activities 2,019 1,460
-------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 2,479 6,016
Maturities of securities available for sale 13,890 7,843
Purchases of securities available for sale (32,017) (13,041)
Loans (originated) repaid by customers, net (9,251) (6,376)
Capital expenditures (469) (54)
-------- --------
Net cash (used) provided by investing activities (25,368) (5,612)
-------- --------
Cash flows from financing activities:
Net increase demand deposits, NOW, money market accounts 11,350 9,288
Net increase (decrease) in certificates of deposit 15,626 (12,103)
Increase in Federal Home Loan Bank borrowings 5,000 9,500
Proceeds from issuance of common stock 38 84
Dividends paid (331) (263)
-------- --------
Net cash provided by financing activities 31,683 6,506
-------- --------
Net increase (decrease) in cash and cash equivalents 8,334 2,354
Cash and cash equivalents - beginning of period 12,953 7,279
-------- --------
Cash and cash equivalents - end of period $ 21,287 $ 9,633
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</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 7
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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<CAPTION>
Nine Months Ended September 30,
------------------------------
1997 1996
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Reconciliation of net income to net cash provided by operating activities:
Net income $ 1,421 $ 1,950
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 295 153
Provision for possible loan losses 75 -
Provision for deferred taxes 140 -
Gain on sale of foreclosed assets (3) (5)
Stock dividend income (60) (20)
(Gain) loss on sale of securities (2) 2
Loss on disposal of equipment - 3
Changes in assets and liabilities:
(Increase) decrease in accrued interest and other assets (320) 65
Increase (decrease) in accounts payable and accrued liabilities 473 (688)
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Net cash provided by operating activities $ 2,019 $ 1,460
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Supplemental Disclosure:
Non Cash Transactions:
Change in unrealized gain (loss) on securities available for sale, net of tax $ 206 $ (462)
======= =======
Foreclosures of loans $ 133 $ -
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</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 8
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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 consolidated 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 Company's 1996 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 fair market value of $29 million at
September 30, 1997, 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):
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Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
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Balance, beginning of period $ 3,010 $ 2,878
Provision charged (credited) to operations 25 75
Loans charged off (109) (149)
Recoveries 94 216
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Balance, end of period $ 3,020 $ 3,020
======= =======
Allowance ratios are as follows:
Balance, to loans outstanding end of period 2.58% 2.58%
Net (charge-offs) recoveries to average loans (.01)% .06%
</TABLE>
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<PAGE> 9
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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.
At September 30, 1997, the Company recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114
are $234,000 and $107,000, 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, 1997 were $240,000 and $249,000,
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 month periods
ended September 30, 1997.
E. INCOME TAXES
Actual income tax expense for the three differed from "expected" tax
expense (computed by applying the U.S. Federal corporate tax rate of
34% to income before income taxes) as follows:
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Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
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Computed "expected" tax expense $ 340 $ 786
State tax expense, net of federal benefit 92 92
Other, net (12) 14
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Total Income Tax Expense $ 420 $ 892
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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.
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<PAGE> 10
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(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, 1997, are presented below (in thousands):
Deferred tax assets:
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Deferred fees, principally due to timing differences in the recognition of income $ 134
Other 11
-----
Total gross deferred tax assets 145
-----
Deferred tax liabilities:
Discount on securities deferred for tax purposes (103)
Unrealized gain on securities available for sale (164)
Loans, principally due to provision for possible losses (184)
Premises and equipment, principally due to differences in depreciation methods (45)
Other (35)
-----
Total gross deferred tax liabilities (531)
-----
Net deferred tax liabilities $(386)
=====
</TABLE>
At December 31, 1996, the Company had a net operating loss carryforward
for income tax purposes of $1.9 million for state purposes. The state
net operating loss carryforward was fully utilized during the nine
months ended September 30, 1997.
F. SHAREHOLDERS' EQUITY
The Company had outstanding stock options totaling 98,000 shares at
September 30, 1997.
At September 30, 1997, warrants to purchase 4,744,742 shares of the
Company common stock were outstanding. This 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 the Company was incorporated. The Company's options and
warrants are common stock equivalents. The above mentioned warrants
have not been included in the Company's computation of earnings per
share because the market price of the Company's common stock has been
less than the exercise price of the warrants for substantially all of
any three-month reporting period since the Company's inception.
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<PAGE> 11
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
F. SHAREHOLDERS' EQUITY - CONTINUED
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share". SFAS No. 128 supersedes Accounting
Principles Bulletin (APB) No. 15 and establishes standards for the
computation, presentation, and disclosures required for earnings per
share. SFAS No. 128 replaces the presentation of primary earnings per
share with a presentation of basic earnings per share and fully diluted
earnings per share with diluted earnings per share. It also requires
dual presentation of basic and diluted earnings per share on the income
statement for all entities other than those with simple capital
structures.
Basic earnings per share exclude dilution and is computed by dividing
income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in
the earnings of the entity. Diluted earnings per share is computed
similarly to fully diluted EPS pursuant to APB 15. SFAS No. 128 retains
the treasury stock method and eliminates the modified treasury stock
method of computing earnings per share. SFAS No. 128 is effective for
financial statements for both interim and annual periods ending after
December 15, 1997. Earlier application is not permitted. Upon adoption
all calculations of prior period earnings per share will be restated to
conform with SFAS No. 128.
Pro forma basic earnings per share calculated under SFAS No. 128 for
the three and nine month periods in 1997 were $.26 and $.64,
respectively. Pro forma diluted earnings per share for such periods
were $.26 and $.64, respectively. Stock options to purchase 98,000
common shares at September 30, 1997 were included in the calculation of
pro forma diluted earnings per share. The warrants to purchase
4,744,742 common shares were excluded from the pro forma diluted
earnings per share calculations because the exercise price has exceeded
the average market price of the company's common stock for each of the
three quarterly reporting periods in 1997, and thus are antidilutive.
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, 1997, the Company had unfunded
commitments to extend credit totaling $47.5 million consisting of
unfunded lines of credit and commitments to extend credit.
Additionally, the Company had standby letters of credit of $3.7 million
as of September 30, 1997.
The Bank is required to maintain average balances with the Federal
Reserve Bank and in vault cash to meet its reserve requirements. The
average amount of these balances at the Federal Reserve Bank and vault
cash for the three and nine months period ended September 30, 1997,
totaled approximately $2,275,000 and $1,844,000. The required balance
at September 30, 1997 was $1,486,000.
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<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Community Financial Group, Inc. (CFGI), is a bank holding company which was
formed on April 30, 1996, and is the parent company of its wholly-owned
subsidiary, The Bank of Nashville (The Bank), collectively referred to as the
Company. The balances and activities for the periods prior to April 30, 1996,
are those of The Bank only. The following discussion compares the Company's
financial condition at September 30, 1997 and December 31, 1996, and results of
operations for the third quarter of 1997 with the same period in 1996. The
accompanying consolidated financial statements and notes are considered an
integral part of the analysis and should be read in conjunction with the
narrative. The quarterly consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for fair
presentation of 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 Company's 1996 annual report for a
more complete discussion of factors that impact the results of operations,
liquidity, and capital.
This discussion is designed to assist readers in their analysis of the Company's
consolidated financial statements and related notes.
OVERVIEW
CFGI reported net income of $581,000 for the third quarter of 1997, up slightly
from net income of $570,000 for the third quarter of 1996. The Company earned
$.26 per share for the third quarter of 1997, compared to $.26 per share
reported for the third quarter of 1996. The increase in net income was the
result of a $312,000 increase in net interest income, and $218,000 in
non-interest income which were partially offset by a $136,000 increase in
non-interest expense and a $358,000 increase in the provision for income taxes.
The Company's annualized return on average assets was 1.17% for the third
quarter of 1997 and 1.44% for the same period in 1996. Annualized return on
average equity for the third quarter of 1997 was 10.03% compared to 10.74% for
the same period in 1996.
Net income for the nine month period ended September 30, 1997, was $1,421,000
compared with net income of $1,950,000 during the first nine months of 1996. The
decline in net income for the nine month period resulted from $892,000 in
provision for income taxes recorded during the first nine months of 1997
compared with only $92,000 for the same period in 1996. Net interest income
increased $692,000, 14.7%, during the first nine months of 1997 compared to the
same period in 1996. Non-interest income increased $321,000, 45.1%, during the
first nine months of 1997 compared with the same period in 1996 while
non-interest expense increased $667,000, 19.7%, during the first nine months of
1997 compared with the same period in 1996. The increase in non-interest expense
was primarily related to the expansion of the Company's delivery system through
the opening of its new Green Hills location in January, 1997, as well as the
establishment of mobile branching in late 1996. The Company's annualized return
on average assets was 1.01% for the nine months ended September 30, 1997 and
1.67% for the same period in 1996. Annualized return on average equity was 8.44%
for the nine months ended September 30, 1997, and 12.62% for the same period in
1996.
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<PAGE> 13
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 interest income.
Net interest income before provision for possible loan losses for the third
quarter of 1997 was $1.9 million, an increase of $.3 million, or 19.6%, compared
to the third quarter of 1996. The increase in net interest income resulted from
a 25.2% increase in the volume of average earning assets which was partially
offset by a one basis point decline in the average interest rate earned on those
assets. Also impacting net interest income was a 27.0% increase in the volume of
interest bearing liabilities and a 15 basis point increase in the average rate
paid on those liabilities. The increase in the volume of average earning assets
may be attributed to a 13.5% increase in average loans outstanding, 47.3%
increase in average investments and a 64.8% increase in Federal Funds sold. The
mix of these assets changed somewhat as the percentage of average investments to
earning assets increased from 27.7% in 1996 to 32.6% in the third quarter of
1997. Although loan volume increased, loans declined as a percentage of average
earning assets during the third quarter of 1997 compared to the same period in
1996. Net interest income was also impacted by a shift in the mix of interest
bearing liabilities in the third quarter of 1997 compared to the same period in
1996. The average volume of certificates of deposit less than $100,000 increased
$7.7 million, or 26.1%, while the average volume of Money Market accounts
increased $6.0 million, 9.8%, certificates of deposit $100,000 or greater
increased $4.2 million, 16.5%, and demand deposits increased $1.9 million,
37.2%. Additionally, the average volume of interest bearing liabilities was
impacted by the Company's decision to increase its Federal Home Loan Bank
borrowings reflected by an increase in average volume of $13.4 million in the
third quarter of 1997 compared to the same period in 1996. The average rate paid
on interest bearing liabilities increased 15 basis points in the third quarter
of 1997 compared to the same period in 1996. The average rate paid on
certificates of deposits $100,000 or greater increased 15 basis points, the rate
paid on Now accounts increased 149 basis points, the rate paid on Money Market
investment accounts increased 4 basis points, and the average rate on Federal
Home Loan Bank and other borrowings increased 40 basis points, while the average
rate paid on certificates of deposit less than $100,000 declined 5 basis points.
Total interest income increased $798,000, or 25.0%, in the third quarter of 1997
compared to the same period in 1996. This increase primarily resulted from an
increase of 25.2% in the average volume of earning assets. Total interest
expense increased $486,000, or 30.4%, in the third quarter of 1997 compared to
the same period in 1996. This increase resulted primarily form an increase in
the average volume of interest bearing liabilities of 27.0%.
The net interest margin (net interest income expressed as a percentage of
average earning assets) was 4.0% and 4.2% for the quarters ended September 30,
1997 and 1996, respectively. Net interest margin was 4.0% for the nine month
period ended September 30, 1997 compared to 4.1% for the same period in 1996.
The decline in net interest margin for both the three and nine month periods
ended September 30, 1997 resulted primarily from the Company's decision to
increase Federal Home Loan Bank borrowings, utilizing those borrowings to
increase investment securities resulting in a lower net interest margin but
increased net interest income.
Net interest income before provision for possible loan losses for the first nine
months of 1997 was $5.4 million, an increase of 14.7%, compared to $4.7 million
during the first nine months of 1996. The increase in net interest income during
the first nine months of 1997 resulted from an increase of 19.5% in the volume
of average earning assets, while average interest bearing liabilities increased
20.8%. Net interest income was also impacted by average rates on earning assets
declining 4 basis points, while average rates paid on interest bearing
liabilities increased 9 basis points. There was a shift in the mix of average
earning assets as the Company implemented an asset liability management strategy
which had previously been approved and is regularly monitored by the Company's
Board of Directors. The strategy consists of matching Federal Home Loan Bank
borrowings to fund the purchase of additional investment securities. This
impacted the mix of both average earning assets and average interest bearing
liabilities. While this strategy contributed to increasing net interest income,
it also had the effect of lowering the net interest margin. Managing and
regularly monitoring the interest rate risk associated with this strategy are
the responsibility of both management and the Company's Board of Directors.
Liquidity and asset liability strategies include the utilization of borrowings
from the Federal Home Loan Bank or drawing on lines of credit established with
correspondent banks to satisfy liquidity or funding needs. At September 30,
1997, the Company had borrowings totaling $14.5 million from the Federal Home
Loan Bank. Approximately $10 million of these borrowings were used to fund
investment securities. The Company had $9.5 million in borrowed funds at
December 31, 1996.
-11-
<PAGE> 14
NON-INTEREST INCOME
Non-interest income was $435,000 for the third quarter of 1997, compared with
$217,000 for the same period in 1996, reflecting an increase of 100%. The
increase in non-interest income may be partially attributed to an increase in
income from previously foreclosed assets of $90,000 during the third quarter of
1997 compared to $12,000 for the same period in 1996. This increase resulted
from the sale of a previously foreclosed partnership interest which was no
longer carried on the Bank's books. Other increases in non-interest income were
comprised of $60,000 in service fee income, $25,000 in Trust income, $4,000 in
Investment Center income and $50,000 in other income comprised primarily of
$45,000 in ATM fees and $5,000 in fee income from mobile branching. These
increases in income were partially offset by declines in debit/credit card
interchange income, safe deposit box rental income and processing fee income.
Total non-interest income was $1,033,000 for the first nine months of 1997,
compared with $712,000 for the same period in 1996. Non-interest income,
excluding gains(losses) on sale of securities and sale of foreclosed assets of
$5,000 in 1997 and $3,000 in 1996, increased 45% for the first nine months of
1997 compared with the same period in 1996. Increases in 1997 compared to 1996
were comprised of $181,000 in service fee income, primarily in the area of
charges for checks drawn on insufficient funds, $42,000 in Trust income, $22,000
in Investment Center income and $102,000 in other areas comprised primarily of
ATM related fees, fees from mobile branching and mortgage origination fees.
These increases were partially offset by a decrease of $28,000 in income from
foreclosed assets.
NON-INTEREST EXPENSE
Total non-interest expense increased $136,000 during the third quarter of 1997
compared with the same period in 1996. This increase was primarily the result of
increases of $78,000 in salaries and employee benefits and $26,000 in occupancy
expense, both of which resulted from the expansion of the Company's delivery
system by a branch office in Green Hills and establishing mobile branching.
Total non-interest expense increased $667,000, or 19.7%, during the first nine
months of 1997 compared with the same period of 1996. Increases were reflected
primarily in the areas of salaries and employee benefits, occupancy expense,
marketing and advertising, and data processing expense. The increases in salary
and employee benefits, occupancy expense and marketing expense were primarily
related to the Company's expansion of its delivery system and locations. At
September 30, 1997, the Company had one employee per $4.0 million in assets,
compared with one employees per $3.5 million in assets at September 30, 1996,
and one employee per $3.2 million in assets at December 31, 1996.
Non-interest expense to date does not include any significant expense related to
the Year 2000 computer programming. The Company has an established Year 2000
task force operating under the direction of and being carefully monitored by the
Board of Directors. The Company has already identified all critical business
processes and is in the process of assessing Year 2000 readiness among its
vendors and customers. Planned capital expenditures include normal system
upgrades, as well as, additional expenditures to accommodate Year 2000
compliance. Nominal expenditures will occur in the fourth quarter of 1997 with
additional expenditures planned for 1998 and 1999, however, these are not
expected to have a material impact on the Company's financial performance.
INCOME TAXES
During the third quarter of 1997, the Company recorded provision for income
taxes of $420,000, compared to $62,000 during the same period in 1996. During
1996, reported earnings benefited from tax loss carryforwards which have now
been fully utilized. As a result of having utilized these operating loss
carryforwards, the 1997 effective tax rate more closely approximates the
applicable statutory income tax rate. Reference should be made to Note E of the
financial statements.
During the first nine months of 1997, the Company reported provision for income
taxes of $892,000, an increase of $800,000 from the $92,000 reported during the
same period in 1996.
-12-
<PAGE> 15
CREDIT QUALITY AND ALLOWANCE
Nonperforming assets, which include nonaccrual loans, restructured loans and
foreclosed properties were $387,000 at September 30, 1997, a decrease of
$192,000 from December 31, 1996, and a decrease of $470,000 from the $857,000
reported at September 30, 1996. There were no loans 90 days or more past due and
still accruing interest at either September 30, 1997 or 1996. Potential problem
loans totaled approximately $630,000 at September 30, 1997, compared with
$84,000 at December 31, 1996.
The Company recorded $25,000 in expense for provision for possible loan losses
during the third quarter of 1997, compared with no expense for provision for
possible loan losses during the same quarter of 1996. Net loan charge-offs were
$15,000 in the third quarter of 1997 compared with $205,000 for the same period
in 1996. The allowance for possible loan losses was $3.0 million at September
30, 1997 compared to $2.9 million at December 31, 1996. Loan and valuation
reserves as a percentage of total nonperforming assets were 780% at September
30, 1997 and 497% at December 31, 1996. The level of the allowance and amount of
the provision are determined on a quarter by quarter basis and, given the
inherent uncertainties 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, 1997, were $200.4 million, an
increase of $33.7 million from $166.7 million at December 31, 1996. This
increase reflects the results of the Company's expansion of its delivery systems
through mobile branching and the establishment of a branch office in the Green
Hills area, as well as the utilization of a matched funding leveraging strategy
consisting of Federal Home Loan Bank borrowings being invested in securities.
Areas reflecting growth were $16.0 million in investment securities, $9.2
million in total loans, $8.0 million in Federal Funds sold and $266,000 in
premises and equipment. Total deposits at September 30, 1997 were $160.2
million, an increase of $27.0 million from the $133.3 million reported at
December 31, 1996. The increase in deposits was comprised of an increase of $9.9
million in certificates of deposit less than $100,000, $5.7 million in
certificates of deposit $100,000 or greater, $5.8 million in non-interest
bearing demand deposits, $2.8 million in Money Market Investment accounts and
$2.8 million in Now accounts. Federal Home Loan Bank borrowings increased $5
million from $9.5 million at December 31, 1996 to $14.5 million at September 30,
1997, as a result of the Company's asset liability management leveraging
strategy.
Shareholders' equity (adjusted for SFAS No. 115) increased $1,334,000 to $23.4
million at September 30, 1997 from $22.1 million at December 31, 1996. The
Company recorded dividend payments of $331,000 during the first nine months of
1997, compared with $263,000 for the same period in 1996. Unrealized gains on
securities available for sale, net of income taxes, was $270,000 at September
30, 1997, compared to $64,000 at December 31, 1996. Changes in unrealized
gains/losses on securities available for sale are the result of adjustments for
SFAS No. 115 reflecting current market value on these securities.
CAPITAL ADEQUACY AND LIQUIDITY
The Company's capital position continued to be strong during the first nine
months of 1997. Shareholders' equity (excluding SFAS No. 115 adjustments) at
September 30, 1997, was $23.2 million, or 11.6% of total assets, which compares
with $22.0 million, or 13.2% of total assets at December 31, 1996. Total
shareholders' equity (including adjustments for SFAS No. 115) at September 30,
1997, was $23.4 million, or 11.7% of total assets, which compares with $22.1
million, or 13.3% of total assets, at December 31, 1996. The increase in capital
during the first nine months of 1997 primarily resulted from earnings and
increases in the unrealized gain on securities available for sale. The effect of
these items was partially offset by the payment of dividends. At September 30,
1997, the Company's primary and total capital ratios to adjusted assets were
both 13.05%, which is significantly in excess of the applicable regulatory
requirements of the Federal Reserve Board. The Company's total risk based
capital ratio was 18.8% at September 30, 1997 compared with 20.6% at December
31, 1996.
-13-
<PAGE> 16
The Company'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 was 6.5 years at September 30,
1997, compared to 3.4 years at December 31, 1996. Securities available for sale
were $62.4 million at September 30, 1997, compared to $46.4 million at December
31, 1996. Federal Funds sold were $14.8 million at September 30, 1997, compared
with $6.8 million at December 31, 1996. Core deposits, a relatively stable
funding base, represented 80.8% of total deposits at September 30, 1997, and
81.2% at December 31, 1996. Core deposits are defined as total deposits, less
time certificates of $100,000 or greater.
CFGI became the parent holding company of The Bank effective April 30, 1996,
following the approval of a plan of exchange by the Board of Directors of The
Bank and its shareholders. Under the plan each share of common stock of The Bank
was exchanged for one share of common stock 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. This
exchange of shares and formation of the holding company received approval of the
Board of Governors of the Federal Reserve System and the Tennessee Department of
Financial Institutions.
-14-
<PAGE> 17
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 1997.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -------------------------------------------------
<S> <C>
11 Statement regarding computation of earnings per share.
27 Financial Data Schedule (for SEC use only)
</TABLE>
(B) There were no reports on Form 8-K filed during the quarter ended
September 30, 1997.
-15-
<PAGE> 18
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, 1997 /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,
1997 1996 1997 1996
----- ---- ---- ----
<S> <C> <C> <C> <C>
Income Per Common Share (1)
- ---------------------------
Net income (in thousands) $ 581 $ 570 $ 1,421 $ 1,950
========= ========= ========= ==========
Net income per share $ .26 $ .26 $ .64 $ .88
========= ========= ========= ==========
Weighted average common shares outstanding 2,231,770 2,219,082 2,230,609 2,216,286
========= ========= ========= ==========
Income Per Common Share, Assuming
- ---------------------------------
Full Dilution (1)
-----------------
Net income (in thousands) $ 581 $ 570 $ 1,421 $ 1,950
========= ========= ========= ==========
Net income per share $ .26 $ .26 $ .64 $ .88
========= ========= ========= ==========
Weighted average common shares outstanding 2,232,571 2,219,082 2,231,410 2,216,286
========= ========= ========= ==========
</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 for substantially all of the three month
reporting period ended September 30, 1997. 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,317
<INT-BEARING-DEPOSITS> 170
<FED-FUNDS-SOLD> 14,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,401
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 117,073
<ALLOWANCE> 3,020
<TOTAL-ASSETS> 200,423
<DEPOSITS> 160,246
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,258
<LONG-TERM> 14,500
0
0
<COMMON> 13,235
<OTHER-SE> 10,184
<TOTAL-LIABILITIES-AND-EQUITY> 200,423
<INTEREST-LOAN> 7,936
<INTEREST-INVEST> 3,032
<INTEREST-OTHER> 286
<INTEREST-TOTAL> 11,254
<INTEREST-DEPOSIT> 5,316
<INTEREST-EXPENSE> 5,849
<INTEREST-INCOME-NET> 5,405
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 4,050
<INCOME-PRETAX> 2,313
<INCOME-PRE-EXTRAORDINARY> 2,313
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,421
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
<YIELD-ACTUAL> 3.98
<LOANS-NON> 387
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 630
<ALLOWANCE-OPEN> 2,878
<CHARGE-OFFS> 149
<RECOVERIES> 216
<ALLOWANCE-CLOSE> 3,020
<ALLOWANCE-DOMESTIC> 2,249
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 771
</TABLE>
