<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 March 31, 1997
---------------------------------------------
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)
Tennessee 62-1626938
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(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
401 Church Street, Nashville, Tennessee 37219-2213
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(Address of principal executive offices) (Zip Code)
(615) 271-2000
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(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 2,204,045 as of April 30, 1997.
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PART I
FINANCIAL INFORMATION
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Page(s)
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ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet
- March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statement of Changes in Shareholders' Equity
- Three Months Ended March 31, 1997 . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income
- Three Months Ended March 31, 1997 and 1996 . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
- Three Months Ended March 31, 1997 and 1996 . . . . . . . . . . . 4 - 5
Notes to Consolidated Financial Statements - March 31, 1997 . . . . 6 - 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 10 - 13
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 14 - 15
</TABLE>
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COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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<S> <C>
ASSETS
Cash and due from banks $ 6,099
Interest-bearing balances with banks 303
Securities:
Available for sale (amortized cost $68,308) 68,096
Loans (net of unearned income of $270):
Commercial 36,686
Real estate - mortgage loans 62,459
Real estate - construction loans 8,073
Consumer 4,474
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Loans, net of unearned income 111,692
Less allowance for possible loan losses ( 2,963)
----------
Total Net Loans 108,729
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Premises and equipment, net 1,146
Accrued interest and other assets 1,392
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Total Assets $ 185,765
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits $ 12,025
Interest-bearing deposits:
NOW accounts 6,035
Money market accounts 65,203
Time certificates less than $100,000 36,103
Time certificates $100,000 and greater 31,572
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Total Deposits 150,938
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Federal funds purchased 1,600
Federal Home Loan Bank borrowings 9,500
Accounts payable and accrued liabilities 1,631
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Total Liabilities 163,669
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Commitments and contingencies -
Shareholders' equity:
Common stock, $6 par value; authorized 50,000,000 shares;
issued and outstanding 2,203,720 shares 13,224
Additional paid-in capital 6,683
Retained earnings 2,321
Unrealized loss on securities available for sale, net of tax ( 132)
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Total Shareholders' Equity 22,096
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$ 185,765
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</TABLE>
See accompanying notes to consolidated financial statements.
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COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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Unrealized
Gain (Loss) on
Additional Securities
Common Paid-In Retained Available
Stock Capital Earnings For Sale Total
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Balance, January 1, 1997 $13,215 $6,676 $ 2,130 $ 64 $ 20,085
Issuance of common stock -
(1,247 shares) 9 7 - - 16
Net income - - 302 - 302
Cash dividends - $.05 per share - - ( 111) - ( 111)
Change in unrealized
gain (loss) on securities
available for sale - - - (196) ( 196)
------- ------ ------- ------- --------
Balance, March 31, 1997 $13,224 $6,683 $ 2,321 $ ( 132) $ 22,096
======= ====== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
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COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1997 1996
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Interest income:
Interest and fees on loans $ 2,461 $ 2,282
Interest on balances in banks 5 -
Interest on federal funds sold 116 85
Interest on securities:
U.S. Treasury securities 57 131
Other U.S. government agency obligations 786 610
States and political subdivisions 5 -
Other securities 19 -
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Total interest income 3,449 3,108
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Interest expense:
Interest-bearing demand deposits 781 671
Savings and time deposits less than $100,000 457 498
Time deposits $100,000 and over 406 430
Interest on federal funds purchased 7 -
Interest on Federal Home Loan Bank borrowings 130 -
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Total interest expense 1,781 1,599
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Net interest income 1,668 1,509
Provision for possible loan losses 25 -
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Net interest income after provision for possible loan losses 1,643 1,509
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Non-interest income:
Service fee income 96 35
Trust income 117 81
Investment Center income 22 12
Income from foreclosed assets 3 115
Gain on sale of foreclosed assets - 5
Other 48 18
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Total non-interest income 286 266
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Non-interest expense:
Salaries and employee benefits 691 556
Occupancy expense 190 113
FDIC insurance 4 1
Advertising expense 80 26
Audit, tax and accounting 62 33
Data processing expense 58 62
Other operating expenses 347 239
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Total non-interest expense 1,432 1,030
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Income before income taxes 497 745
Provision for income taxes 195 15
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Net income $ 302 $ 730
============ =============
Earnings per share: $ .14 $ .33
============ =============
Weighted average common shares outstanding. 2,227,610 2,213,284
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
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COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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Three Months Ended March 31,
--------------------------------
1997 1996
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Cash flows from operating activities:
Interest received $ 3,242 $ 3,129
Fees received 286 266
Interest paid ( 1,573) ( 1,718)
Cash paid to suppliers and associates ( 1,508) ( 1,218)
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Net cash provided by operating activities 447 459
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Cash flows from investing activities:
Maturities of securities available for sale 5,450 3,891
Purchases of securities available for sale (27,445) ( 2,715)
Loans (originated) repaid by customers, net ( 3,744) 1,091
Capital expenditures ( 432) ( 4)
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Net cash used by investing activities (26,171) 2,263
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Cash flows from financing activities:
Net increase (decrease) demand deposits, NOW, money market accounts 1,537 6,886
Net increase (decrease) in certificates of deposit 16,131 ( 3,886)
Increase in Federal funds purchased 1,600 -
Proceeds from issuance of common stock 16 35
Dividends paid ( 111) ( 87)
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Net cash provided by financing activities 19,173 2,948
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Net increase (decrease) in cash and cash equivalents ( 6,551) 5,670
Cash and cash equivalents - beginning of period 12,953 7,279
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Cash and cash equivalents - end of period $ 6,402 $ 12,949
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1997 1996
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Reconciliation of net income to net cash provided by operating activities:
Net income $ 302 $ 730
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 96 63
Provision for possible loan losses 25 -
Provision for deferred taxes 87 -
Gain on sale of foreclosed assets - ( 5)
Loss on disposal of equipment - 3
Changes in assets and liabilities:
(Increase) decrease in accrued interest and other assets (206) ( 18)
Increase (decrease) in accounts payable and accrued liabilities 143 (314)
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Total adjustments 145 (271)
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Net cash provided by operating activities $ 447 $ 459
===== ======
Supplemental Disclosure:
Non Cash Transactions:
Change in unrealized gain/loss on available for sale securities, net of tax $(196) $ (151)
===== ======
</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
MARCH 31, 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 $25.0
million at March 31, 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
March 31, 1997
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Balance, beginning of period $2,878
Provision charged (credited) to operations 25
Loans charged off -
Recoveries 60
------
Balance, end of period $2,963
======
Allowance ratios are as follows:
Balance, to loans outstanding end of period 2.65%
Net charge-offs (recoveries) to average loans (.06)%
</TABLE>
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COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 1997, the Company recorded investment in impaired
loans and the related valuation allowance calculated under SFAS
No. 114 are $435,000 and $207,000, 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
months ended March 31, 1997 was $394,000.
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 months ended March 31, 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
March 31, 1997
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Computed "expected" tax expense $170
State income tax, net of federal benefit 12
Other 13
----
Total Income Tax Expense $195
====
</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.
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<PAGE> 10
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
March 31, 1997, are presented below (in thousands):
<TABLE>
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March 31, 1997
--------------
<S> <C>
Deferred tax assets:
Deferred fees, principally due to timing differences in the recognition of income $ 140
Net operating loss carryforwards 50
Unrealized loss on securities available for sale 81
Other 13
------
Total gross deferred tax assets 284
------
Deferred tax liabilities:
Discount on securities deferred for tax purposes ( 93)
Loans, principally due to provision for possible losses ( 203)
Premises and equipment, principally due to differences in depreciation methods ( 58)
Other ( 19)
------
Total gross deferred tax liabilities (373)
------
Net $( 89)
======
</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 expire in the
year 2007.
F. SHAREHOLDERS' EQUITY
The Company had outstanding stock options totaling 75,000 shares at
March 31, 1997.
At March 31, 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 expires 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 the three-month reporting period ended March 31,
1997. If the market price of the common stock exceeds the warrants'
exercise price for substantially all of any three-month reporting
period, the Company will reflect the impact of the warrants in all
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 the
Company'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 the Company's stock price had been in excess of $12.50 per share
for substantially all of the three month period ending March 31, 1997
and 1996, earnings per share using the modified treasury stock method
for the three month period ended March 31, 1997 and 1996 would have
been $.12 and $.18, respectively.
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<PAGE> 11
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
F. SHAREHOLDERS' EQUITY - Continued
In February 1997 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share". SFAS No. 128 supersedes Accounting Principles
Bulletin (APB) No. 15 and specifics the computation, presentation, and
disclosure requirements 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. SFAS No. 128 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 and earlier application is not
permitted. After adoption all prior period earnings per share will be
restated to conform with SFAS No. 128. The Company does not expect
the impact of adoption to have a material impact on the earnings per
share computation as previously reported.
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 March 31, 1997, the Company had unfunded
commitments to extend credit totaling $37.1 million consisting of
unfunded lines of credit and commitments to extend credit.
Additionally, the Company had standby letters of credit of $2.2
million as of March 31, 1997.
The Bank is required to maintain average balances with the Federal
Reserve Bank and in valut cash to meet its reserve requirements. The
average amount of these balances at the Federal Reserve Bank and vault
cash for the three months ended March 31, 1997 , totaled approximately
$1,542,000. The required balance at March 31, 1997 was $1,268,000.
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<PAGE> 12
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 March 31, 1997 and December 31, 1996, and results of
operations for the first 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
Net income of $302,000 was reported for the first quarter of 1997, a decrease
of 58.6% from the $730,000 reported for the first quarter of 1996, a period in
which the Company recorded $101,000 in income from the sale of a foreclosed
asset. 1996 earnings had the benefit of a Federal tax loss carryforward which
was fully utilized during the fourth quarter of 1996. First quarter 1997
earnings were impacted by an effective tax rate that more closely approximates
the applicable statutory income tax rates, as well as, additional expenses
incurred as a result of opening a full service location in Green Hills. On a
per share basis, earnings for the first quarter of 1997 were $.14 compared with
$.33 per share for the comparable 1996 period.
During the first quarter of 1997, the Company recorded $25,000 in provision for
possible loan losses, compared to no provision for possible loan losses during
the first quarter of 1996. During the first quarter of 1997, the Company had
net recoveries of $60,000 compared to net recoveries of $139,000 during the
first quarter of 1996. The allowance for possible loan losses was 2.7% of
loans at March 31, 1997 compared with 3.3% for the same period in 1996.
The Company's annualized return on average assets was .70% for the first
quarter of 1997 and 1.89% for the first quarter of 1996. Annualized return on
average equity was 5.52% for the first quarter of 1997 and 14.61% for the same
period in 1996.
The Company's nonperforming assets were $616,000 at March 31, 1997, compared to
$579,000 at December 31, 1996. Total loans, net of unearned income, were
$111.7 million at March 31, 1997, an increase of 3.5% from $107.9 million at
December 31, 1996 and an increase of 14.7% from $97.4 million at March 31,
1996. The Company's average equity to average assets ratio, excluding SFAS No.
115 adjustments, was 12.63% at March 31, 1997 compared to 12.96% at March 31,
1996. The Company recorded quarterly dividends of $.04 per share during each
quarter of 1996 and recorded a $.05 per share dividend during the first quarter
of 1997.
During the first quarter of 1997, net income, excluding the provision for
possible loan losses, nonrecurring income from foreclosed assets, and gains
(losses) on sale of securities and foreclosed assets decreased $327,000 from
$624,000 during the first quarter for 1996. Non-interest income increased
$20,000 during the first quarter of 1997 compared with the first quarter of
1996. This increase resulted primarily from an increase of $36,000 in Trust
income, $61,000 in service fee income and $10,000 in Investment Center income.
These increases in non-interest income were partially offset by a decrease of
$112,000 in income from foreclosed assets. Non-interest expense increased
$402,000 in the first quarter of 1997 compared to the same period in 1996.
This increase resulted primarily from a $135,000 in salaries and employee
benefits, $77,000 increase in occupancy expense and $54,000 in advertising
expense. These increases were related to the expansion of the Company's
delivery system though the opening of its new Green Hills location, as well as
the establishment of mobile branching.
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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 after provision for possible loan losses for the first
quarter of 1997 was $1.7 million, an increase of $.1 million, or 8.9%, compared
to the first quarter of 1996. The increase in net interest income resulted
from an 11.6% increase in the volume of average earning assets which was
partially offset by a 4 basis point decline in the average interest rate earned
on those assets. Also impacting net interest income was a 12.3% increase in
the volume of interest bearing liabilities and a 4 basis point decrease in the
average rate paid on those liabilities. The increase in volume of average
earning assets may be attributed to a $9.3 million increase in average loans
outstanding, a $5.6 million increase in average investments and a $2.3 million
increase in Federal Funds sold. The mix of these assets remained relatively
stable during the first quarter of 1997 compared to the same period in 1996.
Loans represented 63.6% of average earning assets in the first quarter of 1997
compared to 64.8% for the same period in 1996. Net interest income was
impacted by a shift in the mix of interest bearing liabilities. The volume of
Money Market Accounts increased $8.5 million, or 15.7%, while the volume of NOW
Accounts declined $.7 million, 11.3%, certificates of deposit less than
$100,000 declined $1.3 million, 4.2%, and certificates of deposit $100,000 or
greater declined $1.4 million, 4.3%. Additionally, average borrowed funds were
$10 million during the first quarter of 1997, while there were no borrowed
funds during the same period of 1996. These funds were primarily comprised of
Federal Home Loan Bank borrowings. The average rate paid declined 8 basis
points on certificates of deposit $100,000 or greater, 20 basis points on
certificates of deposit less than $100,000, while the average rate paid on
Money Market Accounts remained level and the average rate paid on NOW Accounts
increased 108 basis points.
Total interest income increased $341,000, or 11.0%, in the first quarter of
1997 compared to the same period in 1996. This increase was primarily the
result of the increase in the average volume of earning assets. Total interest
expense increased $182,000, or 11.4%, in the first quarter of 1997 compared to
the same period in 1996. This increase also resulted from an increase in the
average volume of interest bearing liabilities of 12.3%. The increase in
average volume of interest bearing liabilities is mainly attributable to
increases in Money Market Accounts and Federal Home Loan Bank advances.
The net interest margin (net interest income expressed as a percentage of
average earning assets) was 3.93% and 3.96% for the quarters ended March 31,
1997 and 1996, respectively. Fluctuations in net interest margins were also
affected by differences in the interest rate sensitivity of the Company's
earning assets and interest bearing liabilities.
NON-INTEREST INCOME
Non-interest income was $286,000 for the first quarter of 1997 compared with
$266,000 for the same period in 1996. Excluding gain (losses) on sale of
securities and foreclosed assets and income from foreclosed assets,
non-interest income increased $137,000 in the first quarter of 1997 compared
with the same period of 1996. Income from foreclosed assets and gain on sale
of foreclosed assets was $120,000 during the first quarter of 1996 compared
with only $3,000 for the same period in 1997. The first quarter of 1996
benefited as a result of income received from liquidating a partnership
interest which was no longer carried on the Company's balance sheet. During
the first quarter of 1997 compared with the same period in 1996, service fee
income increased $61,000, Trust income increased $36,000, and Investment Center
income increased $10,000, while other income increased $30,000.
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<PAGE> 14
NON-INTEREST EXPENSE
Total non-interest expense increased $402,000 during the first quarter of 1997
compared with the first quarter of 1996. This increase was primarily the
result of the Company's expansion of its delivery systems through the addition
of a mobile branch and the opening of its new traditional branch location in
the Green Hills area. This increase in non- interest expense was comprised of
increases of $135,000 in salaries and employee benefits, $77,000 in occupancy
expense, $54,000 in advertising expense, $29,000 in audit, tax and accounting
expense, $3,000 in FDIC insurance expense and $108,000 in other operating
expense. There was a decrease of $4,000 in data processing expense during the
first quarter of 1997 compared to the same period in 1996. At March 31, 1997,
the Company had 51 employees (1 employee per $3.6 million in assets) compared
with 40 employees (1 employee per $3.9 million in assets) at March 31, 1996 and
52 employees (1 employee per $3.2 million in assets) at December 31, 1996.
INCOME TAXES
During the first quarter of 1997, the Company recorded provision for income
taxes of $195,000 compared to $15,000 during the same period in 1996. During
1996, reported earnings benefited from a Federal tax loss carryforward which
was fully utilized during the 4th quarter of 1996. Having fully utilized the
Federal net operating loss carryforward, the 1997 effective tax rates more
closely approximates the applicable statutory income tax rate. Reference
should be made to Note E of the financial statements.
CREDIT QUALITY AND ALLOWANCE
Nonperforming assets, which include nonaccrual loans, restructured loans, and
foreclosed properties, were $616,000 at March 31, 1997, an increase of $37,000
from $579,000 at December 31, 1996, an increase of $85,000 from the $531,000
reported at March 31, 1996. Loans 90 days or more past due and still accruing
interest at March 31, 1997 were $613,000 of which only $92,000 is not
guaranteed by a U.S. government agency. This compares with no loans in that
category at March 31, 1996. Potential problem loans totaled approximately
$169,000 at March 31, 1997, compared with $400,000 at March 31, 1996, and
$84,000 at December 31, 1996.
The Company recorded $25,000 in expense for provision for possible loan losses
during the first quarter of 1997, compared with no expense for provision for
possible loan losses during the first quarter of 1996. Net loan recoveries
were $60,000 in the first quarter of 1997 compared to $139,000 during the same
period of 1996. The allowance for possible loan losses was $3.0 million at
March 31, 1997, compared to $3.2 million at March 31, 1996. Loan and valuation
reserves as a percentage of total nonperforming assets were 481% and 598% at
March 31, 1997 and 1996, respectively. The allowance for possible loan losses
represented 497% of nonperforming loans at December 31, 1996. 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 March 31, 1997, were $185.8 million, an increase
of $19.1 million from December 31, 1996. This increase reflects the early
success of the Company's branch office in the Green Hills area. The increase
was due to an increase of $21.7 million in investment securities, $3.8 million
in total loans, $.4 million in premises and equipment. These increases were
partially offset by a decrease of $6.8 million in Federal Funds sold. Total
deposits at March 31, 1997, were $150.9 million, an increase of $17.7 million
from $133.3 million at December 31, 1996. The increase in deposits was
comprised of a $9.7 million increase in time certificates less than $100,000,
$6.5 million in time certificates of $100,000 and greater, $1.2 million in NOW
Accounts and $1.1 million in Money Market Accounts. These increases were
partially offset by a decrease of $.7 million in non-interest bearing demand
deposits. Shareholders' equity (adjusted for SFAS No. 115) increased $11,000
to $22,096,000 at March 31, 1997 from $22,085,000 at December 31, 1996. The
Company recorded a dividend payment of $111,000 during the first quarter of
1997 compared with $87,000 for the same period in 1996. Unrealized losses on
securities available for sale, net of income taxes, were $132,000 at March 31,
1997 compared to an unrealized gain on securities available for sale, net of
income taxes, of $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.
- 12 -
<PAGE> 15
CAPITAL ADEQUACY AND LIQUIDITY
The Company's capital position continued to remain strong during the first
quarter of 1997. Shareholders' equity (excluding SFAS No. 115 adjustments) at
March 31, 1997, was $22.2 million, or 12.0% 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 March 31,
1997, was $22.1 million, or 11.9% 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 quarter of 1997 was primarily a result of current
period earnings which were partially offset by a decline in the market value of
securities available for sale reflecting an unrealized loss, net of income
taxes, on these securities of $132,000 at March 31, 1997, as well as the
payment of dividends of $111,000 in the first quarter of 1997 compared with
$87,000 for the same period of 1996. At March 31, 1997, the Company's primary
and total capital ratios to adjusted assets were 18.0% and 20.4%, respectively,
which is significantly in excess of the applicable regulatory requirements of
the Federal Reserve Board. In addition, the Company's total risk based capital
ratio was 19.3% at March 31, 1997, compared with 20.6% at December 31, 1996.
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 4.2 years at March 31, 1997,
compared to 3.4 years at December 31, 1996. Securities available for sale were
$68.1 million at March 31, 1997, compared to $46.4 million at December 31,
1996. Although the Company had no Federal Funds sold position at March 31,
1997, its average Federal Funds sold during the first quarter of 1997 was $9.4
million. At December 31, 1996, Federal Funds sold totaled $6.8 million. Core
deposits, a relatively stable funding base, comprised 79.1% of total deposits
at March 31, 1997, and 81.1% at December 31, 1996. Core deposits represent
total deposits excluding time certificates of $100,000 or greater.
The Board of Directors of The Bank and its shareholders approved a plan of
exchange with CFGI whereby CFGI became the parent holding company of The Bank.
This exchange was effective April 30, 1996. Each share of common stock of The
Bank was exchanged for one share of common stock 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 consummated the formation of the holding company and
received the approval of The Bank's shareholders, the Board of Governors of the
Federal Reserve System and the Tennessee Department of Financial Institutions.
- 13 -
<PAGE> 16
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 March 31, 1997.
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
(B) There were no reports on Form 8-K filed during the quarter ended March
31, 1997.
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
May 14, 1997 /s/ Mack S. Linebaugh, Jr.
- -------------------- -------------------------------------
Date Mack S. Linebaugh, Jr.
President, Chairman of the Board,
Chief Executive Officer and Chief
Financial Officer
- 14 -
<PAGE> 1
EXHIBIT 11
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
STATEMENT REGARDING: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1996
----------- ------------
<S> <C> <C>
Income Per Common Share (1)
Net income (in thousands) $302 $730
==== ====
Net income per share $.14 $.33
==== ====
Weighted average common shares outstanding 2,227,610 2,213,284
========= =========
Income Per Common Share, Assuming
Full Dilution (1)
Net income (in thousands) $302 $730
==== ====
Net income per share $.14 $.33
==== ====
2,227,610 2,213,284
========= =========
</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 March 31, 1997. See Note F to CFGI's
consolidated financial statements.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,099
<INT-BEARING-DEPOSITS> 303
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,096
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 111,692
<ALLOWANCE> 2,963
<TOTAL-ASSETS> 185,765
<DEPOSITS> 150,938
<SHORT-TERM> 1,600
<LIABILITIES-OTHER> 1,631
<LONG-TERM> 9,500
0
0
<COMMON> 13,224
<OTHER-SE> 8,872
<TOTAL-LIABILITIES-AND-EQUITY> 185,765
<INTEREST-LOAN> 2,461
<INTEREST-INVEST> 867
<INTEREST-OTHER> 121
<INTEREST-TOTAL> 3,449
<INTEREST-DEPOSIT> 1,644
<INTEREST-EXPENSE> 1,781
<INTEREST-INCOME-NET> 1,668
<LOAN-LOSSES> 25
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,432
<INCOME-PRETAX> 497
<INCOME-PRE-EXTRAORDINARY> 497
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
<YIELD-ACTUAL> 3.93
<LOANS-NON> 616
<LOANS-PAST> 613
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 169
<ALLOWANCE-OPEN> 2,878
<CHARGE-OFFS> 0
<RECOVERIES> 60
<ALLOWANCE-CLOSE> 2,963
<ALLOWANCE-DOMESTIC> 1,896
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,067
</TABLE>
