<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 June 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.)
401 Church Street, Nashville, Tennessee 37219-2213
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(Address of principal executive offices) (Zip Code)
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(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.
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 2,205,149 as of July 31, 1997.
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PART I
FINANCIAL INFORMATION
Page(s)
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ITEM 1. FINANCIAL STATEMENTS
- Consolidated Balance Sheet
- June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 1
- Consolidated Statement of Changes in Shareholders' Equity
- Six Months Ended June 30, 1997 . . . . . . . . . . . . . . . . . 2
- Consolidated Statements of Income
- Three and Six Months Ended June 30, 1997 and 1996 . . . . . . . . 3
- Consolidated Statements of Cash Flows
- Six Months Ended June 30, 1997 and 1996 . . . . . . . . . . . . . 4 - 5
- Notes to Consolidated Financial Statements - June 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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COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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ASSETS
Cash and due from banks $ 6,538
Interest-bearing balances with banks 475
Federal funds sold 5,000
Securities available for sale (amortized cost $62,054) 62,218
Loans (net of unearned income of $276):
Commercial 37,969
Real estate - mortgage loans 66,189
Real estate - construction loans 9,652
Consumer 3,474
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Loans, net of unearned income 117,284
Less allowance for possible loan losses ( 3,010)
--------
Total Net Loans 114,274
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Premises and equipment, net 1,090
Accrued interest and other assets 1,383
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Total Assets $190,978
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits $ 16,830
Interest-bearing deposits:
NOW accounts 6,528
Money market accounts 62,117
Time certificates less than $100,000 36,402
Time certificates $100,000 and greater 30,022
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Total Deposits 151,899
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Federal Home Loan Bank borrowings 14,500
Accounts payable and accrued liabilities 1,813
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Total Liabilities 168,212
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Commitments and contingencies -
Shareholders' equity (Note F):
Common stock, $6 par value; authorized 50,000,000 shares; issued and
outstanding 2,204,784 shares 13,229
Additional paid-in capital 6,686
Retained earnings 2,749
Unrealized gain on securities available for sale, net of tax 102
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Total Shareholders' Equity 22,766
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Total Liabilities and Shareholders' Equity $190,978
========
</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
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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Unrealized
Gain on
Securities
Additional Available
Common Paid-In Retained For Sale, Net
Stock Capital Earnings of Tax Total
----------- -------------- -------- ----------------- ---------
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Balance, January 1, 1997 $13,215 $6,676 $ 2,130 $ 64 $ 22,085
Issuance of common stock -
(2,311 shares) 14 10 - - 24
Net income - - 840 - 840
Cash dividends - $.10 per share - - ( 221) - ( 221)
Change in unrealized gain on
securities available for sale,
net of tax - - - 38 38
------- ------ ------- ---- --------
Balance, June 30, 1997 $13,229 $6,686 $ 2,749 $102 $ 22,766
======= ====== ======= ==== ========
</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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Three Months Ended June 30 Six Months Ended June 30
-------------------------- ---------------------------
1997 1996 1997 1996
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Interest income:
Interest and fees on loans $ 2,668 $ 2,355 $ 5,129 $ 4,637
Interest on federal funds sold 31 53 147 138
Interest on balances in banks 4 - 9 -
Interest on securities:
U.S. Treasury securities 32 90 89 221
Other U.S. government agency obligations 1,045 647 1,831 1,257
States and political subdivisions 5 - 10 -
Other securities 36 29 55 29
----------- ----------- ----------- -----------
Total interest income 3,821 3,174 7,270 6,282
----------- ----------- ----------- -----------
Interest expense:
Interest bearing demand deposits 830 690 1,611 1,361
Savings and time deposits less than $100,000 530 460 987 958
Time deposits $100,000 and over 432 405 838 835
Interest on Federal Home Loan Bank borrowings 173 - 303 -
Federal funds purchased 19 3 26 3
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Total interest expense 1,984 1,558 3,765 3,157
----------- ----------- ----------- -----------
Net interest income 1,837 1,616 3,505 3,125
Provision for possible loan losses 25 - 50 -
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Net interest income after provision for
possible loan losses 1,812 1,616 3,455 3,125
Non-interest income:
Service fee income 100 40 196 75
Trust income 103 122 220 203
Investment Center income 29 21 51 33
Gain (loss) on sale of securities 2 ( 2) 2 ( 2)
Income from foreclosed assets 12 6 15 121
Gain on sale of foreclosed assets 2 - 2 5
Other 64 42
112 60
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Total non-interest income 312 229 598 495
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Non-interest expense:
Salaries and employee benefits 657 611 1,348 1,167
Occupancy expense 177 118 367 231
FDIC insurance 5 1 9 2
Advertising 45 43 125 69
Audit, tax and accounting 54 70 116 103
Data processing expense 61 46 119 108
Other operating expenses 310 291 657 530
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Total non-interest expense 1,309 1,180 2,741 2,210
----------- ----------- ----------- -----------
Income before income taxes 815 665 1,312 1,410
Provision for income taxes 277 15 472 30
----------- ----------- ----------- -----------
Net income $ 538 $ 650 $ 840 $ 1,380
=========== =========== =========== ===========
Earnings per share (Note F) $ .24 $ .29 $ .38 $ .62
=========== =========== =========== ===========
Weighted average common shares outstanding 2,228,602 2,215,507 2,228,079 2,213,589
=========== =========== =========== ===========
</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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<CAPTION>
Six Months Ended June 30,
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1997 1996
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Cash flows from operating activities:
Interest received $ 7,079 $ 6,395
Fees received 597 498
Interest paid ( 3,371) ( 3,360)
Cash paid to suppliers and associates ( 3,151) ( 2,327)
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Net cash provided by operating activities 1,154 1,206
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Cash flows from investing activities:
Proceeds from sales of securities available for sale 2,479 6,016
Maturities of securities available for sale 10,073 5,972
Purchases of securities available for sale ( 28,325) ( 7,135)
Loans (originated) repaid by customers, net ( 9,314) ( 5,494)
Capital expenditures ( 439) ( 15)
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Net cash (used) provided by investing activities ( 25,526) ( 656)
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Cash flows from financing activities:
Net increase demand deposits, NOW, money market accounts 3,749 7,361
Net increase (decrease) in certificates of deposit 14,880 ( 3,592)
Increase in Federal Home Loan Bank borrowings 5,000 -
Increase in Federal funds purchased - 3,000
Proceeds from issuance of common stock 24 77
Dividends paid ( 221) ( 176)
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Net cash provided by financing activities 23,432 6,670
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Net increase (decrease) in cash and cash equivalents ( 940) 7,220
Cash and cash equivalents - beginning of period 12,953 7,279
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Cash and cash equivalents - end of period $ 12,013 $ 14,499
========= =========
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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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Six Months Ended June 30,
----------------------------
1997 1996
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Reconciliation of net income to net cash provided by operating activities:
Net income $ 840 $ 1,380
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 198 102
Provision for possible loan losses 50 -
Provision for deferred taxes 122 -
Gain on sale of foreclosed assets ( 2) ( 5)
(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 ( 200) 145
Increase (decrease) in accounts payable and accrued liabilities 148 ( 421)
------- -------
Net cash provided by operating activities $ 1,154 $ 1,206
======= =======
Supplemental Disclosure:
Non Cash Transactions:
Change in unrealized gain (loss) on securities available for sale, net of tax $ 38 $( 465)
======= =======
</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
JUNE 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 $30.1 million
at June 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 Six Months Ended
June 30, 1997 June 30, 1997
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Balance, beginning of period $ 2,963 $ 2,878
Provision charged (credited) to operations 25 50
Loans charged off ( 40) ( 40)
Recoveries 62 122
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Balance, end of period $ 3,010 $ 3,010
======= =======
Allowance ratios are as follows:
Balance, to loans outstanding end of period 2.57% 2.57%
Net (charge-offs) recoveries to average loans .02% .07%
</TABLE>
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<PAGE> 9
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 30, 1997, the Company recorded investment in impaired loans and
the related valuation allowance calculated under SFAS No. 114 are
$357,000 and $184,000, 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 six
months ended June 30, 1997 were $365,000 and $364,000, 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 six month
periods ended June 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 Six Months Ended
June 30, 1997 June 30, 1997
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Computed "expected" tax expense $277 $446
Other, net - 26
---- ----
Total Income Tax Expense $277 $472
==== ====
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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
JUNE 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
June 30, 1997, are presented below (in thousands):
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Deferred tax assets:
Deferred fees, principally due to timing differences in the recognition of income $ 139
Net operating loss carryforwards 18
Other 12
------
Total gross deferred tax assets 169
------
Deferred tax liabilities:
Discount on securities deferred for tax purposes ( 99)
Unrealized gain on securities available for sale ( 62)
Loans, principally due to provision for possible losses (193)
Premises and equipment, principally due to differences in depreciation methods ( 56)
Other ( 25)
------
Total gross deferred tax liabilities (435)
------
Net deferred tax liabilities $ (266)
======
</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 expires in 2007.
F. SHAREHOLDERS' EQUITY
The Company had outstanding stock options totaling 75,000 shares at
June 30, 1997.
At June 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
JUNE 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 six month periods in 1997 were $.24 and $.38,
respectively. Pro forma diluted earnings per share for such periods
were $.24 and $.38, respectively. Stock options to purchase 75,000
common shares at June 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 calculations because the
exercise price has not exceeded the market price for substantially all
of the respective reporting periods, 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 June 30, 1997, the Company had unfunded
commitments to extend credit totaling $41.7 million consisting of
unfunded lines of credit and commitments to extend credit.
Additionally, the Company had standby letters of credit of $3.2
million as of June 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 six months period ended June 30, 1997, totaled
approximately $1,707,000 and $1,625,000. The required balance at June
30, 1997 was $1,387,000.
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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 June 30, 1997 and December 31, 1996, and results of
operations for the second 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 $538,000 was reported for the second quarter of 1997 compared
with net income of $650,000 for the second quarter of 1996. This decrease of
$112,000 in net income resulted from an increase of $262,000 in provision for
income taxes. The Company earned $.24 per share for the second quarter of
1997, a 17% decrease from the $.29 per share reported for the second quarter of
1996. 1996 earnings had the benefit of a Federal tax loss carryforward which
was fully utilized during the fourth quarter of 1996. 1997 earnings were
impacted by an effective tax rate that more closely approximates the applicable
statutory tax income tax rates.
The Company's annualized return on average assets was 1.15% for the second
quarter of 1997 and 1.70% for the second quarter of 1996. Annualized return on
average equity was 9.61% for the second quarter of 1997 and 12.64% for the same
period in 1996.
Net income for the six month period ended June 30, 1997, was $840,000 and
included a $50,000 provision for possible loan losses and $472,000 provision
for income taxes compared with net income of $1,380,000 during the first six
months of 1996, a period in which the Company reported a zero provision for
possible loan losses and only $30,000 in provision for income taxes. Earnings
per share were $.38 for the six months ended June 30, 1997, compared with $.62
for the same period in 1996. Net interest income increased $380,000, 12.2%,
during the first six months in 1997 from the same period in 1996. Non-interest
income increased $103,000, 20.8%, during the first six months of 1997 compared
with the same period in 1996, resulting primarily from increases in service fee
income. This increase was partially offset by a decrease in income from
foreclosed assets. Non-interest expense increased $531,000, 24.0%, during the
first six months of 1997 compared with the same period in 1996. This increase
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 .93% for the six months ended June 30, 1997 and
1.79% for the same period in 1996. Annualized return on average equity was
7.60% for the six months ended June 30, 1997 and 13.61% 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 second
quarter of 1997 was $1.8 million, an increase of $.2 million, or 13.7%,
compared to the second quarter of 1996. The increase in net interest income
resulted from a 21.5% increase in the volume of average earning assets and a 8
basis point decrease in the average interest rate earned on those assets. Also
impacting net interest income was a 23.0% increase in the volume of interest
bearing liabilities and an 18 basis point increase in the average rate paid on
those liabilities. The increase in volume of average earning assets may be
attributed to a $12.5 million increase in average loans outstanding, and a
$21.4 million increase in average investments which were partially offset by a
$1.9 million decrease in Federal Funds sold. The mix of these assets changed
somewhat as the percentage of average investments to earning assets increased
from 29.9% to 36.4% during the second quarter of 1997 compared with the same
period in 1996. Loans represented 62.1% of average earning assets in the
second quarter of 1997 compared to 67.1% for the same period in 1996. Net
interest income was impacted by a shift in the mix of interest bearing
liabilities during the second quarter of 1997 compared to the same period in
1996. The average volume of Money Market Accounts increased $8.1 million, or
14.6%, while the average volume of NOW Accounts increased $.2 million, 3.0%,
certificates of deposit less than $100,000 increased $5.2 million, 16.7%, and
certificates of deposit $100,000 or greater increased $1.4 million, 4.8%.
Additionally, average borrowed funds were $13.4 million during the second
quarter of 1997, while there were less than $1 million in borrowed funds during
the same period of 1996. These borrowed funds were primarily comprised of
Federal Home Loan Bank borrowings. The average rate paid increased 10 basis
points on certificates of deposit $100,000 or greater, decreased 8 basis points
on certificates of deposit less than $100,000, while the average rate paid on
Money Market Accounts increased 12 basis points, and the average rate paid on
NOW Accounts increased 149 basis points as the Company introduced its "High
Yield Checking" product.
Total interest income increased $647,000, or 20.4%, in the second quarter of
1997 compared to the same period in 1996. This increase was primarily the
result of the increase of 21.5% in the average volume of earning assets. Total
interest expense increased $426,000, or 27.3%, in the second quarter of 1997
compared to the same period in 1996. This increase resulted primarily from the
increase in the average volume of interest bearing liabilities of 23.0%. The
increase in average volume of interest bearing liabilities is primarily
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 4.0% and 4.3% for the quarters ended June 30, 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.
Net interest income for the first six months of 1997 was $3.5 million, an
increase of 12.2%, compared to $3.1 million during the first six months of
1996. The increase in net interest income during the first six months of 1997
resulted from an increase of 16.5% in the volume of average earning assets,
while average interest bearing liabilities increased 17.6%. Average rates
earned on earning assets declined 6 basis points while average rates paid on
interest bearing liabilities increased 7 basis points during the first six
months of 1997 compared to the same period in 1996. Net interest income was
also impacted by the shift in the mix of average earning assets which reflected
loans increasing by 10.9% while investments increased 29.6% and Federal Funds
sold increased by 3.3%. A shift in the mix of average interest bearing
liabilities also contributed to the improvement in net interest income as funds
grew more significantly in Money Market Accounts and Federal Home Loan Bank
advances than in higher rate certificates of deposit. This shift in mix in
average interest bearing liabilities was comprised of increases of $8.3 million
in Money Market Investment Accounts, $10.8 million in Federal Home Loan Bank
advances, $1.9 million in certificates of deposit less than $100,000, and $.8
million in Federal Funds sold. These increases were partially offset by a
decrease of $.3 million in NOW Accounts. Although the movement of funds into
more liquid transaction accounts that has occurred in the past six months had
the effect of lowering the cost of funds, it also positioned this money to
reprice more rapidly in a changing interest rate environment. More growth in
the liquid deposit accounts rather than certificates of deposit and generally
reflects an expectation that interest rates will continue to rise.
-11-
<PAGE> 14
The net interest margin (net interest income expressed as a percentage of
average earning assets) was 4.0% and 4.3% for the quarter ended June 30, 1997
and 1996, respectively. Net interest margin was 4.0% for the six month period
ended June 30, 1997, compared to 4.1% for the same period in 1996. The decline
in net interest margin for the three month and six month periods ended June 30,
1997 compared to the same periods in 1996, resulted primarily from the
implementation of an asset liability management strategy, approved and
monitored by the Company's Board of Directors, which consisted of matching
Federal Home Loan Bank borrowings to fund the purchase of additional investment
securities. 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 June 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 $3 million in borrowed funds at June
30, 1996.
NON-INTEREST INCOME
Non-interest income was $312,000 for the second quarter of 1997, compared with
$229,000 for the same period in 1996. Excluding gains(losses) on sale of
securities and sale of foreclosed assets, totaling $4,000 in 1997 and ($2,000)
in 1996, non-interest income increased $77,000 in 1997 from the same period in
1996. This increase was comprised of an increase of $60,000 in service fee
income, $8,000 in Investment Center income, $6,000 in income from foreclosed
assets and $22,000 in other miscellaneous income areas. These increases were
partially offset by a decline of $19,000 in Trust income.
Total non-interest income was $598,000 for the first six months of 1997,
compared with $495,000 for the same period in 1996. Non-interest income,
excluding gains(losses) on sale of securities and foreclosed assets of $4,000
in 1997 and $3,000 in 1996, increased $102,000 for the first six months of 1997
compared with the same period in 1996. Increases in 1997 compared to 1996 of
$121,000 in service fee income, primarily in the area of charges for checks
drawn on insufficient funds, $17,000 in Trust income, $18,000 in Investment
Center income and $52,000 in other miscellaneous income categories were
partially offset by a decrease of $106,000 in income from foreclosed assets.
The decrease in income from foreclosed assets during 1997 was the result of
income received in 1996 from liquidating a partnership interest which was no
longer carried on the Company's balance sheet.
NON-INTEREST EXPENSE
Total non-interest expense increased $129,000 during the second quarter of 1997
compared with the second quarter of 1996. This increase was the result of
increases of $46,000 in salaries and employee benefits, $59,000 in occupancy
expense, $4,000 in FDIC insurance, $15,000 in data processing expense and
$19,000 in other miscellaneous operating categories. These increases were
partially offset by a decrease of $16,000 in audit, tax and accounting expense.
The increase in salaries and employee benefits and occupancy expense were
primarily the result of the Company having opened its first branch office in
Green Hills in January of 1997.
Total non-interest expenses increased $531,000, or 24.0%, during the first six
months of 1997 compared with the same period of 1996. Increases were reflected
primarily in the areas of salaries and employee benefits, occupancy expense and
advertising expense. These increases were 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. At June 30, 1997, the Company had 52 employees (1 employee per
$3.7 million in assets) compared with 43 employees (1 employee per $3.7 million
in assets) at June 30, 1996 and 52 employees (1 employee per $3.2 million in
assets) at December 31, 1996.
-12-
<PAGE> 15
INCOME TAXES
During the second quarter of 1997, the Company recorded provision for income
taxes of $277,000 compared to $15,000 during the same period in 1996. During
1996, reported earnings benefited from a Federal tax loss carry forward which
was fully utilized during the fourth quarter of 1996. Having fully utilized
the Federal net operating loss carry forward, the 1997 effective tax rate more
closely approximates the applicable statutory income tax rate. The Company
continues to benefit from a State net operating loss carryforward. Reference
should be made to Note E of the financial statements.
During the first six months of 1997, the Company reported provision for income
taxes of $472,000 compared to $30,000 during the same period in 1996.
CREDIT QUALITY AND ALLOWANCE
Nonperforming assets, which include nonaccrual loans, restructured loans and
foreclosed properties were $515,000 at June 30, 1997, a decrease of $64,000
from $579,000 at December 31, 1996 and representing a decrease of $45,000 from
the $560,000 reported at June 30, 1996. There were no loans 90 days or more
past due and still accruing interest at June 30, 1997 or 1996. Potential
problem loans totaled approximately $164,000 at June 30, 1997, compared with
$510,000 at June 30, 1996 and $84,000 at December 31, 1996.
The Company recorded $25,000 in expense for provision for possible loan losses
during the second quarter of 1997, compared with no expense for provision for
possible loan losses during the same quarter of 1996. Net loan recoveries were
$22,000 in the second quarter of 1997 compared with $3,000 for the same period
in 1996. The allowance for possible loan losses was $3.0 million at June 30,
1997 compared to $3.2 million at June 30, 1996 and $2.9 million at December 31,
1996. Loan and valuation reserves as a percentage of total nonperforming
assets were 584% and 567% at June 30, 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 in the estimation process, no assurance can be given as the
amount of the allowance at any future date.
BALANCE SHEET
The Company's total assets at June 30, 1997, were $191.0 million, an increase
of $24.3 million from December 31, 1996. This increase reflects the results of
the Company's expansion of its delivery system through mobile branching and the
establishment of its 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. The increase in total
assets was the result of an increase of $15.8 million in investment
securities, $9.4 million in total loans and $306,000 in premises and equipment.
These increases were partially offset by a decrease of $1.8 million in Federal
Funds sold. Total deposits at June 30, 1997, were $151.9 million, an increase
of $18.6 million from $133.3 million at December 31, 1996. The increase in
deposits was comprised of an increase of $4.1 million in non-interest bearing
demand deposits, $1.7 million in NOW Accounts, $10.0 million in time
certificates less than $100,000 and $4.9 million in time certificates $100,000
and greater. These increases were partially offset by a decrease of $2.0
million in Money Market Accounts. Federal Home Loan Bank borrowings increased
$5 million from $9.5 million at December 31, 1996 to $14.5 million at June 30,
1997 as a result of the Company's asset/liability management leveraging
strategy.
Shareholders' equity (adjusted for SFAS No. 115) increased $681,000 to $22.8
million at June 30, 1997 from $22.1 million at December 31, 1996. The Company
recorded dividend payments of $221,000 during the first six months of 1997
compared with $176,000 for the same period in 1996. Unrealized gain on
securities available for sale, net of income taxes, was $102,000 at June 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.
-13-
<PAGE> 16
CAPITAL ADEQUACY AND LIQUIDITY
The Company's capital position continued to remain strong during the first six
months of 1997. Shareholders' equity (excluding SFAS No. 115 adjustments) at
June 30, 1997, was $22.7 million, or 11.9% 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 June 30, 1997,
was $22.8 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 second quarter of 1997 was primarily a result of current period earnings
and an increase in the unrealized gain on securities available for sale. The
effect of these items was partially offset by the payment of dividends of
$221,000 in the first six months of 1997 compared with $176,000 for the same
period of 1996. At June 30, 1997, the Company's primary and total capital
ratios to adjusted assets were 17.8% and 20.0%, 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 19.1% at June 30, 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 7.12 years at June 30, 1997,
compared to 3.4 years at December 31, 1996. Securities available for sale were
$62.2 million at June 30, 1997, compared to $46.4 million at December 31, 1996.
Federal Funds sold were $5.0 million at June 30, 1997 compared with $6.8
million at December 31, 1996. Core deposits, a relatively stable funding base,
comprised 80.2% of total deposits at June 30, 1997, and 81.2% 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
effective April 30, 1996. 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
consummated the formation of the holding company and received approval of The
Bank's shareholders, 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
At the Company's annual meeting of shareholders held on Tuesday, May 6,
1997, the following items were voted on an are herein incorporated by reference
to the Proxy Statement for the annual meeting of shareholders previously filed
with the Commission.
1. To elect nine (9) Directors to serve until the next Annual meeting or until
their successors are elected and qualified;
2. To transact such other business as may properly be brought before the
Annual meeting or any adjournments thereof.
The following reflects the vote of the shareholders of the items noted above:
<TABLE>
<CAPTION>
Item # Affirmative Negative Abstain
------ ----------- -------- -------
<S> <C> <C> <C>
1. 1,642,197
</TABLE>
* Included in the affirmative votes are negative votes against specific
Directors disclosed as follows:
<TABLE>
<S> <C>
J. B. Baker 9,432
Jo D. Federspiel 9,432
Richard H. Fulton 10,676
Mack S. Linebaugh, Jr. 9,432
Louis A. McRedmond 10,432
Leon Moore 59,232
Perry W. Moskovitz 65,972
C. Norris Nielsen 56,846
G. Edgar Thornton 55,746
-------
287,203
=======
</TABLE>
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) Report on Form 8-K filed during the quarter ended June 30, 1997 was as
follows:
April 9, 1997 reported the promotion of T. Wayne Hood to Senior Vice
President of Community Financial Group, Inc., and Senior Vice
President/General Counsel and Senior Trust Officer of the Company's
wholly owned subsidiary, The Bank of Nashville.
-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
August 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 Six Months Ended
--------------------------- ----------------------
June 30, June 30
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income Per Common Share (1)
Net income (in thousands) $ 538 $ 650 $ 840 $ 1,380
========= ========= ========= =========
Net income per share $ .24 $ .29 $ .38 $ .62
========= ========= ========= =========
Weighted average common shares outstanding 2,228,602 2,215,507 2,228,079 2,213,589
========= ========= ========= =========
Income Per Common Share, Assuming
Full Dilution (1)
Net income (in thousands) $ 538 $ 650 $ 840 $ 1,380
========= ========= ========= =========
Net income per share $ .24 $ .29 $ .38 $ .62
========= ========= ========= =========
Weighted average common shares outstanding 2,228,602 2,215,507 2,228,079 2,213,589
========= ========= ========= =========
</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 June 30, 1997. See Note F to CFGI's
consolidated financial statements.
-17-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COMMUNITY FINANCIAL FOR THE SIX MONTHS ENDED JUNE 30,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,538
<INT-BEARING-DEPOSITS> 475
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,218
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 117,284
<ALLOWANCE> 3,010
<TOTAL-ASSETS> 190,978
<DEPOSITS> 151,899
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,813
<LONG-TERM> 14,500
0
0
<COMMON> 13,229
<OTHER-SE> 9,537
<TOTAL-LIABILITIES-AND-EQUITY> 190,978
<INTEREST-LOAN> 5,129
<INTEREST-INVEST> 1,985
<INTEREST-OTHER> 156
<INTEREST-TOTAL> 7,270
<INTEREST-DEPOSIT> 3,436
<INTEREST-EXPENSE> 3,765
<INTEREST-INCOME-NET> 3,505
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 2,741
<INCOME-PRETAX> 1,312
<INCOME-PRE-EXTRAORDINARY> 1,312
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 840
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
<YIELD-ACTUAL> 3.98
<LOANS-NON> 515
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 164
<ALLOWANCE-OPEN> 2,878
<CHARGE-OFFS> 40
<RECOVERIES> 122
<ALLOWANCE-CLOSE> 3,010
<ALLOWANCE-DOMESTIC> 2,302
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 708
</TABLE>
