<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, 1998
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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)
Tennessee 62-1626938
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(State or other jurisdiction of (I.R.S Employer
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 (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 2,382,173 as of May 8, 1998.
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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, 1998.................................... 1
- Consolidated Statement of Shareholders' Equity - Three Months
Ended March 31, 1998........................................................ 2
- Consolidated Statements of Income
- Three Months Ended March 31, 1998 and 1997................................ 3
- Consolidated Statements of Cash Flows
- Three Months Ended March 31, 1998 and 1997................................ 4 - 5
- Notes to Consolidated Financial Statements - March 31, 1998.................... 6 - 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................ 10 - 15
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS........................................................................ 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................... 16 - 18
</TABLE>
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COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Cash and due from banks $ 8,859
Interest-bearing balances with banks 151
Federal funds sold 9,000
Securities available for sale (amortized cost $63,131) 63,607
Loans (net of unearned income of $295):
Commercial 38,669
Real estate - mortgage loans 71,641
Real estate - construction loans 11,440
Consumer 4,522
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Loans, net of unearned income 126,272
Less allowance for possible loan losses (3,207)
---------
Total Net Loans 123,065
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Premises and equipment, net 947
Accrued interest and other assets 1,532
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Total Assets $ 207,161
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits $ 13,694
Interest-bearing deposits:
NOW accounts 9,273
Money market accounts 80,780
Time certificates less than $100,000 32,349
Time certificates $100,000 and greater 29,961
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Total Deposits 166,057
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Federal Home Loan Bank borrowings 14,500
Accounts payable and accrued liabilities 2,008
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Total Liabilities 182,565
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Commitments and contingencies --
Shareholders' equity (Note F):
Common stock, $6 par value; authorized 50,000,000 shares; issued and
outstanding 2,215,063 shares 13,290
Additional paid-in capital 6,755
Retained earnings 4,255
Accumulated other comprehensive income, net of tax 296
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Total Shareholders' Equity 24,596
---------
Total Liabilities and Shareholders' Equity $ 207,161
=========
</TABLE>
See accompanying notes to consolidated financial statements.
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COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income, Net
Stock Capital Earnings of Tax Total
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<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $13,275 $6,736 $ 3,747 $294 $ 24,052
Comprehensive income:
Net income -- -- 640 --
Change in unrealized gain on securities
available for sale -- -- -- 2
Total comprehensive income -- -- -- -- 642
Issuance of common stock - (2,643 shares) 15 19 -- -- 34
Cash dividends - $.06 per share -- -- (132) -- (132)
------- ------ ------- ---- --------
Balance, March 31, 1998 $13,290 $6,755 $ 4,255 $296 $ 24,596
======= ====== ======= ==== ========
</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
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1998 1997
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<S> <C> <C>
Interest income:
Interest and fees on loans $ 2,886 $ 2,461
Interest on federal funds sold 77 116
Interest on balances in banks 2 5
Interest on securities:
U.S. Treasury securities 32 57
Other U.S. government agency obligations 1,011 786
States and political subdivisions 10 5
Other securities 28 19
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Total interest income 4,046 3,449
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Interest expense:
Interest bearing demand deposits 897 781
Savings and time deposits less than $100,000 482 457
Time deposits $100,000 and over 430 406
Interest on Federal Home Loan Bank borrowings 3 7
Federal funds purchased 206 130
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Total interest expense 2,018 1,781
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Net interest income 2,028 1,668
Provision for possible loan losses 39 25
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Net interest income after provision for possible loan losses 1,989 1,643
Non-interest income:
Service fee income 125 96
Trust income 40 117
Investment Center income 26 22
Income from foreclosed assets -- 3
Gain on sale of foreclosed assets 17 --
Other 88 48
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Total non-interest income 296 286
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Non-interest expense:
Salaries and employee benefits 653 691
Occupancy expense 186 190
FDIC insurance 6 4
Advertising 23 80
Audit, tax and accounting 47 62
Data processing expense 44 58
Other operating expenses 286 347
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Total non-interest expense 1,245 1,432
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Income before income taxes 1,040 497
Provision for income taxes 400 195
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Net income $ 640 $ 302
========== ==========
Earnings per share (Note F) $ .29 $ .14
========== ==========
Basic weighted average common shares outstanding 2,213,868 2,203,098
========== ==========
Diluted earnings per share: $ .22 $ .14
========== ==========
Diluted weighted average common shares outstanding 2,866,809 2,231,450
========== ==========
</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>
Three Months Ended
March 31
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1998 1997
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Cash flows from operating activities:
Interest received $ 3,924 $ 3,242
Fees received 296 286
Interest paid (2,501) (1,573)
Cash paid to suppliers and associates (1,108) (1,508)
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Net cash provided by operating activities 611 447
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Cash flows from investing activities:
Maturities of securities available for sale 6,464 5,450
Purchases of securities available for sale (4,006) (27,445)
Loans (originated) repaid by customers, net (3,483) (3,744)
Capital expenditures (27) (432)
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Net cash used by investing activities (1,052) (26,171)
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Cash flows from financing activities:
Net increase demand deposits, NOW, money market accounts 6,815 1,537
Net increase (decrease) in certificates of deposit (4,857) 16,131
Increase in Federal Home Loan Bank borrowings -- 1,600
Proceeds from issuance of common stock 34 16
Dividends paid (132) (111)
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Net cash provided by financing activities 1,860 19,173
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Net increase (decrease) in cash and cash equivalents 1,419 (6,551)
Cash and cash equivalents - beginning of period 16,591 12,953
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Cash and cash equivalents - end of period $ 18,010 $ 6,402
========== ==========
</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
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1998 1997
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<S> <C> <C>
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 640 $ 302
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 86 96
Provision for possible loan losses 39 25
Provision for deferred taxes -- 87
Gain on sale of foreclosed assets (17) --
Stock dividend income (28) --
Changes in assets and liabilities:
(Increase) decrease in accrued interest and other assets 119 (206)
Increase (decrease) in accounts payable and accrued
liabilities (228) 143
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Net cash provided by operating activities $ 611 $ 447
========== ==========
Supplemental Disclosure:
Non Cash Transactions:
Change in unrealized gain on securities available
for sale, net of tax $ 2 $ (196)
========== ==========
</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, 1998
(UNAUDITED)
A. HOLDING COMPANY INFORMATION 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. 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 1997 Annual Report
to Shareholders. The results for the interim period are not necessarily
indicative of results to be expected for the complete calendar year.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," effective January
1, 1998. SFAS No. 130 establishes standards for reporting comprehensive
income. Comprehensive income includes net income and other
comprehensive income which is defined as non-owner related transactions
in equity. Prior periods have been reclassified to reflect the
application of the provisions of SFAS No. 130.
B. SECURITIES
Securities with an aggregate fair market value of $32.8 million at
March 31, 1998, were pledged to secure public deposits, Federal Home
Loan Bank borrowings and for other purposes as required or permitted by
law.
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<PAGE> 9
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
C. ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the changes in the allowance for possible loan losses
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
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Balance, beginning of period $ 3,128
Provision charged to operations 39
Loans charged off (20)
Recoveries 60
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Balance, end of period $ 3,207
=======
Allowance ratios are as follows:
Balance, to loans outstanding end of period 2.54%
Net (charge-offs) recoveries to average loans .03%
</TABLE>
D. IMPAIRED LOANS
At March 31, 1998, the Company recorded investment in impaired loans
and the related valuation allowance are $163,000 and $51,000,
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, was $169,000.
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 month period ended March
31, 1998.
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, 1998
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Computed "expected" tax expense $353
State tax expense, net of federal benefit 41
Other, net 6
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Total Income Tax Expense $400
====
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The Company uses 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.
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, 1998
(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, 1998, are presented below (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Deferred fees, principally due to timing differences in the recognition of income $ 147
Other 9
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Total gross deferred tax assets 156
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Deferred tax liabilities:
Discount on securities deferred for tax purposes (113)
Unrealized gain on securities available for sale (181)
Loans, principally due to provision for possible losses (160)
Premises and equipment, principally due to differences in depreciation methods (32)
Other (56)
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Total gross deferred tax liabilities (542)
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Net deferred tax liabilities $(386)
=====
</TABLE>
F. SHAREHOLDERS' EQUITY
The Company had outstanding stock options totaling 98,000 shares at
March 31, 1998.
At March 31, 1998, warrants to purchase 4,737,729 shares of the Company
common stock were outstanding. This exercise price of the warrants is
$12.50, and they expire on December 31, 1998.
Subsequent to March 31, 1998 and as of May 8, 1998 166,707 shares of
common stock were issued as a result of the exercise of warrants. This
resulted in an increase in capital of $2,084,000.
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<PAGE> 11
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
F. SHAREHOLDERS' EQUITY - CONTINUED
In December 1997, the Company adopted SFAS No. 128, "Earnings Per
Share".
The following table is a reconciliation of net income and average
shares outstanding used in calculating basic and diluted earnings per
share.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
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<S> <C> <C>
Net income available to common shareholders: $ 640,000 $ 302,000
========== ==========
Weighted average common shares outstanding
Basic 2,213,868 2,203,098
Dilutive effect of
Options 41,432 28,352
Warrants 611,509 --
---------- ----------
Weighted average common shares outstanding
Diluted 2,866,809 2,231,450
========== ==========
Antidilutive securities
Warrants -- 4,744,742
========== ==========
Net income per share:
Basic $ .29 $ .14
Diluted $ .22 $ .14
</TABLE>
All calculations of prior period earnings per share have been restated
to conform with SFAS No. 128.
Accumulated other comprehensive income consists solely of the
unrealized gain or loss on securities available for sales net of the
income tax effect.
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, 1998, the Company had unfunded commitments
to extend credit totaling $49.4 million consisting of unfunded lines of
credit and commitments to extend credit. Additionally, the Company had
standby letters of credit of $4.4 million as of March 31, 1998.
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 month period ended March 31, 1998, totaled
approximately $2,180,000. The required balance at March 31, 1998 was
$2,287,000.
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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 and owns The
Bank of Nashville (The Bank), both of which are collectively referred to as the
Company. The following discussion compares the Company's financial condition at
March 31, 1998 and December 31, 1997, and results of operations for the first
quarter of 1998 with the same period in 1997. The purpose of this discussion is
to focus on important factors affecting the Company's financial condition and
results of operations. Reference should be made to the consolidated financial
statements (including the notes thereto), and the selected financial data
presented elsewhere in this report for an understanding of the following
discussion and analysis. 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 be also made to the Company's 1997 Annual Report for a
more complete discussion of factors that impact the results of the operations,
liquidity and capital. To the extent that the statements in this discussion
relate to the plans, objectives, or future performance of the Company, these
statements may be deemed to be forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements are based
on management's current expectations and the current economic environment.
Actual strategies and results of future periods may differ materially from those
currently expected due to various risks and uncertainties.
OVERVIEW
For the quarter ended March 31, 1998, net income totaled $640,000, a $338,000 or
111.9% increase over the $302,000 of net income reported for the first quarter
of 1997. Earnings in the first quarter of 1997 were impacted by additional
expenses incurred as a result of the Company having opened a full service branch
location in Green Hills during January, 1997. Basic earnings per share were $.29
in the first quarter of 1998, up 107% from $.14 for the same period in 1997.
Diluted earnings per share were $.22 in the first quarter of 1998, compared to
$.14 for the same period in 1997. Per share amounts reported are computed in
accordance with SFAS No. 128 which was effective for financial statements issued
after December 15, 1997. Earnings per share as of March 31, 1997 have been
restated.
During the first quarter of 1998, the Company recorded $39,000 in provision for
possible loan losses, compared to $25,000 during the first quarter of 1997.
During the first quarter of 1998, the Company had net recoveries of $40,000
compared to net recoveries of $60,000 during the first quarter of 1997. The
allowance for possible loan losses was 2.5% of loans at March 31, 1998, compared
with 2.7% for the same period in 1997.
The Company's annualized return on average assets was 1.29% for the first
quarter of 1998 compared to .70% for the first quarter of 1997. Annualized
return on average equity was 10.86% for the first quarter of 1998 and 5.56% for
the same period in 1997.
The Company's non-performing assets were $559,000 at March 31, 1998, compared to
$1,227,000 at December 31, 1997. Total loans, net of unearned income, were
$126.3 million at March 31, 1998, an increase of $3.6 million, or 2.9%, from
$122.7 million at December 31, 1997. Total loans net of unearned income
increased $14.6 million, or 13.1%, at March 31, 1998, compared to March 31,
1997.
The Company's average equity to average assets ratio, excluding SFAS No. 115
adjustments, was 11.95% at March 31, 1998 compared to 12.63% at March 31, 1997.
The Company recorded quarterly dividends of $.05 per share during each quarter
of 1997 and recorded a $.06 per share dividend during the first quarter of 1998.
During the first quarter of 1998, income, excluding the provision for possible
loan losses, non-recurring income from foreclosed assets, and gains (losses) on
sale of securities and foreclosed assets increased $336,000, or 105.9%, from
$318,000 in the first quarter of 1997 to $654,000 for the same period in 1998.
Non-interest income increased $10,000 during the first quarter of 1998 compared
with the same period in 1997. This was comprised of $36,000 in mortgage
origination referral fees, $29,000 in service fee income, $17,000 in gain on
sale of foreclosed assets and $4,000 in investment center income. These
increases were generally offset by a decrease in trust income of $77,000 as a
result of the decision in late 1997 to restructure how investment services were
offered by discontinuing most traditional trust services and redirecting efforts
to an expanded investment services department provided in conjunction with L. M.
Financial Partners, Inc. This decision relative to trust and investment services
has the effect
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<PAGE> 13
of reducing both non-interest income and non-interest expense. Non-interest
expense decreased $187,000 in the first quarter of 1998 compared to the same
period in 1997. This decrease resulted primarily from a decrease in trust
related expenses, a decline in audit, tax and accounting expense as well as the
fact that 1997 results reflected significant expenses related to the opening of
the Green Hills Office. Net interest income after provision for possible loan
losses increased $346,000, or 21.1%, in the first period of 1998 compared to the
first quarter of 1997. This increase in net interest income reflected the
Company's loan growth and was a major factor in the improved earnings for the
first quarter of 1998 compared to the same period in 1997.
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 interest bearing liabilities. Fluctuations 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 increased $346,000,
or 21.1%, in the first quarter of 1998 compared to the same period in 1997. This
increase in the first quarter of 1998 compared to 1997 reflects a $597,000, or
17.3%, increase in interest income, and a $237,000, or 13.3%, increase in total
interest expense. Net interest income before provision for possible loan losses
increased $360,000 to $2.0 million in the first quarter of 1998 compared to $1.7
million for the same period in 1997. The increase in net interest income
resulted from a $24.6 million, or 14.5%, increase in the volume of average
earning assets and an increase of 20 basis points in the average rate earned on
those assets. Further impacting net interest income was the change in mix and
rate on interest bearing liabilities. These liabilities increased $23.1 million,
or 16.7%, while the average rate paid on interest bearing liabilities decreased
15 basis points in the first quarter of 1998 compared to the same period in
1997. The increase in the volume of average earning assets may be attributed to
a $15.3 million increase in average loans outstanding, and a $13.2 million
increase in average investments, which were partially offset by decreases of
37.4% and 87.1% in federal funds sold and due from banks balances, respectively.
This shift in the mix of total earning assets from lower rate federal funds sold
to higher yielding investments and loans contributed to the overall improvement
in net interest income. Average loans represented 63.4% of average earning
assets in the first quarter of 1998 compared to 63.6% for the same period in
1997 while average investments represented 33.5% of average earning assets in
the first quarter of 1998 compared to only 30.6% for the first quarter of 1997.
Net interest income was further impacted by a shift in the mix of interest
bearing liabilities. The volume of money market accounts increased $10.8
million, or 17.3%, certificates of deposits less than $100,000 increased $2.1
million, or 6.7%, certificates of deposit $100,000 or greater increased $1.3
million, or 4.4%, NOW accounts increased $4.3 million, or 77.5%, and federal
home loan bank and other borrowings increased $4.7 million, or 47.1%. This
growth in the Company's deposit products reflects the success of the expansion
into the Green Hills area and through mobile branching. The decline in average
rate paid on interest bearing liabilities was the result of a decline of 53
basis points on NOW accounts, 20 basis points on money market accounts and 6
basis points on certificates of deposits less than $100,000. These declines in
rate were partially offset by increases in rates paid on certificates of deposit
$100,000 or greater of 9 basis points and on federal home loan bank and other
borrowings of 23 basis points.
The net interest margin (net interest income expressed as a percentage of
average earning assets) was 4.17% and 3.93% for the quarters ended March 31,
1998 and 1997, respectively. Fluctuations in net interest margins were also
affected by differences in the interest rate sensitivity of the Company's
earnings assets and interest bearing liabilities.
NON-INTEREST INCOME
Non-interest income was $296,000 for the first quarter of 1998 compared with
$286,000 for the same period in 1997. Non-interest income, excluding gains
(losses) on sale of securities and foreclosed assets and income from foreclosed
assets, declined $4,000 during the first quarter of 1998 compared with the same
period for 1997. Income from foreclosed assets and gains on sale of foreclosed
assets was $17,000 during the first quarter of 1998 compared with $3,000 for the
same period in 1997. Non-interest income during the first quarter of 1998 was
impacted by a decision made in late 1997 to restructure how investment services
were offered by discontinuing most traditional trust services and redirecting
efforts to an expanded investment services department provided in conjunction
with L. M. Financial Partners, Inc. This decision impacts both non-interest
income and non-interest expense. During the first quarter of 1998 compared with
the same period in 1997, trust department income decreased $77,000. This
decrease was offset by increases in income of $29,000 in service fee income,
$3,000 in investment center income, $36,000 in mortgage origination referral fee
income and $5,000 in income related to debit and credit cards.
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<PAGE> 14
NON-INTEREST EXPENSE
Total non-interest expense (excluding the provision for loan losses) decreased
$187,000 during the first quarter of 1998 compared to the same period in 1997.
Approximately $115,000 of this decrease was related to the decision to
restructure the way trust services are provided and occurred in the trust
department. Overall, the Company's salaries and employee benefits declined
$38,000, occupancy expense decreased $4,000, advertising expense decreased
$57,000 (variance due to 1997 expenses related to the Green Hills branch
opening), audit tax and accounting expense decreased $15,000, data processing
expense decreased $14,000 and other operating expenses decreased $61,000 during
the first quarter of 1998 compared with the same period in 1997. At March 31,
1998, the Company had 50 employees (1 employee per $4.1 million in assets)
compared with 51 employees (1 employee per $3.6 million in assets) at March 31,
1997 and 47 (1 employee per $4.4 million in assets) at December 31, 1997.
The Company plans two additional branch locations in 1998. In late 1997, the
Company entered into a lease agreement to establish a branch office in the
Maryland Farms area of Brentwood, Tennessee. This location is currently
scheduled to open in the summer of 1998. Management has also signed a contract
to purchase a branch site in the Hendersonville area, subject to regulatory
approval. This location in Hendersonville is planned for late 1998 or early
1999. Other than expenses related to the expansion of the Company's delivery
systems and service locations, management anticipates only minimal growth in
most non-interest expense categories during 1998. Discontinuing most services
offered through the trust department while expanding the investment services
area provided through L. M. Financial Partners, Inc. should continue to
positively impact non-interest expense but will also reduce non-interest income.
It is expected that the Company's non-interest expense will increase somewhat
during the remainder of 1998 and during 1999 due to expenses related to the Year
2000 issue. The costs related to this project have been projected and are not
expected to exceed $100,000 annually in either 1998 or 1999. A more detailed
discussion of Year 2000 issues is presented under the caption, "Non-Performing
Assets and Risk Elements". It should be noted that economic conditions and other
factors in the market could impact non-interest expense.
INCOME TAXES
During the first quarter of 1998, the Company recorded provision for income
taxes of $400,000 compared to $195,000 during the same period in 1997. The
increase in provision for income taxes was the result of increased earnings.
Reference should be made to note E of the consolidated financial statements.
NON-PERFORMING ASSETS AND RISK ELEMENTS
Non-performing assets, which include non-accrual loans, restructured loans and
other real estate owned, were $559,000 at March 31, 1997, a decrease of $668,000
from $1,227,000 at December 31, 1997 and a decrease of $57,000 from the $616,000
reported at March 31, 1997. The Company maintains an allowance for possible loan
losses at a level which, in management's evaluation, is adequate to cover
estimated losses on loans based on available information at the end of the
reporting period. Considerations in establishing the allowance include
historical net charge-offs, changes in the credit risk, mix and volume of the
loan portfolio, and other relevant factors, such as the risk of loss on
particular loans, the level of non-performing assets and current and forecasted
economic conditions. In the first quarter of 1998, the Company recorded $39,000
in expense for provision for possible loan losses compared with $25,000 for the
same period in 1997. Provisions for possible loan losses were deemed appropriate
due to the growth in the loan portfolio. Net recoveries during the first quarter
of 1997 were $40,000 compared to net recoveries of $60,000 in the first quarter
of 1997. There were no loans 90 days or more past due and still accruing
interest at March 31, 1998 which compares with loans of $613,000 that were 90
days or more past due and still accruing interest at March 31, 1997. The loans
reported in 1997 were primarily guaranteed by a U. S. government agency and have
since been paid. Potential problem loans at March 31, 1998 totaled approximately
$664,000 compared with $169,000 at March 31, 1997, and $177,000 at December 31,
1997. Other potential problem loans consist of loans that are currently not
considered non-performing, but where information about possible credit problems
has caused the Company to have serious doubts as to the ability of the borrower
to fully comply with present repayment terms. Depending on economic changes and
future events, these loans and others, which may not be presently identified,
could become future non-performing assets. The composition of non-performing
assets at March 31, 1998, was 100% in non-accrual loans which compares to 89.2%
in non-accrual loans and 10.8% in other real estate owned at December 31, 1997.
The allowance for possible loan losses was $3.2 million at March 31, 1998,
compared with $3.0 million at March 31, 1997, and $3.1 million at December 31,
1997. Loan and valuation reserves as a percentage of total non-performing assets
were 574% at March 31, 1998, 481% at March 31, 1997, and 255% at December 31,
1997. 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.
-12-
<PAGE> 15
Management and the Board of Directors have established a Year 2000 (Y2K) Task
Force, adopted a comprehensive project plan, prepared budgets, and established
timetables for both conversion and testing. The Y2K issue refers to the process
of converting computer programs to recognize more than two digits identifying a
year in any date field. The Company recognizes the potential technological and
financial risks to both the company and its customers as the new millenium
approaches. Assuring that internal systems and external vendors upon whom the
Company is reliant on Y2K compliance is and will continue to be a major focus of
management. Initial assessments have been completed with budgets and plans
established to test, renovate and/or replace systems, as appropriate. The costs
related to this project have been projected and are not expected to exceed
$100,000 annually in either 1998 or 1999. In addition to assessing internal
systems, electronic interfaces, and vendors, the Company is cognizant of the
potential impact of Y2K on its borrowing customers and large depositors and has,
therefore, begun a process to address these relationships as well. A series of
newsletter articles is being sent to all customers, a Y2K seminar has been
conducted for customers, Y2K credit risk is being assessed on all loans above a
pre-determined amount, Y2K language is being incorporated into contracts and
loan agreements, and the Company continues to train all officers to be attuned
to the potential risks associated with the Year 2000.
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. To that end, Management actively
monitors and manages its interest rate risk exposure. The Company's
profitability is affected by fluctuations in interest rates. A sudden and
substantial movement in interest rates may adversely impact the Company's
earnings to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same basis. The
Company monitors the impact of changes in interest rates on its net interest
income using several tools. One measure of the Company's exposure to changes in
interest rates between assets and liabilities is shown in the company's March
31, 1998 gap table below:
<TABLE>
<CAPTION>
Expected Repricing or Maturity Date
-----------------------------------------------------------------
Within One Two After
One to Two to Five Five
(Dollars In Thousands) Year Years Years Year Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Debt and equity securities $ 30,143 $ 18,312 $13,880 $ 1,272 $ 63,607
Average rate 6.62% 6.92% 7.15% 6.68% 6.82%
Net interest-earning loans 87,972 7,385 20,481 10,434 126,272
Average rate 9.05% 9.14% 8.73% 8.74% 8.98%
Other 9,151 -- -- -- 9,151
Average rate 5.40% -- -- -- 5.40%
- ----------------------------------------------------------------------------------------------------
Total interest-bearing assets 127,266 25,697 34,361 11,706 199,030
Liabilities
Deposits 137,725 12,369 2,269 -- 152,363
Average rate 4.73% 5.94% 6.35% -- 4.86%
Federal Home Loan
Bank borrowings 14,500 -- -- -- 14,500
Average rate 5.60% -- -- -- 5.60%
- ----------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 152,225 12,369 2,269 -- 166,863
- ----------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (24,959) $ 13,328 $32,092 $11,706
====================================================================================================
Cumulative interest rate
sensitivity gap $ (24,959) $(11,631) $20,461 $32,167
====================================================================================================
</TABLE>
At least quarterly, the Asset Liability Committee (ALCO) of the Board of
Directors reviews interest rate risks considering results compared to policy,
current rates and economic outlook, loan and deposit demand levels, pricing and
maturity of assets and liabilities, impact on net interest income under varying
rate scenarios, regulatory developments, comparison of modified duration of both
assets and liabilities as well as any appropriate strategies to counteract
adverse interest rate projections. The imbalance between the duration of assets
and liabilities is limited to under one year and generally should not exceed
one-half year.
-13-
<PAGE> 16
Management recommends appropriate levels of interest rate risk to be assumed
within limits approved by the Board of Directors regarding the maximum
fluctuations acceptable in the market value of equity and in earnings, assuming
sudden rate movements (rising or falling) up to 200 basis points. The Company's
policy establishes a maximum change in annual pre-tax net interest income with a
200 basis point change in rates to 10% while establishing a maximum change
allowable in pre-tax market value of equity to 12% in the same assumed rate
environment. The Company's primary objective in managing interest rate risk is
to minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital while structuring the Company's assets and
liabilities to obtain the maximum yield-cost spread. The Company relies
primarily on its asset liability structure to control interest rate risk. Based
on March 31, 1998 financials, a 200 basis point change in rates would produce
net interest income variations of a 4.6% increase assuming rising rates and
a 4.2% decrease assuming falling rates. Additionally, the 200 basis point rate
shock would produce changes in the market value of equity of a decrease of 5.8%
assuming rising rates and a 5.9% increase assuming falling rates.
BALANCE SHEET
The Company's total assets at March 31, 1997, were $207.2 million, an increase
of $2.3 million from December 31, 1997. This increase was due to a $3.5 million
increase in total loans and a $1.7 million increase in cash and due from banks
which were partially offset by a $2.5 million decrease in investment securities,
a $400,000 decrease in federal funds sold and a $32,000 decrease in premises and
equipment. Total deposits at March 31, 1998, were $166.1 million, an increase of
$2.0 million from $164.1 million at December 31, 1997. The increase in deposits
was comprised of a $5.7 million increase in money market accounts and a $1.1
million increase in non-interest bearing demand deposits. These increases were
partially offset by decreases of $2.9 million in certificates of deposit
$100,000 or greater, $2.0 million in time certificates less than $100,000, and
$46,000 in NOW accounts. Shareholder's equity (adjusted for SFAS No. 115)
increased $544,000 to $24,596,000 at March 31, 1998, from $24,052,000 at
December 31, 1997. The Company recorded a dividend payment of $132,000 during
the first quarter of 1998 compared with $111,000 for the same period in 1997.
Unrealized gains on securities available for sale, net of income taxes, were
$296,000 at March 31, 1998, compared to $294,000 at December 31, 1997. 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 remain strong during the first
quarter of 1998. Shareholders' equity (excluding SFAS No. 115 adjustments) at
March 31, 1998, was $24.3 million, or 11.7% of total assets, which compares with
$23.8 million, or 11.6% of total assets at December 31, 1997. Total
shareholders' equity, including adjustments for SFAS No. 115 at March 31, 1998
was $24.6 million, or 11.9% of total assets, which compares with $24.1 million,
or 11.7%, of total assets, at December 31, 1997. The increase in capital during
the first quarter of 1998 was primarily a result of current period earnings.
Capital was also impacted by an increase of $34,000 due to the issuance of
common stock from exercised warrants and purchases authorized under the
Company's Associates Stock Purchase Plan, and increase of $2,000 in the market
value of securities available for sale reflecting an unrealized gain, net of
income taxes, from December 31, 1997 to March 31, 1998, as well as the payment
of dividends of $132,000 in the first quarter of 1998. At March 31, 1998, the
Company's primary and total capital ratios to adjusted assets were both 13.5%
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 18.3% at March 31, 1998, compared with 18.8% at December 31, 1997.
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 4.1 years at March 31, 1998,
compared to 5.1 years at December 31, 1997. Securities available for sale were
$63.6 million at March 31, 1998, compared to $66.1 million at December 31, 1997.
Federal Funds sold were $9.0 million at March 31, 1998, compared with $9.4
million at December 31, 1997. Core deposits, a relatively stable funding base,
comprised 81.9% of total deposits at March 31, 1998, and 80.0% at December 31,
1997. Core deposits represent total deposits excluding time certificates of
$100,000 or greater.
In January, 1998, the Company's Board of Directors adopted a Shareholder Rights
Plan which authorizes the distribution of a dividend of one common share
purchase right for each outstanding share of CFGI's common stock. The rights
will be exercisable only if a person or group acquires 15% or more of CFGI's
common stock or announces a tender offer, the consummation of which would result
in ownership by a person or group of 15% or more of the common stock. The rights
are designed to assure that all of CFGI's shareholders receive fair and equal
treatment in the event of any proposed takeover of the Company and to guard
against partial tender offers, squeezeouts, open market accumulations and other
abusive tactics to gain control of the Company without paying all shareholders
an appropriate control premium.
-14-
<PAGE> 17
If the Company were acquired in a merger or other business combination
transaction, each right would entitle its holder to purchase, at the right's
then-current exercise price, a number of the acquiring company's common shares
having a market value of twice such a price. In addition, if a person or group
acquires 15% or more of CFGI's common stock, directly or through the purchase of
warrants exercisable for CFGI's common stock, each right would entitle its
holder (other than the acquiring person or members of the acquiring group) to
purchase, at the right's then-current exercise price, a number of CFGI's common
shares having a market value of twice that price. After a person or group
acquires beneficial ownership of 15% or more of CFGI's common stock and before
an acquisition of 50% or more of the common stock, the Board of Directors could
exchange the rights (other than rights owned by the acquiring person or group),
in whole or in part, at an exchange ratio of one share of common stock per
right.
Until a person or group has acquired beneficial ownership of 15% or more of
CFGI's common stock, the rights will be redeemable for one cent per right at the
option of the Board of Directors. The rights are intended to enable all CFGI's
shareholders to realize the long-term value of their investment in the Company.
The Company believes they will not prevent a takeover, but should encourage
anyone seeking to acquire the Company to negotiate with the Board prior to
attempting a takeover.
-15-
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were not matters submitted to a vote of the Security holders during the
quarter ended March 31, 1998.
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 March 31, 1998 was as
follows:
January 26, 1998 reported the declaration of a dividend of one
common share purchase right for each outstanding share of common
stock of Community Financial Group, Inc., payable on February 5,
1998 to shareholders of record on that date.
-16-
<PAGE> 19
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 13, 1998 /s/ Mack S. Linebaugh, Jr.
- ------------------------ ------------------------------------
Date Mack S. Linebaugh, Jr.
President, Chairman of the Board,
Chief Executive Officer and Chief
Financial Officer
-17-
<PAGE> 1
EXHIBIT 11
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
STATEMENT REGARDING: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
--------- ----------
<S> <C> <C>
Basic Income Per Common Share (1)
Net income (in thousands) $ 640 $ 302
========= =========
Net income per share $ .29 $ .14
========= =========
Weighted average common shares outstanding 2,213,868 2,203,098
========= =========
Diluted Income Per Common Share (2)
Net income (in thousands) $ 640 $ 302
========= =========
Net income per share $ .22 $ .14
========= =========
Weighted average common shares outstanding 2,866,809 2,231,450
========= =========
</TABLE>
(1) Basic net income per share has been computed using the weighted average
number of common shares outstanding during each period presented.
(2) Diluted net income per share has been computed using the weighted
average number of common share outstanding and the dilutive effect of
stock options and warrants outstanding during the period presented.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,859
<INT-BEARING-DEPOSITS> 151
<FED-FUNDS-SOLD> 9,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 63,607
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 126,272
<ALLOWANCE> 3,207
<TOTAL-ASSETS> 207,161
<DEPOSITS> 166,057
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,008
<LONG-TERM> 14,500
0
0
<COMMON> 13,290
<OTHER-SE> 11,306
<TOTAL-LIABILITIES-AND-EQUITY> 207,161
<INTEREST-LOAN> 2,886
<INTEREST-INVEST> 1,081
<INTEREST-OTHER> 79
<INTEREST-TOTAL> 4,046
<INTEREST-DEPOSIT> 1,809
<INTEREST-EXPENSE> 2,018
<INTEREST-INCOME-NET> 2,028
<LOAN-LOSSES> 39
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,245
<INCOME-PRETAX> 1,040
<INCOME-PRE-EXTRAORDINARY> 1,040
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 640
<EPS-PRIMARY> .29
<EPS-DILUTED> .22
<YIELD-ACTUAL> 4.17
<LOANS-NON> 559
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 664
<ALLOWANCE-OPEN> 3,128
<CHARGE-OFFS> 20
<RECOVERIES> 60
<ALLOWANCE-CLOSE> 3,207
<ALLOWANCE-DOMESTIC> 2,174
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,033
</TABLE>
