<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No Fee Required)
For the fiscal year ended December 31, 1997
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Commission File Number 0-28496
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Community Financial Group, Inc.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in its charter)
Tennessee 62-1626938
- ---------------------------------- --------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
401 Church Street Nashville, Tennessee 37219-2213
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 271-2000
-----------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $6 per share
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(Title of Class)
Warrants, exercise price $12.50 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act 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
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $16,681,000.
The aggregate market value (price at which the stock sold) of Community
Financial Group, Inc., voting common stock held by non-affiliates as of February
28, 1998, was $25,384,022.
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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.
<TABLE>
<CAPTION>
Outstanding at
Class March 18, 1998
----- --------------
<S> <C>
Common stock $6 par value 2,215,063 shares
</TABLE>
Documents Incorporated by Reference:
<TABLE>
<CAPTION>
Document from which portions Part of Form 10-KSB to
are incorporated by reference which incorporated
----------------------------- ----------------------
<S> <C> <C>
1. Annual Report to Shareholders for year Part II - Items 5,6,
ended December 31, 1997 7 and 8
2. Proxy Statement dated March 27, 1998 Part III - Items 9,
10, 11 and 12
</TABLE>
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ITEM 1 - DESCRIPTION OF BUSINESS
On December 13, 1995, Community Financial Group, Inc. ("CFGI"), was incorporated
as a Tennessee Corporation. CFGI also filed an application with the Board of
Governors of the Federal Reserve System for prior approval to become a one bank
holding company pursuant to Section 3(a)(1) of the Bank Holding Company Act of
1956, as amended. This application was filed on January 22, 1996, and approval
was received on March 29, 1996. The holding company began operation April 30,
1996, following approval of a majority of the shareholders of The Bank of
Nashville.
As of December 31, 1997, the only subsidiary of CFGI was The Bank of Nashville
(The Bank). CFGI and The Bank are collectively referred to herein as "the
Company".
The Bank was incorporated under the laws of the State of Tennessee, on July 10,
1989. The Bank was approved as a State Bank, is a member of the Federal Reserve
System, and is insured by the Federal Deposit Insurance Corporation. The initial
business day for the Bank was November 20, 1989. The Company now has a total of
47 employees.
The present area and scope of the Company's activities include providing a full
range of banking and related financial services, including commercial banking,
consumer banking, financial and investment services, and real estate finance.
The Company has two traditional branches with its main office at 401 Church
Street and its Green Hills office at 3770 Hillsboro Pike. Additionally, these
locations are complimented by the Company's "Bank on Call" mobile branches which
serve customers throughout the market area with at your office banking
convenience. LM Financial Partners, Inc., a subsidiary of Legg Mason Wood
Walker, Inc., operates an Investment Center in the Company's primary location
which provides bank customers at all locations convenient access to a wide array
of investment products and fiduciary services.
The Company is well capitalized as demonstrated by a total risk-based capital
ratio of 18.8%, tier 1 risk-based capital ratio of 17.5% and tier 1 leverage
ratio was 11.8% at December 31, 1997. Additionally, at year end 1997, the Bank's
capital ratios reflected total risk base capital ratio at 18.6%, tier 1
risk-based capital ratio at 17.4% and tier 1 leverage ratio at 11.8%. These
capital ratios exceed the current regulatory minimum requirements.
The loss of any one of the Company's deposits or loans from, or to, a single
person/business (including federal/state/local governments/agencies) would not
have a material adverse effect on the business of the Company beyond which has
been planned for in the Company's liquidity position. Due to the commercial
nature of the Company's target market, liabilities and loans are evaluated
relative to industry concentration and volatility. At December 31, 1997,
approximately 18.5% of total deposits were related to the construction industry,
2.8% to the real estate development/investment industries, 5.7% to the health
care industry and 8% were related to state and local
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governments. These areas represent the largest deposit concentrations and are
generally reflective of the local economy and the Company's asset mix. These
deposits are primarily reflected in the Company's demand deposit and interest
bearing money market account totals and are deposits of relationship commercial
customers, which by their nature are concentrated in a fewer number of customer
relationships than would be the case in consumer funding sources. No significant
portion of the Company's business can be considered seasonal. The nature of the
Company's business is principally domestic, thereby eliminating risks attendant
to foreign sources and applications of funds.
The Company is focused on serving small/mid-sized businesses and individuals in
the middle Tennessee market, with a primary service area of the Metro
Nashville-Davidson County Metropolitan Statistical Area (MSA). Nashville,
located in the north central part of the State, is the State's largest MSA.
Situated midway between the Mississippi delta to the west, and the Great Smokey
Mountains to the east, Metropolitan Nashville covers 533 square miles. Over half
of the population of the United States is located within a 600 mile radius of
the City, and the central location has contributed to the emergence of Nashville
as an important transportation, tourism, and distribution center. Diversity is a
key element of the Nashville economy with printing and publishing, healthcare,
automobile manufacturing, financial services, real estate development and
construction, education, government, entertainment, tourism, hospitality,
manufacturing, warehousing, and various service sectors, all being major
contributors to the economic vitality of the area.
The activities in which the Company engages are very competitive. Generally, the
Company competes with other banks and nonbank financial institutions located
primarily in the middle Tennessee market area. The principal methods of
competition center around such aspects as interest rates on loans and deposits,
decision making relationship management, customer services, and other service
oriented fee based products. Most of the Company's competitors are major
corporations with substantially more assets and personnel than the Company.
The Company actively competes for loans and deposits with other commercial
banks, brokerage firms, savings and loan associations and credit unions.
Consumer finance companies, department stores, mortgage brokers, and insurance
companies are also significant competitors for various types of loans. There is
also active competition for various types of fiduciary and investment business
from other banks, trust companies, brokerage firms, investment companies, and
others.
The Company is headquartered in the downtown central business district of
Nashville. The Company occupies space in the lower level, the second floor, and
the third floor of the L & C Tower, located at 401 Church Street, a location
which serves as the Bank's main office. The Company opened its first Automated
Teller Machine (ATM) in 1989 and now operates ATM's and cash dispensers in
various locations throughout its market, serving local businesses and
individuals as well as tourists. In 1996, the Company received regulatory
approval to establish a mobile branch. The mobile branch brings traditional
banking services to
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the Company's customers at their locations. A full service branch office,
located in Green Hills, opened January 23, 1997. Construction started in
January, 1998, on a full service branch to be located at 5105 Maryland Way,
Brentwood, Tennessee. There are additional expansion plans in the Hendersonville
area of Tennessee with the Bank having signed a letter of intent for the
purchase of property. If deemed appropriate, additional offices may be
established subject to regulatory approval.
During 1997, the Company declared dividends of $.20 per share which resulted in
a dividend payout ratio of 21.43%. Other information relating to current banking
issues and the regulatory environment are addressed in the 1997 Annual Report to
Shareholders.
The following schedules are provided in accordance with Guide 3 "Statistical
Disclosure by Bank Holding Companies." All schedules, except those noted below,
have been omitted since the required information is either not applicable or is
incorporated by reference in the Company's 1997 Annual Report.
- Schedule III-A - Types of Loans
- Schedule III-B - Maturities and Sensitivities of Loans to
Changes in Interest Rates
- Schedule IV-B - Allocation of the Allowance for Loan
Losses
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III. LOAN PORTFOLIO
The following table presents a summary of loan types (net of unearned
income) by categories for the last five years.
SCHEDULE III-A
TYPES OF LOANS
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Loans (net of unearned
income of $297, $256,
$203, $202 and $196
respectively)
Commercial ............ $ 38,571 $ 35,721 $40,657 $35,108 $30,028
Real estate -
mortgage loans .... 71,055 58,763 48,648 41,800 44,743
construction ...... 9,426 9,467 5,952 2,227 849
Consumer .............. 3,697 3,937 3,083 1,950 1,510
-------- -------- ------- ------- -------
$122,749 $107,888 $98,340 $81,085 $77,130
======== ======== ======= ======= =======
</TABLE>
Most of the Company's business activity is with customers located in the Middle
Tennessee region. Generally, loans are secured by real estate, inventory,
accounts receivable, stock, time certificates, or other assets. The loans are
expected to be repaid from cash flow or proceeds from the sale of selected
assets of the borrowers. The Company grants residential, consumer, and
commercial loans to customers throughout the Middle Tennessee region. Real
estate mortgage and construction loans reflected in the preceding schedule are
comprised primarily of loans to commercial borrowers.
At December 31, 1997, funded and unfunded loan commitments as classified by
standard Industry Classification codes include borrowers in the real estate
industry approximating $25 million and $2.2 million, respectively, and loans to
building contractors approximating $7.9 million and $11.2 million, respectively.
At December 31, 1996, funded and unfunded commitments to borrowers in the real
estate industry were approximately $21.3 million and $3.9 million, respectively,
and loans to building contractors were approximately $7.8 million and $7.5
million, respectively.
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The following table presents the maturity distribution of loan categories at
December 31, 1997 (in thousands).
SCHEDULE III-B
TYPES OF LOANS
MATURITIES AND SENSITIVITIES OF LOANS TO
CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
One After One After
Year But Within Five
Or Less Five Years Years Total
------------------------------------------------
<S> <C> <C> <C> <C>
(Net of Unearned
Income)
Commercial ................ $20,901 $15,657 $ 2,013 $ 38,571
Real estate -
mortgage ................ 12,409 25,094 33,552 71,055
Real estate -
construction ............ 5,580 1,041 2,805 9,426
Consumer .................. 1,905 1,290 502 3,697
------- ------- -------- --------
$40,795 $43,082 $ 38,872 $122,749
======= ======= ======== ========
For maturities over one year:
Fixed ................... $38,740
Floating ................ 43,214
</TABLE>
Schedule IV-B presents a breakdown of the allocation of the allowance
for possible loan losses by major categories of loans at December 31,
1997 and 1996. Allocations estimated for each of the categories below
do not indicate that loan charge-offs for these amounts are anticipated
or will be required. There is no precise method of predicting specific
losses which may occur in segments of the loan portfolio. The allowance
for possible loan losses is available to absorb any and all losses and
is not limited to specific loan types. Values assigned to loan
categories in Schedule IV-B represent management's best estimates based
on an evaluation of the loan portfolio and current economic conditions.
Factors considered in establishing the level of the allowance for
possible loan losses include management's ongoing credit review of the
loan portfolio, the state of the national and regional economy, the
nature and content of the loan portfolio and the level of nonperforming
assets.
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SCHEDULE IV-B
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
Balance Applicable To: 1997 1996
- ---------------------- ------ ------
<S> <C> <C>
Commercial ..................... $ 916 $ 775
Real estate - mortgage
loans ........................ 967 900
Real estate - construction
loans ........................ 128 140
Consumer ....................... 79 58
Unallocated .................... 1,038 1,005
------ ------
$3,128 $2,878
====== ======
Percent of Total Allocation:
----------------------------
Commercial ..................... 29.3% 26.9%
Real estate - mortgage
loans ........................ 30.9 31.3
Real estate - construction loans 4.1 4.9
Consumer ....................... 2.5 2.0
Unallocated .................... 33.2 34.9
------ ------
100.0% 100.0%
====== ======
</TABLE>
ITEM 2 - DESCRIPTION OF PROPERTY
The Company, located at 401 Church Street, Nashville, Tennessee, occupies a
total of 15,296 square feet on three floors of the L&C Tower, a 31-story office
building. The facility has a total of 158,907 gross square footage and is
located on .391 acres. The Company's space is leased from LC Tower, L.L.C. (the
"Landlord"). The lease has an initial term of ten years with three five-year
renewal options.
The Company occupies 4,670 square feet in the Glendale Shopping Center located
at 3770 Hillsboro Pike, Nashville, Tennessee. The Company's space is leased from
Coleman Partners, a Tennessee Partnership, and has an initial term of five years
with three five-year renewal options.
In the summer of 1998, the Company will occupy 4,000 square feet in the newly
completed The Bank of Nashville Building located at 5105 Maryland Way,
Brentwood, Tennessee. The Company's space is leased from Graystone, LLC and has
an initial term of ten years with three five-year renewal options.
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ITEM 3 - LEGAL PROCEEDINGS
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following portion of the Company's 1997 Annual Report to Shareholders is
incorporated herein by reference:
Common Stock Information Page 46
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
The following portions of the 1997 Annual Report are herein incorporated by
reference.
Management's Discussion and Analysis of Results of Operations
and Financial Condition on pages 6 through 23.
ITEM 7 - FINANCIAL STATEMENTS
The following portions of the 1997 Annual Report are incorporated herein by
reference.
Financial Statements and Report of Independent Auditors on
pages 24 through 43 and page 44.
Quarterly Results of Operations on page 45.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and the information regarding executive
officers called for by this item is contained in the sections entitled "Election
of Directors" and "Executive Officers" in the Company's proxy statement for its
1998 Annual Meeting of Shareholders, dated March 27, 1998, and is incorporated
herein by reference.
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ITEM 10 - EXECUTIVE COMPENSATION
The information called for by this item is contained in the section entitled
"Compensation of Executive Officers" in the Company's proxy statement for its
1998 Annual Meeting of Shareholders, dated March 27, 1998, and is incorporated
herein by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is contained in the sections entitled
"Directors and Nominees" and "Election of Directors" in the Company's proxy
statement for its 1998 Annual Meeting of Shareholders dated March 27, 1998, and
is incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is contained in the section entitled
"Transactions with Directors and Executive Officers" in the Company's proxy
statement for its 1998 Annual Meeting of Shareholders dated March 27, 1998, and
is incorporated herein by reference.
ITEM 13 - EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The following consolidated financial statements and
the Report of KPMG Peat Marwick LLP, Independent
Certified Public Accountants, are on pages 24 through
43 and page 44 of the 1997 Annual Report and are
incorporated herein by reference.
- Consolidated Balance Sheets at December 31, 1997
and 1996
- Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995
- Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1997, 1996 and
1995
- Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995
- Notes to Consolidated Financial Statements
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(2) Exhibits
1. Not required.
2. Plan of acquisition, reorganization,arrangement,
liquidation or succession. None
3. Articles of Incorporation and By-Laws, incorporated
by reference to Exhibit 3 to the Registrant's
Annual Report Form 10-KSB for the year ended
December 31, 1996.
4. Instruments defining the rights of security holders,
including debentures.
4.01 Warrant Agreement, incorporated by reference to
Exhibit 4.01 to the Registrant's Annual Report Form
10-KSB for the year ended December 31, 1996.
4.02 Form of specimen Certificate of Common Stock,
incorporated by reference to Exhibit 4.02 to the
Registrant's Annual Report Form 10-KSB for the year
ended December 31, 1996.
4.03 Form of specimen Certificate of Common Stock Purchase
Warrant, incorporated by reference to Exhibit 4.03
to the Registrant's Annual Report Form 10-KSB for
the year ended December 31, 1996.
4.04 Community Financial Group, Inc. and Registrar and
Transfer Company, as Rights Agent, Shareholders
Rights Agreement Dated as of January 21, 1998.
Incorporated by reference to Exhibit 4.1 to the
Registrant's Form 8-A dated January 26, 1998.
5. Not required.
6. Not required.
7. Not required.
8. Not required.
9. Voting Trust Agreement. None.
10. Material Contracts.
10.01 Employment Agreement between The Bank of Nashville
and Mack S. Linebaugh, Jr. dated September 2, 1992,
as amended. Incorporated by reference to Exhibit
10.01 to the Registrant's Annual Report Form 10-KSB
for the year December 31, 1996.
10.02 Employment Agreement between The Bank of Nashville
and Julian C. Cornett dated October 13, 1996.
Incorporated by reference to Exhibit 10.02 to the
Registrant's Annual Report Form 10-KSB for the year
ended December 31, 1996.
10.03 Option Agreements between The Bank of Nashville and
Mack S. Linebaugh, Jr. dated September 2, 1992 and
July 27, 1993, and Option Agreement dated July 16,
1996 between Community Financial Group, Inc., and
Mack S. Linebaugh, Jr. Incorporated by reference to
Exhibit 10.03 to the Registrant's Annual Report
Form 10-KSB for the year ended December 31, 1996.
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10.04 Option Agreements between The Bank of Nashville and
Julian C. Cornett dated October 13, 1992 and
October 13, 1993, and Option Agreement dated July
16, 1996 between Community Financial Group, Inc.,
and Julian C. Cornett. Incorporated by reference to
Exhibit 10.04 to the Registrant's Annual Report
Form 10-KSB for the year ended December 31, 1996.
10.05 Lease Agreement dated July 19, 1989 between The Bank
of Nashville and Metropolitan Life Insurance
Company. Incorporated by reference to Exhibit 10.05
to the Registrant's Annual Report Form 10-KSB for
the year ended December 31, 1996. Metropolitan Life
Insurance Company has been succeeded as landlord by
LC Tower, L.L.C.
10.06 Lease Agreement dated August 1, 1996 between The Bank
of Nashville and Coleman Partners, a Tennessee
Partnership. Incorporated by reference to Exhibit
10.06 to the Registrant's Annual Report Form 10-KSB
for the year ended December 31, 1996.
10.07 The Bank of Nashville Retirement Savings Plan.
Incorporated by reference to Exhibit 10.07 to the
Registrant's Annual Report Form 10-KSB for the year
ended December 31, 1996.
10.08 Community Financial Group, Inc.'s Associates' Stock
Purchase Plan. Incorporated by reference to Exhibit
10.08 to the Registrant's Annual Report Form 10-KSB
for the year ended December 31, 1996.
10.09 Community Financial Group, Inc. 1997 Nonstatutory
Stock Option Plan Incorporated by reference to
Exhibit 10.9 to the Registrant's Form S-2 (SEC file
333-24309)dated April 1, 1997.
10.10 Lease Agreement dated August 4, 1997 between The Bank
of Nashville and Graystone, LLC.
10.11 The Bank of Nashville letter of intent to purchase
property from ShoLodge, Inc. dated January 23,
1998.
11. Statement re computation of per share earnings.
12. Statement re computation of ratios. Not applicable.
13. 1997 Annual Report to Shareholders.
14. Not required.
15. Not required.
16. Letter re change in certifying accountant. Not
applicable.
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(2) Exhibits - Continued
17. Not required.
18. Letter re change in accounting principles. Not
applicable.
19. Not required.
20. Not required.
21. Subsidiaries of the registrant.
22. Published report regarding matters submitted to vote
of security holders. None.
23. Consent of experts and counsel. None.
24. Power of Attorney. None.
25. Not required.
26. Not required.
27. Financial Data Schedule (for SEC use only).
28. Information from reports furnished to state insurance
regulatory authorities. Not applicable.
99. Additional Exhibits. None.
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(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE BANK OF NASHVILLE
By: /s/ Mack S. Linebaugh, Jr. Date: March 24, 1998
--------------------------------
Mack S. Linebaugh, Jr.
Chairman of the Board,
President, Chief Executive
Officer and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons or behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Mack S. Linebaugh, Jr. /s/ L. Leon Moore
- ------------------------------ ---------------------------------
Mack S. Linebaugh, Jr. L. Leon Moore
Chairman of the Board, Director
President, Chief
Executive Officer Dated March 24,1998
and Chief Financial
Officer
Dated March 24, 1998
/s/ J. B. Baker, Jr. /s/ Perry W. Moskovitz
- ------------------------------ ---------------------------------
J. B. Baker, Jr. Perry W. Moskovitz
Director Director
Dated March 24, 1998 Dated March 24,1998
/s/ Jo D. Federspiel /s/ Norris Nielsen
- ------------------------------ ---------------------------------
Jo D. Federspiel Norris Nielsen
Director Director
Dated March 24, 1998 Dated March 24, 1998
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SIGNATURES - Continued
/s/ Richard H. Fulton /s/ David M. Resha
- ------------------------------ ---------------------------------
Richard H. Fulton David M. Resha
Director Director
Dated March 24, 1998 Dated March 24, 1998
/s/ Edgar Thornton
- ------------------------------
G. Edgar Thornton
Director
Dated March 24, 1998
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<PAGE> 1
EXHIBIT 10.10
LEASE AGREEMENT
7200 Maryland Way
Brentwood, Tennessee
ARTICLE 1.00: BASIC LEASE TERMS
1.01 PARTIES. This lease agreement ("Lease") is entered into by
and between the following Lessor and Lessee:
Graystone, LLC, a Tennessee limited liability company, hereafter
called ("Lessor"), and the Bank of Nashville, hereafter called
("Lessee").
1.02 LEASED PREMISES. In consideration of the rents, terms,
provisions and covenants of this Lease, Lessor hereby leases, lets and demises
to Lessee the following described premises ("Leased Premises"):
Approximately 4,000 rentable square feet located on the ground floor
of the office building at 7200 Maryland Way, Brentwood, Tennessee,
37027 (the "Building") as indicated on the schematic drawings attached
hereto as Exhibit "A", the Building being located on the site described
on lot number 66, hereafter called (the Land"). The Land, Building,
and other improvements and appurtenances developed by Lessor in
connection with the Building are sometimes collectively referred to
herein as (the "Property").
1.03 TERM. Subject to and upon conditions set forth herein, the
term of this Lease shall commence on the "completion date", which Lessor has
estimated to be May 1, 1998, and shall terminated one hundred twenty days (120)
months thereafter (the "terminated date"). The actual commencement date shall be
the earlier of ninety (90) days from delivery of a "white box" shell space as
defined in the attached Exhibit "A" or the issuance of a use and occupancy
certificate by the appropriate regulatory authorities, thereby permitting use
of the space by the Bank of Nashville.
1.04 BASE RENT. "Base Rent" shall mean the annual amount of rent
payable with respect to each lease year during the term of this Lease. The
"Initial Base Rent" shall be as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
RENTABLE SQUARE BASE RENTAL INITIAL BASE RENT MONTHLY
FEET (RSF) RATE (ANNUALLY) RENT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
4,000 $20.00 Per RSF $80,000.00 $6,666.67
- ------------------------------------------------------------------------------------------
</TABLE>
1.05 ADDRESSES.
Lessor's Address: Lessee's Address:
Graystone, LLC The Bank of Nashville
c/o William E. Connelly 401 Church Street
7200 Maryland Way Post Office Box 198986
Brentwood, TN 37027 Nashville, TN 37219-8986
1.06 PERMITTED USE. Lessee shall use the Leased Premises for
general office purpose (which shall include without limitation banking,
financial services, travel agency, insurance and annuities sales,
administration and training, and any other uses that are permissible to a bank
holding company or its subsidiaries, a savings and loan holding company or its
subsidiaries, a bank, a savings bank or other financial institution), and for
no other purposes. It is understood that Lessee may sublease, with the Lessor's
permission, a certain portion of the Leased Premises to be used as a gourmet
coffee shop. In such event other permitted uses shall include the sale of
coffee,
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tea, soft drinks, pastries and other ready-to-eat foods. There shall not be any
cooking or baking permitted in this space.
ARTICLE 2.00: RENT
2.01 BASE RENT. Lessee agrees to pay the Base Rent for each lease
year during the term of this Lease; in equal monthly installments in the amount
of one-twelfth (1/12) of the Base Rent for such lease year, which monthly
installments shall be payable to Lessor at the address shown above. One
monthly installment of rent shall be due and payable on the date of execution
of this Lease by Lessee for the first month's rent and a like monthly
installment shall be due and payable on or before the first day of each
calendar month succeeding the commencement date during the term of this Lease;
provided, if the commencement date or the completion date should be a date
other than the first day of calendar month, the monthly rental set forth above
shall be prorated to the end of that calendar month, and all succeeding
installments of rent shall be payable on or before the first day of each
succeeding calendar month during the term of this Lease. Lessee shall pay, as
additional rent, all other sums due under this Lease.
2.02 ADDITIONAL RENT. Tenant shall pay, as additional rent, a
Common Area Maintenance charge equal to Three and 05/100 Dollars ($3.05) per
square foot of leased area. This additional rent in the amount of Twelve
Thousand Two Hundred and 00/100 Dollars ($12,200.00) per annum shall be paid in
monthly installments of One Thousand Sixteen and 67/100 dollars ($1,016.67) and
shall be paid in conjunction with the above Base Rent
2.03 RENEWAL OPTIONS. One the tenth (10th), the fifteenth (15th)
and the twentieth (20th) anniversaries of the commencement date set forth in
Section 1.03 above, the Base Rent shall be adjusted to effect the following
increases:
May 1, 2008: Base Rent shall be increased to equal one
hundred fifteen percent (115%) of the
Initial Base Rent.
May 1, 2013: Base Rent shall be increased to equal one
hundred twenty percent (120%) of the
Initial Base Rent.
May 1, 2018: Base Rent shall be increased to equal one
hundred twenty-five percent (125%) of the
Initial Base Rent.
Common Area Maintenance: During the renewal option period the
Common Area Maintenance charge shall be adjusted to reflect
the following increases:
May 1, 2008: Common Area Maintenance shall be increased
to equal one hundred fifteen percent (115%)
of the initial base Common Area Maintenance.
May 1, 2013: Common Area Maintenance shall be increased
to equal one hundred twenty (120%) of the
initial base Common Area Maintenance.
May 1, 2018: Common Area Maintenance shall be increased
to equal one hundred twenty-five percent
(125%) of the initial base Common Area
Maintenance.
2.04 UTILITIES. The Tenant agrees to pay all charges for
installation and maintenance of telephone, electricity, gas and other utilities
and services used by Tenant in its building, and Landlord agrees at all times
to provide Tenant with access to such utilities. Tenant shall be responsible for
any charges for the fire alarm system or security system, but Landlord shall be
responsible for any "hook-up" fees or other charges incident to providing access
initially to any utility.
2.05 TENANT'S REPAIRS. Upon completion of construction and
acceptance of the demised premises by Tenant, Tenant agrees during the initial
term hereby granted and extension or renewal thereof, to perform all
maintenance necessary to keep and maintain, including replacements (exclusive
of HVAC systems), if necessary. The interior of the demised premises is to
remain in good condition and all plumbing, lighting and HVAC units are to be
repaired at the sole expense of Tenant at or before the end of the initial term
of any extension or renewal thereof. Tenant shall have the benefit of all
manufacturer's, installer's or other warranties in connection with
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the items to be maintained by it. Landlord shall keep and maintain in good
condition and repair the parking area, sidewalks and service areas on the
demised premises, including sweeping, cleaning, lighting, snow and ice removal,
if necessary, general repair and maintenance of all paved surfaces, repainting
and re-striping, and maintenance of landscaped areas.
2.06 CONSTRUCTION OF SHELL BUILDING. The Landlord, at its sole cost and
expense, shall diligently proceed to construct a store building, parking area,
sidewalks, service area and other improvements for use and occupancy by Tenant
as shown on the site plan attached hereto marked Exhibit "A" and in conformity
with the plans and specifications to be approved by both Landlord and Tenant.
Said plans and specifications will be initialed by the parties hereto and when
initialed shall constitute a part of this Lease. Said plans and specifications
shall provide for a completed shell building, commonly referred to as a "white
box". Tenant shall be given a dollar allowance to install basic ceiling tile
and grid. Tenant shall furnish, install and connect, at its sole expense, its
own interior tenant finishes including but not limited to walls, partitions,
restroom finishes, carpeting, wall covering, interior doors, bank improvements
and ATM installations, pneumatic tubing for two (2) drive-in teller windows as
well as other bank improvements.
2.07 SIGNS. Tenant may, with the prior approval of Landlord, which
approval will not unreasonable be withheld, place, erect and maintain any sign
on the exterior of the Building, which sign shall remain the property of Tenant
and may be removed at any time during the term of this Lease, or any extension
thereof, provided Tenant shall repair or reimburse Landlord for the costs of
any damage to the building resulting from the installation or removal of such
sign.
It is agreed and understood that all signage design must meet all
specifications and requirements of the approving regulatory agency.
2.08 FIXTURES AND ALTERATIONS. The Tenant, at its own expense, shall
have the right from time to time during the term of this Lease to make any
interior alterations, additions and improvements or exterior alterations
including doors and partitions, in and to the demised premises which it may
deem necessary or desirable and which do not adversely affect the structural
integrity thereof, but it shall make them in a good, workmanlike manner and in
accordance with all valid requirements of municipal or other governmental
authorities. This right of Tenant shall include the erection of interior
partitions. All permanent structural improvements shall belong to the Landlord
and become a part of the premises upon termination or expiration of this Lease.
Tenant may construct and build or install in the premises any and all
racks, counters, shelves and other fixtures and equipment of every kind and
nature as may be necessary or desirable in the Tenant's business, which racks,
counters, shelves and other fixtures and equipment shall at all times be and
remain the property of the Tenant, and Tenant shall have the right to remove
all or any part of the same from the premises at any time provided Tenant shall
repair or reimburse Landlord for the cost of repairing any damage to the
premises resulting from the installation or removal of such items.
2.09 THEFT OR BURGLARY. Lessor shall not be liable to Lessee for losses
to Lessee's property or personal injury caused by criminal acts or entry by
unauthorized persons into the Leased Premises or the building.
2.10 JANITORIAL. Landlord shall at all times keep the interior of the
store building in a reasonable neat and orderly condition and shall keep the
delivery areas of the building reasonably clean and free from rubbish and
dirt. Five (5) days per week janitorial service, including vacuuming, dusting
and trash pick-up, shall be provided by Landlord. Tenant will not make or
suffer any waste of the demised premises or permit anything to be done in or
upon the demised premises creating a nuisance thereon and Tenant further agrees
to permit the Landlord or its agent at all reasonable times to enter upon the
premises for the purpose of making repairs and for examining or showing the
same to prospective purchasers.
2.11 LATE PAYMENT CHARGE. Other remedies for nonpayment of rent
notwithstanding, if the monthly rental payment is not received by Lessor on or
before the tenth (10th) day of the month for which the rent is due, or if any
other payment due Lessor by Lessee is not received by lessor on or before the
tenth (10th) day of the month next following the month in which Lessee was
invoiced, a late payment charge of five percent (5%) of such past due amount
shall become due and payable in addition to such amounts owned under this Lease.
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2.12 INCREASE IN INSURANCE PREMIUMS. If an increase in any insurance
premiums paid by Lessor for the building is caused by Lessee's use of the
Leased Premises in a manner other than as set forth in Section 1.06, or if
Lessee vacates the Leased Premises and causes an increase in such premiums,
then Lessee shall pay as additional rent the amount of such increase to lessor.
2.13 HOLDING OVER. In the event that Lessee does not vacate the Leased
Premises upon the expiration or termination of this Lease, Lessee shall be a
tenant at will for the holdover period and all of the terms and provisions of
this Lease shall be applicable during that period, except that Lessee shall pay
Lessor as base rental for the period of such holdover an amount equal to one
and 15/100 (1.15) times the rent which would have been payable by Lessee had
the holdover period been a part of the original term of this Lease.
Lessee agrees to vacate and deliver the Leased Premises to Lessor upon Lessee's
receipt of notice from Lessor to vacate. Such notice shall be at least sixty
(60) days prior to said date to vacate. The rental payable during the holdover
period shall be payable to Lessor on demand. No holding over by Lessee,
whether with or without consent of Lessor, shall operate to extend the term of
this Lease.
ARTICLE 3.00: OCCUPANCY AND USE
3.01 USE. Lessee warrants and represents to Lessor that the Leased
Premises shall be used and occupied only for the purpose as set forth in
Section 1.06. Lessee shall occupy the Leased Premises, conduct its business
and control its agents, employees, invitees and visitors in such a manner as is
lawful, reputable and will not create a nuisance. Lessee shall not permit any
operation which emits any offensive odor or matter which intrudes into other
portions of the building, use any apparatus or machine which makes undue noise
or causes vibration in any portion of the building or otherwise interfere with,
annoy or disturb any other lessee in its normal business operations or Lessor
in its management of the building. Lessee shall neither permit any waste on the
Leased premises nor allow the Leased Premises to be used in any way which
would, in the opinion of Lessor, be extra hazardous on account of fire or which
would in any way increase or render void the fire insurance on the building.
3.02 COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Lessee, at Lessee's
sole cost and expense, shall comply with all laws, ordinances, orders, rules and
regulations of state, federal, municipal or other agencies or bodies having
jurisdiction over the use, signage, condition or occupancy of the Leased
Premises. Lessee will comply with the rules and regulations of the building
adopted by Lessor which are set forth on a schedule attached to this Lease.
Lessor shall have the right at all times to change and amend the rules and
regulations in any reasonable manner as may be deemed advisable for the safety,
care, cleanliness, preservation of good order and operation or use of the
building or the Leased Premises. All reasonable changes and amendments to the
rules and regulations of the building will be sent to Lessee in writing and
shall thereafter be carried out and observed by Lessee.
3.03 WARRANTY OF POSSESSION. Lessor warrants that it has the right and
authority to execute this Lease, and Lessee, upon payment of the required rents
and subject to the terms, conditions, covenants and agreements contained in
this Lease shall have possession of the Leased Premises during the full term of
this Lease as well as any extension or renewal thereof. Lessor shall not be
responsible for the acts or omissions of any other lessee or third party that
may interfere with Lessee's use and enjoyment of the Leased Premises.
3.04 INSPECTION. Lessee shall allow Lessor access to the Leased Premises
at any time upon reasonable advance notice from Lessor, in order to inspect the
Leased Premises, to show the Leased Premises to prospective purchasers or
lessees, or to alter, improve or repair the Leased Premises or any other
portion of the
Building. Lessee hereby waives any claim for damages for injury or
inconvenience to, or interference with, Lessee's business, any loss of
occupancy or use of the Leased Premises, and any other loss occasioned by
Lessor's entering the Leased Premises under the terms of this section, except
to the extent that such damage or loss is the result of the negligence or
intentional misconduct of Lessor or its employees, agents or independent
contractors.
ARTICLE 4.00: REPAIRS AND MAINTENANCE
401 LESSOR REPAIRS. Lessor shall not be required to make any
improvements, replacements or repairs of any kind or character to the Leased
Premises or the project during the term of this Lease except as are set forth
in this section. Lessor shall maintain only the roof, foundation, parking and
common areas, the structural soundness of the exterior walls, doors, corridors,
windows and other structures or equipment serving the leased premises.
Lessor's cost of maintain and repairing the item set forth in this section are
subject
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to the additional rent provisions in Section 2.02. Lessor shall not be liable
to Lessee, except as expressly provided in this Lease, for any damage or
inconvenience, and Lessee shall not be entitled to any abatement or reduction
or rent by reason of any repairs, alterations or additions made by Lessor under
this Lease.
4.02 LESSEE REPAIRS. Lessee shall, at its own cost and expense,
repair or replace any damage or injury to all or any part of the Leased Premises
caused by any act or omission of Lessee or Lessee's agents, employees, invites,
licensees or visitors; provided, however, if Lessee fails to make the repairs or
replacements promptly, Lessor may, at its option, make the repairs or
replacements, and the costs of such repairs or replacements shall be charged to
Lessee as additional rent and shall become payable by Lessee with the payment of
the rent next due hereunder.
4.03 REQUEST FOR REPAIRS. All requests for repairs or maintenance
that are the responsibility of Lessor pursuant to any provision of this Lease
must be made in writing to Lessor at the address in Section 1.05.
4.04 LESSEE DAMAGES. Lessee shall not allow, due to its
negligence, any damage to be committed on any portion of the Leased Premises or
building, and at the termination of this Lease, by lapse of time or otherwise,
Lessee shall deliver the Leased Premises to Lessor in as good condition as
existed at the commencement date of this Lease, ordinary wear and tear
excepted. The cost and expense of any repairs necessary to restore the
condition of the Leased Premises shall be borne by Lessee.
ARTICLE 5.00: ALTERATIONS AND IMPROVEMENTS
5.01 LESSOR IMPROVEMENTS. Lessor shall complete the construction
of the improvements to the Leased Premises in accordance with plans and
specifications agreed to by Lessor and Lessee, which plans and specifications
are made a part of this Lease by reference (the preliminary drawings and
renderings are attached hereto as Exhibit "A" and shall be substituted by an
executed copy of the final plans and specifications as soon as it shall be
practical). Within seven (7) days of receipt of plans and specifications,
Lessee shall execute a copy of the plans and specifications and, if applicable,
change orders setting forth the amount of any costs to be borne by Lessee. In
the event Lessee fails to execute the plans and specifications and change order
within the seven (7) day period, Lessor may notify Lessee that the base rent
shall commence on the completion date even though the improvements to be
constructed by Lessor may not be complete. Any changes or modifications to the
approved plans and specifications shall be made and accepted by written change
order or agreement signed by Lessor and Lessee and shall constitute and
amendment to this Lease.
5.02 LESSEE IMPROVEMENTS. Lessee shall not make or allow to be
made any alterations or physical additions in or to the Leased Premises without
first obtaining the written consent of Lessor, which consent may in the
reasonable discretion of Lessor be denied. Any alterations, physical additions
or improvements to the Leased Premises made by Lessee shall at once become the
property of Lessor and shall be surrendered to Lessor upon the termination of
this Lease; provided, however, Lessor, at its option, may require Lessee to
remove any physical additions and/or repair any alterations in order to restore
the Leased Premises to the condition existing at the time Lessee took
possession, all costs of removal and/or alterations to be borne by Lessee.
This clause shall not apply to movable equipment or furniture owned by Lessee,
which may be removed by Lessee at the end of the term of this Lease if Lessee
is not then in default and if such equipment and furniture are not then subject
to any other rights, liens and interests of Lessor. Notwithstanding the
foregoing, Lessee shall retain ownership of any ??? may remove from the Leased
Premises at the end of the term hereof the following: any vault door, any
automated teller machines, teller equipment, night drop boxes, drive-up lane
equipment and alarm and surveillance camera systems installed in or about the
Leased Premises.
5.03 MECHANICS LIEN. Lessee will not permit any mechanic's or
material man's lien(s) or other lien to be placed upon the Leased Premises or
the building and nothing in this Lease shall be deemed or construed in any way
as constituting the consent or request of Lessor, express or implied, by
inference or otherwise, to any person for the performance of any labor or the
furnishing of any materials to the Leased Premises, or any part thereof, nor as
giving Lessee any right, power, or authority to contract for or permit the
rendering of any services or the furnishing of any materials that would give
rise to any mechanic's, material man's or other lien against the Leased
Premises. In the event any such lien is attached to the Leased Premises, then,
in addition to any other right or remedy of Lessor, Lessor may, but shall not
be obligated to, obtain the release of or otherwise discharge the same. Any
amount paid by Lessor for any of the aforesaid purposes shall be paid by Lessee
to Lessor on demand as additional rent.
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ARTICLE 6.00: CASUALTY AND INSURANCE
6.01 SUBSTANTIAL DESTRUCTION. If the Leased Premises should be
totally destroyed by fire or other casualty, or if the Leased Premises should
be damaged so that rebuilding cannot reasonably be completed within ninety (90)
working days after the date of written notification by Lessee to Lessor of the
destruction, by mutual agreement this Lease shall terminate and the rent shall
be abated for the unexpired portion of the Lease, effective as of the date of
the written notification.
6.02 PARTIAL DESTRUCTION. If the Leased Premises should be
partially damaged by fire or other casualty, and rebuilding or repairs can
reasonably be completed within ninety (90) working days from the date of
written notification by Lessee to Lessor of the destruction, this Lease shall
not terminate, and Lessor shall at its sole risk and expense proceed with
reasonable diligence to rebuild or repair the building or other improvements to
substantially the same condition in which they existed prior to the damage. If
the Leased Premises are to be rebuilt or repaired and are untenantable in whole
or in part following the damage, and the damage or destruction was not caused
or contributed to by act of negligence of Lessee, its agents, employees,
invites, or those for whom Lessee is responsible, the rent payable under this
Lease during the period for which the Leased Premises are untenantable shall be
adjusted to such an extent as may be fair and reasonable under the
circumstances. In the event that Lessor fails to complete the necessary repairs
or rebuilding within ninety (90) working days from the date of written
notification by Lessee to Lessor of the destruction, Lessee may at its option
terminate this Lease by delivering written notice of termination to Lessor,
whereupon all rights and obligations under this Lease shall cease to exist.
6.03 PROPERTY INSURANCE.
A) Lessor shall at all times during the term of this Lease
maintain a policy or policies of comprehensive general
liability, fire and extended coverage insurance with the
premiums paid in advance, issued by and binding upon some
solvent insurance company. Such fire and extended coverage
insurance shall insure the building against all risk of direct
physical loss in an amount equal to at least ninety percent
(90%) of the full replacement cost of the building structure
and its improvements as of the date of the loss; provided,
Lessor shall not be obligated in any way or manner to insure
any personal property (including, but not limited to, any
fixtures installed goods or supplies) of Lessee upon or within
the Leased Premises, any fixtures installed or paid for by
Lessee upon or within the Leased Premises, or any
improvements which Lessee may construct on the Leased
Premises. Lessee shall have no right in or claim to the
proceeds of any policy of insurance maintained by Lessor
even though the cost of such insurance is borne by Lessee as
set forth in Article 2.00.
B) Lessee shall, during the term of the Lease, at its sole
expense, obtain and keep in force, with Lessee, Lessor, and
the mortgagee(s) of Lessor, names as insureds, as their
respective interest may appear, (1) comprehensive general
liability insurance coverage, personal injury, bodily injury,
broad form property damage, operations hazard, insurance in
limits not less than Two Million and 00/100 Dollars
($2,000,000.00), and (2) fire and extended coverage insurance
for Lessee's property (personal property, fixtures and
leasehold improvements in excess of Lessor's tenant
improvement allowance). Lessee shall furnish evidence
satisfactory to Lessor of the maintenance of such insurance
and shall obtain a written obligation on the part of each
insurance company to notify Lessor at least ten (10) days
prior to cancellation of such insurance.
6.04 WAIVER OF SUBROGATION. Anything in this Lease to the contrary
notwithstanding, Lessor and Lessee hereby waive and release each other of and
from any and all right of recovery, claim, action or cause of action, against
each other, their agents, officers and employees, for any loss or damage that
may occur to the Leased Premises, improvements to the building of which the
Leased Premises are a part, or personal property within the building, by reason
of fire or the elements, regardless of cause of origin, including negligence of
Lessor or Lessee and their agents, officers and employees. Lessor and Lessee
agree immediately to give their respective insurance companies which have issued
policies of insurance covering all risk of direct physical loss, written notice
of the terms of the mutual waivers contained in this section, and to have the
insurance policies properly endorsed, if necessary, to prevent the invalidation
of the insurance coverages by reason of the mutual waivers.
6.05 HOLD HARMLESS. Lessor shall not be liable to Lessee or its
employees, agents, invitees, licensees or visitors, or to any other person, and
Lessee shall indemnify and hold Lessor harmless form and
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against any loss, damages, expenses (including reasonable attorney's fees) or
claims arising out of, any injury to person or damage to property on the Leased
Premises caused by (1) any act or omission of Lessee or its agents, servants,
employees or independent contractors or of any other related person (other than
Lessor and its agents, servants, employees and independent contractors)
entering the Leased premises under the express or implied invitation of Lessee,
or (2) improvements located on the Leased Premises becoming out of repair
(except to the extent that such repairs are the responsibility of Lessor and
lessor has failed to make, or diligently pursue, such repairs after notice from
Lessee. Lessee shall not be liable to Lessor or its employees, agents,
invitees, licensees or visitors, or to any other person, and Lessor shall
indemnify and hold Lessee harmless from and against any loss, damages, expenses
(including reasonable attorney's fees) or claims arising out of, any injury to
person or damage to property on or about the Building caused by (1) any act or
omission of Lessor or its agents, servants, employees or independent
contractors or of any lessee or other person (other than Lessee and its agents,
servants, employees and independent contractors) entering the building under the
express or implied invitation of Lessor, or (2) improvements located in the
Building becoming out of repair (except to the extent that such repairs are the
responsibility of Lessee).
ARTICLE 7.00: CONDEMNATION
7.01 SUBSTANTIAL TAKING. If all or a substantial part of the Leased
Premises are taken for any public or quasi-public use under any governmental
law, ordinance or regulation, or by right of eminent domain or by purchase in
lieu thereof, and the taking would prevent or materially interfere with the use
of the Leased Premises for the purpose for which it is then being used, the
Lease shall terminate and the rent shall be abated during the unexpired portion
of this Lease effective on the date physical possession is taken by the
condemning authority. Lessee shall have no claim to the condemnation award or
proceeds in lieu thereof.
7.02 PARTIAL TAKING. If a portion of the Leased Premises shall be taken
for any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
this Lease is not terminated as provided in Section 7.01 above, Lessor shall at
Lessor's sole risk and expense, restore and reconstruct the building and other
improvements on the Leased Premises to the extent necessary to make it
reasonably tenantable. The rent payable under this Lease during the unexpired
portion of the term shall be adjusted to such an extent as may be fair and
reasonable under the circumstances. Lessee shall have no claim to the
condemnation award or proceeds in lieu thereof.
ARTICLE 8.00: ASSIGNMENT OR SUBLEASE
8.01 LESSOR ASSIGNMENT. Lessor shall have the right to sell, transfer
or assign, in whole or in part, its rights and obligations under this Lease and
in the Building. Any such sale, transfer or assignment of all of its rights and
obligations under this Lease shall operate to release lessor from any and all
liabilities under this Lease arising after the date of such sale, assignment or
transfer.
8.02 LESSEE ASSIGNMENT Lessee shall not assign, in whole or in part, this
Lease, or allow it to be assigned, in whole or in part, by operation of law or
otherwise (including without limitation by transfer of a majority interest of
stock, merger, or dissolution, which transfer of majority interest of stock,
merger or dissolution shall be deemed an assignment) or mortgage or pledge the
same, or sublet the Leased Premises, in whole or in part, unless the proposed
assignee has equal or greater financial capacity as Lessee, effective on the
date of the signing of this Lease, and in no event shall any such assignment or
sublease ever release Lessee or any guarantor from any obligation or liability
hereunder. No assignee or sublessee of the Leased Premises or any portion
thereof may assign or sublet the Leased premises or any portion thereof without
the prior written consent of Lessor. Notwithstanding the foregoing, Lessee may
sublease all or any portion of the Leased Premises to any direct or indirect
subsidiary of Lessee, or to any third party participating with Lessee or its
affiliates in the performance of financial services, without the prior written
consent of Lessor.
8.03 CONDITIONS OF ASSIGNMENT. If Lessee desires to assign or sublet all
or any part of the Leased premises, it shall so notify Lessor at least thirty
(30) days in advance of the date on which Lessee desires to make such assignment
or sublease. Lessee shall provide Lessor with a copy of the proposed assignment
or sublease and such information as Lessor might request concerning the proposed
sublessee or assignee to allow Lessor to make informed judgments as to the
financial condition, reputation, operations and general desirability of the
proposed sublessee or assignee. Within fifteen (15) days after Lessor's receipt
of Lessee's proposed assignment or sublease and all required information
concerning the proposed sublessee or assignee, Lessor shall have the following
options: (1) cancel this Lease as to the Leased Premises or portion thereof
proposed to be assigned or sublet; (2) consent to the proposed assignment or
sublease, and, if the rent due and payable by any assignee or
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sublessee under any such permitted assignment or sublease (or a combination of
the rent payable under such assignment or sublease plus any bonus or any other
consideration or any payment incident thereto) exceeds the rent payable under
this Lease for such space, or (1) refuse to consent to the proposed assignment
or sublease, which refusal shall not be unreasonable and shall be deemed to
have been exercised unless Lessor gives Lessee written notice providing
otherwise. Upon the occurrence of an event of default, if all or any part of
the Leased Premises for which the consent of Lessor is required under the
preceding section are then assigned or sublet, Lessor, in addition to any other
remedies provided by this Lease or provided by law, may, at its option, collect
directly from the assignee or sublessee all rents becoming due to Lessee by
reason of the assignment or sublease, and Lessor shall have a security interest
in all properties on the Leased Premises to secure payment of such sums. Any
collection directly by Lessor from the assignee or sublessee shall not be
construed to constitute a novation or a release of Lessee or any guarantor from
the further performance of its obligations under this Lease.
8.04 SUBORDINATION. Lessee accepts this Lease subject and subordinate
to any recorded mortgage or deed of trust lien presently existing or hereafter
created upon the building or project and to all existing recorded restrictions,
covenants, easements and agreements with respect to the Building or project.
Lessor is hereby irrevocably vested with full power and authority to
subordinate Lessee's interest under this Lease to any first mortgage or deed of
trust lien hereafter placed on the Leased Premises, and Lessee agrees upon
demand to execute additional instruments subordinating this Lease as Lessor may
require. If the interests of Lessor under this Lease shall be transferred by
reason of foreclosure or other proceedings for enforcement of any first
mortgage or deed of trust lien on the Leased Premises, Lessee shall be bound to
the transferee (sometimes called the "Purchaser") at the option of the
Purchaser, under the terms, covenants and conditions of this Lease for the
balance of the remaining, including any extensions or renewals, with the same
force and effect as if the Purchaser were Lessor under this Lease, and, if
requested by the Purchaser, Lessee agrees to attorn to the Purchaser, including
the first mortgagee under any such mortgage, if it be the Purchaser, as its
Lessor, provided that Lessee's attornment shall be subject to the execution of
a non-disturbance and attornment agreement by mortgagee providing, among over
Wings, that so long as Lessee is current its obligations under this Lease, the
Purchaser at foreclosure shall recognize the Lessee's right to tenancy of the
premises. This agreement of Lessee to attorn upon demand of any mortgagee
contained in the immediately preceding sentence shall survive any such
foreclosure sale or trustee sale.
8.05 ESTOPPEL CERTIFICATES. Lessee agrees to furnish, from time to time,
within ten (10) days after receipt of a request from Lessor or Lessor's
mortgagee, a statement certifying, if applicable, the following Lessee is in
possession of the Leased Premises, the Leased Premises are acceptable; the Lease
is in full force and effect; the Lease is unmodified; Lessee claims no present
charge, lien, or claim of offset against rent; the rent is paid for the current
month, but is not prepaid for more than one (1) month and will not be prepaid
for more than one (1) month in advance; there is no existing default by reason
of some act or omission by Lessor; and such other matters as may be reasonably
required by Lessor or Lessor's mortgagee. Lessee's failure to deliver such
statement, in addition to being a default under this Lease, shall be deemed to
establish conclusively that this Lease is in full force and effect except as
declared by Lessor, that Lessor is not in default of any of its obligation under
this Lease, and that Lessor has not received more than one (1) month's rent in
advance.
ARTICLE 9.00 LIENS
9.01 LANDLORD'S LIEN. As security for payment of rent, damages and all
other payments required to be made by this Lease, Lessee hereby grants to Lessor
a lien upon all property of Lessee now or subsequently located upon the Leased
Premises. If Lessee abandons or vacates any substantial portion of the Leased
Premises or is in default in the payment of any rentals, damages or other
payments required to be made by this Lease or is in default in the payment of
any rentals, damages or other payments required to be made by this Lease or is
in default of any other provision of this Lease, Lessor may enter upon the
Leased Premises upon obtaining appropriate legal process, and take possession
of all or my part of the personal property, and may sell all or any part of the
personal property at a public or private sale, in one or successive sales, with
or without notice, to the highest bidder for cash, and, on behalf of Lessee,
sell and convey all or part of the personal property to the highest bidder,
delivering to the highest bidder all of Lessee's title and interest in the
personal property sold. The proceeds of the sale of the personal property shall
be applied by Lessor toward the reasonable costs and expenses of the sale,
including attorney's fees, and then toward the payment of all sums then due by
Lessee to Lessor under the terms of this Lease. Any excess remaining shall be
paid to Lessee or any other person entitled thereto by law.
9.02 UNIFORM COMMERCIAL CODE. This Lease is intended as and constitutes a
security agreement within the meaning of the Uniform Commercial Code of the
state in which the Leased Premises are situated.
8
<PAGE> 9
Lessor, in addition to the rights prescribed in this Lease, shall have all of
the rights, titles, lien and interests in and to Lessee's property,now or
hereafter located upon the Leased Premises, which may be granted a secured
party, as that term is defined, under the Uniform Commercial code to secure to
Lessor payment of all sums due and the full performance of all Lessee's
covenants under this Lease. Lessee will on request execute and deliver to
Lessor a financing statement for the purpose of perfecting Lessor's security
interest under this Lease or lessor may file this Lease or a copy thereof as a
financing statement. Unless otherwise provided by law and for the purpose of
exercising any right pursuant to this section, Lessor and Lessee agree that
reasonable notice shall be met if such notice is given by ten (10) days written
notice, certified mail, return receipt requested, to Lessor or Lessee at the
addresses specified herein.
9.03 LESSEE IMPROVEMENTS. Notwithstanding any provision of this Lease
to the contrary, any improvements to the Property made by Lessee (including but
not limited to furniture, fixtures and/or equipment) and any business files
and/or records of Lessee and/or Lessee's customers shall remain the sole
property of Lessee and shall not be subject to any lien or security interest
under this Article 9.00 or any other provision of this Lease.
ARTICLE 10.00: DEFAULT AND REMEDIES
10.01 DEFAULT BY LESSEE. The following shall be deemed to be events of
default by Lessee under this Lease: (1) Lessee shall fail to pay within ten
(10) days of its due date any installment of Base Rent, or within twenty (20)
days of its due date any other payment required pursuant to this Lease; (2)
Lessee shall abandon any substantial portion of the Leased Premises; (3) Lessee
shall fail to comply with the term, provision or covenant of this Lease, other
than the payment of rent, and the failure is not cured within thirty (30) days
after written notice to Lessee; (4) Lessee shall file a petition or be adjudged
bankrupt or insolvent under any applicable federal or state bankruptcy or
insolvency law or admit that it cannot meet its financial obligations as they
become due; or a receiver or trustee shall be appointed for all or
substantially all of the assets of Lessee; or Lessee shall make a transfer in
fraud of creditors or shall make an assignment for the benefit of creditors; or
(5) Lessee shall do or permit to be done any act which results in a lien being
filed against the Leased Premises or the Building and has not, within thirty
(30) days after the filing of such lien, (a) caused such lien to be removed, or
(b) filed with Lessor a bond in the amount of such lien and initiated
procedures or negotiations to have such lien removed.
10.02 REMEDIES FOR LESSEE'S DEFAULT. Upon the occurrence of any event set
forth in this Lease, Lessor shall have the option to pursue any one or more of
the remedies set forth herein without notice of demand:
1) Lessor may enter upon and take possession of the Leased Premises,
by picking or changing locks if necessary, and lock out, expel or
remove Lessee and any other person who may be occupying all or part
of the Leased premises without being liable for any claim for
damages, and relet the Leased Premises on behalf of Lessee and
receive the rent directly by reason of the reletting. Lessee
agrees to pay Lessor on demand and deficiency that may arise by
reason of any reletting of the Leased Premises; further, Lessee
agrees to reimburse Lessor for any expenditures made by it in order
to relet the Leased Premises, including but not limited to,
remodeling and repair costs.
2) Lessor may enter upon the Leased Premises, by picking or changing
locks if necessary, without being liable for any claim for damages,
and do whatever Lessee is obligated to do under the terms of this
Lease. Lessee agrees to reimburse Lessor on demand for any
expenses which Lessor may incur in effecting compliance with
Lessee's obligations under this Lease; further, Lessee agrees that
Lessor shall not be liable for any damages resulting to Lessee from
effecting compliance with Lessee's obligations under this Lease
caused by the negligence of Lessor or otherwise.
3) Lessor may terminate this Lease, in which event Lessee shall
immediately surrender the Leased Premises to Lessor, and if Lessee
fails to surrender the Leased Premises, Lessor may, without
prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the Leased
Premises, by picking or changing locks if necessary, and lock out,
expel or remove Lessee and any other person who may be occupying
all or part of the Leased Premises without being liable for any
claim for damages. Lessee agrees to pay on demand the amount of all
loss and damage which Lessor may suffer by reason of the
termination of this Lease under this section, whether through
inability to relet the Leased Premises on satisfactory terms or
otherwise.
9
<PAGE> 10
4) Notwithstanding any provision of this lease to the contrary, Lessor
acknowledges and agrees that Lessor's rights are subject to any and
all rights granted by statute, regulation or otherwise, including
but not limited to the right to affirm and to reject leases to the
Federal Deposit Insurance Corporation (or its successors and
assigns) and/or any other state or federal regulatory agency which
supervises Lessee (or their successors and assigns). Further,
Lessor agrees that Lessee's banking and financial services records
that are covered by the Tennessee Bank Privacy Act may be removed
by the Lessee at any time, even after default, termination, or
other such condition. Lessor acknowledges and agrees that no term
of this Lease is intended or designed as an authorization to
violate any of the Lessee's software licenses. Further, Lessee may
remove at any time any collateral pledged by customers of the Bank,
the contents of any safe deposit boxes, and any property
beneficially held for one or more of the Bank's customers.
Notwithstanding any other remedy set forth in this Lease, in the event
Lessor has made rent concessions of any type or character, or waived any base
rent, and Lessee fails to take possession of the Leased Premises on the
commencement or completion date or otherwise defaults at any tie during the
term of this Lease, the rent concessions, including any waived base rent, shall
be canceled and the amount of the base rent or other rent concessions shall be
due and payable immediately as if no rent concessions or waiver of any base
rent had ever been granted. A rent concession or waiver of the base rent shall
not relieve Lessee of any obligation to pay any other charge due and payable
under this Lease including without limitation any sum due under Section 2.02.
Notwithstanding anything contained in this Lease to the contrary, this
Lease may be terminated by Lessor only by mailing and delivering written notice
of such termination to Lessee, and no other act or omission of Lessor shall be
construed as a termination of this Lease.
ARTICLE 11.00: DEFINITIONS
11.01 ABANDON. "Abandon" means the vacating of all or a substantial
portion of the Leased Premises by Lessee, whether or not Lessee is in default
of the rental payments due under this Lease.
11.02 ACT OF GOD OR FOR MAJEURE. An "act of God" or "force majeure" is
defined for purposes of this Lease as strikes, lockouts, sitdowns, material or
labor restrictions by any governmental authority, unusual transportation
delays, riots, floods, washouts, explosions, earthquakes, fire, storms, weather
(including wet grounds or inclement weather which prevents construction), acts
of the public enemy, wars insurrections and any other cause not reasonably
within the control of Lessor and which by exercise of due diligence Lessor is
unable wholly or in part, to prevent or overcome.
11.03 BUILDING OR PROJECT. "Building" or "project" as used in this Lease
means the building and/or project described in Section 1.02, including the
Leaded Premises and the land upon which the building or project is situated.
11.04 COMMENCEMENT DATE. "Commencement date" shall be the date set forth in
Section 1.03. The commencement date shall constitute the commencement of the
term of this Lease for all purposes, whether or not Lessee has actually taken
possession. The actual commencement date shall be the earlier of ninety (90)
days from the delivery of a "white box" shell space as defined in the attached
Exhibit "A" or the issuance of a use and occupancy certificate by the
appropriate regulatory authorities, thereby permitting use of the space by The
Bank of Nashville.
11.05 COMPLETION DATE. "Completion date" shall be the date on which the
improvements erected and to be erected upon the Leased Premises have been
completed in accordance with the plans and specifications described in Section
6.00. The completion date shall constitute the commencement of the term of
this Lease for all purposes, whether or not Lessee has actually taken
possession. Lessor shall use its best efforts to establish the completion date
as the date set forth in Section 1.03. Upon completion of construction, Lessee
shall deliver to lessor a letter accepting the Leased Premises as suitable for
the purposes for which they are let and the date of such letter shall
constitute the commencement of the term of this Lease.
11.06 SQUARE FEET. "Square feet" or "square foot" as used in this Lease
includes the are a contained within the Leased Premises together with a common
area percentage factor of the Leased Premises proportionate to the total
building area.
10
<PAGE> 11
ARTICLE 12.00. MISCELLANEOUS
12.01 WAIVER. Failure of lessor to declare an event of default
immediately upon its occurrence, or delay in taking any action in connection
with an event of default, shall not constitute a waiver of the default, but
Lessor shall have the right to declare the default at any time and take such
action as is lawful or authorized under this Lease. Pursuit of any one or more
of the remedies set forth in Article 11.00 above shall not preclude pursuit of
any one or more of the other remedies provided elsewhere in this Lease or
provided by law, nor shall pursuit of any remedy constitute forfeiture or
waiver of any rent or damages accruing to Lessor by reason of the violation of
any of the terms, provisions or covenants of this Lease. Failure by Lessor to
enforce one or more of the remedies provided upon an event of default shall not
be deemed or construed to constitute a waiver of the default or of any other
violation or breach of any of the terms, provisions and covenants contained in
this Lease.
12.02 ACT OF GOD. Neither party hereto shall be required to perform
any covenant or obligation in the Lease, or be liable in damages to the other
party, so long as the performance or non-performance of the covenant or
obligation is delayed, caused, or prevented by an act of God or by force
majeure and such performance of any covenant or obligation or liability for
damages to the other party shall not be otherwise provided for by insurance or
by other provisions of this Lease.
12.03 ATTORNEY'S FEES. In the event either party defaults in the
performance of any of the terms, covenants, agreements or conditions contained
in this Lease and the non-defaulting party places in the hands of an attorney
the enforcement of all or any part of this Lease, the collection of any rent
due or to become due or recovery of the possession of the Leased Premises, the
defaulting party agrees to pay the non-defaulting party's costs of collection,
including reasonable attorney's fees for the services of the attorney, whether
suit is actually filed or not.
12.04 SUCCESSORS. This Lease shall be binding upon and inure to the
benefit of Lessor and Lessee and their respective heirs, personal
representatives, successors and assigns. It is hereby covenanted and agreed
that should Lessor's interest in the Leased Premises cease to exist for any
reason during the term of this Lease, then notwithstanding the happening of
such event this Lease nevertheless shall remain unimpaired and in full force
and effect, and Lessee hereunder agrees to attorn to the then owner of the
Leased Premises.
12.05 RENT TAX. If applicable in the jurisdiction where the Leased
Premises are situated, Lessee shall pay and be liable for all rental, sales and
use taxes or similar taxes, if any, levied or imposed by any city, state,
county or other governmental body having authority, such payments to be in
addition to all other payments required to be paid to Lessor by Lessee under
the terms of this Lease. Any such payment shall be paid concurrently with the
payment of the rent, additional rent, operating expenses or other charge upon
which tax is based set forth above.
12.06 CAPTIONS. The captions appearing in this Lease are inserted
only as a matter of convenience and in no way define, limit, construe or
describe the scope or intent of any section.
12.07 NOTICE. All rent and other payments required to be made by
Lessee shall be payable to Lessor at the address set forth in Section 1.05.
All payments required to be made by Lessor to Lessee shall be payable to Lessee
at the address set forth in Section 1.05, or at any other address within the
United States as Lessee may specify from time to time by written notice. Any
notice or document required or permitted to be delivered by the terms of this
Lease shall be deemed to be delivered (whether or not actually received) when
deposited in the United States Mail, postage prepaid, certified mail, return
receipt requested, addressed to the parties at the respective addresses set
forth in Section 1.05.
12.08 SUBMISSION OF LEASE. Submission of this Lease to Lessee for
signature does not constitute a reservation of space or an option to lease.
This Lease is not effective until execution by and delivery to both Lessor and
Lessee.
12.09 CORPORATE AUTHORITY. If Lessee executes this Lease as a
corporation, each of the persons executing this Lease on behalf of Lessee does
hereby personally represent and warrant that Lessee is a duly authorized and
existing corporation, that Lessee is qualified to do business in the state in
which the Leased Premises are located, that the corporation has full right and
authority to enter into this Lease, and that each person signing on behalf of
the corporation is authorized to do so. In the event any representation or
warranty is false, all persons who execute this Lease shall be liable,
individually, as Lessee.
11
<PAGE> 12
12.10 SEVERABILITY. If any provision of this Lease or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Lease and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
12.11 LESSOR'S LIABILITY. If Lessor shall be in default under this
Lease and, if as a consequence of such default, Lessee shall recover a money
judgement against Lessor, such judgement shall be satisfied only out of the
right, title and interest of Lessor in the building as the same may then be
encumbered and neither Lessor nor any person or entity comprising Lessor shall
be liable for any deficiency. In no event shall Lessee have the right to levy
execution against the property of Lessor nor any person or entity comprising
Lessor other than its interest in the building as herein expressly provided.
12.12 INDEMNITY. Lessor agrees to indemnify and hold harmless Lessee
from and against any liability or claim, whether meritorious or not, arising
with respect to any broker whose claims arises by, through or on behalf of
Lessor. Lessee agrees to indemnify and hold harmless Lessor from and against
any liability or claim, whether meritorious or not, arising with respect to any
broker whose claim arises by, through or on behalf of Lessee.
12.13 LEASE COMMISSIONS. It is acknowledged and agreed that Laureate
Realty Services, Inc., is the sole broker in this transaction and that they
shall receive a cash-out commission equal to four percent (4%) of the gross
value of the resulting Lease. All lease commission payments will be earned as
of the date the Lease is signed and payable as of the date of possession, but
in any event no later than _____________________. All fees will be paid by
Landlord.
12.14 ACCESS EASEMENT. It is agreed and understood that in
conjunction with the site plan design an access easement, extending between
Ward Circle and Athletic Club Maryland Farms, will be constructed. It is the
intent of the Landlord to maintain this access easement to the Athletic Club
Maryland Farms ad infinitum. However, there will be no assurance from the
present owners of Athletic Club Maryland Farms or its successors that this
access easement shall remain open to the Athletic Club Maryland Farms
notwithstanding the efforts of the Landlord to keep this access easement open
to the Athletic Club Maryland Farms.
ARTICLE 13.00: AMENDMENT AND LIMITATION OF WARRANTIES
13.01 ENTIRE AGREEMENT. IT IS EXPRESSLY AGREED BY LESSEE, AS A
MATERIAL CONSIDERATION FOR THE EXECUTION OF THIS LEASE, WITH THE SPECIFIC
REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF THE
PARTIES; THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES,
UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE
OR TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN
WRITING IN THIS LEASE.
13.02 AMENDMENT. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR
EXTENDED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LESSOR AND LESSEE.
13.03 LIMITATION OF WARRANTIES. LESSOR AND LESSEE EXPRESSLY AGREE
THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY,
HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING
OUT OF THIS LEASE, AND THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE
EXPRESSLY SET FORTH IN THIS LEASE.
ARTICLE 14.00: OTHER PROVISIONS.
14.01 SPECIAL STIPULATIONS.
a) Drive-Through Lanes: In accordance with the site plan shown on
Exhibit "C" attached hereto, the subject site can accommodate two (2)
remote drive-through lanes in a manner which would allow for stacking
of up to eight (8) cars. Final approval of the drive-through lanes
must be obtained from the Brentwood Planning Commission.
12
<PAGE> 13
b) ON-SITE PARKING: With two (2) drive-through lanes, the subject
site can accommodate approximately sixty-five (65) on-site
parking spaces (Exhibit "C"). Of these sixty-five (65) on-site
parking spaces, five (5) will be reserved for bank customers
exclusively. The remaining sixty (60) spaces will be made
available to all guests and invitees of the tenants of the
building.
ARTICLE 15.00: SIGNATURES
AGREED AND ACCEPTED, this 4th day of August, 1997
LESSOR:
GRAYSTONE, LLC
By: /s/ William E. Connelly
------------------------------------
Its: Chief Manager
------------------------------------
LESSEE:
THE BANK OF NASHVILLE
By: /s/ Mack S. Linebaugh, Jr.
------------------------------------
Its: President
------------------------------------
13
<PAGE> 1
EXHIBIT 10.11
CAUDILL PROPERTIES, INC.
REAL ESTATE
January 23, 1998
Mr. Leon Moore
President & CEO
SHOLODGE, INC.
130 Maple Drive North
Hendersonville, Tennessee 37075
Dear Mr. Moore:
Please find below the basic terms under which I, as President and C.E.O. of the
Bank of Nashville would be prepared to recommend to its Board the purchase of
the following identified lot. The approval has not been obtained, but, will be
sought prior to the execution of a Contract:
Property: Lot 3 of the Final Plat of ShoLodge, Inc.
Purchase Price: Not less than $630,000 and not more than $750,000,
however, appraisal will govern price that Buyer
willing and permitted to pay
Terms: Cash
Due Diligence: 60 days from Contract execution, with extension
provisions if delays experienced beyond control of
Buyer
Closing: The closing will be set for 15 days subsequent to
the conclusion of the due diligence period, and upon
receipt by Buyer of all necessary regulatory
approvals.
Other: Purchaser shall have the right to terminate the
Contract, for any reason, at or prior to the
conclusion of the due diligence period. If the
Contract is so terminated, Purchaser shall be
refunded the earnest money.
Taxes: Real Estate taxes will be prorated as of closing
date. Deed and title policy to be furnished by
Seller. Customary fees and costs to be noted in the
Contract, when agreed upon. Seller and Buyer to pay
their respective attorney costs.
Commission: Seller and Purchaser warrant and represent to each
other that they have not dealt with any Realtor,
Broker, or Agent in connection with the negotiation
of this sale, except Caudill Properties, Inc. and
its Agents, Jim and John
208 3RD AVENUE, NORTH/4TH FLOOR/NASHVILLE, TENNESSEE 37201/
(615)254-1297/244-5940
<PAGE> 2
Mr. Leon Moore
January 23, 1998
Page 2
Martin, and agree to indemnify and hold each other
harmless from, and against, any cost, expenses, or
liability (including, but not limited to, costs of
suit and reasonable attorney's fees) for any
compensation, commission, or charges claimed by any
other Broker.
It is our intention to buy this property. Further, this letter is solely a
letter of intent and does not constitute a binding offer or obligation of any
kind. Without limited the foregoing, this letter does not obligate the Buyer to
buy on the terms set forth herein or otherwise. Unless, and until, a Contract
of Sale is executed between Buyer and Seller, neither party shall have any
obligation to the other with respect to the sale of the property. Buyer
reserves the right to revoke, modify, or amend the proposed terms, or to
withdraw the letter of intent at any time, for any reason, and Seller
recognizes the right of Buyer to do so.
Should you wish to proceed, I would appreciate your non-binding acknowledgment
of the terms of this letter by signing where indicated below and returning a
copy to me.
Time is of the essence on this and all terms, negotiations and matters
concerning the letter and, subsequently, the Contract.
If the foregoing is acceptable, please indicate so by signing below and
returning a copy to me.
Very truly yours,
BANK OF NASHVILLE
/s/ Mack S. Linebaugh, Jr.
- ---------------------------------
President (Title)
ACKNOWLEDGED/ACCEPTED:
SHOLODGE, INC.
/s/ Leon Moore
---------------------------------
Leon Moore, President & C.E.O.
Date: 01-27-98
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
COMMUNITY FINANCIAL GROUP, INC.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Income Per Common Share
Basic (1)
Net income (in thousands) $ 2,058 $ 2,547 $ 2,514
========== ==========
Net income per share $ .93 $ 1.16 $ 1.15
========== ========== ==========
Weighted average common shares
outstanding 2,205,043 2,198,619 2,189,971
========== ========== ==========
Income Per Common Share,
Diluted (2)
Net income (in thousands) $ 2,058 $ 2,547 $ 2,514
========== ========== ==========
Net income per share $ .89 $ 1.15 $ 1.14
========== ========== ==========
Weighted average common share
Outstanding 2,323,580 2,222,653 2,206,079
========== ========== ==========
</TABLE>
(1) Basic net income per share has been computed using the weighted average
number of common shares outstanding during each year presented. See
Note B to the Company's consolidated financial statements included in
the Annual Report to Shareholders for the year ended December 31, 1997
incorporated herein by reference.
(2) Diluted net income per share has been computed using the weighted
average number of common shares outstanding and the dilutive effect of
stock options and warrants outstanding during the years presented. See
Note B to the Company's consolidated financial statements included in
the Annual Report to Shareholders for the year ended December 31, 1997
incorporated herein by reference.
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
Community Financial Group, Inc. (CFGI), is a registered bank holding company
under the Federal Bank Holding Company Act of 1956, as amended, and owns 100% of
the outstanding capital stock of The Bank of Nashville (The Bank), collectively
referred to as the Company. The Bank is a state chartered bank incorporated in
1989 under the laws of the State of Tennessee. On April 30, 1996, CFGI executed
a plan of exchange with The Bank, whereby CFGI became the parent bank holding
company of The Bank. Under the agreement, each share of the common stock of The
Bank was exchanged for one share 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. The balances and activity for
the periods prior to April 30, 1996, are those of The Bank only. The holding
company structure provides flexibility for expansion of the Company's banking
business through acquisition of other financial institutions and for the
addition of banking-related services which traditional commercial banks are
prohibited from providing under current law.
The accompanying consolidated financial statements and notes are considered to
be an integral part of this analysis and should be read in conjunction with the
narrative. This discussion and analysis is intended to supplement and highlight
information contained in the accompanying consolidated financial statements and
the selected financial data presented elsewhere in this report. 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.
The Company's primary base of operation is located in the L & C Tower at 401
Church Street, Nashville, Tennessee 37219. The Bank has one full service
traditional branch located at the Glendale Center in Green Hills, which opened
in January, 1997 and full service mobile branching provided through
"Bank-on-Call" which opened in September of 1996. Bank-on-Call provides the
convenience of "at your door" banking services to customers. Additionally, the
Company has expanded its delivery systems through full service ATM's, cash
dispensers and "Bank-on-Line," an on-line banking product providing cash
management services to commercial customers. In late 1997, the Company announced
plans to establish a second traditional branch office in mid-1998 at 5105
Maryland Way, Brentwood, Tennessee. Additional expansion plans include a branch
in the Hendersonville area with The Bank having signed a letter of intent for
the purchase of property. The Company offers a full array of commercial and
consumer banking services, as well as investment services.
The primary service area for the Company is centered around Nashville, Tennessee
and encompasses an eight county area. The Company competes with existing area
commercial banks and other area financial institutions, including savings and
loan associations, insurance companies, consumer finance companies, brokerage
houses, credit unions and other business entities which have been active in
pursuing traditional banking markets. Due to the rapid economic growth in the
Company's market area, additional competition is expected to continue from new
entrants to the market. Although the Company has fewer physical locations than
many of its competitors, it has continued its commitment to providing its
customers with maximum convenience by allowing them to access their accounts
through competitors' ATMs throughout the State of Tennessee at no charge. This
is accomplished through a program whereby the Company rebates any surcharges to
its customers which are imposed by ATM providers within the State of Tennessee
when accessed by a Bank of Nashville ATM or MasterMoney card.
-6-
<PAGE> 2
The Company's assets were $204.9 million at December 31, 1997, compared to
$166.7 million at December 31, 1996 representing an increase of 23%.
Shareholders' equity increased $2.0 million, or 8.9%, from $22.1 million at year
end 1996 to $24.2 million at December 31, 1997. During 1997, shareholders were
paid $.20 per share through four quarterly dividends of $.05 each compared to
dividends totaling $.16 per share in 1996. Effective December 31, 1997, the
Company adopted Statement of Financial Accounting Standard (SFAS) No. 128,
"Earnings Per Share" which requires the presentation of basic and diluted
earnings per share amounts. All prior period earnings per share amounts have
been restated to reflect the implementation of SFAS No. 128. The Company
recorded earnings of $2.1 million, or $.93 basic earnings per share in 1997
compared to $2.5 million, or $1.16 per share in 1996. Dilutive earnings per
share were $.89 and $1.15 for the years ended December 31, 1997 and 1996,
respectively. The decline in earnings was the result of having fully utilized
all Federal and State net operating loss carryforwards in prior periods, thus
the Company became fully taxable in 1997. Income before taxes increased
$674,000, or 24.8%, to $3.4 million in 1997 compared to $2.7 million in 1996.
Return on average shareholders' equity (exclusive of SFAS 115 adjustments) was
9.05% in 1997 compared to 12.18% in 1996, while the return on average assets for
1997 and 1996 were 1.08% and l.61%, respectively. During 1997, as the Company
expanded its service locations and product lines in accordance with its
long-term strategic plan, management's focus on asset quality continued. The
maintenance of an adequate level for the allowance for possible loan losses was
reflected by a provision for possible loan losses of $100,000 being recorded in
1997, a period in which net recoveries were $150,000. This provision expense was
deemed to be prudent given the Company's loan growth and an increased level of
nonperforming assets. There was no provision for possible loan loss expense
recorded in 1996, a period in which net charge-offs were $156,000. During 1997,
net nonperforming assets increased $648,000, or 111.9%, to $1.2 million from
$579,000 at year end 1996, while total loans increased $14.9 million, or 13.8%,
from $107.9 million at December 31, 1996 to $122.7 million at year end 1997. A
more detailed analysis of nonperforming assets and the provision for possible
loan losses is presented under the caption, "Provisions for Possible Loan
Losses" and "Nonperforming Assets and Risk Elements." During 1997, deposits
increased $30.8 million, or 23.1%, to $164.1 million at December 31, 1997 from
$133.3 million at year end 1996. The net loan to deposit ratio declined from
78.8% at year end 1996, to 72.9% at year end 1997, resulting from a significant
increase in deposits primarily generated by the Company's new Green Hills office
which opened in January 1997.
Income tax expense of $1,331,000 was recorded during 1997 compared to only
$168,000 in 1996, a period in which the Company continued to benefit from the
use of net operating loss carryforwards. Both Federal and State net operating
loss carryforwards have been fully utilized resulting in the increased income
tax expense for 1997.
NET INTEREST INCOME
Fluctuations in interest rates, as well as changes in the volume or mix of
earning assets and interest bearing liabilities, can materially impact net
interest income.
Net interest income for 1997 increased 13.2% from 1996. Total interest income
increased $2.4 million, or 18.3%, in 1997 as compared to 1996, while total
interest expense increased $1.5 million, or 23.4%, as compared to 1996. The
increase in total interest income is attributable to a 19.4% increase in average
earning assets comprised primarily of increases of $16.4 million in average
investments and $11.9 million in average loans. These increases in volume were
partially offset by a decline in the rate earned on average earning assets of 8
basis points reflecting a shift in the mix of these assets as investments grew
at a faster pace than loans, which are the Company's highest yielding asset.
Average interest bearing liabilities increased $26.7 million, or 21.4%, in 1997
compared to 1996. This increase in interest bearing liabilities resulted
primarily from the opening of the
-7-
<PAGE> 3
Company's Green Hills office and focused business development efforts. NOW
Accounts increased 22.2%, while certificates of deposit less than $100,000
increased 17.4% and Money Market Investment Accounts increased 13.6%, with
certificates of deposit $100,000 or greater increasing 6.8%. In addition to the
increase in the volume of deposit accounts, Federal Home Loan Bank and other
borrowings increased $10.4 million as the Company continued to utilize a
leveraging strategy begun in the third quarter of 1996 which consists of
matching Federal Home Loan Bank borrowings to fund the purchase of additional
investment securities. The average rate paid on interest bearing liabilities
increased 9 basis points in 1997 compared to 1996. The following two schedules
present an analysis of net interest income and the detail of changes in interest
income, interest expense and the resulting net interest income due to the
fluctuations in volume and rates.
-8-
<PAGE> 4
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -----------------------------------
Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/
Balance Expense* Rates* Balance Expense* Rates*
(Dollars In Thousands)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (net of unearned income):
Commercial $ 36,889 $ 3,438 9.32% $ 39,858 $ 3,762 9.44%
Real Estate - mortgage 65,102 6,002 9.22 52,895 4,836 9.14
Real Estate - construction 9,102 849 9.33 8,144 770 9.45
Consumer 3,742 435 11.62 1,998 201 10.06
- ----------------------------------------------------------------------------------------------------------------------
Total loans (net of
unearned income) 114,835 10,724 9.34 102,895 9,569 9.30
- ----------------------------------------------------------------------------------------------------------------------
Securities 61,587 4,128 6.70 45,163 3,016 6.68
Due from banks 333 19 5.75 -- -- --
Federal funds sold 7,772 398 5.12 6,445 314 4.88
- ----------------------------------------------------------------------------------------------------------------------
Total earning assets $ 184,527 $15,269 8.27% $ 154,503 $12,899 8.35%
Allowance for possible loan losses (3,006) (3,124)
Cash and due from banks 6,633 4,971
Premises and equipment, net 1,040 624
Accrued interest and other assets 1,572 1,641
- ----------------------------------------------------------------------------------------------------------------------
$ 190,766 $ 158,615
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 6,856 $ 253 3.69% $ 5,610 $ 140 2.50%
Money market accounts 67,216 3,205 4.77 59,169 2,813 4.75
Time certificates less
than $100,000 35,186 2,061 5.86 29,982 1,782 5.94
Time certificates
$100,000 and greater 29,294 1,693 5.78 27,431 1,563 5.70
Federal Home Loan Bank and
other borrowings 13,124 744 5.67 2,745 148 5.37
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 151,676 $ 7,956 5.25% $ 124,937 $ 6,446 5.16%
Non-interest bearing demand
deposits 14,088 10,661
Accounts payable and accrued
liabilities 2,156 2,053
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 167,920 137,651
- ----------------------------------------------------------------------------------------------------------------------
Shareholders' equity 22,846 20,964
- ----------------------------------------------------------------------------------------------------------------------
$ 190,766 $ 158,615
======================================================================================================================
Interest income/earning assets* 8.27% 8.35%
Interest expense/earning assets 4.31 4.17
- ----------------------------------------------------------------------------------------------------------------------
Net interest margin* 3.96% 4.18%
======================================================================================================================
</TABLE>
*Fully taxable equivalent basis.
Nonaccrual and 90 days or more past due loans are included in average loans and
average earning assets. Consequently, yields on these items are lower than they
would have been if all loans had earned at their contractual rate of interest.
Had nonaccrual and 90 day or more past due loans earned income at the
contractual rate, interest income of $32,000 and $74,000 would have been
recognized during 1997 and 1996, respectively.
-9-
<PAGE> 5
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Increase(Decrease)Due to Increase(Decrease)Due to
(In Thousands)(1) Rate Volume Net Rate Volume Net
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 41 $1,114 $1,155 $(310) $ 1,253 $ 943
Securities 5 1,107 1,112 43 (286) (243)
Due from banks -- 19 19 -- -- --
Federal funds sold 16 68 84 (50) 2 (48)
- --------------------------------------------------------------------------------------------------------------
Total Interest Income 62 2,308 2,370 (317) 969 652
- --------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW accounts 77 36 113 (18) 13 (5)
Money market accounts 12 380 392 (248) 523 275
Time certificates under $100,000 (23) 302 279 (43) (284) (327)
Time certificates $100,000
and over 22 108 130 (87) (200) (287)
Federal Home Loan Bank
and other borrowings 9 587 596 -- 148 148
- --------------------------------------------------------------------------------------------------------------
Total Interest Expense 97 1,413 1,510 (396) 200 (196)
- --------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $(35) $ 895 $ 860 $ 79 $ 769 $ 848
==============================================================================================================
</TABLE>
(1) Changes in net interest income are attributed to either changes in average
balances (volume change) or changes in average rates (rate change) for earning
assets and sources of funds on which interest is received or paid. These rates
are calculated on a fully taxable equivalent basis. Volume change is calculated
as change in volume multipled by the old rate while rate change is change in
rate multipled by the old volume. The rate/volume change is allocated between
volume change and rate change at the ratio each component bears to the absolute
value of their total. Nonaccrual and 90 days or more past due loans are included
in average loans for which changes due to rates and volume are computed.
Trends in net interest income are commonly evaluated in terms of average rates,
using the net interest margin and the net interest spread. The net interest
margin, or the net yield on earning assets, is computed by dividing net interest
income by average earning assets. This ratio represents the difference between
the average yield on average earning assets and the average rate paid for all
funds used to support those earning assets, including both interest bearing and
non-interest bearing sources of funds. The Company's net interest margin
decreased by 22 basis points to 3.96% in 1997, primarily as a result of an
increase in deposit rates associated with introductory deposit specials offered
with the opening of the Green Hills office and utilization of planned investment
leveraging strategies. The net interest margin was further impacted by a lower
loan to deposit ratio and shifts in the mix of earning assets from higher
yielding loans to investment securities.
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly, while the timing for repricing of
both the asset and liability remain the same; both impact net interest income.
It should be noted, therefore, that a matched interest sensitivity position, by
itself, will not ensure maximum net interest income. Management continually
evaluates the condition of the economy, the pattern of market interest rates and
other economic data to determine the types of investments that should be made
and at what maturity. Using this analysis, management from time to time assumes
calculated interest sensitivity gap positions to maximize net interest income
based upon anticipated movements in the general level of interest rates. The
Company's "negative gap" position in the
-10-
<PAGE> 6
short-term (one year or less) currently positions it to benefit from a declining
interest rate environment. "Negative gap" is used to describe the interest
sensitivity position when a company's rate sensitive liabilities are repricing
faster than its rate sensitive assets. See "Liquidity and Asset/Liability"
section.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing sources of funds.
The interest rate spread eliminates the impact of non-interest bearing funds and
gives a direct perspective on the effect of the market interest rate movement.
During 1997, the interest rate spread declined compared with 1996. The following
table presents an analysis of the Company's interest rate spread and net yield
on earning assets.
<TABLE>
<CAPTION>
Year Ended December 31
- ------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Rate earned on interest earnings assets 8.27% 8.35%
Rate paid on interest bearing liabilities 5.25% 5.16%
Interest rate spread 3.02% 3.19%
Net yield on earnings assets 3.96% 4.18%
</TABLE>
The increased level of earning assets combined with the shift in mix of earning
assets and the shift in interest bearing liabilities resulted in a higher level
of net interest income. The positive impact of increased levels of earning
assets was somewhat offset by growth in interest bearing liabilities and an
increase in the average rate paid on these liabilities as well as a decline in
the average rate earned on earning assets during 1997.
PROVISION FOR POSSIBLE LOAN LOSSES
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 each 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 nonperforming assets,
and current and forecasted economic conditions. A more detailed discussion of
nonperforming assets is presented under the caption, "NonPerforming Assets and
Risk Elements."
In 1997, the Company recorded $100,000 in expense for provision for possible
loan losses, compared with no provision expense in 1996. Provisions for loan
losses were deemed appropriate due to the growth in the loan portfolio and an
increase in nonperforming assets. Net recoveries were $150,000 in 1997 compared
to net charge-offs of $156,000 in 1996. The allowance for possible loan losses
was 2.5% of loans at December 31, 1997, compared to 2.7% of loans at the same
date in 1996. This decline in percentage resulted from growth in the loan
portfolio of 13.8%. Net recoveries of $150,000 in 1997 resulted from charge-offs
of $169,000 and recoveries of $319,000 reflecting continued collection efforts
on loans charged-off in prior periods. 1996 net charge-offs of $156,000 were the
result of $697,000 in loan charge-offs and $541,000 in recoveries.
Management will continue to evaluate the level of the allowance for possible
loan losses and will determine what additional adjustments, if any, are
necessary. Continued growth in the loan portfolio will be a factor in this
evaluation, as well as the quality of the portfolio and other external and
internal factors. 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 provision and the level of the allowance at any future date. Management
anticipates there will be continued provision expense in 1998; however, the
specific amount will be determined on a quarter by quarter basis as all factors
are evaluated. Changes in circumstances affecting the various factors considered
by the Company in establishing the level of the allowance could significantly
affect the amount of the provision that is deemed to be warranted.
-11-
<PAGE> 7
The following table represents a recap of activity in the allowance for possible
loan losses during the past two years.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
(In Thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ALLOWANCE FOR POSSIBLE LOAN LOSSES, JANUARY 1 $ 2,878 $ 3,034
LOANS CHARGED OFF:
Commercial (169) (450)
Real estate -- (243)
Consumer -- (4)
- --------------------------------------------------------------------------------
Total charge-offs (169) (697)
- --------------------------------------------------------------------------------
RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF:
Commercial 317 494
Real estate -- 46
Consumer 2 1
- --------------------------------------------------------------------------------
Total recoveries 319 541
- --------------------------------------------------------------------------------
NET (CHARGE-OFFS) RECOVERIES 150 (156)
- --------------------------------------------------------------------------------
PROVISION CHARGED TO OPERATIONS 100 --
- --------------------------------------------------------------------------------
ALLOWANCE FOR POSSIBLE LOAN LOSSES, DECEMBER 31 $ 3,128 $ 2,878
================================================================================
Loans, net of unearned income
Year-end $122,749 $107,888
Average during year $114,835 $102,895
Allowance for possible loan losses to year-end
loans, net of unearned income 2.5% 2.7%
Provision for possible loan losses to average
loans, net of unearned income .1% --
Net (charge-offs) recoveries to average loans,
net of unearned income .1% (.2%)
</TABLE>
NON-INTEREST INCOME
Total non-interest income was $1.4 million in 1997, reflecting an increase of
53.3% in comparison with $927,000 reported in 1996. Non-interest income, less
nonrecurring income (gains/losses on sale of securities and other real estate),
increased $495,000, or 53.9%, from 1996. Service fee income increased $228,000
due to an increased number of customers and certain pricing changes in service
charge structure as well as in NSF and overdraft charges. Trust income increased
$138,000, while the Company's arrangement with LM Financial Partners, Inc.
(formerly BFP Financial Partners, Inc.) to offer certain investment services
resulted in an increase of $35,000. Plans to restructure how investment services
are offered by discontinuing most traditional Trust Services and redirecting
efforts to an expanded Investment Services Department provided in conjunction
with LM Financial Partners, Inc. in future periods will have the effect of
reducing both non-interest income and non-interest expense. Other income
increased $116,000 which was comprised of increases in ATM surcharge income,
mortgage referral fee income and fees generated by the Company's Bank-on-Call
service. These increases in non-interest income were partially offset by a
decline in income from foreclosed assets of $22,000 in 1997 compared to 1996.
-12-
<PAGE> 8
The Company recorded a net gain on sale of securities available for sale of
$2,000 in 1997 compared with a net loss on these securities of $2,000 in 1996.
These transactions resulted from balance sheet management strategies to adjust
the estimated average maturity of the Company's securities portfolio. Gains on
sale of other real estate owned of $6,000 and $11,000 were recorded in 1997 and
1996, respectively.
NON-INTEREST EXPENSE
The establishment of a branch location in Green Hills, expansion of
"Bank-on-Call" mobile branching and changes in the registration and trading of
the Company's stock and/or warrants caused increases in non-interest expense in
1997 but were strategic decisions employed to provide greater future
opportunities. Total non-interest expense increased to $5.2 million in 1997 from
$4.7 million in 1996. Non-interest expense represented 2.7% of average total
assets in 1997 compared to 2.9% in 1996. The non-interest expense to assets
ratio is an industry measure of a bank's ability to control its overhead.
Control of non-interest expense is essential to profit maximization; therefore,
all non-interest expense categories have been and will continue to be closely
managed through strategic and financial planning, as well as being monitored by
management through regular measurement. Effective management of these expenses
while experiencing solid growth is a focus of the Company's management. During
1997, salaries and employee benefits increased $236,000, or 9.7%, primarily due
to additional personnel employed at the Green Hills location and in the
Company's mobile branch service. Occupancy expense increased $149,000, or 26.5%,
in 1997 compared to 1996 as a result of the establishment of the Company's Green
Hills office in January, 1997. Marketing and advertising expense increased
$61,000, or 46.9%, in 1997 from the prior year primarily due to expenses related
to advertising and promoting the Company's new location. FDIC insurance expense
increased $13,000 in 1997 compared to the prior year, primarily as a result of
the growth in deposits which occurred during 1997. These increases in
non-interest expense were partially offset by decreases in legal expense of
$15,000, data processing expense of $4,000 and a reduction of $2,000 in audit,
tax and accounting expense. Non-interest expense other than salaries and
employee benefits, increased $335,000 during 1997 compared to 1996, while assets
grew $38.2 million.
The Company plans two additional branch locations in 1998. In late 1997, the
Company entered into a lease agreement to establish a branch location in the
Maryland Farms area of Brentwood, Tennessee which is currently planned to open
in the summer of 1998. Management has also signed a letter of intent to purchase
a branch site in the Hendersonville area. 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 LM Financial Partners,
Inc. should positively impact non-interest expense. It is expected that the
Company's non-interest expense will increase somewhat during 1998 and 1999 due
to the expense related to the Year 2000 issue. The cost related to this project
have been projected and are not expected to exceed $100,000 annually in 1998 and
1999. A more detailed discussion of Year 2000 issues is presented under the
caption, "Nonperforming Assets and Risk Elements". However, economic conditions
and other factors in the market could impact non-interest expense.
INCOME TAXES
During 1997, the Company recorded provision for income taxes of $1,331,000,
compared to $168,000 during the same period in 1996. During 1996, reported
earnings benefited from tax loss carryforwards which have now been fully
utilized. As a result of having utilized these net operating loss carryforwards,
the 1997 effective tax rate more closely approximates the applicable statutory
income tax rates. Reference should be made to Note F of the consolidated
financial statements.
-13-
<PAGE> 9
EARNING ASSETS
Average earning assets increased $30.0 million, or 19.4%, in 1997 from 1996.
This increase was the result of a 36.4% increase in average investment
securities, 11.6% increase in loans and a 20.6% increase in Federal funds sold,
reflecting both growth and the change in the mix of average earning assets which
occurred during 1997 when compared to 1996. During 1997, the mix of average
earning assets reflected loans at 62.2%, investment securities at 33.4%, Federal
funds sold at 4.2% and due from banks at .2%. This compares with a mix in 1996
which reflected loans at 66.6%, investment securities at 29.2% and Federal funds
sold at 4.2%. Although the growth in volume of earning assets during 1997
contributed to higher net interest income, this shift in the mix of earning
assets somewhat offset the positive effect of the growth as the percentage of
loans (the Company's highest yielding asset) to total earning assets declined.
The mix of earning assets is monitored on a continuous basis with adjustments
made in other areas based on the availability of quality loan demand.
An analysis of the 11.6% increase in average total loans outstanding in 1997
compared to 1996 reflects a 21.6% increase in average real estate mortgage and
real estate construction loans and a 7.4% decrease in average commercial loans.
The loan portfolio table below shows the classification of loans by major
categories at December 31, 1997 and 1996. Real estate mortgage and construction
loans are primarily commercial as opposed to one-to-four family residential.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31 Change from Prior Year
- -------------------------------------------------------------------------------------------------
(Dollars In Thousands) 1997 %Total 1996 %Total Amount %
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOAN CATEGORIES
Commercial $ 38,571 31.4 $ 35,721 33.1 $ 2,850 8.0
Real Estate/
Mortgage Loans 71,055 57.9 58,763 54.5 12,292 20.9
Real Estate/
Construction Loans 9,426 7.7 9,467 8.8 (41) (.4)
Consumer 3,697 3.0 3,937 3.6 (240) (6.1)
- -------------------------------------------------------------------------------------------------
Total Loans $122,749 100.0 $107,888 100.0 $ 14,861 13.8
=================================================================================================
</TABLE>
The loan portfolio mix continues to reflect the Company's efforts to serve its
target market of small and mid-size businesses in its community. The condition
of the economy and competitive environment of the Company's market, as well as
Management's focus on asset quality, impact the Company's ability to experience
loan growth. Although economic conditions and loan growth remained strong during
1997, the market became more competitive as the supply of available credit
outpaced loan demand. At December 31, 1997, loan demand appeared to be
moderately strong; however, international economic uncertainty is causing many
businesses to be cautious in their outlook, despite the strength of the
underlying U.S. and local economies.
The Company has not invested in loans which would be considered highly leveraged
transactions ("HLT") as defined by the Federal Reserve Board and other
regulatory agencies. Loans made by companies for recapitalization or acquisition
(including acquisitions by management or employees) which result in a material
change in the borrower's financial structure to a highly leveraged condition are
considered HLT loans. The Company has no foreign loans.
-14-
<PAGE> 10
The Company's securities are held as available for sale and provide for
liquidity needs while contributing to profitability. During 1997, the Company
continued utilizing a leveraging strategy begun in 1996 which was comprised of
Federal Home Loan Bank secured borrowings used to fund matched investments of
U.S. Government and municipal securities. Such strategies require careful
monitoring and measurement of the interest rate risk, but have the potential for
providing significant contributions to net interest income. See the "Liquidity
and Asset/Liability Management" section. The composition of the securities
portfolio reflects an investment strategy of maximizing portfolio yields
commensurate with risk and liquidity considerations. The primary objectives of
the Company's investment strategies are to maintain an appropriate level of
liquidity and to provide a tool to assist in controlling the Company's interest
rate position while, at the same time, producing adequate levels of interest
income. Securities held as available for sale are carried on the Company's
balance sheet at estimated fair market value. As a result, the Company
recognized an increase in equity of $294,000 for unrealized gains on securities
held as available for sale, net of tax, at December 31, 1997, which compares
with an increase of $64,000 for unrealized gains on these securities in 1996.
During 1997, gross security sales were $2,479,000 and paydowns, including
prepayments, were $19,404,000, representing 4.0% and 31.5% respectively, of the
average total portfolio for the year. Net gains associated with the sale of
securities available for sale during 1997 were $2,000 compared with net losses
in 1996 of $2,000. Total average securities increased 36.4% during 1997 compared
to 1996, while total securities at year end 1997 were 42.3% greater than year
end 1996 as the Company deployed funds generated through increased deposits and
Federal Home Loan Bank borrowings. The average yield on investment securities
was 6.7% in both 1997 and 1996. The following table contains the carrying amount
of the securities portfolio at the end of each of the last two years.
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------
(In Thousands) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government agencies $31,426 $22,712
Securities of states and political subdivisions 382 368
Collateralized mortgage obligations 32,121 21,696
Equity securities 2,130 1,661
- ----------------------------------------------------------------------------
Total $66,059 $46,437
============================================================================
</TABLE>
The maturities and average weighted yields of the Company's investment portfolio
at the end of 1997 are presented in the following table using primarily the
estimated expected life. While the average stated maturity of the mortgage
backed securities was 2.8 years, the estimated life was 1.1 years. At year end
1997, all securities were held as available for sale.
DEBT SECURITIES AVAILABLE FOR SALE MATURITY SCHEDULE
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------
Within After 1 But After 5 But
1 Year Within 5 Years Within 10 Years
- ------------------------------------------------------------------------------------------
(Dollars In Thousands) Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities and
obligations of U.S.
Government agencies $13,256 7.3% $18,170 7.1% $ -- -%
Securities of states and
political subdivisions -- -- -- -- 382 7.2
- ------------------------------------------------------------------------------------------
Total $13,256 7.3% $18,170 7.1% $382 7.2%
==========================================================================================
</TABLE>
-15-
<PAGE> 11
The previous table excludes collateralized mortgage obligations at an estimated
fair value of $32,121,000 and investments in Federal Reserve Bank stock and
Federal Home Loan Bank stock with an estimated fair value of $2,130,000.
Maturities of collateralized mortgage obligations can be expected to differ from
scheduled maturities due to the prepayment or early call privileges of the
issuer. Federal Reserve Bank stock and Federal Home Loan Bank stock are equity
securities with no stated maturity.
Average Federal funds sold remained relatively level during 1997 compared to
1996. At December 31, 1997, Federal funds sold were $9.4 million, reflecting an
increase of $2.6 million, or 38.2%, from December 31, 1996. Federal funds sold
represent a short-term investment used primarily for liquidity purposes in the
Company's Asset/Liability management strategy.
DEPOSITS
The Company's volume and mix of liabilities in 1997 reflected the successful
opening of its Green Hills office, as well as other business development
efforts, Asset/Liability management strategies, general economic conditions, and
the interest rate and competitive environment of the Company's market area.
During 1997, the portion of average liabilities and stockholders' equity
represented by deposits, the primary source of funding for the Company, stood at
80.0%, a decrease from 83.8% in 1996. This decrease resulted primarily from the
Company's utilization of additional Federal Home Loan Bank borrowings. Deposits
increased 23.1%, or $30.8 million at December 31, 1997, compared to the same
period in 1996. A large percentage of this deposit growth occurred as a result
of the new Green Hills location. The increase in year end deposits was the
result of a 91.6% increase in NOW Accounts, 29.8% increase in time certificates
less than $100,000, 30.9% increase in time certificates of $100,000 or greater
and a 17.0% increase in Money Market Accounts. Non-interest bearing deposits
remained level during 1997 compared to 1996. The average rate paid on interest
bearing liabilities increased nine basis points in 1997 compared to 1996, with
the greatest increase occurring in NOW Accounts as a result of the Company
introducing a new High Yield Checking account in conjunction with the opening of
its Green Hills office. The increase in rate also contributed to a shift in the
mix of the Company's deposit account types in 1997.
The deposit mix at December 31, 1997 reflected the changes that occurred during
the year with non-interest bearing deposits at 7.7%, NOW Accounts at 5.7%, Money
Market Accounts at 45.7%, time deposits under $100,000 at 20.9%, and time
deposits $100,000 or greater at 20.0%. This compares to a deposit mix at year
end 1996 which reflected non-interest bearing deposits at 9.6%, NOW Accounts at
3.7%, Money Market Accounts at 48.1%, time deposits under $100,000 at 19.8% and
time deposits $100,000 or greater at 18.8%. This shift in the mix of the
Company's deposit base reflects the opening of its Green Hills office which
resulted in additional consumer deposits in both NOW Accounts and promotional
certificates of deposit. Maturities of deposit of $100,000 or more issued by the
Company at December 31, 1997 are summarized in the following table:
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(In Thousands)
- ---------------------------------------------------------------
<S> <C>
Three months or less $18,089
Over three through six months 5,435
Over six through twelve months 5,547
Over twelve months 3,803
- ---------------------------------------------------------------
Total $32,874
===============================================================
</TABLE>
-16-
<PAGE> 12
At year end 1997, the Company had Federal Home Loan Bank borrowings of $14.5
million compared to $9.5 million at year end 1996. The average rate paid on
average total interest bearing liabilities was 5.3% in 1997 compared with 5.2%
in 1996. This increase in the average rate paid on interest bearing liabilities
reflected promotional rates at the Green Hills office as well as the shift in
the mix of deposits and includes borrowed funds. In 1997 compared to 1996, the
average rate paid on NOW Accounts increased 119 basis points as the Company
introduced High Yield Checking, the average rate on Money Market Accounts
increased two basis points, the average rate on certificates of deposit $100,000
or greater increased eight basis points, while the average rate on certificates
of deposit less than $100,000 declined nine basis points. The average rate paid
on Federal Home Loan Bank and other borrowings increased 32 basis points in 1997
compared to 1996.
The ratio of average loans, net of unearned income, to average total deposits
was 75.2% in 1997, compared to 77.5% in 1996. This lower loan to deposit ratio
reflected the increase in total deposits which occurred in 1997. The loan to
deposit ratio at December 31, 1997 was 74.8% compared to 81.0% at year end 1996.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The Company's Asset/Liability management process actively involves the Board of
Directors and members of senior management. The Asset/Liability Committee of the
Board of Directors meets at least quarterly to review strategies and the volume
and mix of assets as well as funding sources. Decisions relative to different
types of securities are based upon the assessment of various economic and
financial factors, including, but not limited to interest rate risk, liquidity,
and capital adequacy. Interest rate sensitivity is a function of the repricing
characteristics of the Company's portfolio of earning assets and interest
bearing liabilities. These repricing characteristics are the timeframes within
which interest bearing assets and liabilities are subject to a change in
interest rate either by replacement, repricing or maturity of the instrument.
Interest rate sensitivity management focuses on the maturity structure of assets
and liabilities and their repricing characteristics during periods of change in
market interest rates. Effective interest rate risk management seeks to ensure
that both assets and liabilities respond to changes in interest rate movement
similarly to minimize the effect on net interest income of these fluctuations.
Management utilizes computer interest rate simulation models and analysis to
determine the Company's interest rate sensitivity. Management also evaluates the
condition of the economy, the pattern of market interest rates and other
economic data to determine the appropriate mix and repricing characteristics of
assets and liabilities.
In addition to ongoing monitoring of interest rate sensitivity, the Company may
enter into various interest rate contracts to augment the management of the
Company's interest sensitivity. These contracts may be used to supplement the
Company's objectives relating to its interest sensitivity position. The interest
rate risk factor in these contracts is considered in the overall risk management
strategy of the Company. The Company also utilizes certain leveraging strategies
within risk tolerance guidelines established by its Board of Directors for the
purpose of increasing net income. Such strategies involve the utilization of
borrowings to fund investment securities with similar maturities or repricing
characteristics which result in an acceptable interest rate spread. During 1997,
these strategies contributed $27,000 to the Company's net income. Leveraging
strategies are carefully monitored by the Company's Board of Directors who have
established parameters for matching investment purchases with Federal Home Loan
Bank borrowings. On a monthly basis a matched investment income report is
reviewed by the Company's Board of Directors in an effort to manage risk.
Additionally, the Asset/Liability Committee of the Company's Board of Directors
has established a maximum level of borrowings/investments of $25 million and has
implemented guidelines which require preapproval of each phase of the strategy
prior to implementation. While such strategies contribute to increases in net
interest income, they also have the effect of lowering the net interest margin
and increasing the Company's exposure to interest rate risk. Managing and
regularly monitoring the interest rate risk associated with the leveraging
strategy are the responsibility of both management and the Company's Board of
Directors. At December 31, 1997, the Company had borrowings totaling $14.5
million compared to $9.5 million at December 31, 1996. Approximately $10 million
of the borrowings reflected at December 31, 1997, were used to fund investment
securities.
-17-
<PAGE> 13
At December 31, 1997, the Company had an interest rate floor contract with a
notional value of $3 million compared to interest rate floor contracts of $8
million at December 31, 1996. These contracts were purchased to protect against
declining interest rates. These contracts were purchased during 1992 and 1993,
and have resulted in net income when evaluated on a life to date basis. The
Company recorded net interest expense on these contracts of approximately
$20,000 in 1997 and $21,000 in 1996.
The following interest rate gap table reflects the Company's rate sensitivity
position at December 31, 1997. The carrying amount of interest rate sensitive
assets and liabilities is presented in the periods in which they next reprice to
market rates or mature and is summed to show the interest rate sensitivity gap.
To reflect anticipated prepayments, certain investments are included in the
table based on estimated rather than contractual maturity dates.
<TABLE>
<CAPTION>
Expected Repricing or Maturity Date
Within One Two After
One to Two to Five Five
Year Years Years Year Total
- ----------------------------------------------------------------------------------------------------------
(Dollars In Thousands) 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Debt and equity securities $ 36,060 $ 17,136 $12,481 $ 382 $ 66,059
Average rate 6.93% 7.02% 6.52% 7.21% 6.88%
Net loans 82,407 5,306 25,847 9,189 122,749
Average rate 9.07% 8.98% 8.84% 8.14% 8.93%
Other 9,485 -- -- -- 9,485
Average rate 5.50% --% --% --% 5.50%
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing assets 127,952 22,442 38,328 9,571 198,293
Liabilities
Deposits 140,405 7,949 3,173 2 151,529
Average rate 4.69% 5.89% 6.65% 5.03% 5.03%
Federal Home Loan
Bank borrowings 14,500 -- -- -- 14,500
Average rate 5.88% -- -- -- 5.88%
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 154,905 7,949 3,173 2 166,029
- ----------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (26,953) $ 14,493 $35,155 $ 9,569
==========================================================================================================
Cumulative interest rate
sensitivity gap $ (26,953) $(12,460) $22,695 $ 32,264
==========================================================================================================
</TABLE>
Liquidity is the ability of a financial institution to meet the needs of its
customers and creditors. High levels of liquidity reduce earnings, as liquidity
is normally obtained at a net interest cost as a result of generally lower
yields on short-term, interest earning assets and the higher interest expense
usually associated with the extension of deposit maturities. The Company's
principal sources of asset liquidity are marketable securities available for
sale and Federal funds sold, as well as maturity of securities. The estimated
average maturity of securities was 5.1 years at December 31, 1997, compared to
3.4 years at December 31, 1996. Securities available for sale were $66.1 million
at December 31, 1997, compared to $46.4 million at December 31, 1996. Federal
funds sold were $9.4 million at December 31, 1997, compared with $6.8 million at
year end 1996. Core deposits, a relatively stable funding base, represented
80.0% of total deposits at December 31, 1997, and 81.2% at December 31, 1996.
Core deposits are defined as total deposits, less time certificates of $100,000
or greater. Liquidity is strengthened and reinforced by maintaining a relatively
stable funding base which is achieved by providing relationship banking,
extending contractual maturities of liabilities and reducing reliance on
volatile short-term purchased funds. Maintaining acceptable levels of liquidity
has been an ongoing consideration of the Company's Asset/Liability Committee and
is regularly monitored and adjusted, as appropriate. It is recognized that
maintaining an acceptable level of liquidity becomes even more important during
periods of economic uncertainty and volatile financial markets.
-18-
<PAGE> 14
Due to the commercial nature of the company's target market, liabilities and
loans are evaluated relative to industry concentration and volatility. At
December 31, 1997, approximately 18.5% of deposits were related to the
construction industry, 2.8% to real estate development/investment industries,
while 5.7% were related to health care and 8% to state and local governments.
These areas are the Company's largest deposit concentrations and represent
significant industries within the Nashville area. These deposits are primarily
reflected in the Company's demand deposit and interest bearing Money Market
Account totals and are deposits of relationship commercial customers which, by
their nature, are concentrated in a fewer number of customer relationships than
would be the case for consumer deposit funding sources. At December 31, 1997 and
1996, all investment securities were classified as available for sale. Footnote
C of the notes to the consolidated financial statements shows the components of
the securities portfolio and maturities.
MARKET RISK
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 gap table under the Liquidity and Asset/Liability Management caption.
At least quarterly, the Asset/Liability Committee (ALCO) of the Board of
Directors reviews interest rate risk considering results compared to policy,
current rate and economic outlooks, 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 1 year and generally should not exceed 1/2
year.
Management recommends the appropriate levels of interest rate risk to be assumed
within limits approved by the ALCO and the Board of Directors as to the maximum
fluctuations acceptable in the market value of equity and in earnings assuming
sudden rate movements (rising or failing) up to 200 basis points. The Company's
policy establishes the maximum change in annual pre-tax net interest income with
a 200 basis point change in rates to 10 percent while establishing the maximum
change allowable in pre-tax market value of capital to 12 percent in this 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 asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability structure to control interest rate risk.
The Company continually evaluates interest rate risk management opportunities,
including the use of derivative financial instruments. Management believes that
hedging instruments currently available are not cost-effective to the Company,
and therefore, has focused its efforts on increasing the Company's yield-cost
spread through growth opportunities.
-19-
<PAGE> 15
The following table shows the Company's financial instruments that are sensitive
to changes in interest rates, categorized by expected maturity, and the
instruments' fair values at December 31, 1997. Market risk sensitive instruments
are generally defined as derivatives and other financial instruments both on
balance sheet and off balance sheet.
<TABLE>
<CAPTION>
Expected Maturity/Principal Repayment
Average ----------------------------------------------------------------------------------
Interest There- Total Fair
(DOLLARS IN MILLIONS) Rate 1998 1999 2000 2001 2002 After Balance Value
(1) (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive
Assets:
Fed funds sold and
other short-term
investments 5.50% $ 9.5 $ -- $ -- $ -- $ -- $ -- $ 9.5 $ 9.5
Loan Receivable 8.93 82.4 5.3 9.3 6.4 10.1 9.2 122.7 122.6
Investment Securities 6.88 36.1 17.1 7.4 4.6 .5 .4 66.1 66.1
Interest-Sensitive
Liabilities:
Deposits 5.03 140.4 7.9 1.9 .5 .8 -- 151.5 152.0
FHLB Advances 5.88 14.5 -- -- -- -- -- 14.5 14.5
Interest-Sensitive
Off balance sheet
Items: (2)
Commitments to extend
credit 8.84 53.0 *
Unused lines of credit 11.92 3.0 *
===========================================================================================================================
</TABLE>
(1) Loans are not reduced for the allowance for loan losses.
(2) Total balance equals the notional amount of off-balance sheet items and
interest rates are the weighted average interest rates of the underlying
loans or commitments.
*The estimated fair value of these items was not significant.
Expected maturities are contractual maturities adjusted for prepayments of
principal. The Company uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon contractual
maturity, projected repayments and estimated prepayments of principal. The
actual maturities of these instruments could vary substantially if future
prepayments differ from the Company's historical experience.
-20-
<PAGE> 16
NONPERFORMING ASSETS AND RISK ELEMENTS
Nonperforming assets, which include nonaccrual loans, restructured loans, and
other real estate owned, were $1,227,000 at December 31, 1997, compared with
$579,000 at December 31, 1996. The following table presents the composition of
nonperforming assets at December 31, 1997 and 1996.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
December 31
- ---------------------------------------------------------------------
(Dollars In Thousands) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
NONPERFORMING ASSETS:
Nonaccrual loans $1,094 $579
Restructured loans -- --
Other real estate owned 133 --
- ---------------------------------------------------------------------
Total 1,227 $579
=====================================================================
Nonperforming assets as a percent of
total loans plus other real estate owned 1.0% 0.5%
=====================================================================
</TABLE>
There were no loans 90 days or more past due at December 31, 1997 and 1996 that
were not included in the nonaccrual category. During 1997, $976,000 of loans
were transferred from earning status to nonaccrual status, and there were no
advances on nonaccrual loans. This compares to $1,968,000 of loans transferred
from earning status to nonaccrual status in 1996. In 1997 there was one loan
removed from nonaccrual status and placed in other real estate owned reflecting
a balance of $133,000 at December 31, 1997. The Company had no other real estate
owned in 1996. During 1997, loans totaling $169,000 were charged-off with
recoveries recorded of $319,000 compared to charge-offs of $697,000 and
recoveries of $541,000 in 1996. These charge-offs and recoveries resulted in net
recoveries during 1997 of $150,000 compared to net charge-offs in 1996 of
$156,000.
The Company evaluates the credit risk of each customer on an individual and
ongoing basis and, where deemed appropriate, obtains collateral. Collateral
values are monitored to ensure that they are maintained at appropriate levels.
The largest component of the Company's credit risk relates to the loan
portfolio. During 1997, the Company continued its emphasis on underwriting
standards and loan review procedures. As discussed in the section, "Provision
for Possible Loan Losses", asset quality and loan charge-off and recovery
experience impact the level of the allowance for possible loans losses
maintained.
At December 31, 1997 and 1996, other potential problem loans totaled $177,000
and $84,000, respectively. Other potential problem loans consist of loans that
are currently not considered nonperforming, 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 nonperforming assets. The composition
of nonperforming assets at December 31, 1997 was 10.8% in other real estate
owned and 89.2% in nonaccrual loans which compares to 100% in nonaccrual loans
at December 31, 1996. The largest nonaccrual loan at December 31, 1997 was
$612,000.
At December 31, 1997, the Company's allowance for possible loan losses was $3.1
million, or 2.5%, of total loans compared with $2.9 million, or 2.7%, at
December 31, 1996. The level of the allowance for possible loan losses is
monitored regularly by management and the Company's Board of Directors.
-21-
<PAGE> 17
During 1997, management and the Board of Directors established a Year 2000 (Y2K)
Task Force, adopted a comprehensive project plan, budget, and a timetable 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 technological and financial risks to both
the Company and its customers as the new millennium approaches. Assuring that
internal systems and external vendors upon whom the Company is reliant are Y2K
compliant 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
1998 and 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 relationship risks as well. A series of newsletter articles is
being sent to all customers, Y2K credit risk is being assessed on all loans
above a predetermined 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. Company sponsored
seminars are also planned for 1998 to increase customer awareness of Y2K risks
and solutions.
CAPITAL STRENGTH
The Company's capital position continued to be strong during 1997. Shareholders'
equity (excluding SFAS No. 115 adjustments) at December 31, 1997, was $23.8
million, or 11.6% of total assets, which compares with $22.0 million, or 13.2%
of total assets at December 31, 1996. This calculation, when considered after
the effect of the Company's adoption SFAS No. 115, was $24.1 million, or 11.7%,
at December 31, 1997, which compares with $22.1 million, or 13.3%, of total
assets at December 31, 1996. The adoption of SFAS No. 115 issued by the
Financial Accounting Standards Board is reflected in the Company's shareholder
equity at December 31, 1997 and 1996, net of applicable income taxes, and
identified as unrealized gains on securities available for sale, net of taxes.
The increase in total equity is primarily a result of 1997 earnings net of
dividends paid and is enhanced by an increase in the unrealized gain on
securities available for sale of $294,000 at year 1997 compared with $64,000 at
year end 1996. Certain capital statistics are shown in the following chart:
CAPITAL STATISTICS
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------
(Dollars In Thousands) 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Total assets $204,887 $166,679
==========================================================================
Total shareholders' equity 24,052 22,085
==========================================================================
Total shareholders' equity to total assets 11.7% 13.2%
==========================================================================
</TABLE>
Management and The Board of Directors recognize the potential of additional
capital should outstanding warrants be exercised prior to their expiration date
of December 31, 1998. Strategies continue to be assessed regarding the
appropriate deployment of the potential additional capital inflow.
-22-
<PAGE> 18
The Company continues to maintain a "well capitalized" position as defined by
the Federal Deposit Insurance Corporation Improvement Act of 1991. This
regulation further classified capital in two tiers, referred to as Tier 1 and
Tier 2. Under risk based capital requirements, total capital consists of Tier 1
capital (essentially, common equity less certain intangibles) and Tier 2 capital
(essentially, a portion of the allowance for possible loan losses and certain
qualifying debt). This regulation requires state chartered member banks to
maintain certain minimum capital ratios as shown in the following chart:
CAPITAL RATIOS
<TABLE>
<CAPTION>
CFGI The Bank
December 31 December 31
- -------------------------------------------------------------------------------------------------------
(Dollars In Thousands) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CAPITAL COMPONENTS
TIER 1 CAPITAL:
Shareholders' equity $ 24,052 $ 22,085 $ 23,865 $ 22,005
Unrealized (gain) on securities AFS (294) (64) (294) (64)
- -------------------------------------------------------------------------------------------------------
Total Tier 1 capital 23,758 22,021 23,571 21,941
TIER 2 CAPITAL:
Allowable allowance for
possible loan losses 1,714 1,443 1,713 1,453
- -------------------------------------------------------------------------------------------------------
Total capital $ 25,472 $ 23,464 $ 25,284 $ 23,394
=======================================================================================================
Risk-adjusted assets $ 135,674 $ 113,971 $ 135,639 $ 114,854
Quarterly average assets $ 200,594 $ 167,111 $ 200,560 $ 167,052
</TABLE>
<TABLE>
<CAPTION>
FDICIA
Minimum December 31 December 31
Ratios 1997 1996 1997 1996
------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CAPITAL RATIOS
Total risk-based capital ratio 6 - 10% 18.8% 20.6% 18.6% 20.4%
Tier 1 risk-based capital ratio 3 - 6% 17.5% 19.3% 17.4% 19.1%
Tier 1 leverage ratio 2 - 5% 11.8% 13.2% 11.8% 13.1%
</TABLE>
The Company's capital ratios have continually exceeded all regulatory
requirements as demonstrated in the chart above. The Company reported dividend
payments in 1997 of $441,000 which compares with dividend payments in 1996 of
$352,000.
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.
-23-
<PAGE> 19
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.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income". Comprehensive income represents the
change in equity of the Company during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of general
purpose financial statements. SFAS No.130 requires all components of
comprehensive income, which are required to be recognized under accounting
standards, be reported in a financial statement that is displayed in equal
prominence with the other financial statements. SFAS No. 130 does not require a
specific presentation format, but will require the Company to display an amount
representing total comprehensive income for the period in the financial
statements. SFAS No. 130 is effective for both interim and annual periods
beginning after December 15, 1997 but need not be applied to interim financial
statements in the year of application. Implementation of SFAS No. 130 will not
have a material effect on the Company's financial condition or results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
supercedes numerous requirements in a previously issued statement--SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise"--but retains the
requirement to report information about major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. Implementation of SFAS No. 131 will not have a material effect on the
Company's financial condition or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS 1996 VS. 1995
The narrative which follows is management's discussion and analysis of 1996
results of operations of the Company compared to 1995.
Net income for 1996 was $2.5 million, or $1.16 basic earnings per share,
compared with net income for 1995 of $2.5 million, or $1.15 basic per share.
Dilutive earnings per share were $1.15 and $1.14 for the years ended December
31, 1996 and 1995, respectively. Return on average assets for 1996 and 1995 were
1.61% and 1.69%, respectively. Return on average shareholders' equity (excluding
SFAS No. 115 adjustments) was 12.18% in 1996 compared to 13.54% in 1995. 1996
earnings were impacted as the Company recorded a $168,000 provision for income
taxes compared to
-24-
<PAGE> 20
only $32,000 recorded in 1995, as the result of having utilized all of the
Federal net operating loss carryforward which remained during 1996. Earnings for
1995 benefited from a $520,000 negative provision for possible loan losses,
while no provision was reported in 1996.
Total assets increased from $152.8 million at December 31, 1995 to $166.7
million at December 31, 1996. During 1996, loans, net of unearned income,
increased $9.5 million, or 9.7%, at year end 1996 compared to the same period in
1995. Deposits increased $2.8 million, or 2.1%, from $130.5 million at year end
1995 to $133.3 million at year end 1996. The loan to deposit ratio increased
from 75.3% at year end 1995 to 81.0% at year end 1996, resulting primarily from
a significant increase in net loans which reflected the Company's business
development efforts.
Reported earnings reflected the use of net operating loss carryforwards and
during 1995 and a portion of 1996 and as such, income taxes recorded were
significantly less than the applicable statutory income tax rates. 1996 earnings
were further impacted by the Company beginning to expand its service locations
and delivery systems in 1996.
NET INTEREST INCOME
Net interest income for 1996 increased 15.1% from 1995. This increase resulted
primarily from a 6.3% increase in average earning assets which was partially
offset by a 4.8% increase in average interest bearing liabilities. Additionally,
net interest income was impacted by a decline of seven basis points in the
average rate earned on earning assets which was more than offset by a 41 basis
point decline in the average rate paid on interest bearing liabilities. Interest
income increased $.7 million, or 5.3%, in 1996 compared to 1995. Average loans
increased 14.9%, average investments declined 8.7%, while average Fed funds sold
remained level. Interest income on loans increased 11.0%, from 1995 to 1996, as
a result of the increased volume of loans outstanding which was partially offset
by decline in the average interest rate earned on those loans of 34 basis
points. Interest income on investment securities decreased 7.5% from 1995 to
1996, as a result of an 8.7% decline in the volume of securities which was
partially offset by a nine basis point increase in the average rate earned on
investment securities. Interest income on Federal Funds sold declined 13.3% in
1996 compared to 1995 as a result of a 78 basis point decline in the average
rate earned on these funds. Generally, total earning assets reflected an
increase in interest income which resulted primarily from growth in loans and a
shift in asset mix from investments to higher yielding loans.
Total interest expense decreased 3.0% in 1996 compared to 1995 due to a 41 basis
point decline in the average rate paid on interest bearing liabilities which was
partially offset by an increase of 4.8% in the average volume of these
liabilities. The decrease in rates paid on interest bearing liabilities was
reflected in all areas with the largest decline in rates paid on Money Market
Investment Accounts.
The Company's net interest margin increased 33 basis points to 4.18% in 1996,
primarily as the result of a decline in deposit rates, a higher loan to deposit
ratio and the impact of shifts in the mix of earning assets to higher yielding
loans. During 1996, the interest rate spread improved compared with 1995 from
2.85% in 1995 to 3.19% in 1996. Total interest income in 1996 compared to 1995
increased $652,000. The increased level of earning assets combined with the
shift in mix of earning assets and interest bearing liabilities resulted in a
higher level of net interest income. Total interest expense decreased in 1996
compared to 1995 by $196,000. Average interest bearing liabilities increased
only 4.8%, while average earning assets increased 6.3%. The average rate paid on
all interest bearing liabilities in 1996 was 5.2% compared with 5.6% in 1995.
PROVISION FOR POSSIBLE LOAN LOSSES
In 1996, the Company recorded no provision for possible loan losses, compared
with a net negative provision of $520,000 in 1995. The 1995 negative provision
resulted primarily from the Company having recorded recoveries of previously
charged-off loans in excess of current year charge-offs in the amount $713,000.
In 1996, the Company recorded net charge-offs of $156,000. The allowance for
possible loan losses was 2.7% of loans at December 31, 1996, compared to 3.1% of
loans at the
-25-
<PAGE> 21
same date in 1995. The decision to record no provision for possible loan losses
in 1996, as well as the recording of a negative provision in 1995, reflects
management's evaluation of the adequacy of the allowance for possible loan
losses considering various factors, including the level of loans outstanding,
economic conditions, and an assessment of portfolio quality and risk
characteristics.
NON-INTEREST INCOME
Total non-interest income of $927,000 in 1996 reflected an increase of 28.4% in
comparison with $722,000 reported in 1995. Non-interest income, less
nonrecurring income, increased 35%, or $238,000 in 1996 from 1995. Trust income
increased $80,000, or 25.1%, in 1996 compared to 1995 as a result of increase in
assets under management, as well as an increase in certain fees charged on these
assets. The Company's arrangement with LM Financial Partners, Inc. to offer
certain investment services resulted in an increase of $22,000, or 44%, in
income in 1996 compared to 1995. Income from foreclosed assets no longer carried
on the Company's books increased $93,000, or 251.4%, in 1996 compared to 1995.
These increases in non-interest income were partially offset by a decrease of
$16,000 in service income. Gains on sale of foreclosed assets of $11,000 were
reported in 1996 compared to $53,000 in 1995.
NON-INTEREST EXPENSE
Total non-interest expense increased 8.5% to $4.7 million in 1996 from $4.3
million in 1995. Non-interest expense represented 2.94% of average total assets
in 1996 compared to 2.89% in 1995. The non-interest expense to asset ratio is an
industry measure of a bank's ability to control its overhead. During 1996,
salaries and employee benefits increased $257,000, or 11.8%, to $2.4 million
from $2.2 million in 1995. This increase resulted primarily from increased
number of employees which included the staffing of the mobile branch service and
the employment of staff for the Green Hills location during the fourth quarter
of 1996. Occupancy expense increased $73,000, or 14.9%, primarily as a result of
expenses related to the establishment of the Green Hills office, most of which
occurred in the fourth quarter of 1996. These increases in non-interest expense
items were partially offset by a decrease in FDIC insurance expense of $157,000
in 1996 compared to 1995 as the result of premium decreases announced by the
FDIC in 1995, as well as a reduction in the Company's assessment rate resulting
from an improved overall condition. Non-personnel related expenses for 1996 were
$2.2 million compared to $2.1 million for 1995.
INCOME TAXES
During 1996, the Company fully utilized the Federal tax loss carryforwards which
had benefited income in prior years and continued to do so for a portion of
1996. Reported earnings in 1996 and 1995 reflected use of these net operating
loss carryforwards. In 1996, the Company recorded a $168,000 provision for
income taxes compared to only $32,000 in 1995.
CAPITAL STRENGTH
Total shareholders' equity (excluding the SFAS No. 115 adjustments) at December
31, 1996, was $22.0 million, or 13.2% of total assets, which compares with $19.7
million, or 12.9%, at December 31, 1995. The increase in total equity resulted
primarily from 1996 earnings net of dividends paid.
-26-
<PAGE> 22
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks - Note K $ 7,191 $ 6,128
Federal funds sold 9,400 6,825
Securities - Notes C and G:
Available for sale (amortized cost of $65,585
and $46,334, respectively) 66,059 46,437
Loans (net of unearned income of $297 and $256,
respectively) - Notes D and J:
Commercial 38,571 35,721
Real estate - mortgage loans 71,055 58,763
Real estate - construction loans 9,426 9,467
Consumer 3,697 3,937
- ------------------------------------------------------------------------------------
Loans, net of unearned income 122,749 107,888
Less allowance for possible loan losses (3,128) (2,878)
- ------------------------------------------------------------------------------------
Total net loans 119,621 105,010
- ------------------------------------------------------------------------------------
Premises and equipment, net - Note E 977 784
Accrued interest and other assets 1,639 1,495
- ------------------------------------------------------------------------------------
Total Assets $ 204,887 $ 166,679
====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Non-interest bearing demand deposits $ 12,570 $ 12,721
Interest-bearing deposits
NOW accounts 9,319 4,865
Money market accounts 75,043 64,140
Time certificates less than $100,000 34,293 26,423
Time certificates of $100,000 and greater 32,874 25,121
- ------------------------------------------------------------------------------------
Total Deposits 164,099 133,270
- ------------------------------------------------------------------------------------
Federal Home Loan Bank borrowings (Notes C and G) 14,500 9,500
Accounts payable and accrued liabilities 2,236 1,824
- ------------------------------------------------------------------------------------
Total Liabilities 180,835 144,594
- ------------------------------------------------------------------------------------
Commitments and contingencies
- Notes H, I, J, and M
SHAREHOLDERS' EQUITY: - Notes B, C, L and M
Common stock, $6 par value; authorized
50,000,000 shares; issued and outstanding
2,212,420 in 1997 and 2,202,473 in 1996 13,275 13,215
Additional paid-in capital 6,736 6,676
Retained earnings 3,747 2,130
Unrealized gain on securities available
for sale, net of taxes 294 64
- ------------------------------------------------------------------------------------
Total Shareholders' Equity 24,052 22,085
- ------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 204,887 $ 166,679
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-27-
<PAGE> 23
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
- ---------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $10,724 $ 9,569 $ 8,626
Interest on federal funds sold 398 314 362
Interest on balances with banks 19 -- --
Interest on securities:
U.S. Treasury securities 151 365 653
Other U.S. government agency obligations 3,825 2,583 2,567
States and political subdivisions 20 5 --
Other securities 123 63 39
- ---------------------------------------------------------------------------------------
Total interest income 15,260 12,899 12,247
- ---------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest bearing demand deposits 3,458 2,953 2,683
Time deposits less than $100,000 2,061 1,782 2,109
Time deposits $100,000 and over 1,693 1,563 1,850
Federal funds purchased 26 8 --
Federal Home Loan Bank borrowings 718 140 --
- ---------------------------------------------------------------------------------------
Total interest expense 7,956 6,446 6,642
- ---------------------------------------------------------------------------------------
NET INTEREST INCOME 7,304 6,453 5,605
Provision for possible loan losses - Note D (100) -- 520
- ---------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 7,204 6,453 6,125
NON-INTEREST INCOME:
Service fee income 421 193 209
Trust income 537 399 319
Investment Center income 107 72 50
Gain (loss) on sale of
securities, net - Note C 2 (2) (11)
Income from foreclosed assets 108 130 37
Gain on sale of other real estate owned 6 11 53
Other 240 124 65
- ---------------------------------------------------------------------------------------
Total non-interest income 1,421 927 722
- ---------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,673 2,437 2,180
Occupancy expense 711 562 489
Legal expense 45 60 33
FDIC insurance 19 6 163
Audit, tax and accounting 203 205 184
Advertising expense 191 130 150
Data processing expense 205 209 179
Other operating expenses 1,189 1,056 923
- ---------------------------------------------------------------------------------------
Total non-interest expense 5,236 4,665 4,301
- ---------------------------------------------------------------------------------------
Income before income taxes 3,389 2,715 2,546
Income tax expense - Note F 1,331 168 32
- ---------------------------------------------------------------------------------------
NET INCOME $ 2,058 $ 2,547 $ 2,514
=======================================================================================
Net income per share - Note B
Basic $ .93 $ 1.16 $ 1.15
Diluted .89 1.15 1.14
=======================================================================================
Weighted average common shares
outstanding - Note B
Basic 2,205 2,199 2,190
Diluted 2,324 2,223 2,207
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-28-
<PAGE> 24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Additional Retained on Securities
Common Paid-In Earnings Available
Stock Capital (Deficit) For Sale Total
- -----------------------------------------------------------------------------------------------
(In Thousands)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $13,103 $ 8,491 $(4,430) $ (893) $ 16,271
Issuance of Common
Stock (7,712 shares) 46 9 -- -- 55
Net Income -- -- 2,514 -- 2,514
Change in unrealized gain
(loss) on securities
available for sale,
net of taxes - Note C -- -- -- 1,172 1,172
- -----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 13,149 8,500 (1,916) 279 20,012
Issuance of Common
Stock(10,973 shares) 66 27 -- -- 93
Net Income -- -- 2,547 -- 2,547
Transfers to comply
with state statute,
Net - Note M -- (1,851) 1,851 -- --
Cash dividends - $.16
per share -- -- (352) -- (352)
Change in unrealized
gain on securities
available for sale,
net of taxes - Note C -- -- -- (215) (215)
- -----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 13,215 6,676 2,130 64 22,085
Issuance of Common
Stock (9,947 shares) 60 60 -- -- 120
Net Income -- -- 2,058 -- 2,058
Cash dividends - $.20
per share -- -- (441) -- (441)
Change in unrealized
gain on securities
available for sale,
net of taxes - Note C -- -- -- 230 230
- -----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $13,275 $ 6,736 $ 3,747 $ 294 $ 24,052
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-29-
<PAGE> 25
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
- --------------------------------------------------------------------------------------
(In Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 15,020 $ 13,055 $ 11,879
Fees received 1,419 929 909
Interest paid (7,422) (6,934) (6,144)
Cash paid to suppliers and associates (6,488) (4,623) (4,012)
- --------------------------------------------------------------------------------------
Net cash provided by
operating activities 2,529 2,427 2,632
- --------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities:
Available for sale 2,479 6,012 4,089
Maturities of securities:
Held to maturity -- -- 1,557
Available for sale 19,404 9,632 4,266
Purchase of securities:
Available for sale (41,235) (14,360) (9,065)
Loans (originated) repaid
to customers, net (14,578) (9,704) (16,542)
Capital expenditures (469) (310) (390)
- --------------------------------------------------------------------------------------
Net cash provided (used) by
investing activities (34,399) (8,730) (16,085)
- --------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand,
NOW, and money market savings 15,206 15,767 (2,038)
Net increase (decrease) in time
certificates 15,623 (13,031) 4,229
Advance from Federal Home Loan Bank 5,000 9,500 --
Proceeds from issuance of common stock 120 93 55
Dividends paid (441) (352) --
- --------------------------------------------------------------------------------------
Net cash provided (used) by
financing activities 35,508 11,977 2,246
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 3,638 5,674 (11,207)
Cash and cash equivalents at
beginning of year 12,953 7,279 18,486
- --------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 16,591 $ 12,953 $ 7,279
======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-30-
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31
- ----------------------------------------------------------------------------------------
(In Thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of net income to
net cash provided by operating
activities:
Net income $ 2,058 $ 2,547 $ 2,514
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 399 209 211
Provision for possible
loan losses 100 -- (520)
Provision for deferred income taxes 124 82 --
(Gain) loss on sale of securities (2) 2 11
Loss on disposal of equipment -- 14 --
Gain on sale of other real estate owned (6) (11) (53)
Stock dividend income (87) (20) --
Changes in assets and liabilities:
(Increase) decrease in accrued
interest and other assets (508) 6 (290)
Increase (decrease) in accounts
payable and accrued liabilities 451 (402) 759
- ----------------------------------------------------------------------------------------
Net cash provided by operating
activities $ 2,529 $ 2,427 $ 2,632
========================================================================================
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
<TABLE>
<S> <C> <C> <C>
Change in unrealized gain (loss) on
securities available for sale, net
of taxes $ 230 $ (215) $ 1,172
Transfer of securities to available
for sale -- -- 20,772
Foreclosures of loans during the year 133 -- 128
</TABLE>
See accompanying notes to consolidated financial statements.
-31-
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
common stock was exchanged for an outstanding share of CFGI
and each outstanding warrant and each option to purchase
shares of The Bank became warrants and options to purchase
shares of CFGI.
The consolidated financial statements include the accounts of
CFGI and The Bank (collectively the Company) after elimination
of material intercompany accounts and transactions.
The accounting and reporting policies of the Company conform
to generally accepted accounting principles and to general
practices within the banking industry. Management has made a
number of estimates and assumptions relating to the reporting
of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
Following is a summary of the more significant accounting
policies of the Company.
Securities
Securities are designated as held to maturity, available for
sale, or trading at the time of acquisition. Held to maturity
securities are carried at amortized cost and adjusted for
amortization of premiums and accretion of discounts using a
method that approximates the level-yield method. Trading
account securities are carried at market value with gains and
losses determined using the specific identification method
recognized currently in the income statement. As of December
31, 1997 and 1996, the Company has classified its entire
securities portfolio as available for sale. Available for sale
securities are reported at fair value. If a decline in value
is considered to be other than temporary, the securities are
written down to fair value and the amount of the writedown is
included in earnings. Unrealized gains and losses on
securities available for sale are reflected in a separate
shareholders' equity account, net of applicable income taxes,
in accordance with SFAS No. 115 (See Note C). The adjusted
cost of a specific security sold is used to compute the gain
or loss on the sale of that security. Gains and losses on the
sale of securities available for sale are included in
non-interest income.
Loans
Loans are carried at the principal amount outstanding net of
unearned income. Interest income on loans and amortization of
unearned income is computed by methods which result in level
rates of return on principal amounts outstanding. Management,
considering current information and events regarding the
borrowers ability to repay their obligations, considers a loan
to be impaired when it is probable that the Company will be
unable to collect all amounts due according to contractual
terms of the loan agreement. When a loan is considered
impaired, the amount of the impairment is based on the present
value of the expected future cash flows at the loan's
-32-
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
effective interest rate, at the loan's market price or fair
value of collateral if the loan is collateral-dependent.
Impairment losses are included in the allowance for possible
loan losses through a charge to provision for loan losses.
Interest income is accrued on loans except when doubt as to
collectability exists, in which case the respective loans are
placed on nonaccrual status. The decision to place a loan on
nonaccrual status is based on an evaluation of the borrower's
financial condition, collateral liquidation value, and other
factors that affect the borrower's ability to pay. At the time
a loan is placed on nonaccrual status, the accrued but unpaid
interest is charged against current income. Cash receipts on
nonaccrual loans are applied to reduce the principal amount of
such loans until the principal has been recovered, and are
recognized as interest income thereafter.
Loan origination, commitment fees and certain direct
origination costs are deferred and amortized over the
contractual life of the related loans, adjusted for
prepayments as a yield adjustment.
Allowance for Possible Loan Losses
The allowance for possible loan losses reflects an amount
which, in management's judgment, is adequate to provide for
estimated loan losses. Management's evaluation of the loan
portfolio consists of evaluating current delinquencies, the
adequacy of underlying collateral, current economic
conditions, risk characteristics, and management's internal
credit review process. Accounts are charged off as soon as the
probability of loss is established. While management uses
available information to recognize losses on loans, future
adjustments in the allowance may be necessary based on changes
in economic conditions. In addition, various regulatory
agencies, as part of their examinations, periodically review
the Company's allowance for possible loan losses. Such
agencies may require the Company to adjust the allowance based
on their judgment and information available to them at the
time of their examinations.
Other Real Estate Owned (OREO)
Other real estate owned includes property acquired in
situations in which the Company has physical possession of a
debtor's assets (collateral). Such assets are carried at the
lower of cost or fair value less estimated cost to sell. Cost
includes loan principal, accrued interest, foreclosure expense
and expenditures for subsequent improvements. Losses arising
from the acquisition of such property are charged against the
allowance for possible loan losses. Declines in value
subsequent to foreclosure are recorded as a valuation
allowance. Provisions for subsequent declines or losses from
disposition of such property are recognized in non-interest
expense.
-33-
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Premises and Equipment
Premises and equipment is stated at cost less accumulated
depreciation and amortization. For financial reporting
purposes, depreciation and amortization are computed using the
straight-line method over the estimated lives of those assets.
Leasehold improvements are amortized over the lease terms or
the estimated lives, whichever is less. The estimated lives
are as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Leasehold improvements 3 - 20
Furniture and equipment 3 - 10
</TABLE>
Income Taxes
The Company accounts for income taxes in accordance with the
asset and liability method of accounting. Under such 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.
Trust Assets
Assets of the trust department, other than cash on deposit at
The Bank, are not included in these consolidated financial
statements because they are not assets of the Company.
Statement of Cash Flows
For purposes of reporting cash flow, the Company has defined
cash and cash equivalents as cash and due from banks and daily
federal funds sold.
Earnings Per Common Share
The Company adopted Statement of Financial Accounting Standard
(SFAS) No. 128, "Earnings Per Share" at December 31, 1997. All
prior period earnings per share (EPS) data has been restated
to reflect the implementation of SFAS No. 128. SFAS No. 128
establishes standards for both computing and presentation of
basic and diluted EPS on the face of the income statement.
Basic EPS is computed by dividing net income available to
common shareholders (numerator) by the weighted average number
of common shares outstanding (denominator). The denominator
used in computing diluted EPS reflect's the dilutive effect of
options and warrants outstanding. See Note B.
SFAS No. 129, "Disclosure of Information About Capital
Structure" was adopted in 1997 and requires disclosure of
information about an entity's capital structure. The Company
has made all disclosures required by the statement.
-34-
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Financial Instruments
The Company enters into interest rate floor agreements as part
of its asset/liability management program. Fees paid upon
inception of these agreements are deferred and amortized over
the life of the agreements. Income or expense derived from
these agreements is recognized in interest income during the
period earned.
Reclassifications
Certain reclassifications have been made in the consolidated
financial statements for prior years to conform with the 1997
presentation.
B. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
The Company can issue common stock pursuant to various plans
such as employee stock purchase, contributions to the 401(K)
plan, and payment of directors' fees. Under these plans,
4,417, 5,973, and 7,712 shares were issued during 1997, 1996
and 1995, respectively.
The Company had outstanding stock options totaling 98,000 and
75,000 shares at December 31, 1997 and 1996, respectively.
Options totaling 23,000 shares were issued during 1997.
Options totaling 15,000 shares were issued and options
totaling 5,000 shares were exercised during 1996 (See Note L).
At December 31, 1997 and 1996, warrants to purchase 4,739,397
and 4,744,927, respectively, shares of CFGI's common stock
were outstanding. During 1997, warrants for 5,530 share were
exercised with proceeds of approximately $69,000. The exercise
price of the warrants is $12.50, and they expire on December
31, 1998.
The following table is a reconciliation of net income and
average shares outstanding used in calculating basic and
diluted earnings per share.
<TABLE>
<CAPTION>
Year Ended December 31
- --------------------------------------------------------------------------------
(Dollars in Thousands,
Except Per Share Data) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <S> <S> <S>
Net income available to common
shareholders $ 2,058 $ 2,547 $ 2,514
Weighted average common shares
outstanding
Basic 2,205,043 2,198,619 2,189,971
Dilutive effect of:
Options 30,687 24,034 16,994
Warrants 87,850 -- --
- --------------------------------------------------------------------------------
Weighted average common shares
outstanding
Diluted 2,323,580 2,222,653 2,206,965
================================================================================
Antidilutive securities:
Warrants * 4,744,927 4,744,927
================================================================================
Net income per share:
Basic $ .93 $ 1.16 $ 1.15
Diluted $ .89 $ 1.15 $ 1.14
- --------------------------------------------------------------------------------
</TABLE>
*The warrants were dilutive only in the fourth quarter of 1997.
-35-
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. SECURITIES
The Company has classified all securities as available for
sale in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The Company
recorded increases in shareholders' equity of $294,000 and
$64,000 at December 31, 1997 and 1996, respectively, for the
unrealized gain on securities available for sale.
Proceeds from sales of debt securities during 1997, 1996, and
1995 were $2.5 million, $6.0 million and $4.1 million,
respectively. Gross gains of $5 thousand, $5 thousand and $10
thousand and gross losses of $3 thousand, $7 thousand and $21
thousand were realized on those sales in 1997, 1996 and 1995,
respectively.
The amortized cost, gross unrealized gains and losses, and
estimated fair values of securities at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
Available for Sale
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------
(In Thousands) 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities
and Obligations of U.S.
Government agencies $30,859 $573 $ 6 $31,426
Collateralized mortgage
obligations 32,236 79 194 32,121
Securities of states and
political subdivisions 360 22 -- 382
Equity securities 2,130 -- -- 2,130
- ------------------------------------------------------------------------------
$65,585 $674 $200 $66,059
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Available for Sale
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------
(In Thousands) 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities
and Obligations of U.S.
Government agencies $22,420 $324 $ 32 $22,712
Collateralized mortgage
obligations 21,893 57 254 21,696
Securities of states and
political subdivisions 360 8 -- 368
Equity securities 1,661 -- -- 1,661
- ------------------------------------------------------------------------------
$46,334 $389 $286 $46,437
==============================================================================
</TABLE>
At December 31, 1997 and 1996, the Company did not have any
securities which it classified as held to maturity or trading.
The amortized cost and fair value of debt securities by
contractual maturity at December 31, 1997, are shown in the
following table. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
-36-
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. SECURITIES - CONTINUED
Collateralized mortgage obligations with a weighted average
effective yield of 6.59% are disclosed as a separate line item
due to staggered maturity dates. Investments in Federal
Reserve Bank stock and Federal Home Loan Bank stock totaling
$2,130,000 are excluded as they have no stated maturity date.
<TABLE>
<CAPTION>
Available for Sale
------------------------
Estimated
Amortized Fair
Cost Value
- -------------------------------------------------------------------
(In Thousands) December 31, 1997
- -------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 1,997 $ 2,002
Due after one year through five years 1,533 1,539
Due after five years through ten years 2,976 3,021
Due after ten years 24,713 25,246
- -------------------------------------------------------------------
31,219 31,808
Collateralized mortgage obligations 32,236 32,121
- -------------------------------------------------------------------
$63,455 $63,929
===================================================================
</TABLE>
Securities with an aggregate amortized cost of approximately
$31.3 million and $25.6 million were pledged to secure public
deposits, Federal Home Loan Bank borrowings and for other
purposes as required by law at December 31, 1997 and 1996,
respectively.
D. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the changes in the allowance for possible loan
losses is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
- ------------------------------------------------------------------------------
(In Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $2,878 $ 3,034 $ 2,841
Provision charged (credited)
to operations 100 -- (520)
Loans (charged off), net of recoveries
of $319, $541 and $1,058, in
1997, 1996, 1995, respectively 150 (156) 713
- ------------------------------------------------------------------------------
Balance, December 31 $3,128 $ 2,878 $ 3,034
==============================================================================
</TABLE>
At December 31, 1997 and 1996, loans on nonaccrual status
amounted to $1,094,000 and $579,000, respectively. The effect
of nonaccrual loans was to reduce interest income by
approximately $32,000 in 1997, $74,000 in 1996 and $78,000 in
1995. There were no material commitments to lend additional
funds to customers whose loans were classified as nonaccrual
at December 31, 1997 and 1996.
Renegotiated loans are loans which are performing in
accordance with their new terms and, therefore, are not
included in nonaccrual loans. The Company had no renegotiated
loans at December 31, 1997 and 1996.
-37-
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES - CONTINUED
The Company's recorded investment in impaired loans and the
related valuation allowance are $805,000 and $359,000, and
$116,000 and $184,000 at December 31, 1997 and 1996,
respectively. The valuation allowance is included in the
allowance for loan losses on the consolidated balance sheets.
At December 31, 1997 and 1996 there were no impaired loans
without an accompanying valuation reserve.
The average recorded investment in impaired loans for the
years ended December 31, 1997 and 1996 was $390,000 and
$382,000, 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 1997 or 1996.
In the ordinary course of business, the Company makes loans to
directors, executive officers, and principal shareholders,
including related interests. In management's opinion, these
loans are made on substantially the same terms, including
interest and collateral, as those prevailing at the time for
comparable transactions with other borrowers and they did not
involve more than the normal risk of collectability or present
other unfavorable features at the time such loans were made.
During 1997, $2.3 million of new loans were made while
repayments and other reductions totaled $3.4 million.
Outstanding loans to executive officers and directors,
including their associates and affiliated companies, were $2.2
million and $3.3 million at December 31, 1997 and 1996,
respectively. Unfunded lines to executive officers and
directors were $4.1 million and $4.2 million at December 31,
1997 and 1996, respectively.
The directors, executive officers and principal shareholders
also maintain deposits with the Company. The terms of these
deposit contracts are comparable to those available to other
depositors. The amount of these deposits totaled $1.3 million
and $1.1 million at December 31, 1997 and 1996, respectively.
E. PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------
(In Thousands) 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 577 $ 232
Furniture and equipment 1,948 1,823
- --------------------------------------------------------------------------
2,525 2,055
Less accumulated depreciation and amortization (1,548) (1,271)
- --------------------------------------------------------------------------
Premises and Equipment, Net $ 977 $ 784
==========================================================================
</TABLE>
-38-
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. INCOME TAXES
Actual income tax expense for the years ended December 31,
1997, 1996 and 1995 differed from an "expected" tax expense
(computed by applying the U.S. Federal corporate tax rate of
34% to income before income taxes)as follows:
<TABLE>
<CAPTION>
December 31
- -----------------------------------------------------------------------
(In Thousands) 1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $1,152 $ 923 $ 866
State taxes, net of federal benefit 135 -- --
Benefit of net operating
loss carryforward -- (755) (834)
Other 44 -- --
- -----------------------------------------------------------------------
Total Income Tax Expense $1,331 $ 168 $ 32
=======================================================================
</TABLE>
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------------------
(In Thousands) 1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense:
Federal $1,107 $ 86 $32
State 100 -- --
- ------------------------------------------------------------
1,207 86 32
- ------------------------------------------------------------
Deferred income tax expense:
Federal 20 82 --
State 104 -- --
- ------------------------------------------------------------
124 82 --
- ------------------------------------------------------------
Total Income Tax Expense $1,331 $168 $32
============================================================
</TABLE>
-39-
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. INCOME TAXES- CONTINUED
Significant temporary differences and carryforwards that give
rise to the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------------------------
(In Thousands) 1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred fees, principally due to timing
differences in the recognition of income $147 $134
Net operating loss carryforwards -- 73
Alternative minimum tax credit carryforwards -- 30
Other 10 67
- ------------------------------------------------------------------
Total gross deferred tax assets 157 304
- ------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain securities
available for sale 180 39
Discount on securities deferred
for tax purposes 108 97
Loans, principally due to provision for
possible loan losses 174 213
Premises and equipment, principally due to
differences in depreciation methods 38 66
Other 43 10
- ------------------------------------------------------------------
Total gross deferred tax liabilities 543 425
- ------------------------------------------------------------------
Net deferred tax liabilities $386 $121
==================================================================
</TABLE>
The net decrease during 1996 and 1995 in the valuation
allowance for deferred tax assets was $760,000 and $1,466,000,
respectively.
G. LONG TERM DEBT AND LINES OF CREDIT
The Bank maintains an arrangement with the Federal Home Loan
Bank of Cincinnati to provide for certain borrowing needs of
The Bank. The arrangement requires The Bank to hold stock in
the Federal Home Loan Bank and requires The Bank to pledge
investment securities, to be held by the Federal Home Loan
Bank, as collateral. During 1997 and 1996, $5,000,000 and
$9,500,000, respectively, were advanced under this
arrangement. At December 31, 1997 and 1996 indebtedness under
the arrangement totaled $14,500,000 and $9,500,000
respectively. These advances mature in May and September, 2001
and are eligible for prepayment at The Bank's option beginning
in May and September, 1998. The interest rates on these
advances are tied to the one-month and three-month LIBOR rates
and adjust periodically. Interest is payable monthly. The
maximum advances outstanding were $14,500,000 and $9,500,000,
the average balances outstanding were $12,651,000 and
$2,745,000 and the weighted average rates were 5.68% and 5.37%
for the years ended 1997 and 1996, respectively. The Bank has
pledged investment securities with an amortized cost of
approximately $16.1 million at December 31, 1997 as collateral
under terms of the loan agreement.
-40-
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. LONG TERM DEBT AND LINES OF CREDIT - Continued
On December 31, 1997 and 1996, the Company had available for
its use $19.0 million and $15.0 million, respectively, of
unsecured short-term bank lines of credit. Such short-term
lines serve as backup for loan and investment needs. There are
no compensating balance requirements. These lines facilitate
federal funds borrowings and bear a rate equal to the current
lending rate for federal funds purchased. No amounts were
outstanding under these lines of credit at December 31, 1997
and 1996.
H. LEASE COMMITMENTS
The Company occupies space under noncancelable operating
leases. The leases provide annual escalating rents for periods
through 2000 with options for renewals. Rent expense is
recognized in equal monthly amounts over the lease term. Rent
expense was $345,000, $284,000 and $209,000 for 1997, 1996 and
1995, respectively.
Future lease payments under noncancelable operating leases at
December 31, 1997 are payable as follows:
<TABLE>
<CAPTION>
---------------------------------
(In Thousands)
---------------------------------
<S> <C>
1998 $ 421
1999 382
2000 233
2001 215
2002 92
---------------------------------
$1,343
=================================
</TABLE>
I. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with
off-balance sheet risk in the normal course of business to
meet the financing needs of its customers and to reduce its
own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in
excess of the amount recognized on the balance sheets. The
contract amounts of those instruments reflect the extent of
involvement and the related credit risk the Company has in
particular classes of financial instruments. The Company,
through regular reviews of these arrangements, does not
anticipate any material losses as a result of these
transactions.
At December 31, 1997 and 1996 unused lines of credit were
approximately $53.0 million and $30.5 million, respectively,
with the majority generally having terms at origination of one
year. Additionally, the Company had standby letters of credit
of $3,039,000 and $1,612,000 at December 31, 1997 and 1996,
respectively.
-41-
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - Continued
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amounts of collateral obtained, if
deemed necessary by the Company, upon extension of credit is
based on management's credit evaluation of the customer.
Standby letters of credit are commitments issued by the
Company to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public
and private borrowing arrangements, including commercial
paper, bond financing, and similar transactions. Most
guarantees extend from one to two years. The credit risk
involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.
The Company has entered into interest rate floor agreements
for its asset/liability management program to reduce interest
rate risk. These interest rate floors represent obligations by
third parties whereby the Company receives payment when the
underlying rate index falls below an agreed upon level. The
Company paid a fee, which is amortized as an adjustment of
yield. The unamortized portion of this fee was $11,000 and
$31,000 at December 31, 1997 and 1996, respectively. At
December 31, 1997, the Company held an interest rate floor
contract with a notional amount of $3.0 million which expires
in 1998, and was entered into to protect the Company from
falling interest rates.
J. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
Most of the Company's business activity is with customers
located in the Middle Tennessee region. Generally, loans are
secured by stocks, real estate, time certificates, or other
assets. The loans are expected to be repaid from cash flow or
proceeds from the sale of selected assets of the borrowers.
The Company grants residential, consumer, and commercial loans
to customers throughout the Middle Tennessee region. Real
estate mortgage and construction loans reflected in the
accompanying consolidated balance sheets are comprised
primarily of loans to commercial borrowers.
At December 31, 1997 funded and unfunded loan commitments as
classified by Standard Industry Classification codes include
borrowers in the real estate industry approximating $25
million and $2.2 million, respectively, and loans to building
contractors approximating $7.9 million and $11.2 million,
respectively. At December 31, 1996, funded and unfunded
commitments to borrowers in the real estate industry were
approximately $21.3 million and $3.9 million, respectively,
and to building contractors approximately $7.8 million and
$7.5 million, respectively.
-42-
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. CASH RESTRICTIONS
The Company is required to maintain reserves in the form of
average vault cash and balances with the Federal Reserve Bank.
The average amounts of these balances maintained during the
years ended December 31, 1997 and 1996, were $1,937,000 and
$1,269,000, respectively. The required balance at December 31,
1997 was $1,722,000.
L. EMPLOYEE BENEFITS
The Company maintains for its employees an Associates Stock
Purchase Plan and a Retirement Savings Plan 401(K).
The Retirement Savings Plan 401(K) provides for the maximum
deferral of employee compensation allowable by the IRS under
provisions of Section 401(A) and 401(K). The Plan is available
to all associates who meet the plan eligibility requirements.
The Company provides various levels of employer matching of
contributions up to 4% of the associate's compensation.
Employer contributions are invested exclusively in the
Company's common stock. Associates fully vest in the
employer's contributions after three years of service as
defined in the Plan. Total plan expense for 1997, 1996 and
1995 was approximately $77,000, $61,000, $63,000,
respectively.
In 1997, the Board of Directors adopted the 1997 Nonstatutory
Stock Option Plan which reserved 150,000 shares of the
Company's common stock for use under the Plan (plus 10% of any
additional shares of stock issued after the effective date of
the Plan). Stock issued pursuant to the Plan may be either
authorized but unissued shares or shares held in the treasury
of the Company. Options are granted at an option price of no
less than the fair market value of the stock of the date of
grant. Each grant of an option shall be evidenced by a stock
option agreement specifying the number of shares, the exercise
price, and a vesting schedule. During 1997, 23,000 options
were granted under the Plan.
The Associates Stock Purchase Plan, under which 100,000 shares
of the Company's common stock may be issued, allows associates
to purchase the Company's common stock through payroll
deductions at 84% of the existing market value, not to fall
below par value. The difference between the purchase price and
the market value on the date of issue is recorded as
compensation expense. Compensation expense of $9,000 and
$2,000 was recorded in 1997 and 1996, respectively. Incidental
expenses regarding the administration of the plan are absorbed
by the Company.
-43-
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. EMPLOYEE BENEFITS - CONTINUED
As of December 31, 1997, the Company's Board of Directors had
approved the issuance of stock options to purchase 98,000
shares of the Company's common stock. Compensation expense was
not recorded in connection with the issuance of these options
as the option price was equal to or exceeded the market price
of the Company's common stock at the date of grant. The
following table presents information on stock options:
<TABLE>
<CAPTION>
Weighted
Total Exercisable Option Average
Option Shares Options Options Price Range Price
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding
at January 1, 1995 65,000 43,000 $ 6.00-7.125 $ 6.59
Granted -- -- -- --
Options that became
exercisable -- 8,000 $ 6.00-7.125 $ 6.813
- ----------------------------------------------------------------------------------
Options outstanding
at December 31, 1995 65,000 51,000 $ 6.00-7.125 $ 6.59
Granted 15,000 3,000 $ 10.125 $10.125
Options that became
exercisable -- 8,000 $ 6.00-7.125 $ 6.813
Options exercised (5,000) (5,000) $ 7.125 $ 7.125
- ----------------------------------------------------------------------------------
Options outstanding at
December 31, 1996 75,000 57,000 $6.00-10.125 $ 7.26
Granted 23,000 4,600 $ 11.625 $11.625
Options that became
exercisable -- 9,000 $7.00-10.125 $ 8.10
- ----------------------------------------------------------------------------------
Options outstanding at
December 31, 1997 98,000 70,600 $6.00-11.625 $ 8.28
- ----------------------------------------------------------------------------------
</TABLE>
The stock options have five year vesting schedules and become
exercisable in full in the event of a merger, sale or change
in majority control of the Company. The options expire during
the years 2002 through 2007. The weighted average price of the
options at December 31, 1997 was $8.28 and the weighted
average remaining life was approximately 7.1 years.
Prior to January 1, 1996, the Company accounted for its stock
option plan and ASPP in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. As
such, compensation expense related to stock options would be
recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. On
January 1, 1996 the Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the
provisions of APB No. 25 and provide proforma net income and
proforma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the
fair-value-based method detailed in SFAS No. 123 had been
applied. The Company has elected to continue to apply the
provisions of APB No. 25. As such, proforma disclosures of net
income and earnings per share are as follows:
-44-
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. EMPLOYEE BENEFITS - CONTINUED
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1997 1996
- -----------------------------------------------------------
<S> <C> <C>
Net income - as reported $2,058,000 $2,547,000
Net income - proforma $2,037,000 $2,543,000
Earnings per share:
Basic
As reported $ .93 $ 1.16
Proforma $ .92 $ 1.16
Diluted
As reported $ .89 $ 1.15
Proforma $ .88 $ 1.14
===========================================================
</TABLE>
The weighted average fair values of options granted during
1997 and 1996 were $3.95 and $2.97 per share, respectively.
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1997 1996
- -----------------------------------------------------------
<S> <C> <C>
Expected dividend yield 1.42% 1.42%
Expected stock price volatility 20% 19%
Risk-free interest rate 6.64% 6.61%
Expected life of options(years) 5 5
===========================================================
</TABLE>
M. RESTRICTIONS ON RETAINED EARNINGS, REGULATORY MATTERS AND LITIGATION
In order to declare dividends The Bank must transfer a minimum
of ten percent of current net income from retained earnings to
additional paid-in capital until additional paid-in capital
equals common stock. At December 31, 1997, approximately $3.7
million of The Bank's retained earnings were available for
dividend declaration and payment to its shareholder CFGI
(parent company), without regulatory approval.
The Bank transferred $147,000 from retained earnings to
surplus during 1997. Additionally, during 1996, The Bank
transferred a net of $1,851,000 from additional paid-in
capital to retained earnings. The Bank transferred $187,000
from retained earnings to additional paid-in capital
subsequent to its acquisition by CFGI.
Also, there are from time to time other legal proceedings
pending against the Company. In the opinion of management,
liabilities, if any, arising from such proceedings presently
pending would not have a material adverse effect on the
consolidated financial statements of the Company.
-45-
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. RESTRICTIONS ON RETAINED EARNINGS, REGULATORY
MATTERS AND LITIGATION - Continued
CFGI and The Bank are subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary -
actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company
and The Bank must meet specific capital guidelines that
involve quantitative measures of the Company's and The Bank's
assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The
Company's and The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and The Bank to maintain
minimum amounts and ratios (set forth in the following table)
of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes
the Company and The Bank meet all capital adequacy
requirements to which it is subject as of December 31, 1997.
As of December 31, 1997, the most recent notification from the
Federal Reserve Bank categorized The Bank as adequately
capitalized under the regulatory framework for prompt
corrective action. To be categorized as adequately
capitalized, The Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in
the table below. There are no conditions or events since that
notification that management believes have changed The Bank's
category.
-46-
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. RESTRICTIONS ON RETAINED EARNINGS, REGULATORY MATTERS
AND LITIGATION - CONTINUED
The Company's and The Bank's actual capital amounts and ratios
are also presented in the table.
CAPITAL RATIOS
<TABLE>
<CAPTION>
CFGI The Bank
December 31 December 31
- ---------------------------------------------------------------------------------------------------
(Dollars In Thousands) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CAPITAL COMPONENTS
TIER 1 CAPITAL:
Shareholders' equity $ 24,052 $ 22,085 $ 23,865 $ 22,005
Unrealized (gain) on securities AFS (294) (64) (294) (64)
- ---------------------------------------------------------------------------------------------------
Total Tier 1 capital 23,758 22,021 23,571 21,941
TIER 2 CAPITAL:
Allowable allowance for
possible loan losses 1,714 1,443 1,713 1,453
- ---------------------------------------------------------------------------------------------------
Total capital $ 25,472 $ 23,464 $ 25,284 $ 23,394
- ---------------------------------------------------------------------------------------------------
Risk-adjusted assets $135,674 $113,971 $135,639 $114,854
Quarterly average assets $200,594 $167,111 $200,560 $167,052
</TABLE>
<TABLE>
<CAPTION>
FDICIA
Minimum December 31 December 31
Ratios 1997 1996 1997 1996
------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CAPITAL RATIOS
Total risk-based capital ratio 6 - 10% 18.8% 20.6% 18.6% 20.4%
Tier 1 risk-based capital ratio 3 - 6% 17.5% 19.3% 17.4% 19.1%
Tier 1 leverage ratio 2 - 5% 11.8% 13.2% 11.8% 13.1%
</TABLE>
N. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information
about financial instruments for both on and off-balance sheet
assets and liabilities for which it is practicable to estimate
fair value. The techniques used for this valuation are
significantly affected by the assumptions used, including the
amount and timing of future cash flows and the discount rate.
Such estimates involve uncertainties and matters of judgment
and, therefore, cannot be determined with precision. In that
regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets.
Accordingly, the aggregate fair value amounts presented are
not meant to represent the underlying value of the Company.
-47-
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The following table presents the carrying amounts and the
estimated fair value of the Company's financial instruments at
December 31:
<TABLE>
<CAPTION>
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Value Value
- -------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash, due from banks,
and federal funds sold $ 16,591 $ 16,591 $ 12,953 $ 12,953
Investment securities 66,059 66,059 46,437 46,437
Loans, net of unearned
income 122,749 122,646 107,888 107,974
Financial liabilities:
Deposits 164,099 164,564 133,270 133,633
Federal Home Loan
Bank borrowings 14,500 14,503 9,500 9,500
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Contractual Contractual
or Estimated or Estimated
Notional Fair Notional Fair
Amounts Value Value Value
- -------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Off-balance items:
Interest rate floors $ 3,000 $ * $ 8,000 $ *
Commitments to
extend credit 53,023 * 30,521 *
Standby letters
of credit 3,039 * 1,612 *
- -------------------------------------------------------------------------
</TABLE>
* The estimated fair value of these items was not significant
at December 31, 1997 or 1996.
==============================================================
The following summary presents the methodologies and
assumptions used to estimate the fair value of the Company's
financial instruments presented above.
Cash Due from Banks and Federal Funds Sold
For cash due from banks and federal funds sold, the carrying
amount is a reasonable estimate of fair value. These
instruments expose the Company to limited credit risk and
carry interest rates which approximate market.
Investment Securities
In estimating fair values, management makes use of prices or
dealer quotes for U.S. Treasury securities, other U.S.
government agency securities, and mortgage-backed
certificates. As required by SFAS 115, securities available
for sale are recorded at fair value.
-48-
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Loans
The fair value of loans is estimated by discounting the future
cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings for the
same remaining maturities adjusted for differences in loan
characteristics. The risk of default is measured as an
adjustment to the discount rate, and no future interest income
is assumed for nonaccrual loans.
The fair value of loans does not include the value of the
customer relationship or the right to fees generated by the
account.
Deposit Liabilities
The fair value of deposits with no stated maturities (which
includes demand deposits, NOW accounts, and money market
deposits) is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit
is estimated using a discounted cash flow model based on the
rates currently offered for deposits of similar maturities.
SFAS No. 107 requires deposit liabilities with no stated
maturity to be reported at the amount payable on demand
without regard for the inherent funding value of these
instruments. The Company believes that significant value
exists in this funding source.
Federal Home Loan Bank Borrowings
The fair value of Federal Home Loan Bank borrowings is
estimated using discounted cash flows, based on current
incremental borrowing rates for similar types of borrowing
arrangements.
Interest Rate Floors
The fair value of interest rate floors is established by the
issuer based on the market price to purchase a like instrument
with comparable terms.
O. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Community Financial Group,
Inc., (Parent Company only) as of December 31, 1997 and 1996,
for the year ended December 31, 1997 and the period from May
1, 1996 to December 31, 1996 was as follows:
Condensed Balance Sheet
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 155 $ 37
Investment in bank subsidiary, at cost
adjusted for equity in earnings 23,865 22,005
Other assets 33 61
- --------------------------------------------------------------------
Total Assets $24,053 $22,103
====================================================================
Liabilities and Shareholders' Equity
Other liabilities $ 1 $ 18
- --------------------------------------------------------------------
Total Liabilities 1 18
Total Shareholders' Equity 24,052 22,085
- --------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $24,053 $22,103
====================================================================
</TABLE>
-49-
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
O. PARENT COMPANY FINANCIAL INFORMATION - CONTINUED
Condensed Income Statement
<TABLE>
<CAPTION>
Eight Month
Year Ended Period Ended
December 31 December 31
- -----------------------------------------------------------------------------
(In Thousands) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Income
Dividends from bank subsidiary $ 530 $ 231
- -----------------------------------------------------------------------------
Total income 530 231
- -----------------------------------------------------------------------------
Expenses
Interest expense on short-term borrowings -- 1
Other expenses 165 50
- -----------------------------------------------------------------------------
Total expenses 165 51
- -----------------------------------------------------------------------------
Income before income taxes 365 180
Reduction to consolidated income taxes arising
from parent company taxable loss 63 19
Equity in undistributed earnings of
subsidiary bank 1,630 2,348
- -----------------------------------------------------------------------------
Net income $2,058 $2,547
=============================================================================
</TABLE>
Statement of Cash Flows
<TABLE>
<CAPTION>
Eight Month
Year Ended Period Ended
December 31, December 31
- ------------------------------------------------------------------------------------------
(In Thousands) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net income $ 2,058 $ 2,547
Adjustments to reconcile net income
to net cash provided by operating
activities:
Undistributed earnings of subsidiaries (1,630) (2,348)
(Increase) decrease in other assets 28 (43)
Increase (decrease) in other liabilities (17) 18
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 439 174
- ------------------------------------------------------------------------------------------
Cash provided by investing activities -- --
- ------------------------------------------------------------------------------------------
Financing activities
Repayment of short-term borrowing -- (20)
Proceeds from issuance of common stock 120 56
Cash dividends paid (441) (176)
- ------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (321) (140)
- ------------------------------------------------------------------------------------------
Increase in cash and due from banks 118 34
Cash and due from banks, beginning of period 37 3
- ------------------------------------------------------------------------------------------
Cash and due from banks, end of year $ 155 $ 37
==========================================================================================
</TABLE>
-50-
<PAGE> 46
REPORT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Community Financial Group, Inc. and subsidiary (the Company)
is responsible for preparing the accompanying consolidated financial statements
in accordance with generally accepted accounting principles. The amounts therein
are based on management's best estimates and judgments. Management has also
prepared other information in the annual report and is responsible for its
accuracy and consistency with the consolidated financial statements.
The Company maintains a system of internal accounting control which it believes,
taken as a whole, is sufficient to provide reasonable assurance that assets are
properly safeguarded and that transactions are executed in accordance with
proper authorization and are recorded and reported properly. In establishing and
maintaining any system of internal accounting control, estimates and judgments
are required to assess the relative costs and expected benefits. The Company
also maintains a program that independently assesses the effectiveness of their
internal controls.
The Company's consolidated financial statements have been audited by independent
certified public accountants. Their Independent Auditors' Report, which follows,
is based on an audit made in accordance with generally accepted auditing
standards and expresses an opinion as to the fair presentation of the Company's
consolidated financial statements. In performing their audit, the Company's
independent certified public accountants consider the Company's internal control
to the extent they deem necessary in order to issue their opinion on the
consolidated financial statements.
The Board of Directors pursues its oversight role for the consolidated financial
statements through the Audit Committee, which consists solely of outside
directors. The Audit Committee meets periodically with both management and the
independent auditors to assure that each is carrying out its responsibilities.
/s/Mack S. Linebaugh, Jr.
- -------------------------
Mack S. Linebaugh, Jr.
Chairman of the Board
President and CEO
-51-
<PAGE> 47
Independent Auditors' Report
The Board of Directors and Shareholders
Community Financial Group, Inc.:
We have audited the accompanying consolidated balance sheets of Community
Financial Group, Inc. and subsidiary (the Company) as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Community Financial Group, Inc. and subsidiary as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/KPMG Peat Marwick LLP
- ------------------------
Nashville, Tennessee
January 21, 1998
-52-
<PAGE> 48
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
(UNAUDITED)
CONSOLIDATED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1997
Three Months Ended
- ---------------------------------------------------------------------------------------
(In Thousands,
except per share data) December 31 September 30 June 30 March 31
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $4,006 $3,984 $3,821 $3,449
Interest expense 2,107 2,084 1,984 1,781
- ---------------------------------------------------------------------------------------
Net interest income 1,899 1,900 1,837 1,668
Provision for possible
loan losses 25 25 25 25
Non-interest income 388 435 312 286
Non-interest expense 1,186 1,309 1,309 1,432
- ---------------------------------------------------------------------------------------
Income before income taxes 1,076 1,001 815 497
Provision for income taxes 439 420 277 195
- ---------------------------------------------------------------------------------------
Net income $ 637 $ 581 $ 538 $ 302
=======================================================================================
Income per share:
Net income
Basic $ .29 $ .26 $ .24 $ .14
Diluted .25 .26 .24 .14
=======================================================================================
Weighted Average Common
Shares Outstanding
Basic 2,207 2,205 2,204 2,203
Diluted 2,597 2,234 2,233 2,231
=======================================================================================
</TABLE>
-53-
<PAGE> 49
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
(UNAUDITED)
CONSOLIDATED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1996
Three Months Ended
- ---------------------------------------------------------------------------------------
(In Thousands,
except per share data) December 31 September 30 June 30 March 31
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $3,431 $3,186 $3,174 $3,108
Interest expense 1,691 1,598 1,558 1,599
- ---------------------------------------------------------------------------------------
Net interest income 1,740 1,588 1,616 1,509
Provision for possible
loan losses -- -- -- --
Non-interest income 215 217 229 266
Non-interest expense 1,282 1,173 1,180 1,030
- ---------------------------------------------------------------------------------------
Income before income taxes 673 632 665 745
Provision for income taxes 76 62 15 15
- ---------------------------------------------------------------------------------------
Net income $ 597 $ 570 $ 650 $ 730
=======================================================================================
Income per share:
Net income
Basic $ .27 $ .26 $ .30 $ .33
Diluted .27 .26 .29 .33
=======================================================================================
Weighted Average Common
Shares Outstanding
Basic 2,202 2,201 2,198 2,194
Diluted 2,229 2,223 2,221 2,218
=======================================================================================
</TABLE>
-54-
<PAGE> 50
COMMON STOCK INFORMATION
The common stock of Community Financial Group, Inc., is traded over-the-counter
on the National Association of Securities Dealers, Inc. (NASDAQ) under the
symbol CFGI. The trading symbol for the detachable warrants is CFGIW. The quotes
appear weekly in the Wall Street Journal under the heading, "NASDAQ Weekly Bid &
Asked Quotations" and daily in The New York Times under the heading "NASDAQ
Supplemental List". As of December 31, 1997, there were 487 shareholders of
record of CFGI common stock.
The following table sets forth the Company's high and low prices during each
quarter for the past two years.
<TABLE>
<CAPTION>
Market Price
- --------------------------------------
1997 High Low
- --------------------------------------
<S> <C> <C>
First quarter $12.75 $10.75
Second quarter 12.25 11.00
Third quarter 12.13 11.25
Fourth quarter 15.13 11.75
</TABLE>
<TABLE>
<CAPTION>
Market Price
- --------------------------------------
1996 High Low
- --------------------------------------
<S> <C> <C>
First quarter $11.00 $10.00
Second quarter 11.00 9.75
Third quarter 10.75 9.75
Fourth quarter 11.75 10.50
</TABLE>
Quarterly stock price quotations were provided by the National Association of
Securities Dealers, Inc., and reflect prices without retail markup, markdown or
commissions and may not reflect actual transactions.
-55-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of Name Under Which
Subsidiary Incorporation Does Business
---------- ------------- ----------------
<S> <C> <C>
The Bank of Nashville Tennessee The Bank of Nashville
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,104
<INT-BEARING-DEPOSITS> 85
<FED-FUNDS-SOLD> 9,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,059
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 122,749
<ALLOWANCE> 3,128
<TOTAL-ASSETS> 204,887
<DEPOSITS> 164,099
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,236
<LONG-TERM> 14,500
0
0
<COMMON> 13,275
<OTHER-SE> 10,777
<TOTAL-LIABILITIES-AND-EQUITY> 204,887
<INTEREST-LOAN> 10,724
<INTEREST-INVEST> 4,119
<INTEREST-OTHER> 417
<INTEREST-TOTAL> 15,260
<INTEREST-DEPOSIT> 7,212
<INTEREST-EXPENSE> 7,956
<INTEREST-INCOME-NET> 7,304
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 5,236
<INCOME-PRETAX> 3,389
<INCOME-PRE-EXTRAORDINARY> 3,389
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,058
<EPS-PRIMARY> .93
<EPS-DILUTED> .89
<YIELD-ACTUAL> 3.96
<LOANS-NON> 1,094
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 177
<ALLOWANCE-OPEN> 3,128
<CHARGE-OFFS> 169
<RECOVERIES> 319
<ALLOWANCE-CLOSE> 3,128
<ALLOWANCE-DOMESTIC> 3,128
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,038
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-01-1996
<CASH> 6,128
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,825
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,437
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 107,888
<ALLOWANCE> 2,878
<TOTAL-ASSETS> 166,679
<DEPOSITS> 133,270
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,824
<LONG-TERM> 9,500
0
0
<COMMON> 13,215
<OTHER-SE> 8,870
<TOTAL-LIABILITIES-AND-EQUITY> 166,679
<INTEREST-LOAN> 9,569
<INTEREST-INVEST> 3,016
<INTEREST-OTHER> 314
<INTEREST-TOTAL> 12,899
<INTEREST-DEPOSIT> 6,298
<INTEREST-EXPENSE> 6,446
<INTEREST-INCOME-NET> 6,453
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 4,665
<INCOME-PRETAX> 2,715
<INCOME-PRE-EXTRAORDINARY> 2,715
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,547
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 4.18
<LOANS-NON> 579
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 84
<ALLOWANCE-OPEN> 3,034
<CHARGE-OFFS> 697
<RECOVERIES> 541
<ALLOWANCE-CLOSE> 2,878
<ALLOWANCE-DOMESTIC> 1,873
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,005
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,317
<INT-BEARING-DEPOSITS> 170
<FED-FUNDS-SOLD> 14,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,401
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 117,073
<ALLOWANCE> 3,020
<TOTAL-ASSETS> 200,423
<DEPOSITS> 160,246
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,258
<LONG-TERM> 14,500
0
0
<COMMON> 13,235
<OTHER-SE> 10,184
<TOTAL-LIABILITIES-AND-EQUITY> 200,423
<INTEREST-LOAN> 7,936
<INTEREST-INVEST> 3,032
<INTEREST-OTHER> 286
<INTEREST-TOTAL> 11,254
<INTEREST-DEPOSIT> 5,316
<INTEREST-EXPENSE> 5,849
<INTEREST-INCOME-NET> 5,405
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 4,050
<INCOME-PRETAX> 2,313
<INCOME-PRE-EXTRAORDINARY> 2,313
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,421
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
<YIELD-ACTUAL> 3.98
<LOANS-NON> 387
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 630
<ALLOWANCE-OPEN> 2,878
<CHARGE-OFFS> 149
<RECOVERIES> 216
<ALLOWANCE-CLOSE> 3,020
<ALLOWANCE-DOMESTIC> 2,249
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 771
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<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>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,099
<INT-BEARING-DEPOSITS> 303
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,096
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 111,692
<ALLOWANCE> 2,963
<TOTAL-ASSETS> 185,765
<DEPOSITS> 150,938
<SHORT-TERM> 1,600
<LIABILITIES-OTHER> 1,631
<LONG-TERM> 9,500
0
0
<COMMON> 13,224
<OTHER-SE> 8,872
<TOTAL-LIABILITIES-AND-EQUITY> 185,765
<INTEREST-LOAN> 2,461
<INTEREST-INVEST> 867
<INTEREST-OTHER> 121
<INTEREST-TOTAL> 3,449
<INTEREST-DEPOSIT> 1,644
<INTEREST-EXPENSE> 1,781
<INTEREST-INCOME-NET> 1,668
<LOAN-LOSSES> 25
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,432
<INCOME-PRETAX> 497
<INCOME-PRE-EXTRAORDINARY> 497
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
<YIELD-ACTUAL> 3.93
<LOANS-NON> 616
<LOANS-PAST> 613
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 169
<ALLOWANCE-OPEN> 2,878
<CHARGE-OFFS> 0
<RECOVERIES> 60
<ALLOWANCE-CLOSE> 2,963
<ALLOWANCE-DOMESTIC> 1,896
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,067
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,633
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,649
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 104,653
<ALLOWANCE> 2,971
<TOTAL-ASSETS> 160,106
<DEPOSITS> 127,719
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,566
<LONG-TERM> 9,500
0
0
<COMMON> 13,209
<OTHER-SE> 8,112
<TOTAL-LIABILITIES-AND-EQUITY> 160,106
<INTEREST-LOAN> 7,039
<INTEREST-INVEST> 2,220
<INTEREST-OTHER> 209
<INTEREST-TOTAL> 9,468
<INTEREST-DEPOSIT> 4,737
<INTEREST-EXPENSE> 4,755
<INTEREST-INCOME-NET> 4,713
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 3,383
<INCOME-PRETAX> 2,042
<INCOME-PRE-EXTRAORDINARY> 2,042
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,950
<EPS-PRIMARY> .89
<EPS-DILUTED> .88
<YIELD-ACTUAL> 4.14
<LOANS-NON> 857
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 134
<ALLOWANCE-OPEN> 3,034
<CHARGE-OFFS> 449
<RECOVERIES> 386
<ALLOWANCE-CLOSE> 2,971
<ALLOWANCE-DOMESTIC> 1,991
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 980
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,099
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,593
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 103,976
<ALLOWANCE> 3,176
<TOTAL-ASSETS> 159,964
<DEPOSITS> 134,303
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 1,833
<LONG-TERM> 0
0
0
<COMMON> 13,204
<OTHER-SE> 7,624
<TOTAL-LIABILITIES-AND-EQUITY> 159,964
<INTEREST-LOAN> 4,637
<INTEREST-INVEST> 1,507
<INTEREST-OTHER> 138
<INTEREST-TOTAL> 6,282
<INTEREST-DEPOSIT> 3,154
<INTEREST-EXPENSE> 3,157
<INTEREST-INCOME-NET> 3,125
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 2,210
<INCOME-PRETAX> 1,410
<INCOME-PRE-EXTRAORDINARY> 1,410
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,380
<EPS-PRIMARY> .63
<EPS-DILUTED> .62
<YIELD-ACTUAL> 4.13
<LOANS-NON> 560
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 510
<ALLOWANCE-OPEN> 3,034
<CHARGE-OFFS> 181
<RECOVERIES> 323
<ALLOWANCE-CLOSE> 3,176
<ALLOWANCE-DOMESTIC> 1,640
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,536
</TABLE>
