<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
For the fiscal year ended December 31, 1998
Commission File Number 0-28496
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Community Financial Group, Inc.
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(Name of Small Business Issuer in its charter)
Tennessee 62-1626938
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(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
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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. $18,396,000.
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
26, 1999, was $40,067,058.
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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 10, 1999
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<S> <C>
Common stock $6 par value 4,219,436 shares
</TABLE>
Documents Incorporated by Reference:
<TABLE>
<CAPTION>
Document from which portions Part of Form 10-KSB to
are incorporated by reference which incorporated
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<S> <C> <C>
1. Annual Report to Shareholders for year Part I - Item 1
ended December 31, 1998 Part II - Items 5, 6
and 7
2. Proxy Statement dated April 2, 1999 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, 1998, 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
61 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 three traditional branches with its main office at 401 Church
Street, the Green Hills office at 3770 Hillsboro Pike and the Brentwood office
at 5105 Maryland Way. Additionally, these locations are complemented 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 31.6%, tier 1 risk-based capital ratio of 30.3% and tier 1 leverage
ratio was 23.0% at December 31, 1998. Additionally, at year end 1998, the Bank's
capital ratios reflected total risk based capital ratio at 16.9%, tier 1
risk-based capital ratio at 15.6% and tier 1 leverage ratio at 11.9%. These
capital ratios exceed the current regulatory minimum requirements.
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
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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 the Company's customers at their locations. A full service
branch office, located in Green Hills, opened January 23, 1997. Another, located
in Maryland Farms in Brentwood, Tennessee opened in September 1998. Construction
started in October, 1998, on a full service branch to be located at 100 Maple
Drive North, Hendersonville, Tennessee. If deemed appropriate, additional
offices may be established subject to regulatory approval.
During 1998, the Company declared dividends of $.24 per share which resulted in
a dividend payout ratio of 22.22%. Other information relating to current banking
issues and the regulatory environment are addressed in the 1998 Annual Report to
Shareholders.
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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 1998 Annual Report.
- Schedule III-A - Types of Loans
- Schedule III-B - Maturities and Sensitivities of Loans to
Changes in Interest Rates
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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,
--------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Loans (net of
unearned
income of
$295, $297,
$256, $203
and $202
respectively)
Commercial $ 51,970 $ 38,571 $ 35,721 $40,657 $35,108
Real estate -
mortgage
loans 79,455 71,055 58,763 48,648 41,800
Real estate -
Real estate -
construction 14,667 9,426 9,467 5,952 2,227
Consumer 6,583 3,697 3,937 3,083 1,950
-------- -------- -------- ------- -------
$152,675 $122,749 $107,888 $98,340 $81,085
======== ======== ======== ======= =======
</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. Real estate mortgage and construction loans reflected
in the preceding schedule are comprised primarily of loans to commercial
borrowers.
At December 31, 1998, funded and unfunded commitments to borrowers in the real
estate industry were approximately $27.2 million and $5.2 million, respectively,
and loans to building contractors were approximately $8.8 million and $10.1
million, respectively. 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.
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The following table presents the maturity distribution of loan categories at
December 31, 1998 (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 $28,008 $21,725 $ 2,237 $ 51,970
Real estate -
mortgage 20,424 26,420 32,611 79,455
Real estate -
construction 8,486 6,181 -- 14,667
Consumer 4,653 1,875 55 6,583
------- ------- -------- --------
$61,571 $56,201 $ 34,903 $152,675
======= ======= ======== ========
For maturities
over one year:
Fixed $42,824
Floating 48,280
</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.
The Company occupies 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.
In the spring of 1999, the Company will occupy 5,008 square feet in the newly
constructed building located at 100 Maple Drive North in Hendersonville,
Tennessee. The company purchased the land in June, 1998.
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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 1998 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 1998 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 1998 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
1999 Annual Meeting of Shareholders, dated April 2, 1999, 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 Management and Other Information" in the Company's proxy
statement for its 1999 Annual Meeting of Shareholders, dated April 2, 1999, 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 section entitled
"Stock Ownership" in the Company's proxy statement for its 1999 Annual Meeting
of Shareholders dated April 2, 1999, 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 1999 Annual Meeting of Shareholders dated April 2, 1999, 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 LLP, Independent Certified Public
Accountants, are on pages 24 through 43 and page 44
of the 1998 Annual Report and are incorporated herein
by reference.
- Consolidated Balance Sheets at December 31, 1998
and 1997
- Consolidated Statements of Income for the Years
Ended December 31, 1998, 1997 and 1996
- Consolidated Statements of Shareholders' Equity
and Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996
- Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996
- 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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<PAGE> 12
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.
Incorporated by reference to Exhibit 10.10
to the Registrant's Annual Report Form 10KSB
for the year ended December 31, 1997.
10.11 The Bank of Nashville letter of intent to
purchase property from ShoLodge, Inc. dated
January 23, 1998. Incorporated by reference
to Exhibit 10.11 to the Registrant's Annual
Report Form 10KSB for the year ended
December 31, 1997.
10.12 Financial Advisor Agreement dated May 1,
1998 between The Bank of Nashville and
Harold J. Castner.
10.13 Financial Advisor Agreement dated May 1,
1998 between The Bank of Nashville and
Pamela F. Morris.
10.14 Financial Advisor Promissory Note Repayment
Agreement dated July 24, 1998 between The
Bank of Nashville and Harold J. Castner, and
Exhibit A Promissory Note.
10.15 Financial Advisor Promissory Note Repayment
Agreement dated July 24, 1998 between The
Bank of Nashville and Pamela F. Morris and
Exhibit A Promissory Note.
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(2) Exhibits - Continued
10.16 Construction Contract between The Bank of
Nashville and Ray Bell Construction Company
dated October 2, 1998.
10.l7 Employment Agreement between The Bank of
Nashville and Anne J. Cheatham, dated
February 23, 1999.
11. Statement re computation of per share
earnings.
12. Statement re computation of ratios. Not
applicable.
13. 1998 Annual Report to Shareholders.
14. Not required.
15. Not required.
16. Letter re change in certifying accountant.
Not applicable.
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.
28. Information from reports furnished to state
insurance regulatory authorities. Not
applicable.
99. Additional Exhibits. None.
(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 25, 1999
---------------------------
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 25,1999
and Chief Financial
Officer
Dated March 25, 1999
/s/ J. B. Baker, Jr. /s/ Perry W. Moskovitz
- -------------------- ----------------------
J. B. Baker, Jr. Perry W. Moskovitz
Director Director
Dated March 25, 1999 Dated March 25, 1999
/s/ Jo D. Federspiel /s/ C. Norris Nielsen
- -------------------- ---------------------
Jo D. Federspiel C. Norris Nielsen
Director Director
Dated March 25, 1999 Dated March 25, 1999
/s/ Richard H. Fulton /s/ David M. Resha
- --------------------- ------------------
Richard H. Fulton David M. Resha
Director Director
Dated March 25, 1999 Dated March 25, 1999
/s/ G. Edgar Thornton
- -----------------------
G. Edgar Thornton
Director
Dated March 25, 1999
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EXHIBIT 10.12
FINANCIAL ADVISOR AGREEMENT
THIS FINANCIAL ADVISOR AGREEMENT (the "Agreement") entered into as of the 1st
day of May, 1998, by and between The Bank of Nashville, Nashville, Tennessee
(the "Bank") and Harold J. Castner (the "Employee").
WHEREAS, the Bank is, contemporaneously with the Agreement, entering into a Dual
Employee Program Agreement (the "Dual Employee Agreement") and a Lease Agreement
(the "Lease") (collectively, the Legg Mason Agreements"), with LM Financial
Partners, Inc. ("LMFP") and Legg Mason Financial Services, Inc. ("LMFS"); and
WHEREAS, the Legg Mason Agreements contemplate that certain individuals shall
(i) be registered and qualified as necessary with the Securities and Exchange
Commission (the "SEC"), the National Association of Securities Dealers ("NASD")
and appropriate state regulatory authorities, (ii) shall be employed by LMFP in
addition to their employment by the Bank, and (iii) shall be licensed as
insurance agents with appropriate state regulatory authorities (the "Dual
Employees"); and
WHEREAS, the Bank and the Employee have agreed that the Bank shall employ the
Employee and the Employee shall serve as a Dual Employee.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
agreements contained herein, the Bank and the Employee hereby agree as follows:
1. The Bank hereby employs the Employee as an employee-at-will and the Employee
hereby accepts employment by the Bank as an employee-at-will. There is
absolutely no intention that this Agreement be construed as a contract of
employment for any period of time, and it is agreed and understood that the Bank
may terminate the Employee at any time for any reason or for no specific reason.
2. The Employee, as a Dual Employee, shall be subject to the exclusive control
of LMFP and LMFS with respect to his conduct as a registered representative of
LMFP, and the Bank shall strictly honor such control relationship and shall not
have any involvement whatsoever in any of the securities brokerage, investment
advisory and insurance services provided by the Employee as a Dual Employee.
3. The Employee will be compensated based upon the monthly Program Payments
received by the Bank under the Dual Employee Agreement and the Rent payments
received by the Bank under the Lease to the extent such Program Payments and
Rent payments result from LMFP Products (as defined in the Legg Mason
Agreements) sold by or credited to the Employee (the "Employee's Gross
Production") as follows:
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<PAGE> 2
A. The Employee shall be credited with an amount equal to 46% of the
Employee's Gross Production for the preceding month (the Employee's
Credit").
B. The Employee's Credit shall be reduced by the following:
(i) the total amount paid by the Bank for any personal assistant
assigned to the Employee (the "Personal Assistant") with
respect to salary, employee benefits and the portion of FICA
taxes and medicare taxes paid by the Bank with respect to the
Personal Assistant;
(ii) amounts withheld by the Bank with respect to applicable
federal and state (if applicable) income, FICA, medicare and
other taxes or assessments the Bank is now or in the future
required to withhold;
(iii) the amount the Employee is required to pay for employee
benefits provided by the Bank, consistent with the Bank's
policies as applicable to Bank employees generally;
C. An amount equal to the Employee's Credit, reduced by the amounts in
paragraph 3B hereof shall be paid to the Employee by the 10th day of
each month.
4. The Employee shall be entitled to the services of one or more Personal
Assistants who shall be employees of the Bank and whose compensation and
benefits shall be reimbursed by the Employee to the Bank pursuant to paragraph
3B(i) above; provided, however, the terms of employment of any such Personal
Assistant, including, but not limited to, salary, benefits, hours and working
conditions, are subject to the prior written approval of the Bank and shall not
be altered or changed without the prior written approval of the Bank.
5. The Employee shall be granted options to purchase 4,992 shares (based on
1,000 options for each $100,000 gross production generated by the Employee as an
employee of Legg Mason Wood Walker Incorporated for the 12 months immediately
preceding the date of this Agreement (the "LMWWI Gross Production")) of the
common stock of Community Financial Group, Inc. pursuant to and on the terms and
conditions of the Community Financial Group, Inc. 1997 Nonstatutory Stock Option
Plan.
6. As consideration for the transfer to the Bank of accounts originated by the
employee while an employee of Legg Mason Wood Walker Incorporated, the Bank will
loan to the Employee, pursuant to the Promissory Note attached as Exhibit A to
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<PAGE> 3
the Financial Advisor Promissory Note Repayment Agreement, which is attached
hereto and incorporated herein (the "Note Repayment Agreement"), $124,813.27 (an
amount equal to 25% of the LMWWI Gross Production, such Promissory Note to be
reduced by the Bank pursuant to the terms of the Note Repayment Agreement.
7. In the event the Employee's employment with the Bank is terminated coincident
with or following a change in control (as defined in the Note Repayment
Agreement), wether involuntarily by the Bank or voluntarily by the Employee for
Good Reason (as defined in the Note Repayment Agreement), the Employee shall
have the right, without payment to the Bank, to solicit for transfer any of the
clients the Employee served while acting as a Dual Employee.
8. In connection with the Employee's application to the Bank to become an
employee-at-will of the Bank, the Employee hereby certifies the following to be
true:
A. I am not currently subject to any state or federal
administrative enforcement order or judgment entered by any
state or federal securities administrator within the past five
(5) years and I am not subject to any state or federal
administrative enforcement order or judgment in which fraud or
deceit, including, but not limited to, making untrue
statements of material facts or omitting to state material
facts, was found and the order or judgment was entered within
the past five (5) years;
B. I am not subject to any state or federal administrative
enforcement order or judgment which prohibits, denies or
revokes the use of any exemption from registration in
connection with the offer, purchase or sale of securities;
C. I am not currently subject to any order, judgment or decree of
any court of competent jurisdiction temporarily or
preliminarily restraining or enjoining me, and I am not
subject to any jurisdiction permanently restraining or
enjoining me from engaging in or continuing any conduct or
practice in connection with the purchase or sale of any
security or involving the making of any false filing with a
state or federal securities administrator entered within the
past five (5) years; and
D. I have not been convicted within the past five (5) years of
any felony or misdemeanor in connection with the offer,
purchase or sale of any security or any felony involving
3
<PAGE> 4
fraud or deceit, including, but not limited to, forgery,
embezzlement, obtaining money under false pretenses, larceny
or conspiracy to defraud.
9. This Agreement shall be governed, construed and enforced in accordance with
the laws of the State of Tennessee.
10. The Bank's failure to enforce a breach of this Agreement will not constitute
a waiver of the Bank's right to enforce any other breach of this Agreement.
11. If any part of this Agreement shall be held invalid or unenforceable, that
part shall be deemed modified as necessary to make it effective, and the
remaining provisions of this Agreement shall remain in effect.
12. The Employee understands that the Bank is relying on the representations and
agreements evidenced herein and in the Note Repayment Agreement and the
Promissory Note which, it is agreed, incorporate the entire understanding
between the Employee and the Bank on the subject matter covered by this
Agreement and may not be changed except by a writing signed by a duly authorized
officer of the Bank and the Employee. The Bank shall have the right to assign
this Agreement, the Note Repayment Agreement and/or the Promissory Note to any
affiliate of the Bank. An "affiliate" of the Bank shall include any entity in
control of, controlled by or under common control with the Bank.
13. The Employee acknowledges that the Employee was given the opportunity to
read this Agreement and to seek the assistance of counsel before the Employee
decided to accept employment by the Bank and to sign this Agreement.
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<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Financial Advisor Agreement to
be executed as of the date first hereinabove written.
/s/Pamela F. Morris /s/Harold J. Castner
- -------------------------------- ------------------------------
Witness (Employee)
THE BANK OF NASHVILLE
ATTEST:
/s/Joan B. Marshall, SVP By: /s/Mack S. Linebaugh, Jr.
- -------------------------------- ------------------------------
Title: President
5
<PAGE> 1
EXHIBIT 10.13
FINANCIAL ADVISOR AGREEMENT
THIS FINANCIAL ADVISOR AGREEMENT (the "Agreement") entered into as of the 1st
day of May, 1998, by and between The Bank of Nashville, Nashville, Tennessee
(the "Bank") and Pamela F. Morris (the "Employee").
WHEREAS, the Bank is, contemporaneously with the Agreement, entering into a Dual
Employee Program Agreement (the "Dual Employee Agreement") and a Lease Agreement
(the "Lease") (collectively, the Legg Mason Agreements"), with LM Financial
Partners, Inc. ("LMFP") and Legg Mason Financial Services, Inc. ("LMFS"); and
WHEREAS, the Legg Mason Agreements contemplate that certain individuals shall
(i) be registered and qualified as necessary with the Securities and Exchange
Commission (the "SEC"), the National Association of Securities Dealers ("NASD")
and appropriate state regulatory authorities, (ii) shall be employed by LMFP in
addition to their employment by the Bank, and (iii) shall be licensed as
insurance agents with appropriate state regulatory authorities (the "Dual
Employees"); and
WHEREAS, the Bank and the Employee have agreed that the Bank shall employ the
Employee and the Employee shall serve as a Dual Employee.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
agreements contained herein, the Bank and the Employee hereby agree as follows:
1. The Bank hereby employs the Employee as an employee-at-will and the Employee
hereby accepts employment by the Bank as an employee-at-will. There is
absolutely no intention that this Agreement be construed as a contract of
employment for any period of time, and it is agreed and understood that the Bank
may terminate the Employee at any time for any reason or for no specific reason.
2. The Employee, as a Dual Employee, shall be subject to the exclusive control
of LMFP and LMFS with respect to his conduct as a registered representative of
LMFP, and the Bank shall strictly honor such control relationship and shall not
have any involvement whatsoever in any of the securities brokerage, investment
advisory and insurance services provided by the Employee as a Dual Employee.
3. The Employee will be compensated based upon the monthly Program Payments
received by the Bank under the Dual Employee Agreement and the Rent payments
received by the Bank under the Lease to the extent such Program Payments and
Rent payments result from LMFP Products (as defined in the Legg Mason
Agreements) sold by or credited to the Employee (the "Employee's Gross
Production") as follows:
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<PAGE> 2
A. The Employee shall be credited with an amount equal to 46% of the
Employee's Gross Production for the preceding month (the Employee's
Credit").
B. The Employee's Credit shall be reduced by the following:
(i) the total amount paid by the Bank for any personal assistant
assigned to the Employee (the "Personal Assistant") with
respect to salary, employee benefits and the portion of FICA
taxes and medicare taxes paid by the Bank with respect to the
Personal Assistant;
(ii) amounts withheld by the Bank with respect to applicable
federal and state (if applicable) income, FICA, medicare and
other taxes or assessments the Bank is now or in the future
required to withhold;
(iii) the amount the Employee is required to pay for employee
benefits provided by the Bank, consistent with the Bank's
policies as applicable to Bank employees generally;
C. An amount equal to the Employee's Credit, reduced by the amounts in
paragraph 3B hereof shall be paid to the Employee by the 10th day of
each month.
4. The Employee shall be entitled to the services of one or more Personal
Assistants who shall be employees of the Bank and whose compensation and
benefits shall be reimbursed by the Employee to the Bank pursuant to paragraph
3B(i) above; provided, however, the terms of employment of any such Personal
Assistant, including, but not limited to, salary, benefits, hours and working
conditions, are subject to the prior written approval of the Bank and shall not
be altered or changed without the prior written approval of the Bank.
5. The Employee shall be granted options to purchase 4,085 shares (based on
1,000 options for each $100,000 gross production generated by the Employee as an
employee of Legg Mason Wood Walker Incorporated for the 12 months immediately
preceding the date of this Agreement (the "LMWWI Gross Production")) of the
common stock of Community Financial Group, Inc. pursuant to and on the terms and
conditions of the Community Financial Group, Inc. 1997 Nonstatutory Stock Option
Plan.
6. As consideration for the transfer to the Bank of accounts originated by the
employee while an employee of Legg Mason Wood Walker Incorporated, the Bank will
loan to the Employee, pursuant to the Promissory Note attached as Exhibit A to
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<PAGE> 3
the Financial Advisor Promissory Note Repayment Agreement, which is attached
hereto and incorporated herein (the "Note Repayment Agreement"), $102,119.96 (an
amount equal to 25% of the LMWWI Gross Production, such Promissory Note to be
reduced by the Bank pursuant to the terms of the Note Repayment Agreement.
7. In the event the Employee's employment with the Bank is terminated coincident
with or following a change in control (as defined in the Note Repayment
Agreement), wether involuntarily by the Bank or voluntarily by the Employee for
Good Reason (as defined in the Note Repayment Agreement), the Employee shall
have the right, without payment to the Bank, to solicit for transfer any of the
clients the Employee served while acting as a Dual Employee.
8. In connection with the Employee's application to the Bank to become an
employee-at-will of the Bank, the Employee hereby certifies the following to be
true:
A. I am not currently subject to any state or federal
administrative enforcement order or judgment entered by any
state or federal securities administrator within the past five
(5) years and I am not subject to any state or federal
administrative enforcement order or judgment in which fraud or
deceit, including, but not limited to, making untrue
statements of material facts or omitting to state material
facts, was found and the order or judgment was entered within
the past five (5) years;
B. I am not subject to any state or federal administrative
enforcement order or judgment which prohibits, denies or
revokes the use of any exemption from registration in
connection with the offer, purchase or sale of securities;
C. I am not currently subject to any order, judgment or decree of
any court of competent jurisdiction temporarily or
preliminarily restraining or enjoining me, and I am not
subject to any jurisdiction permanently restraining or
enjoining me from engaging in or continuing any conduct or
practice in connection with the purchase or sale of any
security or involving the making of any false filing with a
state or federal securities administrator entered within the
past five (5) years; and
D. I have not been convicted within the past five (5) years of
any felony or misdemeanor in connection with the offer,
purchase or sale of any security or any felony involving
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<PAGE> 4
fraud or deceit, including, but not limited to, forgery,
embezzlement, obtaining money under false pretenses, larceny
or conspiracy to defraud.
9. This Agreement shall be governed, construed and enforced in accordance with
the laws of the State of Tennessee.
10. The Bank's failure to enforce a breach of this Agreement will not constitute
a waiver of the Bank's right to enforce any other breach of this Agreement.
11. If any part of this Agreement shall be held invalid or unenforceable, that
part shall be deemed modified as necessary to make it effective, and the
remaining provisions of this Agreement shall remain in effect.
12. The Employee understands that the Bank is relying on the representations and
agreements evidenced herein and in the Note Repayment Agreement and the
Promissory Note which, it is agreed, incorporate the entire understanding
between the Employee and the Bank on the subject matter covered by this
Agreement and may not be changed except by a writing signed by a duly authorized
officer of the Bank and the Employee. The Bank shall have the right to assign
this Agreement, the Note Repayment Agreement and/or the Promissory Note to any
affiliate of the Bank. An "affiliate" of the Bank shall include any entity in
control of, controlled by or under common control with the Bank.
13. The Employee acknowledges that the Employee was given the opportunity to
read this Agreement and to seek the assistance of counsel before the Employee
decided to accept employment by the Bank and to sign this Agreement.
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<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Financial Advisor Agreement to
be executed as of the date first hereinabove written.
/s/Harold J. Castner /s/Pamela F. Morris
- -------------------------- ------------------------------
Witness (Employee)
THE BANK OF NASHVILLE
ATTEST:
/s/Joan B. Marshall, SVP By: /s/Mack S. Linebaugh, Jr.
- -------------------------- ------------------------------
Title: President
-----------------------
5
<PAGE> 1
EXHIBIT 10.14
FINANCIAL ADVISOR PROMISSORY NOTE REPAYMENT AGREEMENT
THIS FINANCIAL ADVISOR PROMISSORY NOTE REPAYMENT AGREEMENT ("Agreement") is made
this 24th day of July, 1998 by and between The Bank of Nashville (the "Bank")
and Harold J. Castner (the "Employee").
WHEREAS, the Employee has accepted employment by The Bank as a Financial
Advisor; and
WHEREAS, the Employee has executed the attached Promissory Note; and
WHEREAS, The Bank and the Employee believe it to be mutually advantageous to
provide for the payment of bonuses to the Employee upon the terms and conditions
hereafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Bank will pay bonuses to the Employee on the last business day of
each calendar quarter ("Bonus Date" or "Bonus Dates"). Each bonus will
be in an amount equal to the then-due principal payments under the
Promissory Note (the "Promissory Note") attached hereto as Exhibit A
("Bonus Payment" or "Bonus Payments"). Bonus Payments will continue
until the Promissory Note has been paid in full, subject to the other
provisions of the Agreement.
2. In the event that the Employee ceases to be employed by The Bank for
any reason whatsoever, or for no reason, prior to any Bonus Date, then
the Employee will not be entitled to receive any Bonus Payment or
partial or prorated Bonus Payment for having been employed by The Bank
beyond the date of the Bonus Date.
3. Any Bonus Payment payable hereunder shall be withheld by The Bank and
shall be applied to the payment of then-due principal and interest
obligations pursuant to the Promissory Note. The Employee hereby
consents to such withholding and application.
4. Notwithstanding any other provision herein to the contrary, in the
event the Employee dies prior to the full payment of Promissory Note,
The Bank will pay; as of the date preceding the Employee's death, a
final Bonus Payment equal to the-outstanding principal balance and all
accrued but unpaid interest under the Promissory Note. The Bank shall
withhold and apply said Bonus Payment as provided in paragraph 3 above.
The Employee, for himself/herself, and for his/her estate, heirs,
legatees, executors and person representatives, consents to such
payment, withholding and application.
5. This Agreement, and any Bonus Payment hereunder, shall not be
assignable by voluntary or involuntary assignment or by operation of
law, including, without
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<PAGE> 2
limitation, garnishment, attachment or other creditors' process, and
Bonus Payments hereunder are specifically conditioned on The Bank's
ability to withhold and apply each said Bonus Payment as provided in
paragraph 3 above, without interference from the Employee's creditors.
6. There is absolutely no intention that this Agreement be construed as a
contract of employment for any period of time. The Bank maintains an
employment-at-will policy. Just as employees are free to end their
employment with The Bank at any time for any reason, The Bank is free
to end the employment relationship with any employee at any time for
any reason. The Employee shall be an employee-at-will.
7. A. The Employee understands that in the event of the termination
of the Employee's employment with The Bank, the Employee is
not entitled to receive any further Bonus Payments,
commissions, bonuses, overrides, trails, finder's fees, or any
other compensation which would be due the Employee from prior
transactions had the Employee remained in the employ of The
Bank, other than such amounts as the Employee may be due on
transactions that occurred during the month immediately
preceding the termination of the Employee's employment.
B. Notwithstanding the provisions of paragraph 7(A), in the event
the Employee's employment with The Bank is terminated
coincident with or following a change in control (as defined
below), either involuntarily by The Bank or voluntarily by the
Employee for Good Reason (as defined below), (1) The Bank will
make the final Bonus Payment equal to the then outstanding
principal and accrued interest on the Promissory Note, (2) the
Promissory Note shall be stamped "Paid in Full:; (3)
thereupon, The Bank shall have no further liability on the
Promissory Note.
C. "Change in Control" shall mean the closing of any transaction
resulting in a majority change in control of Community
Financial Group, Inc. to The Bank, including any merger, sale
of assets, transfer of stock, or any reorganization as defined
in Section 368 of the Internal Revenue Code of 1986, as
amended.
D. "Good Reason" shall mean either:
(1) Failure by The Bank to comply with any material
provision of the Agreement, provided that the
Employee gives The Bank (as applicable) written
notice of such failure and such failure is not cured
within ten (10) days thereafter;
(2) Any of the following which shall occur coincident
with or following a Change in Control:
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<PAGE> 3
(a) Without the Employee's express written consent, the
assignment to him or her of any duties inconsistent
with and in diminution of his or her positions,
duties, responsibilities and status with The Bank
immediately prior to such Change in Control, or a
change resulting in diminution of his reporting
responsibilities, titles or offices as in effect
immediately prior to such Change in Control, or any
removal of him or her from or any failure to re-elect
him or her to any of such positions resulting in such
diminution, except in connection with the termination
of his or her employment for Cause Disability or
Retirement or as a result of his death or termination
of employment be him other than for Good Reason;
(b) A reduction by The Bank in the Employee's
compensation structure as in effect on the date of
the Agreement, or as the same may be increased from
time to time; or
(c) Without the Employee's express written consent, The
Bank's requiring him or her to be based anywhere
other than within twenty-five (25) miles of his
primary office location immediately prior to such
Change in Control, except for required travel on The
Bank's business consistent with his or her business
travel obligations immediately prior to such Change
in Control.
E. "Cause" shall mean (1) the willful and continued failure by
the Employee to substantially perform his or her duties under
this Agreement (other than any such failure resulting from his
incapacity due to physical or mental illness), after a demand
for substantial performance is delivered to him or her by the
Chief Executive Officer of The Bank, which demand specifically
identifies the manner in which the Employee is alleged to have
not substantially performed his or her duties; or (2) the
willful engaging by the Employee in misconduct which is
material injurious to The Bank, monetarily or otherwise, or
(3) the Employee's conviction of a felony. For purposes of
this subparagraph, no act, or failure to act, on the
Employee's part shall be considered "willful" unless done, or
omitted to be done, by him not in good faith and without
reasonable belief that his action or omission is in the best
interest of The Bank. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to the Chief
Executive Officer of The Bank, and after he has been afforded
a reasonable opportunity, together with his counsel, to be
heard before such Chief Executive Officer, and a written
finding has been delivered to him to the effect that in the
good faith opinion of such Chief Executive Officer
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<PAGE> 4
the Employee was guilty of conduct as set forth under clause
(1), (2), or (3) of the first sentence of this subparagraph,
specifying in writing the particulars thereof in detail.
F. "Disability" shall mean the Employee's failure to
satisfactorily perform his or her regular duties on behalf of
The Bank on a full-time basis for one hundred eighty (180)
consecutive days, by reason of the Employee's incapacity due
to physical or mental illness, except where within thirty (30)
days after notice of termination is given following such
absence, the Employee shall have returned to the satisfactory,
full-time performance of such duties. Any determination of
Disability hereunder shall be made by the Chief Executive
Officer of The Bank in good faith and on the basis of the
certificates of at least three (3) qualified physicians chosen
by it for such purpose, one of whom shall be the Chief
Executive Officer's regular attending physician.
8. The Employee agrees that any controversy or dispute arising under this
Agreement, the Promissory Note, or out of the Employee's employment by
The Bank (including, but not limited to, claims arising under the Civil
Rights Act of 1964, the Civil Rights Act of 1991, the Age
Discrimination in Employee Act of 1967, and analogous state statues)
shall be submitted for arbitration upon demand of either party in
accordance with the rules of the National Association of Securities
Dealers, Inc. or the New York Stock Exchange, Inc. provided, however,
that in the event of a default under the provisions of the Promissory
Note, The Bank shall be untitled to apply for and obtain from any state
or federal court the injunctive relief provided for in paragraph 7 of
the Agreement before or after the commencement of any arbitration
proceeding, such relief to be afforded to The Bank pending the decision
of the arbitrators.
9. The Employee agrees that in the event of any controversy or dispute
arising under this Agreement, the Promissory Note, or out of the
Employee's employment by The Bank is determined to be ineligible for
arbitration, THE EMPLOYEE SHALL NOT EXERCISE ANY RIGHTS THE EMPLOYEE
MAY HAVE TO ELECT OR DEMAND A TRAIL BY JURY. THE EMPLOYEE AND THE BANK
HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY. The Employee
acknowledges and agrees that this provision is a specific and material
aspect of the agreement between the parties and The Bank would not
enter into this Agreement with the Employee if this provision were not
part of the Agreement.
10. This Agreement shall be governed, constructed and enforced in
accordance with the laws of the State of Tennessee.
11. This Agreement will not be affected by the Employee's disability,
incompetence, or incapacity and is binding on the Employee, the
Employee's estate, and those
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<PAGE> 5
with authority to act on the Employee's behalf. It is also binding on
any organization that may succeed The Bank's interests.
12. The Bank's failure to enforce a breach of this Agreement will not
constitute a waiver of The Bank's right to enforce any other breach of
this Agreement.
13. If any part of this Agreement shall be held invalid or unenforceable,
that part shall be deemed modified as necessary to make it effective,
and the remaining provisions of this Agreement shall remain in effect.
14. The Employee understands that The Bank is relying on the
representations and agreements evidenced herein and in the Promissory
Note, and that this Agreement and the Promissory Note incorporate the
entire understanding between the Employee and The Bank on the subject
matter covered by this Agreement and may not be changed except by a
writing signed by a duly authorized officer of The Bank and the
Employee.
15. The Employee acknowledges that the Employee was given the opportunity
to read this Agreement and to seek the assistance of counsel before the
Employee decided to accept employment by The Bank and to sign this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Bonus Agreement to be executed
as of the date first hereinabove written.
/s/Pamela F. Morris /s/Harold J. Castner
- ---------------------------- ---------------------------------
Witness Employee
ATTEST: THE BANK OF NASHVILLE
/s/Joan B. Marshall, SVP By: /s/Mack S. Linebaugh, Jr.
- ---------------------------- ---------------------------------
Title: President
-------------------------
5
<PAGE> 6
EXHIBIT A
$124,813.29 July 24, 1998
Nashville, Tennessee
PROMISSORY NOTE
1. FOR VALUE RECEIVED, Harold J. Castner promises to pay to the order of
The Bank of Nashville, Nashville, Tennessee (the "Bank"), the principal
sum of One Hundred Twenty Thousand Eight Hundred Thirteen and 29/100
Dollars ($124,813.29). Principal shall be due and payable in thirteen
(13) equal quarterly installments of Eight Thousand Nine Hundred
Fifteen and 23/100 dollars ($8,915.23)followed by one final quarterly
installment of Eight Thousand Nine Hundred Fifteen and 30/100 dollars
($8,915.23), with said payments beginning on the last day of each
calendar quarter beginning September 30, 1998.
2. The Maker may prepay this Promissory Note (this "Note") in whole at any
time or in part from time to time without premium or penalty; provided
that (a) each partial prepayment shall be in an amount not less than
$500, and (b) partial prepayments of this Note shall be applied to the
principal installments due in the inverse order of their maturity.
3. The occurrence of any one or more of the following events shall
constitute a default under the provisions of this Note, and the term
"Default" shall mean, whenever it is used in this Note, any one or more
of the following events:
a. The Maker's employment with the Bank terminates for any reason
other than death, whether involuntary or voluntary and for
whatever cause or no cause;
b. If proceedings in bankruptcy, or for reorganization of the
Maker, or for the readjustment of any of the Maker's debts,
under the United States Bankruptcy Code (as amended) or any
part thereof, or under any other applicable laws, whether
state or federal, for the relief of debtors, now or hereafter
existing, shall be commenced against or by the Maker and,
except with respect to any such proceedings instituted by the
Maker, shall not be discharged within thirty (30) days of
their commencement; and/or
c. A receiver or trustee shall be appointed for the Maker or for
any substantial part of the Maker's assets, or any proceedings
shall be instituted for the dissolution or the full or partial
liquidation of the Maker and, except with respect to any such
appointments requested or
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<PAGE> 7
instituted by the Maker, such receiver or trustee shall not be
discharged within thirty (30) days of his or her appointment
and, except with respect to any such proceedings instituted by
the Maker, such proceedings shall not be discharged within
thirty (30) days of their commencement.
4. If any Default shall occur and be continuing, the Bank may declare the
unpaid principal amount of this Note, together with accrued and unpaid
interest thereon, to be immediately due and payable, whereupon the same
shall become and be forthwith due and payable by the Maker to the Bank,
without presentment, demand, protest or notice of any kind, all of
which are expressly waived by the Maker; provided, that, in the case of
any Default referred to in subparts 3(b) and 3(c) above, the unpaid
principal amount of this Note, together with accrued and unpaid
interest thereon, shall be automatically and immediately due and
payable by the Maker to the Bank without notice, presentment, demand,
protest or other action of any kind, all of which are expressly waived
by the Maker. Upon the occurrence and during the continuation of any
Default, then, in each and every case, the Bank shall be entitled to
exercise in any jurisdiction in which enforcement thereof is sought,
the rights and remedies available to the Bank under the provisions of
this Note and under applicable law.
5. All payments and prepayments of the unpaid balance of the principal
amount of this Note, interest thereon and any other amounts payable
hereunder shall be paid in lawful money of the United States of America
in immediately available funds during regular business hours of the
Bank at the Bank's office at 401 Church Street, Nashville, Tennessee
37219, or at such other place as the Bank or any other holder of this
Note may at any time or from time to time designate in writing to the
Maker.
6. In the event of a Default, the Bank shall have the right, without
giving notice, to withhold from any salary, commissions or other
compensation due to the Maker, or from any funds that the Maker
maintains in any accounts at the Bank, any or all of the principal and
interest due on this Note. If the Bank withholds salary, commissions or
other compensation, or if funds are withheld from the Maker's accounts
at the Bank, they shall be used to offset any amounts due the Bank
under this Note. Maker shall remain liable for the balance of any
amount that remains due under this Note.
7. If this Note is forwarded to an attorney for collection after maturity
hereof (whether by acceleration or otherwise), the Maker shall pay to
the Bank on demand all costs and expenses of collection, including
attorney's fees. without limiting the foregoing, Maker's obligation to
pay all costs and expenses of
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<PAGE> 8
collection shall include all costs and expenses incurred by the Bank if
the Bank is determined to be the prevailing party with respect to any
claim or counterclaim asserted by Maker against the Bank in any action
involving the Bank's attempts to collect amounts due under this Note.
8. The Maker waives presentment, protest and demand, notice of protest,
demand and dishonor and notice of nonpayment of this Note. The Bank
may, without compromising, impairing, modifying, diminishing or in any
way releasing or discharging, the Maker from the Maker's obligations
hereunder and without notifying or obtaining the prior approval of the
Maker at any time or from time to time: (a) grant extension of time for
payment or performance by the Maker, or (b) release, substitute,
exchange, impair, surrender, dispose of or add any collateral which is
security for this Note.
9. No delay in the exercise of, or failure to exercise, any right, remedy
or power accruing upon any Default or failure of the Maker in the
performance of any obligation under this Note shall impair any such
right, remedy or power or shall be construed to be a waiver thereof,
but any such right, remedy or power may be exercised from time to time
and as often as may be deemed by the Bank expedient. If a Default
occurs under this Note, and such Default should thereafter be waived by
the Bank, such waiver shall be limited to the particular Default so
waived.
10. The rights and remedies of the Bank under this Note shall be cumulative
and concurrent and may be pursued singularly, successively or together
at the sole discretion of the Bank, and may be exercised as often as
occasion therefor shall occur, and the failure to exercise any such
right or remedy shall in no event be construed as a waiver or release
of the same or any other right or remedy. By accepting full or partial
payment after the due date of any amount of principal or of interest on
this Note, the Bank shall not be deemed to have waived the right either
to require prompt payment when due and payable of all other amounts of
principal or of interest on this Note or to exercise any remedies
available to it in order to collect all such other amounts due and
payable under this Note.
11. If any provision or part of any provision of this Note shall, for any
reason, be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision (or any remaining part of any provision) of this Note and
this Note shall be construed as if such invalid, illegal or
unenforceable provision (or part thereof) had never been contained in
this Note, but only to the extent of its invalidity, illegality or
unenforceability.
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<PAGE> 9
12. This Note is subject to the terms and conditions of that certain
Financial Advisor Promissory Note Repayment Agreement between Bank and
Maker to which this Note is attached as Exhibit A.
13. This Note shall be governed, construed and interpreted strictly in
accordance with the laws of the State of Tennessee. The Maker agrees to
stipulate in any future proceeding that this Note is to be considered
for all purposes to have been executed and delivered within the
geographical boundaries of the State of Tennessee, even if it was, in
fact, executed and delivered elsewhere.
THE MAKER ACKNOWLEDGES THAT IT HAS HAD THE ASSISTANCE OF COUNSEL IN THE
REVIEW AND EXECUTION OF THIS NOTE.
IN WITNESS WHEREOF, the Maker has caused this Note to be executed in
his name and under his seal on the day and year first written above.
WITNESS:
/s/Pamela F. Morris /s/Harold J. Castner
- ------------------- ---------------------
(Name)
9
<PAGE> 1
EXHIBIT 10.15
FINANCIAL ADVISOR PROMISSORY NOTE REPAYMENT AGREEMENT
THIS FINANCIAL ADVISOR PROMISSORY NOTE REPAYMENT AGREEMENT ("Agreement") is made
this 24th day of July, 1998 by and between The Bank of Nashville (the "Bank")
and Pamela F. Morris (the "Employee").
WHEREAS, the Employee has accepted employment by The Bank as a Financial
Advisor; and
WHEREAS, the Employee has executed the attached Promissory Note; and
WHEREAS, The Bank and the Employee believe it to be mutually advantageous to
provide for the payment of bonuses to the Employee upon the terms and conditions
hereafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Bank will pay bonuses to the Employee on the last business day of
each calendar quarter ("Bonus Date" or "Bonus Dates"). Each bonus will
be in an amount equal to the then-due principal payments under the
Promissory Note (the "Promissory Note") attached hereto as Exhibit A
("Bonus Payment" or "Bonus Payments"). Bonus Payments will continue
until the Promissory Note has been paid in full, subject to the other
provisions of the Agreement.
2. In the event that the Employee ceases to be employed by The Bank for
any reason whatsoever, or for no reason, prior to any Bonus Date, then
the Employee will not be entitled to receive any Bonus Payment or
partial or prorated Bonus Payment for having been employed by The Bank
beyond the date of the Bonus Date.
3. Any Bonus Payment payable hereunder shall be withheld by The Bank and
shall be applied to the payment of then-due principal and interest
obligations pursuant to the Promissory Note. The Employee hereby
consents to such withholding and application.
4. Notwithstanding any other provision herein to the contrary, in the
event the Employee dies prior to the full payment of Promissory Note,
The Bank will pay; as of the date preceding the Employee's death, a
final Bonus Payment equal to the-outstanding principal balance and all
accrued but unpaid interest under the Promissory Note. The Bank shall
withhold and apply said Bonus Payment as provided in paragraph 3 above.
The Employee, for himself/herself, and for his/her estate, heirs,
legatees, executors and person representatives, consents to such
payment, withholding and application.
5. This Agreement, and any Bonus Payment hereunder, shall not be
assignable by voluntary or involuntary assignment or by operation of
law, including, without
1
<PAGE> 2
limitation, garnishment, attachment or other creditors' process, and
Bonus Payments hereunder are specifically conditioned on The Bank's
ability to withhold and apply each said Bonus Payment as provided in
paragraph 3 above, without interference from the Employee's creditors.
6. There is absolutely no intention that this Agreement be construed as a
contract of employment for any period of time. The Bank maintains an
employment-at-will policy. Just as employees are free to end their
employment with The Bank at any time for any reason, The Bank is free
to end the employment relationship with any employee at any time for
any reason. The Employee shall be an employee-at-will.
7. A. The Employee understands that in the event of the termination
of the Employee's employment with The Bank, the Employee is
not entitled to receive any further Bonus Payments,
commissions, bonuses, overrides, trails, finder's fees, or any
other compensation which would be due the Employee from prior
transactions had the Employee remained in the employ of The
Bank, other than such amounts as the Employee may be due on
transactions that occurred during the month immediately
preceding the termination of the Employee's employment.
B. Notwithstanding the provisions of paragraph 7(A), in the event
the Employee's employment with The Bank is terminated
coincident with or following a change in control (as defined
below), either involuntarily by The Bank or voluntarily by the
Employee for Good Reason (as defined below), (1) The Bank will
make the final Bonus Payment equal to the then outstanding
principal and accrued interest on the Promissory Note, (2) the
Promissory Note shall be stamped "Paid in Full:; (3)
thereupon, The Bank shall have no further liability on the
Promissory Note.
C. "Change in Control" shall mean the closing of any transaction
resulting in a majority change in control of Community
Financial Group, Inc. to The Bank, including any merger, sale
of assets, transfer of stock, or any reorganization as defined
in Section 368 of the Internal Revenue Code of 1986, as
amended.
D. "Good Reason" shall mean either:
(1) Failure by The Bank to comply with any material
provision of the Agreement, provided that the
Employee gives The Bank (as applicable) written
notice of such failure and such failure is not cured
within ten (10) days thereafter;
(2) Any of the following which shall occur coincident
with or following a Change in Control:
2
<PAGE> 3
(a) Without the Employee's express written
consent, the assignment to him or her of any
duties inconsistent with and in diminution
of his or her positions, duties,
responsibilities and status with The Bank
immediately prior to such Change in Control,
or a change resulting in diminution of his
reporting responsibilities, titles or
offices as in effect immediately prior to
such Change in Control, or any removal of
him or her from or any failure to re-elect
him or her to any of such positions
resulting in such diminution, except in
connection with the termination of his or
her employment for Cause Disability or
Retirement or as a result of his death or
termination of employment be him other than
for Good Reason;
(b) A reduction by The Bank in the Employee's
compensation structure as in effect on the
date of the Agreement, or as the same may be
increased from time to time; or
(c) Without the Employee's express written
consent, The Bank's requiring him or her to
be based anywhere other than within
twenty-five (25) miles of his primary office
location immediately prior to such Change in
Control, except for required travel on The
Bank's business consistent with his or her
business travel obligations immediately
prior to such Change in Control.
E. "Cause" shall mean (1) the willful and continued failure by
the Employee to substantially perform his or her duties under
this Agreement (other than any such failure resulting from his
incapacity due to physical or mental illness), after a demand
for substantial performance is delivered to him or her by the
Chief Executive Officer of The Bank, which demand specifically
identifies the manner in which the Employee is alleged to have
not substantially performed his or her duties; or (2) the
willful engaging by the Employee in misconduct which is
material injurious to The Bank, monetarily or otherwise, or
(3) the Employee's conviction of a felony. For purposes of
this subparagraph, no act, or failure to act, on the
Employee's part shall be considered "willful" unless done, or
omitted to be done, by him not in good faith and without
reasonable belief that his action or omission is in the best
interest of The Bank. Notwithstanding the foregoing, the
Employee shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to the Chief
Executive Officer of The Bank, and after he has been afforded
a reasonable opportunity, together with his counsel, to be
heard before such Chief Executive Officer, and a written
finding has been delivered to him to the effect that in the
good faith opinion of such Chief Executive Officer
3
<PAGE> 4
the Employee was guilty of conduct as set forth under clause
(1), (2), or (3) of the first sentence of this subparagraph,
specifying in writing the particulars thereof in detail.
F. "Disability" shall mean the Employee's failure to
satisfactorily perform his or her regular duties on behalf of
The Bank on a full-time basis for one hundred eighty (180)
consecutive days, by reason of the Employee's incapacity due
to physical or mental illness, except where within thirty (30)
days after notice of termination is given following such
absence, the Employee shall have returned to the satisfactory,
full-time performance of such duties. Any determination of
Disability hereunder shall be made by the Chief Executive
Officer of The Bank in good faith and on the basis of the
certificates of at least three (3) qualified physicians chosen
by it for such purpose, one of whom shall be the Chief
Executive Officer's regular attending physician.
8. The Employee agrees that any controversy or dispute arising under this
Agreement, the Promissory Note, or out of the Employee's employment by
The Bank (including, but not limited to, claims arising under the Civil
Rights Act of 1964, the Civil Rights Act of 1991, the Age
Discrimination in Employee Act of 1967, and analogous state statues)
shall be submitted for arbitration upon demand of either party in
accordance with the rules of the National Association of Securities
Dealers, Inc. or the New York Stock Exchange, Inc. provided, however,
that in the event of a default under the provisions of the Promissory
Note, The Bank shall be untitled to apply for and obtain from any state
or federal court the injunctive relief provided for in paragraph 7 of
the Agreement before or after the commencement of any arbitration
proceeding, such relief to be afforded to The Bank pending the decision
of the arbitrators.
9. The Employee agrees that in the event of any controversy or dispute
arising under this Agreement, the Promissory Note, or out of the
Employee's employment by The Bank is determined to be ineligible for
arbitration, THE EMPLOYEE SHALL NOT EXERCISE ANY RIGHTS THE EMPLOYEE
MAY HAVE TO ELECT OR DEMAND A TRAIL BY JURY. THE EMPLOYEE AND THE BANK
HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY. The Employee
acknowledges and agrees that this provision is a specific and material
aspect of the agreement between the parties and The Bank would not
enter into this Agreement with the Employee if this provision were not
part of the Agreement.
10. This Agreement shall be governed, constructed and enforced in
accordance with the laws of the State of Tennessee.
11. This Agreement will not be affected by the Employee's disability,
incompetence, or incapacity and is binding on the Employee, the
Employee's estate, and those
4
<PAGE> 5
with authority to act on the Employee's behalf. It is also binding on
any organization that may succeed The Bank's interests.
12. The Bank's failure to enforce a breach of this Agreement will not
constitute a waiver of The Bank's right to enforce any other breach of
this Agreement.
13. If any part of this Agreement shall be held invalid or unenforceable,
that part shall be deemed modified as necessary to make it effective,
and the remaining provisions of this Agreement shall remain in effect.
14. The Employee understands that The Bank is relying on the
representations and agreements evidenced herein and in the Promissory
Note, and that this Agreement and the Promissory Note incorporate the
entire understanding between the Employee and The Bank on the subject
matter covered by this Agreement and may not be changed except by a
writing signed by a duly authorized officer of The Bank and the
Employee.
15. The Employee acknowledges that the Employee was given the opportunity
to read this Agreement and to seek the assistance of counsel before the
Employee decided to accept employment by The Bank and to sign this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Bonus Agreement to be executed
as of the date first hereinabove written.
/s/Harold J. Castner /s/Pamela F. Morris
- ----------------------------- -----------------------------------
Witness Employee
ATTEST: THE BANK OF NASHVILLE
/s/Joan B. Marshall, SVP By: /s/Mack S. Linebaugh, Jr.
- ----------------------------- -----------------------------------
Title: President
---------------------------
5
<PAGE> 6
EXHIBIT A
$102,119.96 July 24, 1998
Nashville, Tennessee
PROMISSORY NOTE
1. FOR VALUE RECEIVED, Pamela F. Morris promises to pay to the order of
The Bank of Nashville, Nashville, Tennessee (the "Bank"), the principal
sum of One Hundred Two Thousand One Hundred Thirteen and 96/100 Dollars
($102,119.96). Principal shall be due and payable in thirteen (13)
equal quarterly installments of Seven Thousand Two Hundred Ninety Four
and 28/100 dollars ($7,294.28)followed by one final quarterly
installment of Seven Thousand Two Hundred Ninety Four and 32/100
dollars ($7,294.32), with said payments beginning on the last day of
each calendar quarter beginning September 30, 1998.
2. The Maker may prepay this Promissory Note (this "Note") in whole at any
time or in part from time to time without premium or penalty; provided
that (a) each partial prepayment shall be in an amount not less than
$500, and (b) partial prepayments of this Note shall be applied to the
principal installments due in the inverse order of their maturity.
3. The occurrence of any one or more of the following events shall
constitute a default under the provisions of this Note, and the term
"Default" shall mean, whenever it is used in this Note, any one or more
of the following events:
a. The Maker's employment with the Bank terminates for any reason
other than death, whether involuntary or voluntary and for
whatever cause or no cause;
b. If proceedings in bankruptcy, or for reorganization of the
Maker, or for the readjustment of any of the Maker's debts,
under the United States Bankruptcy Code (as amended) or any
part thereof, or under any other applicable laws, whether
state or federal, for the relief of debtors, now or hereafter
existing, shall be commenced against or by the Maker and,
except with respect to any such proceedings instituted by the
Maker, shall not be discharged within thirty (30) days of
their commencement; and/or
c. A receiver or trustee shall be appointed for the Maker or for
any substantial part of the Maker's assets, or any proceedings
shall be instituted for the dissolution or the full or partial
liquidation of the Maker and, except with respect to any such
appointments requested or
6
<PAGE> 7
instituted by the Maker, such receiver or trustee shall not be
discharged within thirty (30) days of his or her appointment
and, except with respect to any such proceedings instituted by
the Maker, such proceedings shall not be discharged within
thirty (30) days of their commencement.
4. If any Default shall occur and be continuing, the Bank may declare the
unpaid principal amount of this Note, together with accrued and unpaid
interest thereon, to be immediately due and payable, whereupon the same
shall become and be forthwith due and payable by the Maker to the Bank,
without presentment, demand, protest or notice of any kind, all of
which are expressly waived by the Maker; provided, that, in the case of
any Default referred to in subparts 3(b) and 3(c) above, the unpaid
principal amount of this Note, together with accrued and unpaid
interest thereon, shall be automatically and immediately due and
payable by the Maker to the Bank without notice, presentment, demand,
protest or other action of any kind, all of which are expressly waived
by the Maker. Upon the occurrence and during the continuation of any
Default, then, in each and every case, the Bank shall be entitled to
exercise in any jurisdiction in which enforcement thereof is sought,
the rights and remedies available to the Bank under the provisions of
this Note and under applicable law.
5. All payments and prepayments of the unpaid balance of the principal
amount of this Note, interest thereon and any other amounts payable
hereunder shall be paid in lawful money of the United States of America
in immediately available funds during regular business hours of the
Bank at the Bank's office at 401 Church Street, Nashville, Tennessee
37219, or at such other place as the Bank or any other holder of this
Note may at any time or from time to time designate in writing to the
Maker.
6. In the event of a Default, the Bank shall have the right, without
giving notice, to withhold from any salary, commissions or other
compensation due to the Maker, or from any funds that the Maker
maintains in any accounts at the Bank, any or all of the principal and
interest due on this Note. If the Bank withholds salary, commissions or
other compensation, or if funds are withheld from the Maker's accounts
at the Bank, they shall be used to offset any amounts due the Bank
under this Note. Maker shall remain liable for the balance of any
amount that remains due under this Note.
7. If this Note is forwarded to an attorney for collection after maturity
hereof (whether by acceleration or otherwise), the Maker shall pay to
the Bank on demand all costs and expenses of collection, including
attorney's fees. without limiting the foregoing, Maker's obligation to
pay all costs and expenses of
7
<PAGE> 8
collection shall include all costs and expenses incurred by the Bank if
the Bank is determined to be the prevailing party with respect to any
claim or counterclaim asserted by Maker against the Bank in any action
involving the Bank's attempts to collect amounts due under this Note.
8. The Maker waives presentment, protest and demand, notice of protest,
demand and dishonor and notice of nonpayment of this Note. The Bank
may, without compromising, impairing, modifying, diminishing or in any
way releasing or discharging, the Maker from the Maker's obligations
hereunder and without notifying or obtaining the prior approval of the
Maker at any time or from time to time: (a) grant extension of time for
payment or performance by the Maker, or (b) release, substitute,
exchange, impair, surrender, dispose of or add any collateral which is
security for this Note.
9. No delay in the exercise of, or failure to exercise, any right, remedy
or power accruing upon any Default or failure of the Maker in the
performance of any obligation under this Note shall impair any such
right, remedy or power or shall be construed to be a waiver thereof,
but any such right, remedy or power may be exercised from time to time
and as often as may be deemed by the Bank expedient. If a Default
occurs under this Note, and such Default should thereafter be waived by
the Bank, such waiver shall be limited to the particular Default so
waived.
10. The rights and remedies of the Bank under this Note shall be cumulative
and concurrent and may be pursued singularly, successively or together
at the sole discretion of the Bank, and may be exercised as often as
occasion therefor shall occur, and the failure to exercise any such
right or remedy shall in no event be construed as a waiver or release
of the same or any other right or remedy. By accepting full or partial
payment after the due date of any amount of principal or of interest on
this Note, the Bank shall not be deemed to have waived the right either
to require prompt payment when due and payable of all other amounts of
principal or of interest on this Note or to exercise any remedies
available to it in order to collect all such other amounts due and
payable under this Note.
11. If any provision or part of any provision of this Note shall, for any
reason, be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision (or any remaining part of any provision) of this Note and
this Note shall be construed as if such invalid, illegal or
unenforceable provision (or part thereof) had never been contained in
this Note, but only to the extent of its invalidity, illegality or
unenforceability.
8
<PAGE> 9
12. This Note is subject to the terms and conditions of that certain
Financial Advisor Promissory Note Repayment Agreement between Bank and
Maker to which this Note is attached as Exhibit A.
13. This Note shall be governed, construed and interpreted strictly in
accordance with the laws of the State of Tennessee. The Maker agrees to
stipulate in any future proceeding that this Note is to be considered
for all purposes to have been executed and delivered within the
geographical boundaries of the State of Tennessee, even if it was, in
fact, executed and delivered elsewhere.
THE MAKER ACKNOWLEDGES THAT IT HAS HAD THE ASSISTANCE OF COUNSEL IN THE
REVIEW AND EXECUTION OF THIS NOTE.
IN WITNESS WHEREOF, the Maker has caused this Note to be executed in
his name and under his seal on the day and year first written above.
WITNESS:
/s/Harold J. Castner /s/Pamela F. Morris
- ---------------------- ----------------------
(Name)
9
<PAGE> 1
EXHIBIT 10.16
[THE AMERICAN INSTITUTE OF ARCHITECTS LOGO]
- --------------------------------------------------------------------------------
AIA Document A101
STANDARD FORM OF AGREEMENT BETWEEN
OWNER AND CONTRACTOR
where the basis of payment is a
STIPULATED SUM
1987 EDITION
THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES; CONSULTATION WITH
AN ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION
The 1987 Edition of AIA Document A201, General Conditions
of the Contract for Construction, is adopted in this document
by reference. Do not use with other general conditions unless
this document is modified. This document has been approved and
endorsed by The Associated General Contractors of America.
- --------------------------------------------------------------------------------
AGREEMENT
made as of the Second (2nd) day of October in the year of Nineteen Hundred and
Ninety-Eight (1998)
<TABLE>
<S> <C>
BETWEEN the Owner: The Bank of Nashville
(Name and address) 401 Church Street
P.O. Box 198986
Nashville, TN 37219-8986
and the Contractor: Ray Bell Construction Company, Inc.
(Name and address) P.O. Box 363
Brentwood, TN 37024-0363
The Project is: The Bank of Nashville
(Name and location) Hendersonville Branch
Hendersonville, Tennessee
The Architect is: Gould Turner Group PC
(Name and address) 4400 Harding Road
Suite 1000
Nashville, TN 37205
</TABLE>
The Owner and Contractor agree as set forth below.
- -------------------------------------------------------------------------------
Copyright 1915, 1918, 1925, 1937, 1951, 1958, 1961, 1963, 1967, 1974, 1977,
(C) 1987 by The American Institute of Architects, 1735 New York Avenue,
N.W., Washington, D.C. 20006. Reproduction of the material herein or
substantial quotation of its provisions without written permission of
the AIA violates the copyright laws of the United States and will be
subject to legal prosecution.
- -------------------------------------------------------------------------------
<PAGE> 2
ARTICLE 1
THE CONTRACT DOCUMENTS
The Contract Documents consist of this Agreement, Conditions of the Contract
(General, Supplementary and other Conditions), Drawings, Specifications, Addenda
issued prior to execution of this Agreement, other documents listed in this
Agreement and Modifications issued after execution of this Agreement; these form
the Contract, and are as fully a part of the Contract as if attached to this
Agreement or repeated herein. The Contract represents the entire and integrated
agreement between the parties hereto and supersedes prior negotiations,
representations or agreements, either written or oral. An enumeration of the
Contract Documents, other than Modifications, appears in Article 9.
ARTICLE 2
THE WORK OF THIS CONTRACT
The Contractor shall execute the entire Work described in the Contract
Documents, except to the extent specifically indicated in the Contract Documents
to be the responsibility of others, or as follows:
Construction of a one-story branch bank with no sprinkler system, totaling 5,008
SF and associated site improvements. Payment and Performance Bond is included.
No Builders Risk Insurance is included.
ARTICLE 3
DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION
3.1 The date of commencement is the date from which the Contract Time of
Paragraph 3.2 is measured, and shall be the date of this Agreement, as
first written above, unless a different date is stated below or provision
is made for the date to be fixed in a notice to proceed issued by the
Owner.
(Insert the date of commencement, if it differs from the date of this Agreement
or, if applicable, state that the date will be fixed in a notice to proceed.)
Two hundred twenty-six (226) days from the date stipulated in the Notice to
Proceed, August 31, 1998.
Unless the date of commencement is established by a notice to proceed issued by
the Owner, the Contractor shall notify the Owner in writing not less than five
days before commencing the Work to permit the timely filing of mortgages,
mechanic's liens and other security interests.
3.2 The Contractor shall achieve Substantial Completion of the entire Work not
later than
(Insert the calendar date or number of calendar days after the date of
commencement. Also insert any requirements for earlier Substantial Completion
of certain portions of the Work, if not stated elsewhere in the Contract
Documents.)
April 15, 1999.
, subject to adjustments of this Contract Time as provided in the Contract
Documents.
(Insert provisions, if any, for liquidated damages relating to
failure to complete on time.)
Three hundred dollars ($300.00) per calendar day liquidated damages.
- -------------------------------------------------------------------------------
<PAGE> 3
ARTICLE 4
CONTRACT SUM
4.1 The Owner shall pay the Contractor in current funds for the Contractor's
performance of the Contract the Contract Sum of One Million Twenty-Two Thousand
Nine Hundred Forty and no/100-----------------------------------------Dollars
($ 1,022,940.00-------------------------------------), subject to additions and
deductions as provided in the Contract Documents.
4.2 The Contractor Sum is based upon the following alternates, if any, which
are described in the Contract Documents and are hereby accepted by the Owner:
(State the numbers or other identification of accepted alternates. If decisions
on other alternates are to be made by the Owner subsequent to the execution of
this Agreement, attach a schedule of such other alternates showing the amount
for each and the date until which that amount is valid.)
<TABLE>
<S> <C>
Base Bid $1,038,000.00
Change "barrel" roof over drive-thru to flat roof (17,254.00)*
Change light poles to steel in lieu of concrete (5,335.00)*
Change metal ceiling to drywall (2,226.00)*
Delete temporary chain link fence (3,291.00)*
Concrete curb revision 7,096.00 *
Add roof drains at flat roof over drive-thru 5,950.00
---------------
TOTAL $1,022,940.00
</TABLE>
* See attached Exhibit "C" dated October 2, 1998, one (1) page.
4.3 Unit prices, if any, are as follows:
Earth Excavation: Change in quantity of excavation in connection with remedial
excavation:
Add to/deduct from contract sum $ 6.00/CY
Earth/Loose Rock Excavation:
General Excavation: Add to contract sum $ 9.00/CY
Trench Excavation: Add to contract sum $30.00/CY
Backfilling above excavations as specified:
Add to/deduct from contract sum $ 9.00/CY
---------------------------------------------------------------------
<PAGE> 4
ARTICLE 5
PROGRESS PAYMENTS
5.1 Based upon Applications for Payment submitted to the Architect by the
Contractor and Certificates for Payment issued by the Architect, the Owner
shall make progress payments on account of the Contract Sum to the Contractor
as provided below and elsewhere in the Contract Documents.
5.2 The period covered by each Application for Payment shall be one calendar
month ending on the last day of the month, or as follows:
Nothing follows.
5.3. Provided an Application for Payment is received by the Architect not later
than the twenty-fifth (25th) day of a month, the Owner shall make payment to the
Contractor not later than the tenth (10th) day of the following month. If an
Application for Payment is received by the Architect after the application date
fixed above, payment shall be made by the Owner not later than days
after the Architect receives the Application for Payment.
5.4 Each Application for Payment shall be based upon the Schedule of Values
submitted by the Contractor in accordance with the Contract Documents. The
Schedule of Values shall allocate the entire Contract Sum among the various
portions of the Work and be prepared in such form and supported by such data to
substantiate its accuracy as the Architect may require. This schedule, unless
objected to by the Architect, shall be used as a basis for reviewing the
Contractor's Applications for Payment.
5.5 Applications for Payment shall indicate the percentage of completion of
each portion of the Work as of the end of the period covered by the Application
for Payment.
5.6 Subject to the provisions of the Contract Documents, the amount of each
progress payment shall be computed as follows:
5.6.1 Take that portion of the Contract Sum properly allocable to completed Work
as determined by multiplying the percentage completion of each portion of the
Work by the share of the total Contract Sum allocated to that portion of the
Work in the Schedule of Values, less retainage of ten----------------------
percent (10%). Pending final determination of cost to the Owner of changes in
the Work, amounts not in dispute may be included as provided in Subparagraph
7.3.7 of the General Conditions even though the Contract Sum has not yet been
adjusted by Change Order.
5.6.2 Add that portion of the Contract Sum properly allocable to materials and
equipment delivered and suitably stored at the site for subsequent incorporation
in the completed construction (or, if approved in advance by the Owner, suitably
stored off the site at a location agreed upon in writing), less retainage of
ten-----------------------------------------------------percent (10%);
5.6.3 Subtract the aggregate of previous payments made by the Owner; and
5.6.4 Subtract amounts, if any, for which the Architect has withheld or
nullified a Certificate for Payment as provided in Paragraph 9.5 of the General
Conditions.
5.7 The progress payment amount determined in accordance with Paragraph 5.6
shall be further modified under the following circumstances:
5.7.1 Add, upon Substantial Completion of the Work, a sum sufficient to increase
the total payments to ninety-five----------------------------percent (95%) of
the Contract Sum, less such amounts as the Architect shall determine for
incomplete Work and unsettled claims; and
5.7.2 Add, if final completion of the Work is thereafter materially delayed
through no fault of the Contractor, any additional amounts payable in
accordance with Subparagraph 9.10.3 of the General Conditions.
5.8 Reduction or limitation of retainage, if any, shall be as follows:
(If it is intended, prior to Substantial Completion of the entire Work, to
reduce or limit the retainage resulting from the percentages inserted in
Subparagraphs 5.6.1 and 5.6.2 above, and this is not explained elsewhere in the
Contract Documents, insert here provisions for such reduction or limitation.)
Retainage amount shall be as noted above in paragraphs 5.6.1 and 5.6.2 until
fifty percent (50%) of the contractual amount is complete and zero percent (0%)
retainage withheld thereafter.
- --------------------------------------------------------------------------------
<PAGE> 5
ARTICLE 6
FINAL PAYMENT
Final payment, constituting the entire unpaid balance of the Contract Sum,
shall be made by the Owner to the Contractor when (1) the Contract has been
fully performed by the Contractor except for the Contractor's responsibility to
correct nonconforming Work as provided in Subparagraph 12.2.2 of the General
Conditions and to satisfy other requirements, if any, which necessarily survive
final payment; and (2) a final Certificate for Payment has been issued by the
Architect; such final payments shall be made by the Owner not more than 30 days
after the issuance of the Architect's final Certificate for Payment, or as
follows:
Nothing follows.
ARTICLE 7
MISCELLANEOUS PROVISIONS
7.1 Where reference is made in this Agreement to a provision of the General
Conditions or another Contract Document, the reference refers to that provision
as amended or supplemented by other provisions of the Contract Documents.
7.2 Payments due and unpaid under the Contract shall bear interest from the
date payment is due at the rate stated below, or in the absence thereof, at the
legal rate prevailing from time to time at the place where the Project is
located.
Two percent (2%) over Prime Rate as published in The Tennessean.
(Usury laws and requirements under the Federal Truth in Lending Act, similar
state and local consumer credit laws and other regulations at the Owner's and
Contractor's principal places of business, the location of the Project and
elsewhere may affect the validity of this provision. Legal advice should be
obtained with respect to deletions or modifications, and also regarding
requirements such as written disclosures or waivers.)
7.3 Other provisions:
Laws of the State of Tennessee will apply.
ARTICLE 8
TERMINATION OR SUSPENSION
8.1 The Contract may be terminated by the Owner or the Contractor as provided
in Article 14 of the General Conditions.
8.2 The Work may be suspended by the Owner as provided in Article 14 of the
General Conditions.
<PAGE> 6
ARTICLE 9
ENUMERATION OF CONTRACT DOCUMENTS
9.1 The Contract Documents, except for Modifications issued after execution of
this Agreement, are enumerated as follows:
9.1.1 The Agreement is this executed Standard Form of Agreement Between Owner
and Contractor, AIA Document A101, 1987 Edition.
9.1.2 The General Conditions are the General Conditions of the Contract for
Construction, AIA Document A201, 1987 Edition.
9.1.3 The Supplementary and other Conditions of the Contract are those
contained in the Project Manual dated July 17, 1998, and are as follows:
<TABLE>
<CAPTION>
Document Title Pages
<S> <C> <C>
Project Manual Hendersonville Branch Bank Table of Contents
The Bank of Nashville attached as Exhibit "A"
Hendersonville, Tennessee dated October 2, 1998.
</TABLE>
9.1.4 The Specifications are those contained in the Project Manual dated as in
Subparagraph 9.1.3, and are as follows:
(Either list the Specifications here or refer to an exhibit attached to this
Agreement.)
<TABLE>
<CAPTION>
Section Title Pages
<S> <C> <C>
</TABLE>
See attached Exhibit "A" dated October 2, 1998, three (3) total pages.
<PAGE> 7
9.1.5 The Drawings are as follows, and are dated as noted in Exhibit "B" unless
a different date is shown below:
(Either list the Drawings here or refer to an exhibit attached to this
Agreement.)
<TABLE>
<CAPTION>
Number Title Date
<S> <C> <C>
</TABLE>
See attached Exhibit "B" dated October 2, 1998.
Nothing follows.
9.1.6 The Addenda, if any, are as follows:
<TABLE>
<CAPTION>
Number Date Pages
<S> <C> <C>
1 July 29, 1998 7
2 August 7, 1998 6
3 August 13, 1998 17
</TABLE>
Nothing follows.
Portions of Addenda relating to bidding requirements are not part of the
Contract Documents unless the bidding requirements are also enumerated in this
Article 9.
- --------------------------------------------------------------------------------
<PAGE> 8
9.1.7 Other documents, if any, forming part of the Contract Documents are as
follows:
(List here any additional documents which are intended to form part of the
Contract Documents. The General Conditions provide that bidding requirements
such as advertisement or invitation to bid, instructions to Bidders, sample
forms and the Contractor's bid are not part of the Contract Documents unless
enumerated in this Agreement. They should be listed here only if intended to be
part of the Contract Documents.)
Vendor drawings by Webster Safe and Lock Co., Inc., dated June 12, 1998, seven
(7) total pages.
Per Amendment 1 dated September 28, 1998, the following specification sections
were added:
Section 02281 Termite Control
Section 07411 Preformed Metal Siding
Nothing follows.
This Agreement is entered into as of the day and year first written above and is
executed in at least three original copies of which one is to be delivered to
the Contractor, one to the Architect for use in the administration of the
Contract, and the remainder to the Owner.
RAY BELL
OWNER THE BANK OF NASHVILLE CONTRACTOR CONSTRUCTION COMPANY, INC.
/S/ Joan Marshall, SVP /S/ Donald J. Estes
- ----------------------------- --------------------------------------
(Signature) (Signature)
Donald J. Estes
Senior Vice President
- ----------------------------- --------------------------------------
(Printed name and title) (Printed name and title)
- ------------------------------------------------------------------------------
<PAGE> 9
EXHIBIT "A"
October 2, 1998
TABLE OF CONTENTS Hendersonville Branch Bank
THE BANK OF NASHVILLE
BIDDING REQUIREMENTS
00020...Invitation To Bid
00100...Instructions to Bidders
00220...Soil Investigation Data
00233...Property Survey
00300...Bid Form
00420...Statement Of Bidders Qualifications
00430...Subcontractor List
CONTRACT FORMS
00500...Agreement Forms
00670...Waiver and Release of Lien
CONDITIONS OF THE CONTRACT
00700...General Conditions of the Contract for
Construction (AIA Document A201)
00800...Supplementary Conditions
DIVISION 1 - GENERAL REQUIREMENTS
01010...Summary of Work
01026...Unit Prices
01027...Applications for Payment
01028...Modification Procedures
01040...Coordination Procedures
01060...Regulatory Requirements and Reference
Standards
01070...Abbreviations
01200...Project Meetings
01300...Submittals
01310...Progress Schedules
01400...Quality Control
01410...Testing Agency Services
01500...Construction Facilities and Temporary
Controls
01600...Material and Equipment
01650...Special Criteria for Computers and
Computerized Equipment
01700...Contract Closeout
DIVISION 2 - SITE WORK
02000...Items Affecting Site Work
02105...Protection
02110...Clearing and Grubbing
02151...Removal Of Structures and Obstructions
02201...General Excavation
02203...Embankment
02205...Subgrade
02220...Site Backfilling and Compacting
02221...Unclassified Excavating for Utilities
02222...Foundation Excavation and Backfilling
02260...Finish Grading
02432...Inlets
02485...Seeding
02515...Portland Cement Concrete Paving
02640...Valves, Hydrants, and Blowoffs
02713...Water Lines
02721...Storm Sewers
DIVISION 3 - CONCRETE
03100...Concrete Formwork
03210...Concrete Reinforcing Steel
03300...Cast-In-Place Concrete
03301...Concrete Work
03347...Self-Levelling Underlayment
03603...Non-Shrinking Grout
DIVISION 4 - MASONRY
04110...Masonry Mortar
04153...Masonry Reinforcement
04210...Brick Masonry
04220...Concrete Unit Masonry
04270...Glass Unit Masonry
DIVISION 5 - METALS
05120...Structural Steel
05210...Steel Joists and Joist Girders
05310...Steel Decking
05500...Miscellaneous Steel Fabrications
05510...Metal Stairs
05515...Ladders
05750...Miscellaneous Aluminum Break Metal
DIVISION 6 - WOOD AND PLASTICS
06112...Nailers and Blocking
06116...Plywood
06223...Closet and Storage Shelving
06224...Interior Wood Trim
06411...Custom Casework-Laminated Plastic Clad
06423...Wood Veneer Faced Paneling
06621...Cast Vanity Tops
<PAGE> 10
EXHIBIT "A"
October 2, 1998
DIVISION 7 - THERMAL AND MOISTURE
PROTECTION
07191....Exterior Wall Vapor Retarder
07212....Insulation Under Metal Roofing
07214....Thermal Batt Insulation
07270....Firestopping
07416....Standing Seam Metal Roofing
07531....Adhered EPDM Sheet Roofing
07620....Sheet Metal Flashings
07625....Gutters and Downspouts
07651....Membrane Wall Flashing
07710....Manufactured Roof Edge Systems
07921....Sealants and Caulking
DIVISION 8 - DOORS AND WINDOWS
08110....Hollow Metal Doors and Frames
08210....Wood Doors
08305....Non-Rated Access Doors
08410....Aluminum Entrances and Storefront
Framing
08710....Door Hardware
08800....Glazing
08811....Unframed Glass Mirrors
DIVISION 9 - FINISHES
09111....Interior Metal Stud Framing
09112....Exterior Steel Stud Framing
09121....Soffic and Drywall Ceiling Suspension
Systems
09131....Non-Rated Exposed Ceiling Suspension
System
09250....Gypsum Board
09251....Gypsum Sheathing
09310....Ceramic Tile Finish
09345....Window Sills
09510....Acoustical Ceiling Panels
09515....Metal Ceiling System
09650....Resilient Flooring Materials
09655....Flooring Transition Trim
09682....Carpet
09900....Painting
09921....Sealed Concrete Floor Finish
09960....Vinyl Wallcovering
09970....Fabric Wallcovering
DIVISION 10 - SPECIALTIES
10165....Toilet Partitions
10810....Toilet Accessories
10875....Custodial Accessories
DIVISION 11 - EQUIPMENT (Not Used)
DIVISION 12 - FURNISHINGS
12350....Modular Casework
DIVISION 13 - SPECIAL CONSTRUCTION (Not Used)
DIVISION 14 - CONVEYING SYSTEMS (Not Used)
DIVISION 15 - MECHANICAL
15010....Basic Mechanical Requirements
15050....Basic Materials and Methods
15060....Piping and Fittings
15061....Pipe Hangers
15065....Refrigerant Piping System
15100....Valves
15103....Sleeves
15170....Electric Motors and Starters
15242....Vibration Isolation
15250....Mechanical System Insulation
15400....Plumbing
15423....Water Heater - Electric
15440....Plumbing Fixtures
15515....Hydronic Specialties
15761....Unit Heaters
15781....Split System A/C Units
15791....Electric Duct Heaters
15862....Centrifugal Exhaust Fans - Roof and Wall
15886....Filters
15890....Sheet Metal Ductwork - Low Pressure
15910....Sheet Metal Accessories
15972....HVAC Controls
15990....HVAC Systems Test and Balance
DIVISION 16 - ELECTRICAL
16010....Basic Electrical Requirements
16050....Basic Materials and Methods
16110....Raceways and Conduit Systems
16121....Conductors - 600 Volts and Below
16130....Outlet Boxes
16131....Pull and Junction Boxes
16134....Panelboards
16140....Wiring Devices
16141....Device Plates
16161....Cabinets
16170....Safety Switches
16190....Supporting Devices and Hangers
16403....Pad Transformer Electric Service
TC-2
<PAGE> 11
EXHIBIT "A"
October 2, 1998
16421...Main Switchboard
16450...Grounding
16480...Motor Starters
16510...Interior Lighting and Lamps
16530...Exterior Lighting and Lamps
16603...Transient Voltage Surge Suppression
16610...Uninterruptible Power System
16740...Telephone System
16769...Security and Data Processing Systems
END OF TABLE OF CONTENTS
<PAGE> 12
EXHIBIT "B"
October 2, 1998
INDEX OF DRAWINGS
<TABLE>
<CAPTION>
Sheet No. Description Date
- --------- ----------- ----
<S> <C> <C>
N/A Cover Sheet 07/17/98
N/A Index Sheet 07/17/98
C1.01 Existing Conditions/Demolition Plan 07/09/98
C2.01 Site Layout and Utility Plan 07/09/98
C3.01 Grading and Drainage Plan 09/28/98
C4.01 Site Details 09/28/98
C4.02 Site Details 09/28/98
L1.00 Landscape Plan 07/09/98
L1.01 Landscape Plan 07/09/98
L2.01 Landscape Details 05/18/98
A1.01A Floor Plan Dimensioned 09/18/98
A1.01B Floor Plan Noted 09/18/98
A1.21 Roof Plan 09/18/98
A1.31 Enlarged Plans 09/18/98
A2.01 Elevations 09/18/98
A3.21 Building Sections 09/18/98
A3.31 Wall Sections 07/17/98
A3.32 Wall Sections 07/17/98
A3.33 Wall Sections 09/18/98
A3.34 Wall Sections 09/18/98
A4.01 Details 07/17/98
A4.02 Details 07/17/98
A4.03 Details 07/17/98
A4.04 Details 07/17/98
A4.05 Details 07/17/98
A5.01 Reflected Ceiling Plan 09/18/98
A6.01 Details/Door Schedule 09/18/98
A7.01 Casework Elevations 07/17/98
A7.02 Casework Details 07/17/98
F1.01 Finish/Furniture Plan 07/17/98
F1.02 Finish Legends 07/17/98
S1.00 Structural General Notes 07/17/98
S1.01 Foundation Plans 09/18/98
S1.10 Roof Framing Plan 09/18/98
S2.01 Foundation Sections 09/18/98
S2.10 Framing Sections 07/17/98
S2.11 Framing Sections 09/18/98
S2.12 Framing Sections 09/18/98
</TABLE>
<PAGE> 13
PAGE TWO
EXHIBIT "B"
OCTOBER 2, 1998
<TABLE>
<CAPTION>
Sheet No. Description Date
- --------- ----------- -------
<S> <C> <C>
M1.1 HVAC Schedules 6/26/98
M2.1 HVAC Plan 6/26/98
M3.1 HVAC Details and Controls 6/26/98
P1.1 Plumbing Schedules and Details 6/26/98
P1.01 Plumbing Site Plan 6/26/98
P2.1 Plumbing Plan Underground 9/18/98
P2.2 Plumbing Plan 9/18/98
P2.3 Plumbing Roof Plan 9/18/98
E0.01 Electrical Index and Schedules 6/26/98
E1.01 Electrical Site Plan 6/26/98
EL1.01 Lighting Plan 6/26/98
EP1.01 Power Plan 6/26/98
ES1.01 Systems Plan 6/26/98
</TABLE>
<PAGE> 14
EXHIBIT "C"
OCTOBER 2, 1998
<TABLE>
<CAPTION>
ITEM IN ESTIMATE NEW PRICE ADD CUT
- ---- ----------- --------- ------- ----------
<S> <C> <C> <C> <C>
MASONRY $ 119,467 112,263 0 7,204
ELECTRICAL $ 126,335 121,000 0 5,335
ROOFING $ 63,003 57,153 0 5,850
STRUCTURAL STEEL $ 95,000 90,800 0 4,200
DRYWALL CEILING $ 7,000 4,774 0 2,226
TEMP. FENCE $ 3,291 0 0 3,291
PLUMBING $ 29,023 34,973 5,950 0
CONCRETE CURB $ 6,210 13,306 7,096 0
---------- -------- ------- ----------
SUB TOTALS $ 449,329 434,269 13,046 28,106
IN ESTIMATE $ 449,329 TOTAL CUT 28,106
NEW PRICE $ 434,269 TOTAL ADD 13,046
TOTAL CUT $15,060.00 RESULT $15,060.00
ORIGINAL BID $1,038,000.00
CUT AMOUNT $15,060.00
REVISED BID $1,022,940.00
$0.00
$0.00
$0.00
$0.00
</TABLE>
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as the "Agreement")
is dated this 23rd day of February, 1999, and is by and between THE BANK OF
NASHVILLE (hereinafter referred to as the "Employer"), a corporation formed
under the laws of the State of Tennessee, and ANNE J. CHEATHAM (hereinafter
referred to as the "Employee").
Employer and Employee hereby agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee, and Employee
hereby accepts employment, upon the terms and conditions hereinafter set forth.
2. TERM. Subject to the provisions hereof, and the faithful
performance by Employee of this employment, as herein defined, the term of
Employee's employment hereunder shall commence on January 3, 1999, and shall
continue thereafter for a period of one year.
3. COMPENSATION.
(a) Base Salary. As compensation for the services to be
rendered by Employee during the period of her employment hereunder, and upon the
condition that Employee shall fully and faithfully keep and perform all of the
terms and conditions hereof, Employer shall pay Employee a salary of
$102,000.00, less income tax and social security withholdings and other
deductions for employee benefits applicable to other employees of Employer
("Salary"). Such Salary shall be payable in one initial
<PAGE> 2
installment (pro rata) and 23 equal installments paid on the 15th and last day
of each month. The Salary shall be subject to periodic review and revision by
the Employer but shall not be decreased during the term of employment hereunder.
(b) Participation in Benefit Plans. Employee shall
receive all other benefits generally offered to other employees of the Employer
("Benefits").
(c) Continuation. This Agreement shall not be deemed
abrogated or terminated if the Board of Directors or shareholders of Employer
shall determine to increase the compensation of Employee for any period of time.
4. DUTIES. Employee is to be engaged as Senior Vice President and
head of Bank Administration to render services in such capacity which are
consonant with the position of Senior Vice President - Bank Administration. In
addition, Employee shall perform such other duties as are reasonably required of
her by Employer in her capacity as an executive employee. The precise services
of Employee may be extended or curtailed, from time to time, at the direction of
Employer as long as Employee continues to serve as the Senior Vice President in
Bank Administration with such duties as are consistent with that position. If
Employee is elected or appointed to serve as any other officer and/or director
of Employer during the term of this Agreement, Employee shall serve in such
capacity or capacities without further compensation.
5. UNAUTHORIZED DISCLOSURE. During the period of her employment
hereunder, Employee shall not, without the prior written consent of the
Employer, disclose to any person , other than a person to whom disclosure is
necessary or appropriate in connection with the performance by Employee of her
duties as an officer of the employer, any confidential information obtained by
her while in the employ of the Company with
2
<PAGE> 3
respect to any of the Employer's products, improvements, designs or styles,
processes, customers, methods of marketing or distribution, systems, procedures,
plans, proposals, or policies the disclosure of which she knows, or should have
reason to know, could be damaging to the Employer; provided, however, that
confidential information shall not include any information known generally to
the public (other than as a result of unauthorized disclosure by the Employee)
or any information of a type not otherwise considered confidential by persons
engaged in the same business or a business similar to that conducted by the
Employer. Following the termination of employment hereunder, the Employee shall
not disclose any confidential information of the type described above except as
may be required in the opinion of the Employee's counsel in connection with any
judicial or administrative proceeding or inquiry.
6. EXPENSES. Employee is authorized to incur reasonable expenses
for promoting the business of Employer. Employer shall reimburse Employee for
all such expenses upon the presentation by Employee, from time to time, of an
account of such expenditures, setting forth the purposes for which incurred, and
the amounts thereof, together with such receipts showing payments as Employee
has reasonably been able to obtain.
7. VACATIONS. Employee shall be entitled each year to a
reasonable vacation or vacations, consistent with Employer's vacation policy,
during which time her compensation shall be paid in full. Each such vacation
shall be taken during a period mutually satisfactory to both Employer and
Employee hereunder.
8. EXTENT OF SERVICES. Employee agrees to perform her services
efficiently, to the best of her ability, and to Employer's reasonable
satisfaction. Employee agrees that
3
<PAGE> 4
throughout the Term of this Agreement she will not be engaged or interested in
any other business activity which competes with Employer, whether or not such
business activity is pursued for gain, profit or other pecuniary advantage.
Employee agrees that all of her activities as Employee shall be in conformity
with all present and future policies, rules, regulations and reasonable
directions of Employer.
9. INTELLECTUAL PROPERTY. All right, title and interest of every
kind and nature whatsoever in any to any intellectual property, including any
inventions, patents, trademarks, copyrights, ideas, creations, and properties
furnished to Employer during the Term, and/or used in connection with any of
Employer's activities, or written or created by Employee, or with which Employee
is connected in the performance of her services hereunder, shall as between the
parties hereto be, become, and remain the sole and exclusive property of
Employer for any and all purposes and uses whatsoever, regardless of whether the
same were invented, created, written, developed, furnished, produced, or
disclosed by Employee or any other party, and Employee shall have no right,
title or interest of any kind or nature therein or thereto, or in any to any
results and proceeds therefrom. Employee agrees, during and after the Term
hereof, to execute any and all documents and agreements which Employer may deem
necessary and appropriate to effectuate the provisions of this Section 9. The
provisions of this Section 9 shall survive the expiration or terminations, for
any reason, of this Agreement and of Employee's employment.
10. DEATH DURING EMPLOYMENT. If Employee dies during the Term of
this employment, Employer shall pay to the estate of Employee the compensation
which
4
<PAGE> 5
would otherwise be payable to Employee up to the end of the month in which hers
death occurs.
11. TERMINATION OF AGREEMENT. Should any of the following events
occur, Employer may, at its election, terminate this Agreement by giving written
notice thereof to Employee, which such notice shall be effective immediately:
(a) Employee is physically or mentally incapacitated either
for a period of sixty (60) consecutive days, or for a total of ninety
(90) days in any twelve month period and is unable to perform the
essential functions of her job with or without reasonable
accommodations.
(b) Employee conducts herself in a manner substantially
detrimental to Employer, and constitutes on the part of the Employee
personal dishonesty, willful misconducts, breach of fiduciary duty
involving personal profit intentional failure to perform stated duties
of the Senior Vice President of the Employer, willful violation of any
law, governmental rule or regulation (other than traffic violations or
similar offenses) or final cease and desist order, or material breach
of this Agreement or for any of the reasons set forth in 12 USC -
1818(e) and (g), determined on a reasonable basis.
(c) Employee competes, in a manner prohibited by this
Agreement, with Employer during the Term hereof.
(d) Employee is convicted of a misdemeanor involving breach of
trust or is convicted of any felony.
(e) Employee engages in the illegal usage of any drug.
5
<PAGE> 6
(f) Any state or federal regulatory agency or court of
competent jurisdiction issues an order requiring Employee's removal
from any duties or responsibilities for Employer.
Termination or any other disciplinary actions for any of the reasons
stated in this Section 11 shall be deemed to be "for cause." In the event
Employer terminates or otherwise reduces the total value of Employee's Salary
and Benefits "for cause," Employer shall pay Employee the compensation and
benefits which would otherwise be payable to Employee up to the end of the month
in which the termination or disciplinary action occurs.
If Employer, for reasons other than cause (i) does not, at the end of
the term, renew this agreement for a period of at least one year, (ii) or
otherwise terminates this agreement, then the Employer shall pay Employee within
30 days of notice from Employee to the President of the Bank a lump sum equal to
six (6) months Salary then being paid plus any Salary then due. Such payments
will be conditioned, at the employer's option, upon the Employee's continuation
of this employment for 60 days after notice with full Salary and Benefits, which
shall be in addition to the lump sum payment made thereafter. Employee shall
vacate the premises of the Employer the last business day of the month in which
such lump sum payment is made.
The Employee may terminate her employment hereunder (i) at any time if
her health should become impaired to an extent that makes the continued
performance of her duties hereunder hazardous to her physical or mental health,
or (ii) upon sixty (60) days written notice for any other reason.
6
<PAGE> 7
12. COMPETITION DURING AND AFTER TERM. Employee agrees that during
her employment hereunder, and for a period of six (6) additional months if a
payment of the lump sum amount referred to in Section 11 has been made, she will
not, either separately, or in association with others, directly or indirectly,
as an agent, employee, owner, partner, stockholder, or otherwise, allow her name
to be used by, or establish, engage in, or become interested in any business,
trade or occupation in substantial competition with the principal business being
conducted by Employer, in any banking market of Employer where Employee has been
principally stationed, and in which Employer's business is presently being
conducted, as long as Employer, or any person, firm, or corporation deriving
title to the goodwill of, or shares from it, carries on a like business therein.
Employer and Employee acknowledge that during the term of the Employee's
employment, Employee will acquire special knowledge and/or skill that she can
effectively utilize in competition with Employer.
Employee agrees that the remedy at law for any breach by her of the
covenants contained herein will be inadequate, and that in the event of a
violation of the covenants contained herein, in addition to any and all legal
and equitable remedies which may be available, the said covenants may be
enforced by an injunction in a suit in equity, without the necessity of proving
actual damage, and that a temporary injunction may be granted immediately upon
the commencement of any such suit, and without notice. The parties hereto intent
that the covenants contained in this Section 12 shall be deemed to be a series
of separate covenants, one for each county of each state where Employer does
business and Employee has been stationed. If, in any judicial proceeding, a
court shall refuse to enforce any or all of the separate covenants deemed
included in such action, then such
7
<PAGE> 8
unenforceable covenants shall be deemed eliminated from the provisions hereof
for the purposes of such proceeding to the extent necessary to permit the
remaining separate covenants to be enforced in such proceeding. Furthermore, if
in any judicial proceeding a court shall refuse to enforce any covenant by
reason of the duration or extent thereof, such covenant shall be construed to
have only the maximum duration or extent permitted by law.
13. NOTICES. Any notice required or permitted to be given under
this Agreement shall be sufficient if in writing, and if sent by registered or
certified mail, postage prepaid, addressed as follows:
If to Employer: The Bank of Nashville
401 Church Street
Nashville, Tennessee 37219
Attention: Corporate Secretary
If to Employee: Anne J. Cheatham
111 Robin Springs Road
Nashville, Tennessee 37220
The persons and addresses to which mailings may be made may be changed from time
to time by a notice mailed as aforesaid.
14. ACKNOWLEDGMENT OF PECULIAR VALUE OF SERVICES. The Employer and
Employee recognize that each party will have no adequate remedy at law for
breach by the other of any of the agreements contained herein and, in the event
of any such breach, the parties hereby agree and consent that the other shall be
entitled to a decree of specific performance, mandamus or other appropriate
remedy to enforce performance of this Agreement.
8
<PAGE> 9
15. WAIVER OF BREACH. No provisions of this Agreement may be
waived or discharged unless such waiver or discharge is agreed to in writing
signed by Employee and the Employer. No waiver by either party hereto at any
time of any breach by the other party hereto or compliance with any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time.
16. ASSIGNMENT. This Agreement is personal in nature and neither
of the parties hereto shall, without the consent of the other, assign, transfer
or delegate this Agreement or any rights or obligations hereunder except as
expressly provided for herein. Without limiting the generality of the foregoing,
Employee's right to receive payments hereunder shall not be assignable,
transferable or delegable, whether by pledge, creation of a security interest or
otherwise, other than by a transfer by hers will or by the laws of descent and
distribution and, in the event of any attempted assignment or transfer contrary
to this paragraph, the Employer shall have no liability to pay any amount so
attempted to be assigned, transferred or delegated.
17. ENTIRE AGREEMENT AND MODIFICATION. This instrument contains
the entire agreement of the parties hereto, and supersedes any and all prior
agreements, arrangements or understandings between the parties hereto relating
to the subject matter hereof. This Agreement may not be modified, changed, or
terminated by the parties hereto, unless such modification, change or
termination is expressly agreed in writing by the party against whom enforcement
of any waiver, change, modification, extension, or discharge is sought.
18. GOVERNING LAW. This Agreement shall be construed and enforced
in accordance with the laws of the State of Tennessee.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 23rd day of February, 1999.
EMPLOYER:
THE BANK OF NASHVILLE
By: /s/Mack S. Linebaugh, Jr.
---------------------------------------------
Mack S. Linebaugh, Jr., President and CEO
EMPLOYEE:
/s/Anne J. Cheatham
--------------------------------------------------
Anne J. Cheatham
10
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
COMMUNITY FINANCIAL GROUP, INC.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Income Per Common Share
Basic (1)
Net income (in thousands) $ 2,581 $ 2,058 $ 2,547
========= ========= ==========
Net income per share 1.08 $ .93 $ 1.16
========= ========= ==========
Weighted average common
shares outstanding 2,393,576 2,205,043 2,198,619
========= ========= ==========
Income Per Common Share,
Diluted (2)
Net income (in thousands) $ 2,581 $ 2,058 $ 2,547
========= ========= ==========
Net income per share $ .78 $ .89 $ 1.15
========= ========= ==========
Weighted average common share
Outstanding 3,321,228 2,323,580 2,222,653
========= ========= ==========
</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 K to the Company's consolidated financial statements included in
the Annual Report to Shareholders for the year ended December 31, 1998
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 K to the Company's consolidated financial statements included in
the Annual Report to Shareholders for the year ended December 31, 1998
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). CFGI and its
subsidiary, The Bank, are 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 Company experienced a significant change in its
capital structure in 1998 as 2.0 million warrants, each representing the right
to acquire a common share at a price of $12.50, were exercised. In 1998,
proceeds generated from the exercise of the warrants totaled $25.0 million and
the Company ended the year with 4.2 million common shares outstanding. All
warrants expired on December 31, 1998. 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 will result in ownership by a person or group of 15% or
more of the common stock. The rights are designed to ensure 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, squeeze
outs, open market accumulations, and other abusive tactics to gain control of
the Company without paying all shareholders an appropriate control premium. The
holding company's structure, as well as the influx of additional capital that
occurred in 1998, provide flexibility for expansion of the Company's banking
business through acquisition of other financial institutions and/or 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 operations is located in the L&C Tower at 401
Church Street, Nashville, Tennessee, 37219. The Bank has two full service
traditional branches, one located at the Glendale Center in Green Hills, which
opened in January, 1997 and the other located in Maryland Farms in Brentwood,
which opened in September, 1998. Additional branch services are provided through
full service mobile branching, "Bank-on-Call", which was established in
September, 1996 and which has expanded in each subsequent year. Bank-on-Call
provides the convenience of "at your door" banking service to customers.
Additionally, the Company has expanded its delivery systems through full service
ATMs, cash dispensers, cash management services, and now its soon to be
introduced, "Bank-on-Line" Internet banking service.
-7-
<PAGE> 2
Additional expansion plans include a branch in Hendersonville, Tennessee
currently under construction with a planned opening in the late spring of 1999.
During 1998, the Company discontinued most services offered through the Trust
Division while expanding the Investment Services Division provided with LM
Financial Partners, Inc. The addition of two investment advisors and their
support staff at the Green Hills Office to offer LM Financial Partners, Inc.
investment services during the second quarter of 1998 has resulted in a net
contribution to the Company's earnings. The Company offers a full array of
commercial and consumer banking services, as well as investment services.
The primary service area of 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
firms, 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 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
imposed on its customers by ATM providers within the State of Tennessee when
accessed by a Bank of Nashville ATM or MasterMoney card.
The Company's assets were $238.2 million at December 31, 1998, compared to
$204.9 million at December 31, 1997, representing an increase of 16.3%.
Shareholders' equity increased $27.1 million, an increase of 112.8% from the
$24.1 million at December 31, 1997. This increase included $25.0 million in
equity capital resulting from the exercise of warrants during 1998. During 1998,
shareholders were paid $.24 per share through four quarterly dividends of $.06
each compared to dividends totaling $.20 per share in 1997. The Company reported
earnings of $2.6 million, or basic earnings per share of $1.08 in 1998 compared
to $2.1 million, or $.93 basic earnings per share in 1997. Diluted earnings per
share were $.78 in 1998 compared to $.89 in 1997. The decrease in diluted
earnings per share resulted from the warrants outstanding during 1998, all of
which were either exercised or expired at December 31, 1998. The increased
number of shares outstanding resulting from the exercise of warrants will reduce
basic earnings per share on a comparative basis until the Company has the
opportunity to more effectively employ the additional capital to enhance
profitability. Return on average shareholders' equity (exclusive of other
comprehensive income) was 9.56% in 1998 compared to 9.05% in 1997, while the
return on average assets for 1998 and 1997 were 1.23% and 1.08%, respectively.
During 1998, the Company continued its focus on asset quality while expanding
its service locations and product lines in accordance with its long-term
strategic plan. The maintenance of an adequate level for the allowance for loan
losses was reflected by a provision for loan losses of $128,000 being reported
in 1998, a period in which net recoveries were $390,000. This provision expense
was deemed to be prudent given the Company's loan growth despite a decline of
$767,000 in the level of nonperforming assets at year end 1998 when compared to
the same period in 1997. The Company recorded $100,000 in 1997 for provision for
loan loss, a period in which net recoveries were $150,000. During 1998, net
nonperforming assets decreased $767,000, or 62.5%, to $460,000 from $1.2 million
at year end 1997, while total loans increased $29.9 million, or 24.4%, from
$122.7 million at December 31, 1997 to $152.7 million at year end 1998. A more
detailed analysis of nonperforming assets
-8-
<PAGE> 3
and the provision for loan losses is presented under the caption, "Provision for
Loan Losses" and "Nonperforming Assets and Risk Elements". During 1998, deposits
declined $1.5 million, or .9%, to $162.6 million at December 31, 1998 from
$164.1 million at year end 1997; however, average deposits increased $14.7
million, or 9.6%, in 1998 compared to 1997. The decline in total deposits at
year-end, 1998, was reflected in higher rate time certificates and money market
accounts while non-interest bearing demand deposits and NOW accounts reflected
significant growth compared to year-end 1997. The net loan to deposit ratio at
December 31, 1998, was 93.9% while the net loans to asset ratio was 64.1%.
Additional capital generated from the exercise of warrants allowed the Company
to be less aggressive in rates offered for time certificates of deposit to
non-relationship customers during late 1998.
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 increased 17.1% to $8.6 million in 1998 from $7.3 million in
1997. Total interest income increased $1.3 million, or 8.7%, in 1998 compared to
1997, while total interest expense increased $.1 million, or 1.0%, compared to
1997. The increase in total interest income is attributable primarily to an 8.5%
increase in average earning assets and a shift in the mix of these assets as the
growth was comprised primarily of an $18.8 million increase in average loans.
This increase in loans was partially offset by a decline of $2.5 million in the
volume of average investments and $.6 million in other earning asset categories.
Additionally, the rate earned on average earning assets in 1998 increased two
basis points when compared to 1997, reflecting a shift in the mix of these
assets as loans, the Company's highest yielding asset, reflected an increase
while other categories declined. Average interest bearing liabilities increased
$11.9 million, or 7.9%, in 1998 compared to 1997. This increase in average
interest bearing liabilities was comprised of a $10.8 million increase in
average money market accounts, $4.3 million in average NOW accounts and $.9
million in CDs $100,000 or greater while CDs less than $100,000 declined $3.6
million and Federal Home Loan Bank and other borrowings declined $.4 million.
The average rate paid on interest bearing liabilities decreased 34 basis points
in 1998 compared to 1997. The decline in rates paid was reflected in all
categories of interest bearing liabilities. The following two schedules present
an analysis of net interest income and the detail of income due to the
fluctuations in volumes and rates.
-9-
<PAGE> 4
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ---------------------------------------
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 $ 43,137 $ 3,983 9.23% $ 36,889 $ 3,438 9.32%
Real Estate - mortgage 72,627 6,649 9.15 65,102 6,002 9.22
Real Estate - construction 12,288 1,132 9.21 9,102 849 9.33
Consumer 5,608 627 11.18 3,742 435 11.62
- ---------------------------------------------------------------------------------------------------------------------------
Total loans (net of
unearned income) 133,660 12,391 9.27 114,835 10,724 9.34
- ---------------------------------------------------------------------------------------------------------------------------
Securities 59,117 3,833 6.48 61,587 4,128 6.70
Due from banks 163 10 5.84 333 19 5.75
Federal funds sold 7,305 374 5.13 7,772 398 5.12
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets $200,245 $16,608 8.29% $184,527 $15,269 8.27%
Allowance for loan losses (3,389) (3,006)
Cash and due from banks 9,449 6,633
Premises and equipment, net 1,670 1,040
Accrued interest and other assets 1,526 1,572
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $209,501 $190,766
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW accounts $ 11,190 $ 367 3.28% $ 6,856 $ 253 3.69%
Money market accounts 77,982 3,463 4.44 67,216 3,205 4.77
Time certificates less
than $100,000 31,551 1,809 5.73 35,186 2,061 5.86
Time certificates
$100,000 and greater 30,162 1,692 5.61 29,294 1,693 5.78
Federal Home Loan Bank and
other borrowings 12,718 704 5.54 13,124 744 5.67
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $163,603 $ 8,035 4.91% $151,676 $ 7,956 5.25%
Non-interest bearing demand
deposits 16,409 14,088
Accounts payable and accrued
liabilities 2,176 2,156
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 182,188 167,920
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 27,313 22,846
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $209,501 $190,766
===========================================================================================================================
Interest income/earning assets* 8.29% 8.27%
Interest expense/earning assets 4.01 4.31
- ---------------------------------------------------------------------------------------------------------------------------
Net interest margin* 4.28% 3.96%
===========================================================================================================================
</TABLE>
* Fully taxable equivalent basis.
Nonaccrual 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 loans
earned income at the contractual rate, interest income of $29,000 and $32,000
would have been recognized during 1998 and 1997, respectively.
-10-
<PAGE> 5
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
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 $ (78) $ 1,745 $ 1,667 $ 41 $1,114 $1,155
Securities (131) (164) (295) 5 1,107 1,112
Due from banks -- (9) (9) -- 19 19
Federal funds sold 1 (25) (24) 16 68 84
- ----------------------------------------------------------------------------------------------------------------
Total Interest Income (208) 1,547 1,339 62 2,308 2,370
- ----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW accounts (31) 145 114 77 36 113
Money market accounts (231) 489 258 12 380 392
Time certificates under $100,000 (45) (207) (252) (23) 302 279
Time certificates $100,000
and over (50) 49 (1) 22 108 130
Federal Home Loan Bank
and other borrowings (22) (18) (40) 9 587 596
- ----------------------------------------------------------------------------------------------------------------
Total Interest Expense (379) 458 79 97 1,413 1,510
- ----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 171 $ 1,089 $ 1,260 $(35) $ 895 $ 860
================================================================================================================
</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
multiplied by the old rate while rate change is change in rate multiplied
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 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
increased by 32 basis points to 4.28% in 1998, primarily as a result of a shift
in the mix of earning assets from investments to higher yielding loans combined
with an overall decrease in deposit rates paid during 1998. A higher average
loan to deposit ratio also contributed to the improvement in the net interest
margin in 1998 compared to 1997.
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 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.
-11-
<PAGE> 6
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 1998, the interest rate spread increased compared with 1997. The
following table presents an analysis of the Company's interest rate spread and
net yield on earning assets.
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Rate earned on interest earnings assets 8.29% 8.27%
Rate paid on interest bearing liabilities 4.91% 5.25%
Interest rate spread 3.38% 3.02%
Net yield on earnings assets 4.28% 3.96%
</TABLE>
The shift in mix of earning assets together with the increased level of earning
assets and the decline in the average rate paid on interest bearing liabilities
resulted in a higher level of net interest income. The positive impact of the
increased level of earning assets particularly in the area of loans was somewhat
offset by growth in interest bearing liabilities.
PROVISION FOR LOAN LOSSES
The Company maintains an allowance for 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 1998, the Company recorded $128,000 in expense for provision for loan losses,
compared with $100,000 in 1997. This provision for loan losses was deemed
appropriate due to the growth in the loan portfolio despite net recoveries for
1998 and a decline in nonperforming assets. Net recoveries were $390,000 in 1998
compared to $150,000 in 1997. The allowance for loan losses was 2.4% of loans at
December 31, 1998, compared to 2.5% of loans at the same date in 1997. This
decline in percentage resulted from a 24.4% increase in the loan portfolio. Net
recoveries of $390,000 in 1998 resulted from charge-offs of $84,000 and
recoveries of $474,000 reflecting continued collection efforts on loans charged
off in prior periods. In 1997, net recoveries of $150,000 were the result of
charge-offs of $169,000 and recoveries of $319,000.
Management will continue to evaluate the level of the allowance for 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 loan 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 1999; 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.
-12-
<PAGE> 7
As a financial institution that assumes lending and credit risks as a principal
element of its business, the Company anticipates that credit losses will be
experienced in the normal course of business. Accordingly, the Company
consistently applies a comprehensive methodology and procedural discipline which
is updated on a quarterly basis at the subsidiary bank level to determine both
the adequacy of the allowance for loan losses and the necessity for charging
provisions against earnings. The allowance for loan losses is based on
assessments of the probable estimated losses inherent in the loan portfolio. The
allowance for loan losses is comprised of an allocated and unallocated portion.
Both portions of the allowance are available to support inherent losses in the
portfolio. The allocated allowance is determined for each classification of both
performing and nonperforming loans within the portfolio. This methodology
includes:
- - The application of allowance allocations for commercial loans, consumer
loans, and real estate loans are calculated by using weighted-average loss
rates over a defined time horizon based upon analysis of the Company's
historical averages of actual net loan charge-offs incurred within the
loan portfolios by loan quality grade. The Company has established minimum
loss factors for certain loan grade categories.
- - A detailed review of all criticized, nonperforming, and impaired loans to
determine if any specific allowance allocations are required on an
individual loan where management has identified significant conditions or
circumstances exist that indicate the probability that a loss may be
incurred in excess of the amount determined by the application of the
historical loss methodology.
The unallocated allowance is established for loss exposure that may exist in the
remainder of the loan portfolio but has yet to be identified and to compensate
for the uncertainty in estimating loan losses, including the possibility of
changes in risk ratings of loans. The unallocated allowance is based upon
management's evaluation of various conditions, the effects of which are not
directly measured in determining the allocated allowance. The evaluation of the
inherent loss related to these conditions involves a higher degree of
uncertainty because they are not associated with specific problem credits or
portfolio segments. The unallocated allowance represents prudent recognition of
the fact that allowance estimates, by definition, lack precision. The conditions
evaluated in connection with the unallocated allowance include the following
conditions as of the balance sheet date:
- - Changes in lending policies and procedures
- - National and local economic conditions
- - Trends in loan volumes and terms of loans in the portfolio
- - Changes in experience of personnel
- - Recent levels of, and trends in, delinquencies and non-accruals
- - Loan review evaluation of the credit process
- - Credit concentrations
- - Competition, legal, and regulatory requirements
- - Peer comparisons
Management reviews these conditions quarterly in discussion with its loan
officers. If any of these conditions is evidenced by a specifically identifiable
problem loan or portfolio segment as of the evaluation date, management's
estimate of the effect of this condition may be reflected in the allocated
allowance applicable to the loan or portfolio segment. Where a specifically
identifiable problem loan or portfolio segment as of the evaluation date does
not evidence any of these conditions, management's evaluation of the probable
loss concerning this condition is reflected in the unallocated allowance.
Management believes that in most instances, the impact of these events on the
collectibility of the applicable loans has not yet been reflected in the level
of nonperforming loans or in the internal risk grading process regarding these
loans. Accordingly, our evaluation of the probable losses related to these
factors is reflected in the unallocated allowance.
-13-
<PAGE> 8
The Company does not weight the unallocated allowance among segments of the
portfolio. The following specific factors are reflected in management's estimate
of the unallocated allowance:
- - Concentration of real estate dependent loans
- - Declining performance in certain industries such as healthcare and
construction
While the Company's rate of charge-offs is low and net recoveries have been
realized, management is aware that the Company has been operating in an
extremely beneficial economic environment. Management of the Company, along with
a number of economists, perceives increasing instability in the national and
mid-south economies and a worldwide economic slowdown that could contribute to
job losses and otherwise adversely affect a broad variety of business sectors in
our markets. Also, by virtue of its increased capital levels, the Company is
able to make larger loans, thereby increasing the possibility of a loan having a
larger adverse impact than before. Accordingly, management believes that the
maintenance of an unallocated allowance in the current amount is prudent and
consistent with regulatory requirements.
After completion of this process, a Board of Directors meeting is held to
evaluate the adequacy of the allowance and establish the provision level for the
current quarter. The Company believes that the procedural discipline, systematic
methodology, and comprehensive documentation of this quarterly process is in
full compliance with all regulatory requirements and provides appropriate
support for accounting and reporting purposes. The Company believes that the
allocation of its allowance for loan losses is reasonable.
-14-
<PAGE> 9
The following table represents a recap of activity in the allowance for loan
losses during the past two years.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES, JANUARY 1 $ 3,128 $ 2,878
LOANS CHARGED OFF:
Commercial (41) (169)
Real estate (38) --
Consumer (5) --
- --------------------------------------------------------------------------------------
Total charge-offs (84) (169)
- --------------------------------------------------------------------------------------
RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF:
Commercial 222 317
Real estate 2 --
Consumer 250 2
- --------------------------------------------------------------------------------------
Total recoveries 474 319
- --------------------------------------------------------------------------------------
NET RECOVERIES 390 150
- --------------------------------------------------------------------------------------
PROVISION CHARGED TO OPERATIONS 128 100
- --------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES, DECEMBER 31 $ 3,646 $ 3,128
======================================================================================
Loans, net of unearned income
Year-end $152,675 $122,749
Average during year $133,660 $114,835
Allowance for loan losses to year-end
loans, net of unearned income 2.4% 2.5%
Provision for loan losses to average
loans, net of unearned income .1% .1%
Net recoveries to average loans, net of unearned income .3% .1%
</TABLE>
The following table presents the allocation of the allowance for loan losses for
the past two years.
ALLOCATION OF THE ALLOWANCE LOAN FOR LOSSES
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
BALANCE APPLICABLE TO:
Commercial $ 918 $ 916
Real estate - mortgage loans 1,006 967
Real estate - construction loans 133 128
Consumer 47 79
Unallocated 1,542 1,038
- --------------------------------------------------------------------------------
$ 3,646 $3,128
================================================================================
PERCENT OF TOTAL ALLOCATION
Commercial 25.2% 29.3%
Real estate - mortgage loans 27.6 30.9
Real estate - construction loans 3.6 4.1
Consumer 1.3 2.5
Unallocated 42.3 33.2
- --------------------------------------------------------------------------------
100.0% 100.0%
================================================================================
</TABLE>
-15-
<PAGE> 10
NON-INTEREST INCOME
Total non-interest income was $1.8 million in 1998, reflecting an increase of
27.0% from $1.4 million reported in 1997. Non-interest income, less
non-recurring income (gains/losses on sale of securities and other real estate),
increased $311,000, or 22.0%, from 1997. Investment center income increased
$555,000 as the Company expanded its arrangement with LM Financial Partners,
Inc. to offer certain investment services through the addition of two investment
advisors at the Green Hills Office in May, 1998. Service fee income increased
$128,000 due primarily to an increased number of transaction accounts.
Additionally, other income increased $49,000 in 1998 compared to 1997. These
increases were partially offset by decreases of $313,000 in trust income and
$108,000 in income from previously foreclosed assets. Both the increase in
investment center income and the decline in trust income resulted from a
decision made in late 1997 to restructure how investment services were offered
by discontinuing most traditional trust services and redirecting the Company's
efforts into an expanded investment services department provided in conjunction
with LM Financial Partners, Inc. This decision impacted both non-interest income
and non-interest expense.
The Company reported a net gain on sale of securities available for sale of
$52,000 in 1998 compared with $2,000 in 1997. 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
were $29,000 in 1998 and $6,000 in 1997.
NON-INTEREST EXPENSE
A new branch location established in the Maryland Farms area of Brentwood,
Tennessee, expansion of investment services provided in conjunction with LM
Financial Partners, Inc., expansion of "Bank on Call" mobile branching, upgrades
of the Company's computer systems and expenses related to the Company's Year
2000 project contributed to increases in non-interest expenses in 1998. Total
non-interest expense increased 15.9% from $5.2 million in 1997 to $6.1 million
in 1998. Non-interest expense represented 2.9% of average total assets in 1998
compared to 2.7% in 1997. The non-interest expense to assets ratio is an
industry measure of the 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 measurements. However, management will continue to
implement its strategic plan expanding geographic locations and product lines,
as appropriate, to provide greater future opportunities. Effective management of
expenses while expanding and experiencing solid growth in traditional service
offerings is a focus of the Company's management. During 1998, salaries and
employee benefits increased $684,000, or 25.6%, primarily due to additional
personnel employed to deliver investment services, staffing of the Brentwood
location, expansion of the Company's mobile branch service and addition of
personnel in the technology and operations area, some of whom are actively
involved in the Company's Year 2000 project. Occupancy expense increased
$119,000, or 16.7%, in 1998 compared to 1997 as a result of the establishment of
the Company's Brentwood Office in September, 1998. Other operating expenses
increased $117,000 during 1998 compared to 1997. These increases in non-interest
expense were partially offset by decreases in other non-interest expense
categories. Advertising and marketing expense declined $47,000, or 24.6%, in
1998 compared to 1997 as a result of less utilization of media expense related
to the opening of the Brentwood Office compared to the media expense incurred
with the opening of the Green Hills Office in 1997. Audit, tax and accounting
expense and data processing expense declined $7,000 and $18,000, respectively,
in 1998 compared to 1997 primarily as a result of the Company's decision to
discontinue its trust department. Non-interest expense, other than salaries and
employee benefits, increased $151,000, or 5.9%, during 1998 compared to 1997,
while assets grew $33.3 million.
-16-
<PAGE> 11
During the second quarter of 1998, the Company purchased property in
Hendersonville and has begun construction on a new branch office planned to open
in the late spring of 1999. Other planned expenses relate to the expansion of
the Company's delivery systems and service locations and include additional
mobile branch service employees and equipment, an investment in an internet
banking system and consulting and legal expense related to expansion of
additional lines of business. Other than these planned expenses, management
anticipates only minimal growth in most non-interest expense categories during
1999. During 1998, costs related to Year 2000 were approximately $115,000 and
are projected to be approximately $135,000 in 1999. A more detailed discussion
of Year 2000 issues is presented under the caption, "Nonperforming Assets and
Risk Elements". It should be noted that economic conditions and other factors in
the market could further impact non-interest expense.
INCOME TAXES
During 1998, the Company recorded provision for income taxes of $1.6 million
compared to $1.3 million during 1997. During 1998, reported earnings were
impacted by a franchise tax accrual of $63,000 resulting largely from additional
capital generated by the exercise of the Company's warrants during the fourth
quarter of 1998. The effective tax rate was approximately 38% for 1998 and 39%
for 1997. The Company continues to explore strategies which would lower the
effective tax rate while being consistent with its profits goals.
EARNING ASSETS
Average earning assets increased $15.7 million, or 8.5%, in 1998 from 1997. This
increase was the result of a 16.4% increase in average loans, which was
partially offset by decreases of 4.0% in investment securities, 6.0% in federal
funds sold and 51.1% in due from banks. These changes reflected both the growth
in loans and the subsequent change in the mix of average earning assets which
occurred during 1998 when compared to 1997. During 1998, the mix of average
earning assets reflected loans at 66.7%, investment securities at 29.5%, federal
funds sold at 3.6% and due from banks at .1%. This compares with a mix in 1997
which reflected loans at 62.2%, investment securities at 33.4%, federal funds
sold at 4.2% and due from banks at .2%. The shift in mix during 1998 from
investments to higher yielding loans contributed to higher net interest income
as the percentage of loans to total earning assets increased. 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 16.4%
increase in average total loans outstanding in 1998 compared to 1997 reflects a
11.6% increase in average real estate mortgage and real estate construction
loans and a 35.0% increase in average commercial loans. The loan portfolio table
below shows the classifications of loans by major categories at December 31,
1998 and 1997. 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) 1998 % Total 1997 % Total Amount %
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOAN CATEGORIES
Commercial $ 51,970 34.0% $ 38,571 31.4% $13,399 34.7%
Real Estate/
Mortgage Loans 79,455 52.1 71,055 57.9 8,400 11.8
Real Estate/
Construction Loans 14,667 9.6 9,426 7.7 5,241 55.6
Consumer 6,583 4.3 3,697 3.0 2,886 78.1
- ------------------------------------------------------------------------------------------------
Total Loans $152,675 100.0% $122,749 100.0% $29,926 24.4%
================================================================================================
</TABLE>
-17-
<PAGE> 12
The loan portfolio mix continues to reflect the Company's efforts to serve its
target market of small and mid-sized 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. Both economic conditions and loan growth remained strong during
1998; however, the market continued to be very competitive as the supply of
available credit often outpaced quality loan demand. At December 31, 1998, loan
demand appeared to be moderately strong; however, international economic
uncertainty and concentration on Year 2000 issues have caused some businesses to
be cautious in their outlook, despite the strengths 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
acquisitions (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.
The Company's securities are held as available for sale and provide for
liquidity needs while contributing to profitability. During 1998, 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. In the fourth quarter of 1998, the
Company made an investment in a factoring company which was consistent with its
strategic plan to invest in other lines of business. 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 value. As a result, the Company
recognized an increase in equity of $340,000 for unrealized gains on securities
held as available for sale, net of tax, at December 31, 1998, which compares
with an increase of $294,000 for unrealized gains on these securities in 1997.
During 1998, gross securities sales were $3,102,000 and paydowns, including
prepayments, were $33,599,000, representing 5.2% and 57.3%, respectively, of the
average total portfolio for the year. Net gains associated with the sale of
securities available for sale during 1998 were $52,000 compared with $2,000 in
1997. Total average investments decreased $2.5 million, or 4.0%, during 1998
compared to 1997, while total securities at year end 1998 were $5.6 million, or
8.5%, greater than year end 1997 as the Company deployed funds generated from
the exercise of warrants which resulted in an increase in equity. The average
yield on investment securities was 6.7% in both 1998 and 1997. 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) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government agencies $35,900 $31,426
Securities of states and political subdivisions 1,309 382
Collateralized mortgage obligations 31,721 32,121
Equity securities 2,732 2,130
- --------------------------------------------------------------------------------
Total $71,662 $66,059
================================================================================
</TABLE>
-18-
<PAGE> 13
The maturities and average weighted yields of the Company's investment portfolio
at the end of 1998 are presented in the following table using primarily the
estimated expected life. The average stated maturity of the mortgage backed
securities was 1.6 years, and the estimated life was 1.1 years. At year end
1998, all securities were held as available for sale.
DEBT SECURITIES AVAILABLE FOR SALE MATURITY SCHEDULE
<TABLE>
<CAPTION>
December 31, 1998
- ------------------------------------------------------------------------------------------
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 $14,759 5.7% $21,141 7.0% $ -- --%
Securities of states and
political subdivisions -- -- 386 8.1 923 6.7
- ------------------------------------------------------------------------------------------
Total $14,759 5.7% $21,527 7.0% $923 6.7%
==========================================================================================
</TABLE>
The previous table excludes collateralized mortgage obligations at an estimated
fair value of $31,721,000 and investments in equity securities which have no
stated maturity. Maturities of collateralized mortgage obligations can be
expected to differ from scheduled maturities due to the prepayment or early call
privileges of the issuer. Average federal funds sold remained relatively level
during 1998 compared to 1997. However, at December 31, 1998, the Company had no
federal funds sold compared to $9.4 million in federal funds sold at year end
1997. Federal funds sold represent a short-term investment used primarily for
liquidity purposes in the Company's asset liability management strategy.
DEPOSITS
During 1998, the Company's volume and mix of liabilities shifted somewhat as
average shareholders' equity increased $4.5 million and average other borrowings
declined slightly by $.4 million. The portion of average liabilities and
shareholders' equity represented by deposits, the primary source of funding for
the Company, stood at 79.9%, a slight decrease from the 80.0% during 1997. This
decrease resulted primarily from the Company's additional shareholders' equity
from exercise of warrants. Average deposits increased $14.7 million, or 9.6% in
1998 compared to 1997. At December 31, 1998, total deposits were $162.6 million,
a decline of .9% from the $164.1 million reflected at December 31, 1997. The
slight decline in deposits at year end 1998 compared to 1997 was the result of a
temporary decline in money market accounts combined with a decline in time
certificates of deposit that resulted from a strategic decision to utilize
additional shareholders' equity rather than higher rate certificates of deposit
to fund earning assets. At December 31, 1998, compared to the same period in
1997, non-interest bearing demand deposits increased $5.4 million, or 43.0%, NOW
accounts increased $4.0 million, or 43.4%, while money market accounts declined
$3.8 million, or 5.0%, time certificates less than $100,000 declined $6.5
million, or 19.1%, and time certificates of $100,000 and greater declined $.7
million, or 2.1%. This shift in the mix of deposits reflected the Company's
business development efforts in establishing relationship transaction accounts
and becoming less reliant on higher cost certificates of deposit. With the
addition of the Green Hills Office which opened in 1997 and the Brentwood Office
which opened in the third quarter of 1998, together with the expansion of the
Company's mobile branching service, the Company has had additional opportunities
to expand its commercial and consumer relationships. The shift in the mix of
deposits as well as a general decline in interest rates during 1998 contributed
to a decline of 34 basis points in the average rate paid on interest bearing
liabilities during 1998 compared to 1997.
-19-
<PAGE> 14
The deposit mix at December 31, 1998 reflected the changes that occurred during
the year as well as temporary year-end fluctuations with non-interest bearing
deposits at 11.1%, NOW accounts at 8.2%, money market accounts at 43.8%, time
deposits under $100,000 at 17.1% and time deposits $100,000 or greater at 19.8%.
This compares to a deposit mix at year end 1997 which reflected 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%. The shift in the mix of the Company's deposit base reflects its branch
expansions which have resulted in additional consumer deposits in NOW accounts
as well as the expansion of its commercial deposit base as reflected by the
increase in non-interest bearing demand deposits. Maturities of time deposits
$100,000 or more issued by the Company at December 31, 1998 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 $15,157
Over three through six months 8,843
Over six through twelve months 4,612
Over twelve months 3,573
- -------------------------------------------------------------------------------------------
Total $32,185
===========================================================================================
</TABLE>
At year-end 1998, the Company had total borrowings of $22.5 million comprised of
$14.5 million in Federal Home Loan Bank borrowings and $8.0 million in federal
funds purchased. The average volume of these borrowings during 1998 was $12.7
million compared to $13.1 million during 1997 with an average rate paid on
borrowed funds during 1998 of 5.5% compared to 5.7% during 1997. The average
rate paid on average total interest bearing liabilities was 4.9% in 1998
compared with 5.3% in 1997.
The ratio of average loans, net of unearned income, to average total deposits
was 79.90% in 1998, compared to 75.2% in 1997. This higher loan to deposit ratio
reflected the increase in average loans which occurred in 1998. The loan to
deposit ratio at December 31, 1998, was 93.9% compared to 74.8% at year-end
1997. Most financial institutions manage the loan to deposit ratio considering
the capital to asset ratio. The Company's management has considered its capital
ratio in conjunction with its higher loan to deposit ratio.
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 by 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.
-20-
<PAGE> 15
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 1998,
these strategies contributed $17,000 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 interest rate risk associated with the leveraging strategy
are the responsibility of both management and the Company's Board of Directors.
At December 31, 1998, the Company had borrowings totaling $22.5 million compared
to $14.5 million at December 31, 1997. Approximately $4.5 million of the
borrowings reflected at December 31, 1998, were used to fund investment
securities.
The following interest rate gap table reflects the Company's rate sensitivity
position at December 31, 1998. 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 Years Total
(Dollars In Thousands) 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Debt and equity securities $ 35,398 $22,637 $12,704 $ 923 $ 71,662
Average rate 5.85% 6.87% 6.52% 6.70% 6.30%
Net loans $112,965 $ 8,854 $19,333 $11,523 $152,675
Average rate 8.28% 8.98% 8.56% 8.42% 8.37%
Other $ 954 $ -- $ -- $ -- $ 954
Average rate 4.76% -- -- -- 4.76%
- -------------------------------------------------------------------------------------------------------
Total interest-earning assets $149,317 $31,491 $32,037 $12,446 $225,291
Liabilities
Deposits $135,489 $ 6,383 $ 2,698 $ 3 $144,573
Average rate 3.93% 5.83% 5.87% 4.95% 4.41%
Federal Home Loan
Bank and other borrowings $ 17,500 $ 5,000 $ -- $ -- $ 22,500
Average rate 5.21% 4.45% -- -- 5.05%
- -------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $152,989 $ 11,383 $ 2,698 $ 3 $167,073
- -------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (3,672) $20,108 $29,339 $12,443 $ 58,218
=======================================================================================================
Cumulative interest rate
sensitivity gap $ (3,672) $16,436 $45,775 $58,218
=======================================================================================================
</TABLE>
-21-
<PAGE> 16
Liquidity is the ability of the 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 7.0 years at December 31, 1998 compared to
5.1 years at December 31, 1997. Securities available for sale were $71.7 million
at December 31, 1998, compared to $66.1 million at December 31, 1997. The
Company had federal funds purchased of $8.0 million at December 31, 1998
compared with federal funds sold of $9.4 million at December 31, 1997. Core
deposits, a relatively stable funding base, represented 80.2% of total deposits
at December 31, 1998, and 80.0% of total deposits at year-end 1997. Core
deposits are defined as total deposits, less time certificates of deposit
$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.
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, 1998, approximately 22.2% of deposits were related to the
construction industry, 3.6% to real estate development/investment industries,
while 4.0% were related to health care, 9.4% state and local government and 2.7%
were related to the automotive and transportation industry. 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 deposits and interest bearing money market accounts 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, 1998 and 1997, all
investment securities were classified as available for sale.
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 Company's imbalance between the duration
of assets and liabilities is limited to under one year and generally should not
exceed one-half year.
-22-
<PAGE> 17
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 movement (rising or falling) up to 200 basis points. The Company's
policy establishes the maximum change in annual pre-tax interest income with a
200 basis point change in rates to 10% while establishing the maximum change
allowable in pre-tax market value of capital to 12% in the same assumed rate
environment.
The Company's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Company's net interest
income and capital, while structuring the Company's asset/liability structure to
obtain the maximum yield-cost spread. The Company relies primarily on its asset
liability structure to control interest rate risk.
Based on December 31, 1998 financial data, a 200 basis point change in rates
would produce net interest income variations of a .5% increase assuming falling
rates and a 2.7% decrease assuming rising rates. Additionally, the 200 basis
point rate shock would produce changes in the market value of equity of a
decrease of 6.4% assuming rising rates and a 6.1% increase assuming falling
rates.
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.
-23-
<PAGE> 18
The following table shows the Company's financial instruments that are sensitive
to change in interest rates, categorized by expected maturity, and the
instruments fair value at December 31, 1998. Market risk sensitive instruments
are generally defined as derivatives and other financial instruments both on
balance sheet and off balance sheet.
<TABLE>
<CAPTION>
Average Expected Maturity/Principal Repayment
Interest ---------------------------------------------------------------------------------
Rate There- Total Fair
(DOLLARS IN MILLIONS) 1999 2000 2001 2002 2003 After Balance Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive
Assets:
Fed funds sold and
other short-term
investments 4.76% $ 1.0 $ -- $ -- $ -- $ -- $ -- $ 1.0 $ 1.0
Loans Receivable (1) 8.37 112.5 8.9 6.9 7.6 4.9 11.9 152.7 153.1
Investment Securities 6.30 35.3 22.6 8.1 2.0 2.7 .4 71.1 71.7
Interest-Sensitive
Liabilities:
Deposits 3.93 135.5 6.4 1.3 .8 .6 -- 144.6 144.9
FHLB and other
borrowings 5.05 17.5 5.0 -- -- -- -- 22.5 22.7
Interest-Sensitive
Off balance sheet
Items: (2)
Commitments to extend
credit 8.31 58.2 *
Unused lines of credit 11.76 4.8 *
==========================================================================================================================
</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.
-24-
<PAGE> 19
NONPERFORMING ASSETS AND RISK ELEMENTS
Nonperforming assets, which include nonaccrual loans, restructured loans, and
other real estate owned, were $460,000 at December 31, 1998, compared with
$1,227,000 at December 31, 1997. The following table represents the composition
of nonperforming assets at December 31, 1998 and 1997.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
December 31
(Dollars In Thousands) 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
NONPERFORMING ASSETS:
Nonaccrual loans $408 $1,094
Restructured loans -- --
Other real estate owned 52 133
- -----------------------------------------------------------------
Total $460 $1,227
=================================================================
Nonperforming assets as a percent of
total loans plus other real estate owned 0.3% 1.0%
=================================================================
</TABLE>
There were no loans ninety days or more past due at December 31, 1998 and 1997
that were not included in the nonaccrual category. During 1998, $925,000 of
loans were transferred from earnings status to nonaccrual status and there were
no advances on nonaccrual loans. This compares to $976,000 of loans transferred
from earnings status to nonaccrual status in 1997. In 1998 and 1997 there were
$1,611,000 and $461,000, respectively of loans transferred from nonaccrual
status primarily due to the repayment of principal. In 1998, there was one loan
removed from nonaccrual status and placed in other real estate owned reflecting
a balance of $52,000 at December 31, 1998. The Company had $133,000 in other
real estate owned at December 31, 1997. During 1998, loans totaling $84,000 were
charged-off with recoveries reported of $474,000 compared to charge-offs of
$169,000 and recoveries of $319,000 in 1997. These charge-offs and recoveries
resulted in net recoveries during 1998 of $390,000 compared to net recoveries in
1997 of $150,000. The Company evaluates the credit risk of each customer on an
individual and on-going 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 1998, the Company continued its emphasis on
underwriting standards and loan review procedures. As discussed in the section,
"Provision for Loan Losses", asset quality and loan charge-off and recovery
experience impact the level of the allowance for loan losses maintained.
At December 31, 1998 and 1997, other potential problem loans totaled $256,000
and $177,000, 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, 1998 was 11.3% in other real estate
owned and 88.7% in nonaccrual loans which compares to 10.8% in other real estate
owned and 89.2% in nonaccrual loans at December 31, 1997. The largest nonaccrual
loan at December 31, 1998 was $242,000.
At December 31, 1998, the Company's allowance for loan losses was $3.6 million,
or 2.4%, of total loans compared with $3.1 million, or 2.5%, at December 31,
1997. The level of the allowance for loan losses is monitored regularly by
management and the Company's Board of Directors.
-25-
<PAGE> 20
During 1998, management and the Board of Directors continued its emphasis on the
Year 2000 implementing a comprehensive project plan, adopting a test plan and
establishing contingency plans, where appropriate. Year 2000 (Y2K) represents an
issue which 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 technology and financial risks to both the Company and its
customers as the new millennium approaches and is taking appropriate steps as
outlined in the Company's "Year 2000 Readiness Disclosure Statement" to combat
these risks. The Company completed assessments of all systems and completed
remediation and/or testing of all internal systems by December 31, 1998. The
software system utilized for the Company's primary core applications processing
is fully warranted by a financially strong, publicly traded company that
supplies this software to over 200 financial institutions nationwide. The
Company has no internally developed systems. Additionally, the Company has
actively participated in proxy testing with external vendors upon whom the
Company is reliant and has carefully reviewed the results of all tests to ensure
these systems are Y2K compliant. Testing or reviewing test scripts with other
external vendors on whom the Company is less dependent but with whom there is
some interaction, will continue through the first two quarters of 1999 with
completion planned prior to June 30, 1999. The costs related to this project
were projected and totaled approximately $115,000 in 1998 and are not expected
to exceed $135,000 in 1999. In addition to testing, renovating and/or replacing
systems, as appropriate, the Company is cognizant of the potential impact of Y2K
on its borrowing customers and large depositors and has, therefore, established
a system for monitoring the Y2K compliance of these customers. The Company has
also assessed its investment portfolio relative to Y2K risk exposure.
Additionally, the Company's Y2K Task Force has established a date of June 30,
1999 on which no further changes will be made to technology systems except as
necessary due to changes in regulatory requirements. Both a contingency and a
liquidity plan have been prepared and will be implemented, as appropriate,
during 1999 to ensure the Company is prepared to serve its customers. In an
effort to communicate with customers, the Company has published and distributed
a "Year 2000 Readiness Disclosure Statement" in addition to a series of
newsletter articles. Y2K credit risk continues to be assessed on all loans above
a predetermined amount, Y2K language is being incorporated into contracts and
loan agreements, and the Company continues to educate all officers to be attuned
to the potential risks associated with the Year 2000. During 1998, the Company
sponsored a seminar to increase customer awareness of Y2K risks and solutions.
Management and the Board of Directors remain committed to ensuring that the
Company's customers and shareholders will not be impacted by the Y2K issue.
CAPITAL STRENGTH
The Company experienced a material change its capital structure in 1998 as 2.0
million warrants, each representing the right to acquire a common share at a
price of $12.50, were exercised resulting in the addition of $25.0 million in
new equity capital. Since all warrants had an expiration date of December 31,
1998, there are no remaining warrants outstanding. Management and the Board of
Directors had previously recognized the potential for additional capital and had
reviewed both long-term and short-term strategies considering the appropriate
deployment of additional capital. The majority of the additional capital was
received during the last week of 1998; therefore, management implemented its
short-term investment strategy and together with the Board of Directors is now
actively evaluating appropriate longer-term business opportunities.
SHAREHOLDERS EQUITY
Shareholders' equity (excluding other comprehensive income) at December 31,
1998, was $50.8 million, or 21.3% of total assets, which compares with $23.8
million, or 11.6% of total assets at December 31, 1997. This calculation, when
considered after the effect of the Company's adoption of Statement of Financial
Accounting Standards (SFAS) No. 115, was $51.2 million, or 21.5%, at December
31, 1998, which compares with $24.1 million, or 11.7%, of total assets at
December 31, 1997. The increase in total equity during 1998 primarily resulted
from the proceeds ($25.0 million) from the issuance of common stock as warrants
were exercised; however, 1998 earnings net of dividends paid as well as a slight
increase ($46,000) in the unrealized gain on securities available for sale at
year end 1998 compared with year end 1997 further contributed to the increase in
total equity. Certain capital statistics are shown in the following chart:
-26-
<PAGE> 21
CAPITAL STATISTICS
<TABLE>
<CAPTION>
December 31
(Dollars In Thousands) 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Total assets $238,185 $204,887
- -----------------------------------------------------------------------
Total shareholders' equity 51,171 24,052
- -----------------------------------------------------------------------
Total shareholders' equity to total assets 21.5% 11.7%
- -----------------------------------------------------------------------
</TABLE>
Management and the Board of Directors recognized in 1998 the opportunities that
would be provided by an influx of capital. It is further recognized that the
increased number of shares outstanding (1,996,807) in 1999 will reduce basic
earnings per share on a comparative basis until the Company has the opportunity
to more effectively deploy the additional capital.
While, in the past, the Company's capital ratios have exceeded all regulatory
requirements, currently its ratios indicate a significant amount of excess
capital based on industry standards and Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") minimum ratios, resulting from the addition of $25.0
million in new capital, primarily in the last week of 1998. The Company reported
dividend payments in 1998 of $569,000 which compares with dividend payments in
1997 of $441,000. Each quarterly dividend payment made in 1998 was made at $.06
per share. The Company announced an increase in the quarterly dividend payment
per share of $.01 to $.07 a share during the first quarter of 1999. It should be
noted that this increase in the dividend payment amount per share combined with
the approximately 2.0 million additional outstanding shares in 1999 will
significantly increase the total amount of dividend payments.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
valuation of derivatives will be accounted for based upon the use of the
derivative and whether it qualifies for hedge accounting. SFAS No. 133 could
increase volatility in earnings and other comprehensive income. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Initial application of this statement should be as of the beginning of an
entity's fiscal quarter; on that date, hedging relationships must be
redesignated and documented pursuant to the provisions of this statement.
Earlier application of this statement is encouraged, but it is permitted only as
of the beginning of any fiscal quarter that begins after issuance of this
statement and should not be applied retroactively to financial statements of
prior periods. The Company has not yet determined when it will adopt SFAS No.
133. The Company does not extensively utilize derivatives, thus the impact of
SFAS No. 133 is not expected to be material.
-27-
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS 1997 VS. 1996
The narrative which follows is management's discussion and analysis of 1997
results of operations of the company compared to 1996.
Net income for 1997 was $2.1 million, or $.93 basic earnings per share, compared
with net income of $2.5 million, or $1.16 per share in 1996. Diluted 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 carry forwards 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 shareholder's equity (exclusive of SFAS No. 115 adjustments)
was 9.05% in 1997 compared to 12.18% in 1996, while return on average assets for
1997 and 1996 were 1.08% and 1.61%, respectively. During 1997, the Company
expanded service locations and product lines in accordance with its long-term
strategic plan as it continued its focus on asset quality. Income tax expense of
$1.3 million 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 carry forwards. Both federal and state net operating loss carry forwards
were fully utilized resulting in the increased income tax expense for 1997. The
maintenance of an adequate level for the allowance for loan losses was reflected
by a provision for loan losses of $100,000 being recorded in 1997, a period in
which net recoveries were $150,000. There was no provision for loan loss expense
recorded in 1996, a period in which net charge-offs were $156,000.
Total assets were $204.9 million at December 31, 1997, compared to $166.7
million at December 31, 1996 representing an increase of 23%. Loans, net of
unearned income, increased $14.9 million, or 13.8%, at year end 1997 compared to
the same period in 1996. Deposits increased $30.8 million, or 23.1% from $133.3
million at year end 1996 to $164.1 million at year-end 1997. This significant
increase in total deposits resulted from the successful opening of the Company's
Green Hills Office in early 1997, as well as other business development efforts.
The loan to deposit ratio reflected the increase in total deposits which
occurred during 1997 with this ratio being 74.8% at December 31, 1997 compared
to 81.0% at year-end 1996.
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 was 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 outstanding. 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 Company's Green Hills Office and focused
business development efforts. 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 consisted 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. Total interest expense increased $1.5 million, or 23.4%, in
1997 compared to 1996 due primarily to an increase of 21.4% in average interest
bearing liabilities as well as the increase of 9 basis points in the average
rate paid on interest bearing liabilities during 1997 compared to 1996. The
opening of the Company's Green Hills Office and related promotional activities
contributed to the large increase in interest bearing liabilities as well as to
the increase in the average rate paid on these liabilities during 1997 compared
to 1996.
-28-
<PAGE> 23
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 the utilization of planned investment leveraging strategies. The net
interest margin was further impacted by a lower loan to deposit ratio and a
shift in the mix of earning assets from higher yielding loans to investment
securities. The interest rate spread declined from 3.19% in 1996 to 3.02% in
1997. The increased level of earning assets combined with the shift in the mix
of earning assets and 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 those liabilities as well as a decline in the average
rate earned on earning assets during 1997 compared to 1996.
PROVISION FOR LOAN LOSSES
In 1997, the Company recorded $100,000 in expense for loan losses, compared with
no provision expense in 1996. This provision for loan losses was 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 loan losses was 2.5% of loans
at December 31, 1997, compared to 2.7% of loans at the same time 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. In 1996, net charge-offs of $156,000 resulted from
$697,000 in loan charge-offs and $541,000 in recoveries. 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 or the level of the
allowance at any future date.
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
non-recurring 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 pricing changes reflected in service
charges and NSF and overdraft charges. Trust income increased $138,000 while the
Company's arrangement with LM Financial Partners, Inc. to offer certain
investment services resulted in an increase of $35,000 in income from investment
services. It was announced in late 1997 that the Company planned to restructure
how investment services were offered by discontinuing most traditional Trust
Services and redirecting its efforts to an expanded Investment Services
Department provided in conjunction with LM Financial Partners, Inc. This change
in strategy would impact both non-interest income and non-interest expense.
Other income increased $116,000 during 1997 compared to 1996. 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.
NON-INTEREST EXPENSE
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. 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 "Bank-on-Call" 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 branch. 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 in audit, tax and accounting expense of $2,000.
Non-interest expense other than salaries and employee benefits, increased
$335,000 during 1997 compared to 1996, while assets grew $38.2 million.
-29-
<PAGE> 24
INCOME TAXES
During 1997, the Company recorded provision for income taxes of $1.3 million,
compared to $168,000 during the same period in 1996. During 1996, reported
earnings benefited from tax loss carry forwards which were fully utilized during
that year. As a result of having fully utilized these net operating loss carry
forwards, the 1997 effective tax rate more closely approximated the applicable
statutory income tax rate.
CAPITAL STRENGTH
Total shareholders' equity (excluding other comprehensive income) 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. The increase in total
equity resulted primarily from 1997 earnings net of dividends paid.
-30-
<PAGE> 25
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
(Dollars In Thousands) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,243 $ 7,191
Federal funds sold -- 9,400
Securities:
Available for sale (amortized cost of $71,113
and $65,585, respectively) 71,662 66,059
Loans (net of unearned income of $295 and $297,
respectively):
Commercial 51,970 38,571
Real estate - mortgage loans 79,455 71,055
Real estate - construction loans 14,667 9,426
Consumer 6,583 3,697
- ---------------------------------------------------------------------------------
Loans, net of unearned income 152,675 122,749
Less allowance for loan losses (3,646) (3,128)
- ---------------------------------------------------------------------------------
Total net loans 149,029 119,621
- ---------------------------------------------------------------------------------
Premises and equipment, net 2,726 977
Accrued interest and other assets 1,525 1,639
- ---------------------------------------------------------------------------------
Total Assets $238,185 $204,887
=================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Non-interest bearing demand deposits $ 17,980 $ 12,570
Interest-bearing deposits
NOW accounts 13,368 9,319
Money market accounts 71,263 75,043
Time certificates less than $100,000 27,757 34,293
Time certificates of $100,000 and greater 32,185 32,874
- ---------------------------------------------------------------------------------
Total Deposits 162,553 164,099
- ---------------------------------------------------------------------------------
Federal Home Loan Bank borrowings 14,500 14,500
Federal funds purchased 8,000 --
Accounts payable and accrued liabilities 1,961 2,236
- ---------------------------------------------------------------------------------
Total Liabilities 187,014 180,835
- ---------------------------------------------------------------------------------
Commitments and contingencies (Notes E, H, I, L)
SHAREHOLDERS' EQUITY:
Common stock, $6 par value; authorized
50,000,000 shares; issued and outstanding
4,216,531 in 1998 and 2,212,420 in 1997 25,299 13,275
Additional paid-in capital 19,773 6,736
Retained earnings 5,759 3,747
Accumulated other comprehensive income,
net of taxes 340 294
- ---------------------------------------------------------------------------------
Total Shareholders' Equity 51,171 24,052
- ---------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $238,185 $204,887
=================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-31-
<PAGE> 26
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
(In Thousands, Except Per Share Data) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $12,391 $10,724 $ 9,569
Interest on federal funds sold 374 398 314
Interest on balances with banks 10 19 --
Interest on securities:
U.S. Treasury securities 54 151 365
Other U.S. government agency obligations 3,557 3,825 2,583
States and political subdivisions
- nontaxable 57 20 5
Other securities 148 123 63
- --------------------------------------------------------------------------------------
Total interest income 16,591 15,260 12,899
- --------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest-bearing demand deposits 3,830 3,458 2,953
Time deposits less than $100,000 1,809 2,061 1,782
Time deposits $100,000 and over 1,692 1,693 1,563
Federal funds purchased 29 26 8
Federal Home Loan Bank borrowings 675 718 140
- --------------------------------------------------------------------------------------
Total interest expense 8,035 7,956 6,446
- --------------------------------------------------------------------------------------
NET INTEREST INCOME 8,556 7,304 6,453
Provision for loan losses 128 100 --
- --------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 8,428 7,204 6,453
NON-INTEREST INCOME:
Service fee income 549 421 193
Trust income 224 537 399
Investment Center income 662 107 72
Gain (loss) on sale of
securities, net 52 2 (2)
Income from foreclosed assets -- 108 130
Gain on sale of other real estate owned 29 6 11
Other 289 240 124
- --------------------------------------------------------------------------------------
Total non-interest income 1,805 1,421 927
- --------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,357 2,673 2,437
Occupancy expense 830 711 562
Legal expense 36 45 60
FDIC insurance 15 19 6
Audit, tax and accounting 196 203 205
Advertising expense 144 191 130
Data processing expense 187 205 209
Other operating expenses 1,306 1,189 1,056
- --------------------------------------------------------------------------------------
Total non-interest expense 6,071 5,236 4,665
- --------------------------------------------------------------------------------------
Income before income taxes 4,162 3,389 2,715
Income tax expense 1,581 1,331 168
- --------------------------------------------------------------------------------------
NET INCOME $ 2,581 $ 2,058 $ 2,547
======================================================================================
Net income per share
Basic $ 1.08 $ .93 $ 1.16
Diluted .78 .89 1.15
======================================================================================
Weighted average common shares
outstanding
Basic 2,394 2,205 2,199
Diluted 3,321 2,324 2,223
======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-32-
<PAGE> 27
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Accumulated
Other
Additional Retained Comprehensive
Common Paid-In Earnings Income, Net
Stock Capital (Deficit) Of Tax Total
(Dollars In Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $13,149 $ 8,500 $(1,916) $ 279 $20,012
Comprehensive Income:
Net Income -- -- 2,547 --
Other comprehensive
loss -- -- -- (215)
Total Comprehensive
Income -- -- -- -- 2,332
Issuance of Common
Stock (10,973 shares) 66 27 -- -- 93
Transfers to comply
with state statute,
Net -- (1,851) 1,851 -- --
Cash dividends - $.16
per share -- -- (352) -- (352)
- --------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 13,215 6,676 2,130 64 22,085
Comprehensive Income:
Net Income -- -- 2,058 --
Other comprehensive
income -- -- -- 230
Total Comprehensive
Income -- -- -- -- 2,288
Issuance of Common
Stock (9,947 shares) 60 60 -- -- 120
Cash dividends - $.20
per share -- -- (441) -- (441)
- --------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 13,275 6,736 3,747 294 24,052
Comprehensive Income:
Net Income -- -- 2,581 --
Other comprehensive
income -- -- -- 46
Total Comprehensive
Income -- -- -- -- 2,627
Issuance of common
stock (2,004,111
shares) 12,024 13,037 -- -- 25,061
Cash dividends -
$.24 per share -- -- (569) -- (569)
- --------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $25,299 $19,773 $ 5,759 $ 340 $51,171
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-33-
<PAGE> 28
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
(In Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 16,487 $ 15,020 $ 13,055
Fees received 1,805 1,419 929
Interest paid (8,476) (7,422) (6,934)
Cash paid to suppliers and associates (6,982) (6,488) (4,623)
- -------------------------------------------------------------------------------------
Net cash provided by
operating activities 2,834 2,529 2,427
- -------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities:
Available for sale 3,102 2,479 6,012
Maturities of securities:
Available for sale 33,599 19,404 9,632
Purchase of securities:
Available for sale (42,252) (41,235) (14,360)
Loans originated to customers, net (29,484) (14,578) (9,704)
Capital expenditures (2,093) (469) (310)
- -------------------------------------------------------------------------------------
Net cash used by
investing activities (37,128) (34,399) (8,730)
- -------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, and
money market savings 5,679 15,206 15,767
Net (decrease) increase in time
certificates (7,225) 15,623 (13,031)
Advance from Federal Home Loan Bank 5,000 5,000 9,500
Repayment of advance from Federal
Home Loan Bank (5,000) -- --
Proceeds from issuance of common stock 25,061 120 93
Dividends paid (569) (441) (352)
- -------------------------------------------------------------------------------------
Net cash provided by
financing activities 22,946 35,508 11,977
- -------------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (11,348) 3,638 5,674
Cash and cash equivalents at
beginning of year 16,591 12,953 7,279
- -------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,243 $ 16,591 $ 12,953
=====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-34-
<PAGE> 29
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31
(In Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of net income to
net cash provided by operating
activities:
Net income $2,581 $2,058 $2,547
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 404 399 209
Provision for loan losses 128 100 --
Provision for deferred income taxes (15) 124 82
(Gain) loss on sale of securities (52) (2) 2
Loss on disposal of equipment 26 -- 14
Gain on sale of other real estate owned (29) (6) (11)
Stock dividend income (112) (87) (20)
Changes in assets and liabilities:
Decrease (increase) in accrued
interest and other assets 192 (508) 6
(Decrease) increase in accounts
payable and accrued liabilities (289) 451 (402)
- -------------------------------------------------------------------------------------
Net cash provided by operating
activities $2,834 $2,529 $2,427
=====================================================================================
Supplemental disclosures of noncash investing and financing activities:
Change in unrealized gain (loss) on
securities available for sale, net
of taxes $ 46 $ 230 $ (215)
Foreclosures of loans during the year 52 133 --
Cash paid for:
Income taxes $1,516 $1,211 $ 77
</TABLE>
See accompanying notes to consolidated financial statements.
-35-
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations
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 Bank primarily provides commercial banking services to
small business customers located in the Metropolitan
Nashville, Tennessee market. The Bank competes with numerous
financial institutions within its market place.
Consolidation and Basis of Presentation
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.
Cash and Cash Equivalents
Cash and highly liquid investments with maturities of three
months or less when purchased are considered to be cash and
cash equivalents. Cash and cash equivalents consist primarily
of cash and due from banks and federal funds sold net of
federal funds purchased.
Securities
Securities are designated as held to maturity, available for
sale, or trading at the time of acquisition. The Company does
not have securities designated as trading securities or as
held to maturity. 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
fair value with gains and losses, determined using the
specific identification method, recognized currently in the
income statement. As of December 31, 1998 and 1997, 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, and in other comprehensive income.
The adjusted cost of a specific security sold is used to
compute the gain or loss on the
-36-
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
sale of that security. Security purchases and sales are
recorded on their trade date. Gains and losses on the sale of
securities available for sale are included in non-interest
income. Purchased premiums and discounts are amortized and
accreted into interest income on a constant yield over the
life of the securities taking into consideration current
prepayment assumptions.
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
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 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. Thereafter,
interest on nonaccrual loans is recognized as interest income
only as received, unless the collectability of outstanding
principal is doubtful, in which case such interest received is
applied as a reduction of principal 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 Loan Losses
The allowance for 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. The allowance is established through a provision
charged against earnings. Loans are charged off as soon as
they are determined to be uncollectible. Recoveries of loans
previously charged off are added to the allowance. 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 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.
-37-
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Other Real Estate Owned
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 and
are included in other assets. Cost includes the fair value of
the property at the time of foreclosure, foreclosure expense
and expenditures for subsequent improvements. Losses arising
from the acquisition of such property are charged against the
allowance for 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.
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.
Earnings Per Common Share
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 reflects the dilutive effect of
options and warrants outstanding.
-38-
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Business Segments
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise
and Related Information" on December 31, 1998. The Statement
establishes standards for the way public business enterprises
report information about operating segments in annual financial
statements. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial
information is available that is regularly evaluated by the
chief operating decision maker in deciding how to allocate
resources and assess performance. The Company operates in one
business segment, commercial banking, and has no additional
individually significant business segments.
Stock-Based Compensation
The Company accounts for all stock-based compensation plans
under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Compensation cost
for stock-based awards is measured by the excess, if any, of
the fair market value of the stock over the amount the employee
is required to pay. Compensation cost for the Company is
measured at the grant date as all options are fixed awards.
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.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive
Income" on January 1, 1998. SFAS No. 130 establishes standards
for reporting comprehensive income which includes net income
and other comprehensive income, non-owner related transactions
in equity. SFAS No. 130 requires only additional disclosures
in the consolidated financial statements. During 1998, 1997
and 1996 the only component of comprehensive income, other
than net income, is unrealized gains or losses on securities
available for sale. Prior periods have been reclassified to
conform with the provisions of the statement.
Reclassifications
Certain reclassifications have been made in the consolidated
financial statements for prior years to conform with the 1998
presentation.
B. 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, 1998 and 1997, were $3,204,000 and
$1,937,000, respectively. The required balance at December 31,
1998 was $3,547,000.
-39-
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. SECURITIES
The amortized cost, gross unrealized gains and losses, and
estimated fair values of securities at December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
Available for Sale
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands) 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities
and Obligations of U.S.
Government agencies $35,356 $544 $ - $35,900
Collateralized mortgage
obligations 31,758 85 122 31,721
Securities of states and
political subdivisions 1,267 42 - 1,309
Equity securities 2,732 - - 2,732
--------------------------------------------------------------------------------------------------------
$71,113 $671 $122 $71,662
========================================================================================================
</TABLE>
<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>
Proceeds from sales of debt securities during 1998, 1997, and
1996 were $3.1 million, $2.5 million and $6.0 million,
respectively. Gross gains of $52 thousand, $5 thousand and $5
thousand and gross losses of zero, $3 thousand and $7 thousand
were realized on those sales in 1998, 1997 and 1996,
respectively.
At December 31, 1998 and 1997, 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, 1998, 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.
-40-
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
C. SECURITIES - CONTINUED
Collateralized mortgage obligations with a weighted average
effective yield of 6.09% are disclosed as a separate line item
due to staggered maturity dates. Investments in equity
securities are excluded as they have no stated maturity date.
<TABLE>
<CAPTION>
Available for Sale
---------------------------------
Estimated
Amortized Fair
Cost Value
(In Thousands) December 31, 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 9,990 $ 9,990
Due after one year through five years 2,032 2,064
Due after five years through ten years 457 476
Due after ten years 24,144 24,679
- -----------------------------------------------------------------------------------------------------------------
36,623 37,209
Collateralized mortgage obligations 31,758 31,721
- -----------------------------------------------------------------------------------------------------------------
$68,381 $68,930
=================================================================================================================
</TABLE>
Securities with an aggregate amortized cost of approximately
$35.7 million and $31.3 million were pledged to secure public
deposits, Federal Home Loan Bank borrowings and for other
purposes as required by law at December 31, 1998 and 1997,
respectively.
D. LOANS AND ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses is
as follows:
<TABLE>
<CAPTION>
Year Ended December 31
(In Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $3,128 $2,878 $ 3,034
Provision charged to operations 128 100 --
Loans (charged off), net of recoveries
of $474, $319 and $541, in 1998,
1997, and 1996, respectively 390 150 (156)
- --------------------------------------------------------------------------------------
Balance, December 31 $3,646 $3,128 $ 2,878
======================================================================================
</TABLE>
At December 31, 1998 and 1997, loans on nonaccrual status
amounted to $408,000 and $1,094,000, respectively. The effect
of nonaccrual loans was to reduce interest income by
approximately $29,000 in 1998, $32,000 in 1997 and $74,000 in
1996. There were no material commitments to lend additional
funds to customers whose loans were classified as nonaccrual
at December 31, 1998 and 1997.
The Company's recorded investment in impaired loans and the
related valuation allowance are $108,000 and $17,000 and
$805,000 and $359,000, at December 31, 1998 and 1997,
respectively. The valuation allowance is included in the
allowance for loan losses on the consolidated balance sheets.
At December 31, 1998 and 1997 there were no impaired loans
without an accompanying valuation allowance.
-41-
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. LOANS AND ALLOWANCE FOR LOAN LOSSES - CONTINUED
The average recorded investment in impaired loans for the
years ended December 31, 1998, 1997 and 1996 was $143,000,
$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 1998 or 1997.
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 uncollectability or
present other unfavorable features at the time such loans were
made. During 1998, $4.3 million of new loans were made while
repayments and other reductions totaled $1.1 million.
Outstanding loans to executive officers and directors,
including their associates and affiliated companies, were $5.4
million and $2.2 million at December 31, 1998 and 1997,
respectively. Unfunded lines to executive officers and
directors were $4.0 and $4.1 million at December 31, 1998 and
1997, 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 $2.5 million
and $1.3 million at December 31, 1998 and 1997, respectively.
E. PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 638 $ --
Leasehold improvements 978 577
Furniture and equipment 2,023 1,948
Building and improvements 298 --
- -------------------------------------------------------------------------------------------
3,937 2,525
Less accumulated depreciation and amortization (1,211) (1,548)
- -------------------------------------------------------------------------------------------
Premises and equipment, net $ 2,726 $ 977
===========================================================================================
</TABLE>
-42-
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
E. PREMISES AND EQUIPMENT - CONTINUED
The Company occupies space under noncancelable operating
leases. The leases provide annual escalating rents for periods
through 2003 with options for renewals. Rent expense is
recognized in equal monthly amounts over the lease term. Rent
expense was $357,000, $345,000 and $284,000 for 1998, 1997 and
1996, respectively.
Future lease payments under noncancelable operating leases at
December 31, 1998 are payable as follows:
<TABLE>
<CAPTION>
(In Thousands)
- --------------------------------------------------------------------------------
<S> <C>
1999 $410
2000 239
2001 171
2002 92
2003 38
- --------------------------------------------------------------------------------
$950
================================================================================
</TABLE>
F. INCOME TAXES
Actual income tax expense for the years ended December 31,
1998, 1997 and 1996 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>
(In Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $1,415 $1,152 $923
State taxes, net of federal benefit 163 135 -
Benefit of net operating
loss carryforward - - (755)
Other 3 44 -
- --------------------------------------------------------------------------------------------------------------
Total income tax expense $1,581 $1,331 $168
==============================================================================================================
</TABLE>
The components of income tax expense (benefit) were as
follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense:
Federal $ 1,347 $1,107 $ 86
State 249 100 --
- --------------------------------------------------------------------------------------------
1,596 1,207 86
- --------------------------------------------------------------------------------------------
Deferred income tax expense (benefit):
Federal (13) 20 82
State (2) 104 --
- --------------------------------------------------------------------------------------------
(15) 124 82
- --------------------------------------------------------------------------------------------
Total income tax expense $ 1,581 $1,331 $168
============================================================================================
</TABLE>
-43-
<PAGE> 38
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) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred fees, principally due to timing
differences in the recognition of income $141 $147
Other 4 10
- --------------------------------------------------------------------------------
Total gross deferred tax assets 145 157
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities
available for sale 209 180
Discount on securities deferred
for tax purposes 130 108
Loans, principally due to provision for
loan losses 126 174
Premises and equipment, principally due to
differences in depreciation methods 17 38
Other 63 43
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 545 543
- --------------------------------------------------------------------------------
Net deferred tax liabilities $400 $386
================================================================================
</TABLE>
It is more likely than not that the results of the Company's
future operations will generate sufficient taxable income to
realize the deferred tax assets.
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 or loans, to be held by the Federal Home
Loan Bank, as collateral. During 1998, loans totaling
$5,000,000 were advanced and repaid. During 1997, $5,000,000
was advanced under this arrangement. At December 31, 1998 and
1997 indebtedness under the arrangement totaled $14,500,000.
Advances of $9,500,000 mature in September, 2001 and
$5,000,000 November 2003, and are eligible for prepayment at
The Bank's option beginning in September, 1998 and November,
2000. The interest rate on $9,500,000 of the advances is tied
to the one-month LIBOR rate and adjusts periodically. Interest
on the $5,000,000 advance is at 4.45% for two years and then
adjusts quarterly to the three month LIBOR rate. Interest is
payable monthly. The maximum advances outstanding were
$14,500,000, the average balances outstanding were $12,144,000
and $12,651,000 and the weighted average rates were 5.56% for
the years ended 1998 and 1997, respectively. The Bank has
pledged investment securities with an amortized cost of
approximately $15.2 million at December 31, 1998 as collateral
under terms of the loan agreement.
-44-
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. LONG TERM DEBT AND LINES OF CREDIT - CONTINUED
On December 31, 1998 and 1997, the Company had available for
its use $26.5 million and $19.0 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. Amounts outstanding
under these lines of credit at December 31, 1998 and 1997 were
$8.0 million and $0, respectively.
H. 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, 1998 and 1997 unused lines of credit were
approximately $58.2 million and $53.0 million, respectively,
with the majority generally having terms at origination of one
year. Additionally, the Company had standby letters of credit
of $4,832,000 and $3,039,000 at December 31, 1998 and 1997,
respectively.
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.
-45-
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. 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, 1998 funded and unfunded loan commitments as
classified by Standard Industry Classification codes include
borrowers in the real estate industry approximating $27.2
million and $5.2 million, respectively, and loans to building
contractors approximating $8.8 million and $10.1 million,
respectively. At December 31, 1997, funded and unfunded
commitments to borrowers in the real estate industry were
approximately $25 million and $2.2 million, respectively, and
to building contractors approximately $7.9 million and $11.2
million, respectively.
J. 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 1998, 1997 and
1996 was approximately $88,000, $77,000, and $61,000,
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 on 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 1998 and 1997, 45,177
options, and 23,000 options, respectively, were granted under
the Plan.
The Associates Stock Purchase Plan (ASPP), 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 $16,000, $9,000
and $2,000 was recorded in 1998, 1997 and 1996, respectively.
Incidental expenses regarding the administration of the plan
are paid by the Company.
-46-
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. EMPLOYEE BENEFITS - CONTINUED
As of December 31, 1998, the Company's Board of Directors had
approved the issuance of stock options to purchase 142,627
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, 1996 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 22,450 4,490 $ 11.625 $11.625
Options that became
exercisable -- 9,000 $ 7.00-10.125 $ 8.10
- ------------------------------------------------------------------------------------------------------
Options outstanding at
December 31, 1997 97,450 70,490 $ 6.00-11.625 $ 8.28
Granted 45,177 9,035 $ 14.75 $14.75
Options that became
exercisable -- 7,490 $7.125-11.625 $11.02
- ------------------------------------------------------------------------------------------------------
Options outstanding at
December 31, 1998 142,627 87,015 $ 6.00-14.75 $10.32
- -----------------------------------------------------------------------------------------------------
</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, 1998 was $10.32 and the weighted
average remaining life was approximately 7.3 years.
The Company accounts 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. Had the Company used the
provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company would have recognized, as expense
over the vesting period, the fair value of all stock-based
awards on the date of grant. 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 as
if the fair value based method of SFAS No. 123 had been used,
are as follows:
-47-
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. EMPLOYEE BENEFITS - CONTINUED
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $2,581,000 $2,058,000 $2,547,000
Net income - proforma $2,543,000 $2,045,000 $2,543,000
Earnings per share:
Basic
As reported $ 1.08 $ .93 $ 1.16
Proforma $ 1.06 $ .93 $ 1.16
Diluted
As reported $ .78 $ .89 $ 1.15
Proforma $ .77 $ .88 $ 1.14
==============================================================================================================
</TABLE>
The weighted average fair values of options granted during
1998, 1997 and 1996 were $5.79, $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>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 2.13% 1.78% 1.42%
Expected stock price volatility 22% 20% 19%
Risk-free interest rate 5.66% 6.64% 6.61%
Expected life of options(years) 5 5 5
==============================================================================================================
</TABLE>
K. 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,
7,304, 4,417 and 5,973 shares were issued during 1998, 1997
and 1996, respectively.
The Company had outstanding stock options totaling 142,627 and
97,450 shares at December 31, 1998 and 1997, respectively.
Options totaling 45,177 shares were issued during 1998.
Options totaling 22,450 shares were issued during 1997.
At December 31, 1997, warrants to purchase 4,739,397, shares
of CFGI's common stock at a price of $12.50 per share were
outstanding. During 1998 and 1997, warrants for 1,996,807
shares and 5,530 shares were exercised with proceeds of
$24,960,087 and $69,125, respectively. The unexercised
warrants expired on December 31, 1998.
-48-
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE - CONTINUED
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) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income available to common
shareholders $ 2,581 $ 2,058 $ 2,547
- --------------------------------------------------------------------------------
Weighted average common shares
outstanding
Basic 2,393,576 2,205,043 2,198,619
Dilutive effect of:
Options 40,090 30,687 24,034
Warrants 887,562 87,850 --
- --------------------------------------------------------------------------------
Weighted average common shares
outstanding
Diluted 3,321,228 2,323,580 2,222,653
- --------------------------------------------------------------------------------
Antidilutive securities:
Warrants -- * 4,744,927
- --------------------------------------------------------------------------------
Net income per share:
Basic $ 1.08 $ .93 $ 1.16
Diluted $ .78 $ .89 $ 1.15
- --------------------------------------------------------------------------------
</TABLE>
* The warrants were dilutive beginning in the fourth quarter of 1997.
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 takeovers,
squeeze outs, open market accumulations and other abusive
tactics to gain control of the Company without paying all
shareholders an appropriate control premium.
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, each
right would entitle its holder (other than the acquiring
person or members of the acquiring group) to purchase, at the
rights 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 would
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.
-49-
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
K. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE - CONTINUED
Until a person or group has acquired beneficial ownership of
15% or more of CFGI's common stock, the rights will be
redeemable for $.01 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.
L. 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, 1998, approximately $5.7
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 $258,000 and $147,000 from retained
earnings to surplus during 1998 and 1997, respectively.
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.
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, 1998.
As of December 31, 1998, the most recent notification from the
Federal Reserve Bank categorized The Bank as well 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.
-50-
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. 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) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CAPITAL COMPONENTS
TIER 1 CAPITAL:
Shareholders' equity $ 51,171 $ 24,052 $ 26,474 $ 23,865
Unrealized gain on securities (340) (294) (340) (294)
- ----------------------------------------------------------------------------------------------------
Total Tier 1 capital 50,831 23,758 26,134 23,571
TIER 2 CAPITAL:
Allowable allowance for
loan losses 2,113 1,714 2,107 1,713
Total capital $ 52,944 $ 25,472 $ 28,241 $ 25,284
- ----------------------------------------------------------------------------------------------------
Risk-adjusted assets $ 167,527 $ 135,674 $ 166,997 $135,639
Quarterly average assets $ 220,645 $ 200,594 $ 220,398 $200,560
</TABLE>
<TABLE>
<CAPTION>
Regulatory
Minimum CFGI The Bank
Ratios December 31 December 31
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CAPITAL RATIOS
Total risk-based capital ratio 8% 31.6% 18.8% 16.9% 18.6%
Tier 1 risk-based capital ratio 4% 30.3% 17.5% 15.6% 17.4%
Tier 1 leverage ratio 4% 23.0% 11.8% 11.9% 11.8%
</TABLE>
There are from time to time 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.
-51-
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. 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.
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) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash, due from banks,
and federal funds sold $ 13,243 $ 13,243 $16,591 $ 16,591
Investment securities 71,662 71,662 66,059 66,059
Loans, net of unearned
income 152,675 153,113 122,749 122,646
Financial liabilities:
Deposits 162,553 162,893 164,099 164,564
Federal Home Loan
Bank and other
borrowings 22,500 22,676 14,500 14,503
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Contractual Contractual
or Estimated or Estimated
Notional Fair Notional Fair
Amounts Value Amounts Value
(In Thousands) 1998 1997
<S> <C> <C> <C> <C>
Off-balance items:
Interest rate floors $ -- $ * 8,000 $ *
Commitments to
extend credit 58,207 * 53,023 *
Standby letters
of credit 4,832 * 3,039 *
- -------------------------------------------------------------------------------------------------------------------
* The estimated fair value of these items was not significant at December 31, 1998 or 1997.
</TABLE>
-52-
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. FAIR VALUE OF FINANCIAL INSTRUMENTS
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 collateralized mortgage
obligations, securities of states and political subdivisions,
and equity securities. As required, securities available for
sale are recorded at fair value.
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 and Other 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.
-53-
<PAGE> 48
N. OTHER COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" was adopted by
the Company on January 1, 1998. SFAS No. 130 establishes
standards for reporting comprehensive income. Comprehensive
income includes net income and other comprehensive income
which is defined as nonowner related transactions in equity.
Prior periods have been reclassified to reflect the provisions
of SFAS No. 130. The statement requires the Company's
unrealized gains and losses (net of tax) on securities
available for sale to be included in other comprehensive
income. The amounts of other comprehensive income included in
equity along with the related tax effect are set forth in the
table below:
<TABLE>
<CAPTION>
Gain (Loss) Tax Net of
(Dollars In Thousands) Before Tax Expense Tax
<S> <C> <C> <C>
Year ended December 31, 1998
Net unrealized gain on securities
available for sale arising
during 1998 $127 $49 $78
Less: Reclassification adjustment
for net gains included in
net income 52 20 32
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 75 $29 $46
===================================================================================================================
Year ended December 31, 1997
Net unrealized gain on securities
available for sale arising
during 1997 $373 $142 $231
Less: Reclassification adjustment
for net gains included in
net income 2 1 1
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive income $371 $141 $230
===================================================================================================================
Year ended December 31, 1996
Net unrealized loss on securities
available for sale arising
during 1996 $(178) $38 $(216)
Less: Reclassification adjustment
for net losses included in
net income (2) 1 (1)
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive income $(176) $39 $(215)
===================================================================================================================
</TABLE>
-54-
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
O. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Community Financial Group,
Inc., (Parent Company only) as of December 31, 1998 and 1997,
for the years ended December 31, 1998 and 1997 and the period
from May 1, 1996 to December 31, 1996 was as follows:
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 14,229 $ 155
Investment in bank subsidiary, at cost
adjusted for equity in earnings 26,474 23,865
Securities available for sale
(Amortized cost of $10,490) 10,490 -
Other assets 24 33
- ----------------------------------------------------------------------------------------------------------------
Total Assets $51,217 $24,053
================================================================================================================
Liabilities and Shareholders' Equity
Other liabilities $ 46 $ 1
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities 46 1
Total Shareholders' Equity 51,171 24,052
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $51,217 $24,053
================================================================================================================
</TABLE>
Condensed Income Statements
<TABLE>
<CAPTION>
Eight Month
Year Ended Year Ended Period Ended
December 31 December 31 December 31
(In Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from bank subsidiary $ 133 $ 530 $ 231
Interest income 1 - -
- ----------------------------------------------------------------------------------------------------------------
Total income 134 530 231
- ----------------------------------------------------------------------------------------------------------------
Expenses
Interest expense on short-term
borrowings - - 1
Other expenses 186 165 50
- ----------------------------------------------------------------------------------------------------------------
Total expenses 186 165 51
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (52) 365 180
Increase to consolidated
income taxes arising from parent
company taxable income 70 63 19
Equity in undistributed earnings
of subsidiary bank 2,563 1,630 2,348
- ----------------------------------------------------------------------------------------------------------------
Net income $2,581 $2,058 $2,547
================================================================================================================
</TABLE>
-55-
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
O. PARENT COMPANY FINANCIAL INFORMATION - CONTINUED
Statements of Cash Flows
<TABLE>
<CAPTION>
Eight Month
Year Ended Year Ended Period Ended
December 31, December 31, December 31
(In Thousands) 1998 1997 1996
<S> <C> <C> <C>
Operating activities
Net income $ 2,581 $2,058 $2,547
Adjustments to reconcile net
income to net cash provided
by operating activities:
Undistributed earnings of
bank subsidiary (2,563) (1,630) (2,348)
Decrease (increase) in
other assets 9 28 (43)
Increase (decrease) in
other liabilities 45 (17) 18
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 72 439 174
- ---------------------------------------------------------------------------------------------------------------
Investment activities
Purchases of securities (10,490) - -
- ---------------------------------------------------------------------------------------------------------------
Cash used by investing
activities (10,490) - -
- ---------------------------------------------------------------------------------------------------------------
Financing activities
Repayment of short-term
borrowing - - (20)
Proceeds from issuance of
common stock 25,061 120 56
Cash dividends paid (569) (441) (176)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by
(used in) financing
activities 24,492 (321) (140)
- ---------------------------------------------------------------------------------------------------------------
Increase in cash 14,074 118 34
Cash beginning of period 155 37 3
- ---------------------------------------------------------------------------------------------------------------
Cash end of year $14,229 $ 155 $ 37
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
-56-
<PAGE> 51
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
-57-
<PAGE> 52
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, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Nashville, Tennessee
January 26, 1999
-58-
<PAGE> 53
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY
(UNAUDITED)
CONSOLIDATED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1998
Three Months Ended
(In Thousands,
except per share data) December 31 September 30 June 30 March 31
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $4,251 $4,162 $4,132 $4,046
Interest expense 1,981 1,973 2,063 2,018
- --------------------------------------------------------------------------------------------
Net interest income 2,270 2,189 2,069 2,028
Provision for loan losses 25 25 39 39
Non-interest income 572 578 359 296
Non-interest expense 1,687 1,695 1,444 1,245
- --------------------------------------------------------------------------------------------
Income before income taxes 1,130 1,047 945 1,040
Provision for income taxes 422 403 356 400
- --------------------------------------------------------------------------------------------
Net income $ 708 $ 644 $ 589 $ 640
============================================================================================
Income per share:
Basic $ .28 $ .26 $ .25 $ .29
Diluted .17 .23 .17 .22
============================================================================================
Weighted Average Common
Shares Outstanding
Basic 2,540 2,457 2,363 2,214
Diluted 4,250 2,754 3,414 2,867
============================================================================================
</TABLE>
-59-
<PAGE> 54
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 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:
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>
-60-
<PAGE> 55
COMMON STOCK INFORMATION
The common stock of Community Financial Group, Inc., is traded on Nasdaq Stock
Market(R) under the symbol CFGI. As of December 31, 1998, there were 466
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 Dividends
1998 High Low
<S> <C> <C> <C>
First quarter $15.00 $13.69 $.06
Second quarter 17.06 14.00 .06
Third quarter 15.00 12.06 .06
Fourth quarter 12.88 11.81 .06
<CAPTION>
Market Price Dividends
1997 High Low
<S> <C> <C> <C>
First quarter $12.75 $10.75 $.05
Second quarter 12.25 11.00 .05
Third quarter 12.13 11.25 .05
Fourth quarter 15.13 11.75 .05
</TABLE>
Quarterly stock price quotations were provided by the Nasdaq Stock Market(R),
and reflect prices without retail markup, markdown or commissions and may not
reflect actual transactions.
-61-
<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> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,243
<INT-BEARING-DEPOSITS> 954
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,662
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 152,675
<ALLOWANCE> 3,646
<TOTAL-ASSETS> 238,185
<DEPOSITS> 162,553
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,961
<LONG-TERM> 14,500
0
0
<COMMON> 25,299
<OTHER-SE> 25,872
<TOTAL-LIABILITIES-AND-EQUITY> 238,185
<INTEREST-LOAN> 12,391
<INTEREST-INVEST> 3,816
<INTEREST-OTHER> 384
<INTEREST-TOTAL> 16,591
<INTEREST-DEPOSIT> 7,331
<INTEREST-EXPENSE> 8,035
<INTEREST-INCOME-NET> 8,556
<LOAN-LOSSES> 128
<SECURITIES-GAINS> 52
<EXPENSE-OTHER> 6,071
<INCOME-PRETAX> 4,162
<INCOME-PRE-EXTRAORDINARY> 4,162
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,581
<EPS-PRIMARY> 1.08
<EPS-DILUTED> .78
<YIELD-ACTUAL> 4.28
<LOANS-NON> 408
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 256
<ALLOWANCE-OPEN> 3,128
<CHARGE-OFFS> 84
<RECOVERIES> 474
<ALLOWANCE-CLOSE> 3,646
<ALLOWANCE-DOMESTIC> 2,104
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,542
</TABLE>
