<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-28496
------------------------
COMMUNITY FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1626938
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
401 CHURCH STREET, SUITE 200
NASHVILLE, TENNESSEE 37219-2213
(Address of principal executive offices including zip code)
(615) 271-2000
(Registrant's telephone number, including area code)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $6.00 per share
(Title of class)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ].
As of November 9, 2000, the number of outstanding shares of Common
Stock, par value $6.00 per share was 3,456,774.
================================================================================
<PAGE> 2
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
o Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999 ......................................... 2
o Consolidated Statements of Income - Three and Nine Months
Ended September 30, 2000 and 1999 ......................... 3
o Consolidated Statements of Shareholders' Equity and Other
Comprehensive Income - Nine Months Ended September 30, 2000
and 1999 .................................................. 4
o Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2000 and 1999 ............................... 5
o Notes to Consolidated Financial Statements ................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.............................................. 17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ......................................... 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 19
ITEM 5. OTHER INFORMATION ......................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 19
ITEM 6A. EXHIBITS AND REPORTS ON FORM 8-K........................... 19
ITEM 6B. REPORTS ON FORM 8-K........................................ 19
Signatures ........................................................... 20
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks ........................................................................ $ 9,644 $ 11,483
Federal funds sold and other temporary investments ............................................. -- 14,300
Investment securities available-for-sale
(amortized cost of $75,879 in 2000 and $76,467 in 1999) .................................... 74,731 74,877
Loans (net of unearned income of $2,780 in 2000 and $2,171 in 1999)
Commercial ................................................................................ 73,318 70,166
Real estate - mortgage loans .............................................................. 139,472 102,476
Real estate - construction loans .......................................................... 18,800 19,688
Consumer .................................................................................. 14,035 5,870
Lease financing ........................................................................... 9,086 7,311
--------- ---------
Loans, net of unearned income ............................................................. 254,711 205,511
Less allowance for loan losses ............................................................ (4,437) (4,062)
--------- ---------
Total Net Loans ......................................................................... 250,274 201,449
--------- ---------
Premises and equipment, net .................................................................... 3,525 3,529
Accrued interest receivable and other assets ................................................... 3,137 2,468
--------- ---------
Total assets ............................................................................ $ 341,311 $ 308,106
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ......................................................................... $ 26,512 $ 18,480
NOW accounts ................................................................................ 18,918 16,019
Money market accounts ....................................................................... 97,295 91,892
Certificates of deposit less than $100,000 .................................................. 51,652 54,383
Certificates of deposit greater than $100,000 ............................................... 67,727 48,367
--------- ---------
Total deposits ........................................................................... 262,104 229,141
--------- ---------
Federal Home Loan Bank and other borrowings .................................................... 16,036 24,500
Federal funds purchased ........................................................................ 18,600 5,000
Accounts payable and accrued liabilities ....................................................... 2,794 2,150
--------- ---------
Total liabilities ........................................................................ 299,534 260,791
--------- ---------
Commitments and contingencies (Note G) ......................................................... -- --
Shareholders' equity:
Common stock, $6 par value; authorized 50,000,000 shares; issued and
outstanding shares 3,466,118 in 2000 and 3,923,640 in 1999 ................................ 20,797 23,542
Additional paid-in capital .................................................................. 13,722 17,381
Retained earnings ........................................................................... 7,970 7,379
Accumulated other comprehensive loss, net of tax ............................................ (712) (987)
--------- ---------
Total shareholders' equity ............................................................... 41,777 47,315
--------- ---------
Total liabilities and shareholders' equity ............................................... $ 341,311 $ 308,106
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
-2-
<PAGE> 4
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans ....................... $ 6,030 $ 4,312 $ 16,419 $ 11,269
Federal funds sold and other temporary investments 38 284 164 423
Interest on investment Securities:
U.S. government agency obligations ............ 1,185 948 3,535 2,913
States and political subdivisions, tax-exempt.. 29 16 87 47
Other securities .............................. 128 57 248 160
----------- ----------- ----------- -----------
Total interest income ....................... 7,410 5,617 20,453 14,812
----------- ----------- ----------- -----------
Interest expense:
Interest bearing demand deposits ................. 1,382 1,198 3,581 3,016
Savings and certificates of deposits less than
$100,000 ...................................... 824 609 2,446 1,303
Certificates of deposit greater than $100,000 .... 1,167 514 3,037 1,249
Federal Home Loan Bank and other borrowings ...... 246 182 762 548
Federal funds purchased .......................... 105 -- 173 156
----------- ----------- ----------- -----------
Total interest expense ...................... 3,724 2,503 9,999 6,272
----------- ----------- ----------- -----------
Net interest income ................................. 3,686 3,114 10,454 8,540
Provision for loan losses ........................... 360 6 807 54
----------- ----------- ----------- -----------
Net interest income after provision for loan losses.. 3,326 3,108 9,647 8,486
----------- ----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts .............. 220 249 653 659
Trust Income ..................................... -- -- -- 13
Investment center income ......................... 407 354 1,123 996
Loss on sale of investment securities, net ....... -- -- (34) (5)
Other noninterest income ......................... 85 90 247 260
----------- ----------- ----------- -----------
Total noninterest income .................... 712 693 1,989 1,923
----------- ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits ................... 1,550 1,207 4,210 3,329
Occupancy ........................................ 360 343 1,077 950
Advertising ...................................... 52 66 235 215
Audit, tax and accounting ........................ 63 73 177 207
Data processing .................................. 39 57 134 143
Other noninterest expense ........................ 651 734 1,765 1,634
----------- ----------- ----------- -----------
Total noninterest expense ................... 2,715 2,480 7,598 6,478
----------- ----------- ----------- -----------
Income before provision for income taxes ............ 1,323 1,321 4,038 3,931
Provision for income taxes .......................... 523 510 1,555 1,505
----------- ----------- ----------- -----------
Net income .......................................... $ 800 $ 811 $ 2,483 $ 2,426
=========== =========== =========== ===========
Earnings per common share:
Basic ............................................ $ 0.23 $ 0.20 $ 0.68 $ 0.59
Diluted .......................................... $ 0.23 $ 0.20 $ 0.67 $ 0.58
Weighted average shares outstanding:
Basic ............................................ 3,519,105 3,995,843 3,675,526 4,113,469
Diluted .......................................... 3,521,445 4,096,048 3,696,944 4,175,165
</TABLE>
See accompanying notes to consolidated financial statements
-3-
<PAGE> 5
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND
OTHER COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Additional Comprehensive
------------------------- Paid-in Retained Income (loss),
Shares At Par Capital Earnings net of tax Total
------ ------ ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 ..... 4,216,531 $ 25,299 $ 19,773 $ 5,759 $ 340 $ 51,171
Comprehensive income:
Net income .................. -- -- -- 2,426 -- --
Other comprehensive loss .... -- -- -- -- (972) --
Total comprehensive income -- -- -- -- -- 1,454
Issuance of common stock ....... 8,668 52 62 -- -- 114
Repurchase of common stock ..... (294,500) (1,767) (2,389) -- -- (4,156)
Cash dividends ................. -- -- -- (1,369) -- (1,369)
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1999 .. 3,930,699 $ 23,584 $ 17,446 $ 6,816 $ (632) $ 47,214
========== ========== ========== ========== ========== ==========
Balance at January 1, 2000 ..... 3,923,640 $ 23,542 $ 17,381 $ 7,379 $ (987) $ 47,315
Comprehensive income:
Net income .................. -- -- -- 2,483 -- --
Other comprehensive income .. -- -- -- -- 275 --
Total comprehensive income -- -- -- -- -- 2,758
Issuance of common stock ....... 77,478 465 298 -- -- 763
Repurchase of common stock ..... (535,000) (3,210) (3,957) -- -- (7,167)
Cash dividends ................. -- -- -- (1,892) -- (1,892)
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 2000 .. 3,466,118 $ 20,797 $ 13,722 $ 7,970 $ (712) $ 41,777
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
-4-
<PAGE> 6
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
--------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Interest received ..................................................... $ 19,949 $ 14,693
Fees received ......................................................... 1,989 1,923
Interest paid ......................................................... (9,657) (6,127)
Cash paid to suppliers and associates ................................. (9,561) (7,214)
-------- --------
Net cash provided by operating activities ........................ 2,720 3,275
-------- --------
Cash flows from investing activities:
Maturities of securities available for sale .......................... 12,451 48,832
Sales of securities available for sale ............................... 1,397 8,203
Purchases of securities available for sale ........................... (13,131) (55,182)
Net cash paid for BON leasing ........................................ -- (1,250)
Loans originated by customers, net ................................... (48,937) (31,848)
Capital expenditures ................................................. (442) (1,096)
-------- --------
Net cash used by investing activities ............................ (48,662) (32,341)
-------- --------
Cash flows from financing activities:
Net increase in demand deposits, NOW and money market accounts ....... 16,334 44,598
Net increase in certificates of deposit .............................. 16,629 31,476
Repayment of advance from Federal Home Loan Bank ..................... (10,000) (4,720)
Advance of other borrowings .......................................... 1,536 --
Net proceeds from issuance of common stock ........................... 763 114
Repurchase of common stock ........................................... (7,167) (4,156)
Cash dividends paid .................................................. (1,892) (1,369)
-------- --------
Net cash provided by financing activities ........................ 16,203 65,943
-------- --------
Net (decrease) increase in cash and cash equivalents ..................... (29,739) 36,877
Cash and cash equivalents at beginning of period ......................... 20,783 5,243
-------- --------
Cash and cash equivalents at end of period ............................... $ (8,956) $ 42,120
======== ========
Reconciliation of net income to net cash provided by operating activities:
Net income ............................................................... $ 2,483 $ 2,426
Adjustments to reconcile net income to net cash provided by operating
activities:
Loss on sale investment securities ................................... 34 5
Depreciation and amortization ........................................ 501 515
Provision for loan losses ............................................ 807 54
Provision for deferred taxes ......................................... (408) (142)
Gain on sale of foreclosed assets .................................... -- (7)
Stock dividend income ................................................ (96) (117)
Changes in assets and liabilities:
Increase in accrued interest receivable and other assets ............. (679) (981)
Increase in accounts payable and accrued liabilities ................. 78 1,522
-------- --------
Net cash provided by operating activities ................................ $ 2,720 $ 3,275
======== ========
Supplemental Disclosure
Non Cash Transactions:
Change in unrealized loss on securities available for sale, net of tax $ 275 $ (972)
Cash paid for:
Income taxes ......................................................... $ 1,856 $ 1,467
</TABLE>
See accompanying notes to consolidated financial statements
-5-
<PAGE> 7
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. HOLDING COMPANY INFORMATION AND PRINCIPLES OF CONSOLIDATION
Community Financial Group, Inc. (CFGI), a Tennessee corporation, is a
bank holding company operating according to federal bank holding
company law. It owns The Bank of Nashville (The Bank), TBON-Mooreland
Joint Venture, LLC and a majority interest in The Bank's subsidiary
Machinery Leasing Company of North America, Inc., (BON Leasing).
The accompanying unaudited consolidated financial statements include
the accounts of CFGI, The Bank and its subsidiaries Mooreland Title and
BON Leasing, the operations of which are collectively referred herein
as the Company. All significant intercompany balances and transactions
have been eliminated in the accompanying consolidated financial
statements.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with general practices within the banking
industry and accounting principles generally accepted in the United
States of America for interim financial information. Accordingly, they
do not include all the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete consolidated financial statements. In the opinion of
management, all adjustments consisting of normal recurring accruals
considered necessary for a fair presentation of interim results have
been included.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
The interim consolidated financial statements should be read in
conjunction with the Summary of Significant Accounting Policies and the
Notes to the Financial Statements presented in the Company's 1999
Annual Report to Shareholders. The results for the interim period are
not necessarily indicative of results to be expected for the complete
calendar year.
B. JOINT VENTURE AND BUSINESS COMBINATIONS
In April, 1999, The Bank formed TBON-Mooreland Joint Venture, LLC. The
new company, a joint venture of The Bank and Mooreland Title Company,
LLC, will provide title services within the office of Mooreland Title.
This new title agency has the ability to underwrite title insurance on
most real estate loan transactions. The Bank owns 100% of the title
agency and consolidates all of its operations, and participates in a
revenue sharing agreement with Mooreland for 50% of the revenue.
On June 18, 1999 The Bank of Nashville acquired 80% ownership in
Machinery Leasing Company of North America, Inc. (BON Leasing) for $1.3
million in cash. The transaction has been accounted for using the
purchase method of accounting. The leasing company is included in the
consolidated financial statements of The Bank. The primary asset
acquired was the equipment lease portfolio of approximately $6.0
million. The total premium and goodwill recorded in the transaction was
$676,000. During the three and nine month periods ended September 30,
2000 the company recorded premium and goodwill amortization expense of
approximately $41,000 and $123,000, respectively.
Minority interest of approximately $10,000 and $33,000 is included in
other operating expenses for the three and nine months ended September
30, 2000, respectively.
C. SECURITIES
Securities with an aggregate fair market value of $46.1 million at
September 30, 2000, were pledged to secure public deposits, Federal
Home Loan Bank borrowings and for other purposes as required or
permitted by law.
-6-
<PAGE> 8
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
D. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2000 2000
------- -------
<S> <C> <C>
Balance, beginning of period ................. $ 4,412 $ 4,062
Provision charged to operations .............. 360 807
Loans charged off ............................ (352) (528)
Recoveries ................................... 17 96
------- -------
Balance, end of period ....................... $ 4,437 $ 4,437
======= =======
Allowance ratios are as follows:
Balance, to loans outstanding end of period 1.74% 1.74%
Net charge-offs to average loans .......... 0.15% 0.19%
</TABLE>
E. INCOME TAXES
Actual income tax expense for the three and nine months ended September
30, 2000 differed from "expected" tax expense (computed by applying the
U.S. Federal corporate tax rate of 34% to income before income taxes)
as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Computed "expected" tax expense ......... $ 450 $ 449 $1,373 $1,337
State tax expense, net of federal benefit 50 52 153 156
Other ................................... 23 9 29 12
------ ------ ------ ------
Total Income Tax Expense ................ $ 523 $ 510 $1,555 $1,505
====== ====== ====== ======
</TABLE>
-7-
<PAGE> 9
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
E. INCOME TAXES - Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 2000 and December 31, 1999, are presented below (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Deferred tax assets:
Unrealized loss on securities available for sale .......... $ 436 $ 603
Deferred fees, principally due to timing differences in the
recognition of income ................................... 279 208
Net operating loss carry forwards ......................... 241 195
Loans, principally due to provision for loan losses ....... 250 --
Premises and equipment, principally due to differences in
depreciation methods .................................... 44 22
Other ..................................................... 12 12
------- -------
Total gross deferred tax assets .............................. 1,262 1,040
------- -------
Deferred tax liabilities:
Discount on securities deferred for tax purposes .......... (98) (57)
Loans, principally due to provision for loan losses ....... -- (57)
Leases, principally due to difference in basis acquired and
the recognition of income ............................... (191) (234)
Other ..................................................... (144) (104)
------- -------
Total gross deferred tax liabilities ......................... (433) (452)
------- -------
Net deferred tax assets ...................................... $ 829 $ 588
======= =======
</TABLE>
F. EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing net income by
the weighted-average number of common shares outstanding during the
period. Diluted EPS is computed by dividing net income by the
weighted-average number of common shares and potential dilutive common
shares outstanding during the period. The Company had outstanding stock
options totaling 455,677 and 248,177 shares at September 30, 2000 and
December 31, 1999, respectively. The following table is a
reconciliation of net income and average shares outstanding used in
calculating basic and diluted earnings per share (in thousands, except
per share).
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income ......................................... $ 800 $ 811 $2,483 $2,426
====== ====== ====== ======
Weighted-average common shares outstanding ......... 3,519 3,996 3,676 4,113
Dilutive common shares from options ................ 2 100 21 62
------ ------ ------ ------
Weighted-average diluted shares outstanding ....... 3,521 4,096 3,697 4,175
====== ====== ====== ======
Net income per share:
Basic ........................................... $ 0.23 $ 0.20 $ 0.68 $ 0.59
Diluted ......................................... $ 0.23 $ 0.20 $ 0.67 $ 0.58
</TABLE>
-8-
<PAGE> 10
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
G. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various commitments
outstanding to extend credit, such as the funding of undrawn lines of
credit or standby letters of credit, which generally accepted
accounting principles do not require to be recognized in the financial
statements. The Company, through regular reviews of these arrangements,
does not anticipate any material losses as a result of these
transactions. At September 30, 2000 and December 31, 1999, the Company
had unfunded commitments to extend credit totaling $87.0 million and
$66.3 million, respectively. Additionally, the Company had standby
letters of credit of $4.3 million and $3.5 million as of September 30,
2000 and December 31, 1999, respectively.
The Bank is required to maintain average balances with the Federal
Reserve Bank and in vault cash to meet its reserve requirements. The
average amount of these balances at the Federal Reserve Bank and vault
cash for the three and nine month periods ended September 30, 2000,
totaled approximately $2,898,000 and $3,697,000, respectively. The
required balance at September 30, 2000 was $322,000.
H. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 established reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under SFAS No. 133, the Company would recognize all
derivatives as either assets or liabilities, measured at fair value, in
the statement of financial position. In July 1999, SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of Effective Date of FASB No. 133, An Amendment of FASB
Statement No. 133" was issued deferring the effective date of SFAS 133
to fiscal years beginning after June 15, 2000. In June 2000, SFAS No.
138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of FASB Statement No. 133" was issued
clarifying the accounting for derivatives under the new standard. The
Company is in the process of evaluating the impact these pronouncements
will have on its consolidated financial statements.
-9-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain of the matters discussed in this Form 10-Q, including matters
discussed under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," may constitute forward-looking statements
for purposes of the Private Securities Litigation Reform Act of 1995, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Community Financial Group, Inc. to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. The words "expect," "anticipate," "intend," "contemplate," "plan,"
"believe," "seek," "estimate," "will," "would," "should," "projected," and
similar expressions are intended to identify such forward-looking statements.
The Company's actual results may differ materially from the results anticipated
in these, forward-looking statements due to a variety of factors, including,
without limitation: the effects of future economic conditions; governmental
monetary and fiscal policies, as well as legislative and regulatory changes; the
risks of changes in interest rates on the level and composition of deposits,
loan demand, and the values of loan collateral, securities and interest rate
protection agreements, as well as interest rate risks; the effects of
competition from other commercial banks, savings banks, savings and loan
associations, consumer finance companies, credit unions, securities brokerage
and investment banking firms, insurance companies, money market and other mutual
funds and other financial institutions operating in the Company's market area
and elsewhere, including institutions operating locally, regionally, nationally
and internationally, together with such competitors offering banking products
and services by mail, telephone, computer and the Internet; the failure of
assumptions underlying the establishment of reserves for loan losses and
estimations of values of collateral and various financial assets and
liabilities; that technological changes, including data systems compliance
issues, are more difficult or expensive than anticipated; and other
uncertainties set forth in the Company's other public reports and filings and
public statements. All written or oral forward-looking statements attributable
to the Company are expressly qualified in their entirety by these cautionary
statements.
Community Financial Group, Inc. is a registered bank holding company
under the Federal Reserve Holding Company Act of 1956, as amended. CFGI owns The
Bank of Nashville (The Bank) and its subsidiaries (collectively referred to as
the "Company" or "CFGI"). The Bank owns TBON-Mooreland Joint Venture, LLC and a
majority interest in Machinery Leasing Company of North America, Inc. ("BON
Leasing"). The following discussion compares the Company's financial condition
at September 30, 2000 and December 31, 1999, and results of operations for the
three-month and nine month periods ended September 30, 2000, compared with the
same periods in 1999. The purpose of the discussion is to focus on important
factors affecting the Company's financial condition and results of operations.
During the second quarter of 2000, the Company announced the election
of J. Hunter Atkins as President and Chief Executive Officer of both the Company
and The Bank. Mr. Atkins' election followed an announcement during the first
quarter of 2000 that the Company planned to pursue a management succession plan
and expand its management team. The Board of Directors then formed a search
committee to seek a highly qualified individual to assume the responsibilities
of President and Chief Executive Officer stating that Mack S. Linebaugh, Jr.
would remain as Chairman of the Board of Directors of both the Company and The
Bank. Mr. Atkins joined the Company on June 19, 2000. He has over 27 years of
banking experience in the Nashville community and most recently served as City
President for AmSouth Bank from 1994 through 1999 until his appointment as
Consumer Banking Manager for Amsouth Bank in Middle Tennessee. During the third
quarter of 2000, the Company announced that Attilio F. Galli has been elected
Senior Vice President and Chief Financial Officer of both the Company and The
Bank. Mr. Galli joined the Company on August 21, 2000. Mr. Galli has over 26
years of commercial and investment banking as well as venture capital
experience. Most recently, Galli served as Managing Director and Founding
Partner of Cogito Ventures LLC, a financial consulting and venture capital firm.
Prior to forming Cogito, he was chief financial officer of MetroCorp Bancshares,
Inc. where he led the company through its initial public offering, directed
institutional investor efforts and managed the relationship with security
analysts. Mr. Galli began his banking career in 1974 with Citicorp/Citibank and
served in a variety of domestic and international corporate finance positions.
The addition of Mr. Atkins and Mr. Galli strengthens the Company's management
team and positions it to take advantage of market opportunities to further
expand existing lines of business while adding appropriate new lines of
business. During the remainder of 2000, there are plans to expand or establish
new lines of business including private banking, consumer banking and
residential lending.
The Bank operates from its main office at 401 Church Street, Nashville,
Tennessee as well as three full-service traditional branches, one located at the
Glendale Center in Green Hills, one at Maryland Farms in Brentwood and the other
on Gallatin Road in Hendersonville. The Company has received regulatory
approval to establish a new branch office in the Cool Springs area at the corner
of Baker Bridge Road and Caruthers Road which is expected to open during the
first half of 2001. The addition of the Cool Springs Office will bring the total
number of traditional banking locations to five. The Company has entered into a
lease agreement to install an ATM cash dispenser in the new downtown Hilton
Suites Hotel which opened in September 2000. Additionally, the Company has
executed a lease to expand its presence in downtown Nashville through the
addition of 11,123 square feet of contiguous space in the building adjacent to
its main location. During the first three quarters of 2000, the Company
continued the expansion of its leasing business through BON Leasing and of its
investment services through its relationship with Legg Mason Financial Partners,
Inc. (LMFP). Management plans to continue to seek attractive branch locations to
further expand its delivery systems and increase its market share.
Additional banking services are provided through full-service mobile
branches, "Bank-on-Call", which was established in 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 Bank has expanded its delivery
systems through full-service ATMs, cash dispensers, cash management
-10-
<PAGE> 12
services and "Bank-on-Line" Internet banking service. The Company has offered
Internet banking services to its consumer clients since early 1999 and recently
introduced a complete array of Net-based banking services for commercial
customers comprising basic Internet banking, bill payment services as well as
full cash management services including ACH origination.
On September 5, 2000, the Company announced that it had signed a
multi-year contract with EarningsInsights, in partnership with First Manhattan
Consulting Group, to develop and maintain a customer profitability and
relationship management system. Management believes that the data warehouse
services provided by EarningsInsights will allow the Company to have better
control over its operating costs, develop a state-of-the arts pricing system for
all bank products and services while at the same time continue its commitment to
customer service.
During 1999 and 2000, the Company approved and implemented two separate
stock repurchase plans. As of September 30, 2000, the Company had repurchased
439,500 shares pursuant to the second repurchase agreement. This brings the
total number of shares repurchased as of September 30, 2000 to 839,500 shares.
An additional 60,500 shares remain available for repurchase under the second
agreement which expires December 31, 2000.
GENERAL. Net income for the quarters ended September 30, 2000 and 1999
was $800,000 and $811,000, respectively. Basic and diluted EPS for the three
months ended September 30, 2000 were $0.23 compared with $0.20, for the same
period in 1999. Net income for the nine months ended September 30, 2000 and 1999
was $2.5 million and $2.4 million, respectively. Basic and diluted EPS for the
nine months ended September 30, 2000 were $0.68, and $0.67, compared with $0.59
and $0.58, respectively, for the same period in 1999.
At September 30, 1999, total assets and net loans were $341.3 million
and $250.3 million compared with $308.1 million and $201.4 million,
respectively, at December 31, 1999. Total liabilities and total shareholders'
equity at September 30, 2000, were $299.5 million and $41.8 million,
respectively, compared with $260.8 million and $47.3 million, respectively, at
December 31, 1999.
The Company's annualized return on average assets was 1.04% for the
nine months ended September 30, 2000, and 1.25% for the same period in 1999. The
decrease in the return on average assets resulted from a lower capital base due
to the share repurchase program. The decline in the return of average equity is
the result of lower earnings combined with the reduction of capital. Annualized
return on average equity was 7.42% for the nine months ended September 30, 2000,
compared with 6.50% for the same period in 1999. The increase in annualized
return on average equity reflected the Company's increased net income and a
reduction in average equity that resulted from the Company's stock repurchase
plans.
NET INTEREST INCOME. Net interest income is the principal component of
the Company's income stream and represents the difference or spread between
interest generated from earning assets and interest paid on interest bearing
liabilities. Fluctuations in interest rates, volume and mix changes in earning
assets and, non-interest and interest bearing liabilities, materially impact net
interest income.
Net interest income for the quarter ended September 30, 2000 increased
by $572,000 or 18.4% to $3.7 million compared with $3.1 million for the same
period in 1999. The increase in net interest income during the three month
period ended September 30, 2000 was due to a 27.0% increase in the volume of
average earning assets, coupled with increases of 89 basis points in the average
rate earned on average assets. These changes were partially offset by a 23.2%
increase in average interest bearing liabilities and an increase of 90 basis
points in the average rate paid on these liabilities.
The increase in the volume of average earning assets, for the three
months ended September 30, 2000, was due to a $56.1 million increase in average
loans outstanding and an increase of $14.4 million in average investments. These
increases in average earnings assets were partially offset by a $19.9 million
drop in the average volume of federal funds sold. The mix of assets changed
during the third quarter of 2000, compared with the same period in 1999, as the
percentage of average loans (the Company's highest yielding asset) to average
earning assets increased from 68.4% to 75.1%.
During the quarter ended September 30, 2000, net interest income was
impacted by a shift in the mix of interest bearing liabilities, compared with
the same period in 1999. The average volume of NOW accounts increased $2.7
million, or 18.7%, certificates of deposit (CDs) less than $100,000 increased by
19.6% or $8.8 million, CDs greater than $100,000 increased by 91.8%, or $34.8
million, while federal funds purchased increased $6.6 million. The increase in
average CDs resulted from the combination of enhanced marketing efforts and
greater demand due to higher yields available in the market. During the third
quarter of 2000, the average rate paid on CDs greater than $100,000 increased by
94 basis points, while the average rate on CDs less than $100,000 increased by
69 basis points, the average rate on money market accounts increased by 74 basis
points, the average rate on NOW accounts increased by 28 basis points and the
average rate on Federal Home Loan Bank of Cincinnati (FHLB) borrowings increased
103 basis points. The increases in interest rates on interest bearing
liabilities and in average earnings assets reflect interest rate increases by
the Federal Reserve Bank.
Interest expense increased by $1.2 million for the three months ended
September 30, 2000 to $3.7 million, compared with $2.5 million during the same
period in 1999. For the nine months ended September 30, 2000, interest expense
increased by $3.7 million
-11-
<PAGE> 13
or 59.4%, to $10.0 million, compared with $6.3 million during the same period in
1999. The increase was due to a higher volume of deposits coupled with higher
interest paid on deposits.
The Company considers CDs as a stable means of supporting loan
growth. The Company believes that based on its historical experience its large
CDs have core-type characteristics. The Company anticipates that this source of
funding will continue to be a factor in sustaining the Company's projected asset
growth.
For the quarters ended September 30, 2000 and 1999, net interest margin
(net interest income expressed as a percentage of average earning assets) was
4.56% and 4.58%, respectively. The decline in net interest margin resulted
primarily from the Company's greater reliance on interest-bearing liabilities.
Fluctuations in net interest margin were also affected by the differences in the
interest rate sensitivity of the Company's earning assets and interest bearing
liabilities.
For the nine months ended September 30, 2000, net interest income
increased by $1.9 million or 22.4% to $10.5 million compared with $8.5 million
for the same period in 1999. This increase in net interest income resulted from
a 23.3% increase in average earning assets, a change in the mix of earning
assets and an increase of 97 basis points in the average rate earned on average
earning assets. These increases were partially offset by a 31.9% increase in
average interest bearing liabilities and an increase of 94 basis points on the
average rate paid on interest bearing liabilities. The change in the mix of
average earning assets reflected loans increasing by 33.5%, investments
increasing by 13.6% while federal funds sold declined 71.4%. Further impacting
net interest income was a shift in the mix of average interest bearing
liabilities which reflected an increase of 108.2% in CDs that are greater than
$100,000, 68.2% in CDs less than $100,000, 23.2% in NOW accounts, and a 15.2% in
FHLB and other borrowings, while federal funds purchased declined 12.1%. The
shift in the mix of the Company's deposit products from lower rate money market
and NOW accounts to CDs reflected results of a certificate of deposit
advertising campaign conducted during the summer of 1999 and greater demand for
CDs due to higher rates. For the nine-month period ended September 2000, net
interest margin declined slightly to 4.60% from 4.62% for the same period in
1999 as result of the increased funding requirements which ensued the stock
repurchase plans.
During the three months ended September 30, 2000, the Company recorded
an increase of $354,000 to $360,000 to the provision for loan losses, compared
with $6,000 during the same period of 1999. The increase in the provision is
attributable to the $63.9 million or 33.5% growth in the loan portfolio and a
$203,000 or 30.6% increase in the level of non-performing assets. Net
charge-offs during the third quarter of 2000 were $335,000 compared with net
recoveries of $108,000 during the same period in 1999. There were no loans 90
days or more past due and still accruing interest at September 30, 2000 or
September 30, 1999.
Management and the Asset Liability Committee of the Board of Directors
(ALCO) continue to review various strategies to enhance net interest income and
improve the Company's funding, these include but are not limited to the issuance
of brokered CDs, increased levels of borrowings from the FHLB, establishments of
repurchase agreements with selected broker-dealer and the implementation of
future leveraging strategies. At September 30, 2000, the Company had borrowings
from the FHLB which totaled $14.5 million compared with $24.5 million, during
the same period in 1999.
NON-INTEREST INCOME. For the three months ended September 30, 2000,
non-interest income increased by $19,000 or 2.7% to $712,000, from $693,000 for
the same period in 1999, included in non-interest income was an increase of
$53,000 in investment center income service which was partially offset by
decline of $29,000 in service charges.
For the nine-month period ending September 30, 2000, non-interest
income increased by $66,000 or 3.4% to $2.0 from $1.9 million for the same
period in 1999. For the nine months ended September 30, 2000, non-interest
income, excluding losses on sale of securities, increased by 4.9% or $95,000,
compared with the same period in 1999. Included in non-interest income was an
increase of $127,000 in investment center income which was partially offset by
declines of $13,000 in trust income, $6,000 in service fee income and $13,000 in
other income. The increase in investment center income reflects the Company's
continued efforts to expand its investment services through its relationship
with Legg Mason Financial Partners.
NON-INTEREST EXPENSE. During the quarter ended September 30, 2000,
non-interest expense increased by $235,000, or 9.5%, to $2.7 million, compared
with the third quarter of 1999. This increase was the result of increases of
$343,000 in salaries and employee benefits and $17,000 in occupancy expense
resulting from higher salaries and employee benefits and occupancy expense
related to the Company's expansion in the loan origination staff and loan
administration area. These increases were partially offset by a $127,000 decline
in advertising, data processing, audit tax and accounting expense and other
operating expenses. The Company anticipates that pursuant to its expansion and
growth plans additional expenses may be anticipated in these and other areas.
During the nine-month period ending on September 30, 2000 total
non-interest expense increased by $1,120,000, or 17.3%, compared with the same
period of 1999, the increase resulted from a $881,000 increase in salaries and
employee benefits, a $127,000 increase in occupancy expense and a $131,000
increase in other operating expense. The increase in other operating expenses
resulted primarily from higher expenses related to expansion of the Company's
accounts receivable financing and home equity loan programs. At September 30,
2000, the Company had 94 employees compared with 75 employees at September 30,
1999. Plans for the remainder of year 2000 include continued expansion in
lending and support areas of the Company's commercial banking activities,
expansion of
-12-
<PAGE> 14
consumer banking services, and further expansion of the Company's investment
center services. It is expected that the Company's non-interest expense will
also increase during the remainder of 2000 due to technology investments
necessary to enhance the Company's product and service delivery capabilities. It
should be noted that economic conditions and other factors in the market could
further impact non-interest expense.
The Company outsources certain non-core competencies. Core data and
item processing, as well as imaging functions have been outsourced to The
Intercept Group, Inc. (Nasdaq: ICPT) a developer of fully integrated electronic
commerce products and services primarily for community financial institutions.
The internal audit function has been outsourced to the Nashville-based certified
public accounting firm of Kraft Brothers, Esstman Patton & Harrell, PLLC. The
accounting and financial reporting functions have been outsourced to the
Nashville-based firm of Williams, Crosslin, Sparks & Vaden, P.C. an independent
member of the BDO Seidman Alliance. The relationship with these certified
independent public accounting firms provides the Company with access to both the
resources of large national accounting and consulting firms while at the same
time receiving the individualized attention and fee structure of provided by a
local firm.
The outsourcing agreements allow the Company to continue to direct its
efforts to develop and maintain customer relationships. In this context, the
Company signed a multi-year contract with EarningsInsights, in partnership with
First Manhattan Consulting Group, to develop and maintain a customer
profitability and relationship management system. Management believes that the
data warehouse services provided by EarningsInsights will allow the Company to
have better control over its operating costs, have access to a state-of-the art
pricing system for its banking products and services while at the same time
continue its commitment to customer service.
Management is of the opinion that by outsourcing non-core competencies
to professional organizations with expertise in their respective field of
operations, it can avail itself of professional skills and state-of-the-art
systems and technologies that would otherwise not be cost efficient because of
economies of scale. The Company believes that these outsourcing agreements have
allowed it to remain a customer driven organization, while at the same time
continue improving the quality of its management information systems, the
timeliness of reports needed by management to run the organization and better
control over non-interest expenses.
INCOME TAXES. During the three months ended September 30, 2000, the
Company recorded provision for income taxes of $523,000, compared with $510,000
during the same period in 1999. During the first nine months of 2000, the
Company recorded provisions for income taxes of $1,555,000, an increase of
$50,000, or 3.3%, compared with $1,505,000 recorded for the same period of 1999.
The effective tax rate for each nine-month period was 38.5% and 38.3%,
respectively.
FINANCIAL CONDITION
Total assets at September 30, 2000, were $341.3 million, an increase
of $33.2 million, or 10.8%, from December 31, 1999. This increase was due to a
$49.2 million increase in total loans outstanding and a $.6 million increase in
accrued interest and other assets. These increases were partially offset by
decreases of $14.3 million in federal funds sold and $1.8 million in cash and
due from banks.
LOAN PORTFOLIO. Total net loans, net of unearned income and allowance
for loan losses, increased to $250.3 million or 22.0% at September 30, 2000,
from $201.4 million at December 31, 1999. The growth in total loans reflected
the local economic conditions and the Company's investment in loan production
capacity. At September 30, 2000 and December 31, 1999, the ratio of total loans
to total deposits was 97.2% and 89.7%, respectively. For the same periods, total
loans represented 74.6% and 66.7% of total assets, respectively.
-13-
<PAGE> 15
The following table summarizes the Company's loan portfolio, net of
unearned income, by type of loan:
<TABLE>
<CAPTION>
As of September 30, 2000 As of December 31, 1999
------------------------ ------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial ....................... $ 73,318 28.8% $ 70,166 34.1%
Real estate mortgage
Residential ................... 71,745 28.1 30,642 14.9
Commercial .................... 67,727 26.6 71,834 35.0
Real estate construction
Residential ................... 14,323 5.6 6,092 3.0
Commercial .................... 4,477 1.8 13,596 6.6
Consumer and other ............... 14,035 5.5 5,870 2.8
Lease financing .................. 9,086 3.6 7,311 3.6
-------- ---------- -------- ----------
Total loans ...................... $254,711 100.0% $205,511 100.0%
-------- ---------- -------- ----------
Less: allowance for loan losses 4,437 4,062
-------- --------
Net loans .................. $250,274 $201,449
======== ========
</TABLE>
NON-PERFORMING ASSETS. At September 30, 2000, non-performing assets,
including non-accrual loans, restructured loans and other real estate owned,
were $867,000, compared with $291,000 at December 31, 1999 and $664,000 at
September 30, 1999. The increase in non-performing assets was primarily the
result of two loans placed on non-accrual in the second quarter of 2000 with an
aggregate total value of $854,000. 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. Consideration in establishing the allowance includes
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 or leases, the level of non-performing assets and current and
forecasted economic conditions.
At September 30, 2000, other potential problem loans were $546,000
compared with $294,000 at September 30, 1999 and $349,000 at December 31, 1999.
Other potential problem loans consist of loans that are currently not considered
non-performing, but where information about possible credit problems has caused
the Company to have concerns as to the ability of the borrower to fully comply
with present repayment terms. Depending on economic changes and future events,
these loans and others, which may not be presently identified, could become
future non-performing assets. The composition of non-performing assets at
September 30, 2000, was 85.9% in non-accrual loans and 14.1% in repossessed
equipment compared with 100% in non-accrual loans at December 31, 1999 and 92.2%
in non-accrual loans and 7.8% in other real estate owned at September 30, 1999.
The Company's non-performing assets were $867,000 at September 30,
2000, compared with $291,000 at December 31, 1999 and $664,000 at September 30,
1999. Total loans, net of unearned income, were $254.7 million at September 30,
2000, an increase of $63.9 million or 33.5% from September 30, 1999, and an
increase of $49.2 million, or 23.9%, from December 31, 1999.
The following table presents information regarding non-performing
assets at the periods indicated(in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Nonaccrual loans ........................................... $ 745 $ 291
Accruing loans 90 days or more past due .................... -- --
Repossessed equipment ...................................... 122 --
------ --------
Total non-performing assets ........................... $ 867 $ 291
====== ========
Non-performing assets to total assets ...................... 0.25% 0.09%
Non-performing assets to total loans and other real estate.. 0.34 0.14
</TABLE>
ALLOWANCE FOR LOAN LOSSES. At September 30, 2000 and December 31, 1999,
the allowance for loan losses aggregated $4.4 million and $4.0 million, or 1.74%
and 1.98% of total loans, respectively. The level of the allowance for loan
losses and the amount of the provision are determined on a quarter-by-quarter
basis. However, given the inherent uncertainties in the estimation process, no
assurance can be given as to the adequacy or the ultimate amount of the
allowance at any future date. As of September 30, 2000, the allocated and
unallocated portions of the allowance were $3.3 million and $1.1 million,
respectively. The unallocated portion of the reserve represented 25.4% at
September 30, 2000 compared with 21.4% at December 31, 1999. Presently,
management is of the opinion
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<PAGE> 16
that the reserves are appropriate considering the current level of loans and
overall asset quality reflected in the portfolio. For the nine months ended
September 30, 2000, net loan charge-offs were $432,000 or 0.19% of average loans
outstanding, compared with net recoveries of $218,000 or 0.12% of average loans
outstanding for the year ended December 31, 1999.
The following table presents an analysis of the allowance for loan
losses and other related data:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 2000 December 31, 1999
------------------ ------------------
(Dollars in thousands)
<S> <C> <C>
Average loans outstanding .............................. $ 225,771 $ 176,027
========= =========
Total loans outstanding at end of period ............... $ 254,711 $ 205,511
========= =========
Allowance for loan losses at beginning of period ....... $ 4,062 $ 3,646
Provision for loan losses .............................. 807 106
Purchased reserve of BON Leasing ....................... -- 92
Charge-offs:
Commercial ......................................... (469) (608)
Real estate - mortgage ............................. -- (129)
Real estate - construction ......................... -- --
Consumer and other ................................. -- (20)
Lease financing .................................... (59) (15)
--------- ---------
Total charge-offs ............................... (528) (772)
========= =========
Recoveries:
Commercial ......................................... 68 988
Real estate - mortgage ............................. -- --
Real estate - construction ......................... -- --
Consumer and other ................................. 8 2
Leasing financing .................................. 20 --
--------- ---------
Total recoveries ................................. 96 990
--------- ---------
Net loan charge-offs/ (recoveries) ..................... (432) (218)
--------- ---------
Allowance for loan losses at end of period ............. $ 4,437 $ 4,062
========= =========
Ratio of allowance to end of period total loans ........ 1.74% 1.98%
Ratio of net loan charge-offs to average loans ......... 0.19 0.12
Ratio of allowance to end of period non-performing loans 595.57 1,395.88
</TABLE>
SECURITIES. At September 30, 2000, the securities portfolio totaled
$74.7 million, a decrease of $146,000 or 0.19% from $74.9 million at December
31, 1999. This decrease was primarily due to the scheduled repayment of the
investment securities. At September 30, 2000 and December 31, 1999, the Company
maintained the entire investment portfolio classified as available for sale in
an effort to better manage its interest rate risk and liquidity position.
DEPOSITS. At September 30, 2000, total deposits increased by $33.0
million or 14.4%, to $262.1 million, from $229.1 million at December 31, 1999.
The increase in deposits was comprised of a $19.4 million increase in CDs
greater than $100,000, a $8.0 million increase in non-interest bearing demand
deposits, a $2.9 million increase in NOW accounts and a $5.5 million increase in
money market accounts. These increases were partially offset by a $2.7 million
decrease in CDs less than $100,000.
Non-interest-bearing deposits at September 30, 2000 increased by $8.0
million or 43.5% to $26.5 million from $18.5 million at December 31, 1999. The
Company's ratios of noninterest-bearing demand deposits to total deposits for
September 30, 2000 and December 31, 1999 were 10.1% and 8.1%, respectively.
Core deposits, a relatively stable funding base, comprised 74.2% of
total deposits at September 30, 2000 and 78.9% at December 31, 1999. Core
deposits represent total deposits excluding CDs greater than $100,000. At
September 30, 2000, interest-bearing deposits increased by $24.9 million or
11.8% to $235.6 million from $210.7 million at December 31, 1999. The increase
in interest-bearing deposits resulted from a $5.4 million rise in money market
accounts and an increase of $19.4 million in CDs greater than $100,000. These
increases were offset by a decrease of $2.7 million in CDs less than $100,000.
OTHER BORROWINGS. At September 30, 2000, the Company had three, 5-year
loans totaling $14.5 million from the FHLB to further leverage its balance sheet
and diversify its funding sources. The loans bear interest at the average rate
of 5.84% per annum. Other short-term borrowings principally consist of U.S.
Treasury tax note option accounts having a maturity of 14 days or less. Total
borrowed funds increased $5.1 million
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<PAGE> 17
at September 30, 2000 from December 31, 1999. This increase was comprised
primarily of federal funds purchased. At September 30, 2000 and December 31,
1999, the Company had available for its use $41.0 million and $34.5 million,
respectively, of short term unsecured lines of credit. Such short-term lines
serve as temporary liquidity source for unanticipated loan and investment
surges. These lines facilitate federal funds borrowings and bear a rate that is
equal to the current rate for federal funds purchased. Amounts outstanding under
these lines of credit were $18.6 million and $5.0 million at September 30, 2000
and December 31, 1999, respectively.
CAPITAL RESOURCES. Shareholder's equity declined by $5.5 million to
$41.8 million at September 30, 2000, from $47.3 million at December 31, 1999.
Unrealized losses on securities available for sale were $712,000 at September
30, 2000, compared with unrealized losses on securities available for sale of
$1.0 million at December 31, 1999.
Shareholders' equity, excluding SFAS No. 115 adjustments, declined by
$5.8 million or 12.0%, to $42.5 million at September 30, 2000, from $48.3
million at December 31, 1999. The change in shareholders' equity was primarily
due to the repurchase of 535,000 million shares of common stock repurchased
during the nine months ended September 30, 2000 pursuant to the Company's stock
repurchase plans. During the same period, the Company recorded net income $2.5
million.
At September 30, 2000 total shareholders' equity as a percentage of
total assets declined to 12.2% from 15.4%, due to the stock buy-backs, dividends
paid, a 10.8% increase in total assets during the first nine months of 2000 and
$712,000 in accumulated other comprehensive losses. These factors were partially
offset by $2.5 million in net income recorded during the first nine months of
2000.
In December 1998, 2.0 million warrants, each representing the right to
acquire a common share of stock at a price of $12.50, were exercised resulting
in the addition of $25.0 million in new equity capital and the implementation of
two stock repurchase plans during 1999 and 2000. While the Company has
repurchased 839,500 shares under these plans, at September 30, 2000, the
additional capital generated in 1998 through the exercise of warrants continues
to provide expansion opportunities for the Company. In April 1999, the Company,
through The Bank, formed TBON-Mooreland Joint Venture, LLC. The new company, a
joint venture of The Bank and Mooreland Title Company, LLC, provides title
services including underwriting title insurance on most real estate loan
transactions, within the office of Mooreland Title. On June 18, 1999, $1.3
million in capital was utilized to acquire the majority interest in BON Leasing.
Furthermore, the Company continues to execute its internal expansion plan as
demonstrated by the increase in loan origination capacity. This was accomplished
through the addition of loan officers and the related support staff, as well as
the addition of the Private Banking practice in June 2000. Current plans are to
establish additional branch and ATM locations and to continue the deployment of
capital through further diversification of the Company's business lines and
investments in other strategic long-term business opportunities.
The Company reported dividend payments of $1.9 million during the first
nine months of 2000 compared with $1.4 million for the same period in 1999. The
total dividend payments during the first nine months of 1999 were $0.33 per
share, respectively, which compares with total dividend payments of $0.51 per
share for the same period of 2000.
The Company's capital ratios continued to exceed all regulatory
requirements reflecting a significant amount of excess capital based on industry
standards and Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
minimum ratios. At September 30, 2000, the Company's Tier 1, total capital to
adjusted assets and total risk based capital ratios were 15.18%, 13.78% and
16.43%, respectively. At December 31, 1999 Tier 1, total capital to adjusted
assets and risk based capital ratio were 21.12% 16.13% and 22.37%, respectively.
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of September 30, 2000 to the
minimum and well-capitalized regulatory standards:
<TABLE>
<CAPTION>
Minimum Well Actual Ratio At
Required Capitalized September 30, 2000
-------- ----------- ------------------
<S> <C> <C> <C>
THE COMPANY
Leverage ratio ................ 3.00%(1) N/A 12.65%
Tier 1 risk-based capital
ratio ....................... 4.00 N/A 15.18
Risk-based capital ratio ...... 8.00 N/A 16.43
THE BANK
Leverage ratio ................ 3.00%(1) 5.00% 9.61%
Tier 1 risk-based capital
ratio ....................... 4.00 8.00 11.22
Risk-based capital ratio ...... 8.00 10.00 12.47
</TABLE>
--------
(1) The Federal Reserve Board may require the Company to maintain a
leverage ratio of up to 200 basis points above the required minimum.
MARKET RISK AND LIQUIDITY. Market risk is the risk of loss from adverse
changes in market prices and rates. The Company's market risk results 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
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<PAGE> 18
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 on interest rates on its net interest
income using several tools. The Company's Funds Management Policy provides
management with the necessary guidelines for effective funds management. The
Company manages its sensitivity position within established guidelines.
Interest rate risk is managed by the ALCO in accordance with policies
approved by the Company's Board of Directors. The ALCO formulates strategies
based on appropriate levels of interest rate risk. In determining the
appropriate level of interest rate risk, the ALCO considers the impact on
earnings and capital of the current outlook on interest rates, potential changes
in interest rates, regional and local economy, liquidity, business strategies
and other factors. The ALCO meets regularly to review, among other things, the
sensitivity of assets and liabilities to interest rate changes, the book and
market values of assets and liabilities, unrealized gains and losses, purchase
and sale activities, commitments to originate loans and the maturities of
investments and borrowings. Additionally, the ALCO reviews liquidity, cash flow
flexibility, maturities of deposits and consumer and commercial deposit
activity. Management uses two methodologies to manage interest rate risk: (i) an
analysis of relationships between interest-earning assets and interest-bearing
liabilities and (ii) an interest rate shock simulation model. The Company has
traditionally managed its business to reduce its overall exposure to changes in
interest rates, however, under current policies of the Company's Board of
Directors, management has been given some latitude to increase the Company's
interest rate sensitivity position within certain limits if, in management's
judgment, it will enhance profitability. As a result, changes in market interest
rates may have a greater impact on the Company's financial performance in the
future than they have had historically.
The Company's interest rate risk management policy establishes
fluctuation limits of 15.0% and 16.0% to net interest income and the economic
value of equity, respectively, assuming an instantaneous 200 basis points shift
in interest rates. The Company's primary objective in managing interest rate
risk is to minimize the adverse impact that changes in interest rates would have
on net interest income and the economic value of equity while structuring the
Company's assets and liabilities to optimize the yield-cost spread. The Company
manages its exposure to interest rates by structuring its balance sheet in the
ordinary course of business. Presently, the Company is evaluating the benefits
that interest rate swaps, caps, floors, financial options, financial futures
contracts or forward delivery contracts would have in helping reduce its
interest rate risk.
At least quarterly, the ALCO reviews interest rate risk considering
results compared with policy, current rate and economic outlook, loan and
deposit demand levels, pricing and maturity of assets and liabilities, impact on
net interest income under varying rate scenarios, regulatory developments,
comparison of modified duration of both assets and liabilities as well as any
appropriate strategies to counteract adverse interest rate projections. The
Company's imbalance between the duration of assets and liabilities is limited to
less than one year and generally does not exceed one-half year.
An interest rate sensitive asset or liability is one that, within a
defined time period, either matures or experiences an interest rate change in
line with general market interest rates. The management of interest rate risk is
performed by analyzing the maturity and repricing relationships between
interest-earning assets and interest-bearing liabilities at specific points in
time ("GAP") and by analyzing the effects of interest rate changes on net
interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments. Interest
rate sensitivity reflects the potential effect on net interest income of a
movement in interest rates. A company is considered to be asset sensitive, or
having a positive GAP, when the amount of its interest-earning assets maturing
or repricing within a given period exceeds the amount of its interest-bearing
liabilities also maturing or repricing within that time period. Conversely, a
company is considered to be liability sensitive, or having a negative GAP, when
the amount of its interest-bearing liabilities maturing or repricing within a
given period exceeds the amount of its interest-earning assets also maturing or
repricing within that time period. During a period of rising interest rates, a
negative GAP would tend to affect adversely net interest income, while a
positive GAP would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative GAP would tend to result in an
increase in net interest income, while a positive GAP would tend to affect net
interest income adversely.
The following table provides Company management with repricing data at
September 30, 2000. The purpose of this information is to assist management in
the elements of pricing and matching interest sensitive assets with interest
sensitive liabilities within time frames. The table indicates a $75.3 million
negative GAP on a cumulative basis for the one year time period. With this
condition, the Company might be susceptible to a decrease in net interest income
should market interest rates increase and no actions are undertaken by
management to enhance its funding costs and increase lending rates. The Company
is aware of this imbalance and has initiated strategies to lower the negative
GAP by emphasizing the origination of floating rate loans while lengthening the
terms of fixed rate liability products. GAP reflects a one-day position that is
continually changing and is not indicative of the Company's position at any
other time. While the GAP position is a useful tool in measuring interest rate
risk and contributes toward effective asset and liability management, it is
difficult to predict the effect of changing interest rates solely on that
measure, without accounting for alterations in the maturity or repricing
characteristics of the balance sheet that occur during changes in market
interest rates. For example, the GAP position reflects only the prepayment
assumptions pertaining to the current rate environment. Assets tend to prepay
more rapidly during periods of declining interest rates than during periods of
rising interest rates. Because of this and other risk factors not contemplated
by the GAP position, an institution could have a matched GAP position in the
current rate environment and still have its net interest income exposed to
increased rate risk.
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<PAGE> 19
EXPECTED REPRICING OR MATURITY DATE
(Dollars in Thousands)
<TABLE>
<CAPTION>
Average Average Average
0 - 365 Interest 1 - 3 Interest 3 - 5 Interest
Days Rate Years Rate Years Rate
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Securities .................... $ 25,509 7.08% $ 14,699 6.37% $ 12,116 6.86%
Loans ......................... 154,706 9.68 39,548 8.23 53,284 8.31
Cash .......................... 180 6.35 -- -- -- --
--------- --------- --------
Total interest-earning assets.. 180,395 54,247 65,400
========= ========= ========
Liabilities
Deposits ...................... 221,020 5.47 14,572 7.09 -- --
FHLB and other borrowings ..... 34,636 6.68 -- -- -- --
--------- --------- --------
Total interest bearing
liabilities.................. $ 255,656 $ 14,572 $ --
========= ========= ========
Interest rate sensitive GAP .... $ (75,261) $ 39,675 $ 65,400
Cumulative interest rate
sensitive GAP ............... $ (75,261) (35,586) $ 29,814
Period GAP to total assets
sensitive GAP ............... -22.05% 11.62% 19.16%
Cumulative interest rate GAP ... -22.05% -10.43% 8.74%
Cumulative interest earning
assets to cumulative
interest bearing
liabilities ................. 70.56% 86.83% 111.03%
</TABLE>
<TABLE>
<CAPTION>
Greater Average Average
Than Interest Interest
5 Years Rate Total Rate
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Assets
Securities .................... $ 22,407 6.66% $ 74,731 6.78%
Loans ......................... 7,173 8.72 254,711 9.14
Cash .......................... -- -- 180 6.35
--------- ---------
Total interest-earning assets.. 29,580 329,622
========= =========
Liabilities
Deposits ...................... -- -- 235,592 5.57
FHLB and other borrowings ..... -- -- 34,636 6.68
--------- ---------
Total interest bearing
liabilities.................. $ -- $ 270,228
========= =========
Interest rate sensitive GAP .... $ 29,580
Cumulative interest rate
sensitive GAP ............... 59,394
Period GAP to total assets
sensitive GAP ............... 8.67%
Cumulative interest rate GAP ... 17.40%
Cumulative interest earning
assets to cumulative
interest bearing
liabilities ................. 121.98%
</TABLE>
At September 30, 2000 and based on the above analysis, given a sudden
200 basis point shift in interest rates, net interest income would increase
1.32% in the raising rate scenario and increases 0.87% in the falling rate
scenario. Pre-tax earnings increase 2.92% in rising rates and increase 1.94% in
falling rates. The 365-day cumulative re-pricing GAP is -$75.2 million and the
ratio of risk sensitive asset to risk sensitive liability is 0.70.
Liquidity involves the Company's ability to raise funds to support
asset growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. The Company's liquidity needs are met primarily by
financing activities, consisting mainly of growth in CDs, supplemented by
available investment securities held-for-sale, federal funds bought and other
borrowings. Federal funds bought generally represent overnight borrowings. Other
borrowings principally consist of U.S. Treasury tax note option accounts with
maturities of 14 days or less and borrowings from the FHLB. At September 30,
2000, the estimated average life of the investment portfolio was 5.42 years,
compared with 8.28 years at December 31, 1999. At September 30, 2000 and
December 31, 1999, all securities were classified as available for sale. The
Company also uses the investment securities, federal funds bought and other
borrowings in its management of interest rate risk and to enhance net interest
margin.
The Company is eligible for certain borrowing programs through the
FHLB. Generally, most advances require delivery of eligible securities as
collateral. Maturities under these programs range from one day to 20 years. FHLB
advances can be particularly attractive as a longer-term funding source to
balance interest rate sensitivity and reduce interest rate risk. At September
30, 2000, the Company had $24.5 in borrowings under these programs compared with
$14.5 at year-end 1999.
On September 30, 2000 and December 31, 1999, the Company had available
for its use $41.0 million and $34.5 million, respectively, of short term
unsecured lines of credit. Such sort term lines serve as temporary liquidity
source for unanticipated loan and investment surges. These lines facilitate
federal funds borrowings and bear a rate that is equal to the current rate for
federal funds purchased. Amounts outstanding under these lines of credit were
$18.6 million and $5.0 million at September 30, 2000 and December 31, 1999,
respectively.
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<PAGE> 20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6A. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Number Identification of Exhibit
------ -------------------------
11 -- Computation of Earnings Per Common Share, included as
Note (F) to the Interim Consolidated Financial
Statements on Page 8 of this Form 10-Q.
27 -- Financial Data Schedule. The required Financial Data
Schedule has been included as Exhibit 27 of the Form
10-Q filed electronically with the Securities and
Exchange Commission.
ITEM 6B. THE FOLLOWING REPORTS ON FORM 8-K WERE FILED DURING THE QUARTER ENDED
SEPTEMBER 30, 2000.
September 5, 2000 announcing the acceleration of the vesting of 17,600
options previously granted to retiring President and Chief Executive Officer Mr.
Mack S. Linebaugh, Jr.
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<PAGE> 21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
COMMUNITY FINANCIAL GROUP, INC.
Registrant
November 13, 2000 /s/ J. Hunter Atkins
--------------------- ----------------------------------
Date J. Hunter Atkins
President and Chief Executive Officer
November 13, 2000 /s/ Attilio F. Galli
--------------------- -----------------------------------
Date Attilio F. Galli
Senior Vice President and
Chief Financial Officer
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