<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
-----------------------------------------
Commission File Number: 0-28496
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Community Financial Group, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Tennessee 62-1626938
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
401 Church Street, Nashville, Tennessee 37219-2213
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(Address of principal executive offices) (Zip Code)
(615) 271-2000 (Registrant's telephone number, including area code)
- --------------------------
Check 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 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common shares outstanding 3,643,147 as of May 3, 2000.
<PAGE> 2
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page(s)
-------
ITEM 1. FINANCIAL STATEMENTS
<S> <C> <C>
- - Consolidated Balance Sheets - March 31, 2000 and December 31, 1999................... 1
- - Consolidated Statements of Shareholders' Equity and Other
Comprehensive Income - Three Months Ended March 31, 2000 and 1999................... 2
- - Consolidated Statements of Income - Three Months Ended
March 31, 2000 and 1999............................................................ 3
- - Consolidated Statements of Cash Flows
- Three Months Ended March 31, 2000 and 1999....................................... 4 - 5
- - Notes to Consolidated Financial Statements........................................... 6 - 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................. 10 - 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................................... 14
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................... 17
Signatures ............................................................................. 18
Exhibit 11 ............................................................................. 19
</TABLE>
<PAGE> 3
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- -----------
<S> <C> <C>
Cash and due from banks $ 9,817 $ 11,483
Federal funds sold 16,500 14,300
Securities available for sale (amortized cost of $74,024 and $76,467, respectively) 72,261 74,877
Loans (net of unearned income of $2,475 and $2,171, respectively):
Commercial 73,339 70,166
Real estate - mortgage loans 117,854 102,476
Real estate - construction loans 9,157 19,688
Consumer 8,987 5,570
Leases financing 8,635 7,311
--------- ---------
Loans, net of unearned income 217,972 205,511
Less allowance for loan losses (4,260) (4,062)
--------- ---------
Total Net Loans 213,712 201,449
--------- ---------
Premises and equipment, net 3,522 3,529
Accrued interest and other assets 2,723 2,468
--------- ---------
Total Assets $ 318,535 $ 308,106
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest bearing demand deposits $ 20,890 $ 18,480
Interest-bearing deposits:
NOW accounts 20,807 16,019
Money market accounts 76,080 91,892
Time certificates less than $100,000 54,804 54,383
Time certificates $100,000 and greater 65,909 48,367
--------- ---------
Total Deposits 238,490 229,141
--------- ---------
Federal Home Loan Bank and other borrowings 15,810 24,500
Federal funds purchased 15,000 5,000
Accounts payable and accrued liabilities 3,474 2,150
--------- ---------
Total Liabilities 272,774 260,791
--------- ---------
Commitments and contingencies (Note G) -- --
Shareholders' equity:
Common stock, $6 par value; authorized 50,000,000 shares; issued and
outstanding shares, 3,818,428 in 2000 and 3,923,640 in 1999 22,911 23,542
Additional paid-in capital 16,395 17,381
Retained earnings 7,549 7,379
Accumulated other comprehensive loss, net of tax (1,094) (987)
--------- ---------
Total Shareholders' Equity 45,761 47,315
--------- ---------
Total Liabilities and Shareholders' Equity $ 318,535 $ 308,106
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND OTHER
COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (loss) Total
-------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 25,299 $ 19,773 $ 5,759 $ 340 $ 51,171
Comprehensive income:
Net income -- -- 805 -- --
Other comprehensive income -- -- -- (99) --
Total comprehensive income -- -- -- -- 706
Issuance of Common Stock (2,905 shares) 17 12 -- -- 29
Repurchase of Common Stock (10,000 shares) (60) (69) -- -- (129)
Cash dividends - $.07 per share -- -- (295) -- (295)
-------- -------- -------- -------- --------
Balance, March 31, 1999 $ 25,256 $ 19,716 $ 6,269 $ 241 $ 51,482
======== ======== ======== ======== ========
Balance, January 1, 2000 $ 23,542 $ 17,381 $ 7,379 $ (987) $ 47,315
Comprehensive income:
Net income -- -- 832 -- --
Other comprehensive income -- -- -- (107) --
Total comprehensive income -- -- -- -- 725
Issuance of Common Stock (30,288 shares) 182 73 -- -- 255
Repurchase of Common Stock (135,500 shares) (813) (1,059) -- -- (1,872)
Cash dividends - $.17 per share -- -- (662) -- (662)
-------- -------- -------- -------- --------
Balance, March 31, 2000 $ 22,911 $ 16,395 $ 7,549 $ (1,094) $ 45,761
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS , EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 4,968 $ 3,251
Interest on federal funds sold 52 119
Interest on balances in banks 2 11
Interest on securities:
U.S. government agency obligations 1,174 957
States and political subdivisions, nontaxable 29 16
Other securities 38 38
----------- -----------
Total interest income 6,263 4,392
----------- -----------
Interest expense:
Interest bearing demand deposits 1,022 933
Savings and time deposits less than $100,000 763 346
Time deposits $100,000 and over 838 391
Federal Home Loan Bank and other borrowings 272 175
Federal funds purchased 16 11
----------- -----------
Total interest expense 2,911 1,856
----------- -----------
Net interest income 3,352 2,536
Provision for loan losses 210 45
----------- -----------
Net interest income after provision for loan losses 3,142 2,491
Non-interest income:
Service fee income 205 205
Trust income -- 12
Investment Center income 365 321
Loss on sale of securities (34) --
Other 82 83
----------- -----------
Total non-interest income 618 621
----------- -----------
Non-interest expense:
Salaries and employee benefits 1,305 1,017
Occupancy expense 382 276
Audit, tax and accounting 55 64
Data processing expense 50 45
Other operating expenses 626 434
----------- -----------
Total non-interest expense 2,418 1,836
----------- -----------
Income before income taxes 1,342 1,276
Provision for income taxes 510 471
----------- -----------
Net income $ 832 $ 805
=========== ===========
Net income per share
Basic $ .21 $ 0.19
=========== ===========
Diluted $ .21 $ 0.19
=========== ===========
Weighted average common shares outstanding
Basic 3,875,053 4,217,795
=========== ===========
Diluted 3,920,275 4,296,416
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 6,258 $ 4,324
Fees received 618 621
Interest paid (2,410) (2,037)
Cash paid to suppliers and associates (2,315) (2,035)
-------- --------
Net cash provided by operating activities 2,151 873
-------- --------
Cash flows from investing activities:
Maturities of securities available for sale 2,618 35,245
Sales of securities available for sale 1,397 330
Purchases of securities available for sale (1,565) (38,568)
Loans originated by customers, net (12,300) (9,584)
Capital expenditures (147) (533)
-------- --------
Net cash used by investing activities (9,997) (13,110)
-------- --------
Cash flows from financing activities:
Net (decrease) increase in demand deposits, NOW, and money market accounts (8,614) 14,426
Net increase (decrease) in certificates of deposit 17,963 (4,566)
Repayment of advance from Federal Home Loan Bank (10,000) --
Advance of short-term borrowings 1,310 --
Proceeds from issuance of common stock 255 29
Repurchase of common stock (1,872) (129)
Cash dividends paid (662) (295)
-------- --------
Net cash (used) provided by financing activities (1,620) 9,465
-------- --------
Net decrease in cash and cash equivalents (9,466) (2,772)
Cash and cash equivalents - beginning of period 20,783 5,243
-------- --------
Cash and cash equivalents - end of period $ 11,317 $ 2,471
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 7
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
------- -------
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 832 $ 805
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on sale securities 34 --
Depreciation and amortization 186 110
Provision for loan losses 210 45
Provision for deferred taxes (155) (95)
Gain on sale of foreclosed assets -- --
Stock dividend income (31) (28)
Changes in assets and liabilities:
Decrease in accrued interest and other assets (255) (193)
Increase in accounts payable and accrued liabilities 1,330 229
------- -------
Net cash provided by operating activities $ 2,151 $ 873
======= =======
Supplemental Disclosure:
Non Cash Transactions:
Change in unrealized loss on securities available for sale, net of tax $ (107) $ (99)
======= =======
Cash paid for:
Income taxes $ 206 $ 79
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 8
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 generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the
opinion of management, all adjustments consisting of normal recurring
accruals considered necessary for a fair presentation of interim
results have been included.
Certain prior year amounts have been reclassified to conform with 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. for $1.3 million in
cash. The transaction has been accounted for using the purchase method
of accounting and closed in June 1999. 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 month period ended March 31, 2000
approximately $41,000 in amortization expense was recorded.
Minority interest expense of $10,000 is included in other operating
expenses for the three months ended March 31, 2000.
C. SECURITIES
Securities with an aggregate fair market value of $47.6 million at
March 31, 2000, were pledged to secure public deposits, Federal Home
Loan Bank borrowings and for other purposes as required or permitted by
law.
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<PAGE> 9
COMMUNITY FINANCIAL GROUP, INC. AND 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 Ended
March 31, 2000
--------------
<S> <C>
Balance, beginning of period $ 4,062
Provision charged to operations 210
Loans charged off (59)
Recoveries 47
--------
Balance, end of period $ 4,260
========
Allowance ratios are as follows:
Balance, to loans outstanding end of period 1.95%
Net charge-offs to average loans .01%
</TABLE>
E. INCOME TAXES
Actual income tax expense for the three months ended March 31, 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 Ended
--------------------------------
March 31, 2000 March 31, 1999
-------------- ---------------
<S> <C> <C>
Computed "expected" tax expense $ 457 $ 434
State tax expense, net of federal benefit 53 50
Other -- (13)
----- -----
Total Income Tax Expense $ 510 $ 471
===== =====
</TABLE>
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<PAGE> 10
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
March 31, 2000 and December 31, 1999, are presented below (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Deferred tax assets:
Unrealized loss on securities available for sale $ 669 $ 604
Deferred fees, principally due to timing differences
in the recognition of income 206 207
Net operating loss carryforwards 241 195
Premises and equipment, principally due to
differences in depreciation methods 28 22
Other 58 12
----- -----
Total gross deferred tax assets 1,202 1,040
----- -----
Deferred tax liabilities:
Discount on securities deferred for tax purposes (63) (57)
Loans, principally due to provision for loan losses -- (57)
Leases, principally due to difference in basis acquired
and the recognition of income (219) (234)
Other (112) (104)
----- -----
Total gross deferred tax liabilities (394) (452)
----- -----
Net deferred tax asset (liabilities) $ 808 $ 588
===== =====
</TABLE>
F. SHAREHOLDERS' EQUITY
The Company had outstanding stock options totaling 352,177 and 248,177
shares at March 31, 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.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net income available to common shareholders: $ 832,000 $ 805,000
========== ==========
Weighted average basic common shares outstanding 3,875,053 4,217,795
Dilutive effect of Options 45,222 78,621
---------- ----------
Weighted average diluted common shares outstanding 3,920,275 4,296,416
========== ==========
Antidilutive options 175,377 45,177
========== ==========
Net income per share:
Basic $ .21 $ .19
Diluted $ .21 $ .19
</TABLE>
Accumulated other comprehensive income consists solely of the
unrealized gain or loss on securities available for sale net of the
income tax effect.
-8-
<PAGE> 11
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 March 31, 2000 and December 31, 1999, the Company had
unfunded commitments to extend credit totaling $65.1 million and $66.3
million, respectively. Additionally, the Company had standby letters of
credit of $4.2 million and $3.5 million as of March 31, 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 month period ended March 31, 2000, totaled
approximately $4,122,000. The required balance at March 31, 2000 was
$3,894,000.
-9-
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Community Financial Group, Inc. (CFGI) 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, all of which are collectively
referred to as the Company. The Bank owns TBON-Mooreland Joint Venture, LLC
(TBON Mooreland) and a majority interest in The Bank's subsidiary company
Machinery Leasing Company of North America, Inc., (BON Leasing). The following
discussion compares the Company's financial condition at March 31, 2000 and
December 31, 1999, and results of operations for the first quarter of 2000 with
the same period in 1999. The purpose of this discussion is to focus on important
factors affecting the Company's financial condition and results of operations.
Reference should be made to the consolidated financial statements (including the
notes thereto), presented elsewhere in this report for an understanding of the
following discussion and analysis. The quarterly consolidated financial
statements reflect all adjustments which are, in the opinion of management,
necessary for fair presentation of results of interim periods. The results for
interim periods are not necessarily indicative of results to be expected for the
complete calendar year. Reference should also be made to the Company's 1999
Annual Report for a more complete discussion of factors that impact the results
of operations, liquidity and capital. To the extent that the statements in this
discussion relate to the plans, objectives or future performance of the Company,
these statements may be deemed to be forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are based on management's current expectations and the current economic
environment. Actual strategies and results of future periods may differ
materially from those currently expected due to various risks and uncertainties.
The Company's primary base of operation is located in the L & C Tower at 401
Church Street, Nashville, Tennessee, 37219. In addition to its Main Office in
the L & C Tower, The Bank has three full service, traditional branches; one
located in the Glendale Center in Green Hills, which opened in January, 1997;
one located in Maryland Farms in Brentwood, which opened in September, 1998; and
the other located on Maple Drive North in Hendersonville, which opened in April,
1999. Additional branch services are provided through full service mobile
branching, "Bank-on-Call", which was established in September, 1996 and expanded
in each subsequent year. Bank-on-Call provides the convenience of "at your door"
banking service to commercial customers. Additionally, the Company has expanded
its delivery systems through full service ATM's, cash dispensers, cash
management services and its "Bank on Line" Internet banking service. The Company
offers a full array of commercial and consumer banking services as well as
leasing, title insurance and investment services.
During the first quarter of 2000, the Company completed the repurchase of
400,000 shares of the Company's stock under a repurchase plan approved in 1999
and extended in early 2000. Additionally, during the first quarter of 2000, the
Company's Board of Directors approved another stock repurchase plan to
repurchase up to 500,000 shares of the Company stock which will expire on
December 31, 2000. Community Financial Group, Inc., is listed on the NASDAQ
stock market and traded under the symbol CFGI.
During the first quarter of 2000, the Company's Board of Directors announced
that it would pursue a management succession plan by selecting a new President
to assist Mack S. Linebaugh, Jr. in his role as chairman and to assure the
Company's continued growth.
PERFORMANCE OVERVIEW
For the quarter ended March 31, 2000, net income totaled $832,000, a $27,000 or
3.4% increase over the $805,000 of net income reported for the first quarter of
1999. Income increased $1,868,000 due primarily to increased yields, loan growth
in the Bank and the acquisition of a majority interest in BON Leasing. Expenses,
excluding income taxes increased $1,802,000 resulting primarily from increased
cost of funds, deposit growth, increased provision for loan loss expense and
expenses related to the Company's Hendersonville branch location that was not
open in the first quarter of 1999. Both basic and diluted earnings per share
were $.21 in the first quarter of 2000, compared to both numbers at $.19 in the
first quarter of 1999. Reference should be made to Note F to the financial
statements regarding the computation of earnings per share.
During the first quarter of 2000, the Company recorded $210,000 in provisions
for loan losses, compared to $45,000 during the first quarter of 1999. During
the first quarter of 2000, the Company had net charge-offs of $12,000 compared
to net charge-offs of $82,000 during the first quarter of 1999. The allowance
for loan losses was 1.95% of loans at March 31, 2000, compared with 1.98% at
December 31, 1999 and 2.22% at March 31, 1999.
-10-
<PAGE> 13
The Company's annualized return on average assets was 1.11% for the first
quarter of 2000, compared to 1.34% for the first quarter of 1999. The decline in
return on average assets was the result of a $57.4 million increase in average
assets during the first quarter of 2000 compared with the same period in 1999.
Annualized return on average equity was 7.03% for the first quarter of 2000
compared to 6.40% for the same period in 1999.
The Company's non-performing assets were $768,000 at March 31, 2000 compared to
$532,000 at March 31, 1999 and $291,000 at December 31, 1999. Total loans, net
of unearned income, were $218.0 million at March 31, 2000, an increase of $55.8
million, or 34.4%, from March 31, 1999 and an increase of $12.5 million, or
6.1%, from the $205.5 million reported at December 31, 1999.
The Company's average equity to average assets ratio, excluding accumulated
other comprehensive loss, was 15.8% during the first quarter of 2000 compared to
20.9% for the same period in 1999. The decline in average equity to average
assets ratio reflected the Company's significant growth in average assets and a
reduction in average equity primarily resulting from the Company's stock
repurchase plans. The Company recorded a quarterly dividend of $.17 per share
during the first quarter of 2000 compared to a quarterly dividend recorded
during the first quarter of 1999 of $.07 per share
NET INTEREST INCOME
Net Interest Income is the principal component of the Company's income stream
and represents the difference or spread between interest generated from earning
assets and interest paid on interest bearing liabilities. Fluctuations in
interest rates, as well as volume and mix changes in earning assets and interest
bearing liabilities, materially impact net interest income.
Net interest income after provisions for loan losses increased $651,000, or
26.1%, in the first quarter of 2000, compared to the same period in 1999. This
increase reflects a $1.9 million, or 42.6%, increase in interest income, and a
$1.1 million, or 56.8%, increase in total interest expense. Net interest income
before provision for loan losses increased $816,000, or 32.2%, in the first
quarter of 2000, compared to the same period in 1999. The increase in net
interest income resulted from a $57.6 million, or 24.9%, increase in the volume
of average earning assets as well as an increase of 108 basis points in the
average rate earned on those assets. These increases were partially offset by an
increase of $60.8 million, or 35.5%, in the average volume of interest bearing
liabilities as well as an increase of 68 basis points in the average rate paid
on interest bearing liabilities. The increase in rates paid on interest bearing
liabilities and the average rate earned on earning assets reflect the effect of
the Federal Reserve Board having increased the stated Discount Rate five times
between March 31, 1999 and March 31, 2000. Each of these increases were 25 basis
points. The increase in the volume of average earning assets is attributed to a
$58.7 million increase in average loans outstanding and a $5.5 million increase
in average investments, which were partially offset by a decrease of $6.5
million in average federal funds sold. This shift in the mix of total earning
assets which reflected more growth in average loans outstanding, the Company's
highest yielding assets, contributed to the overall improvement in net interest
income. Average loans represented 73.0% of average earning assets in the first
quarter of 2000 compared to 65.8% for the same period in 1999 while average
investments represented 25.7% and 29.7% of average earning assets in the first
quarters of 2000 and 1999, respectively. Net interest income was further
impacted by a shift in the mix of interest bearing liabilities. The average
volume of certificates of deposit less than $100,000 increased $27.9 million, or
105.9%, average certificate of deposit $100,000 or greater increased $27.6
million, or 89.1%, average Federal Home Loan Bank and other borrowings increased
$4.4 million, or 30.6%, and average NOW account volume increased $2.4 million,
or 17.2%, in the first quarter of 2000 compared to the same period in 1999.
These increases were slightly offset by a decline of $1.8 million, or 2.1%, in
the average volume of money market accounts. The shift in the mix of the
Company's deposit products to higher rate certificates of deposit from lower
rate money market and NOW accounts reflect the Company's efforts to attract
additional certificates of deposit as funding sources for the Company's growth
in loan volume. The increase in the average rate paid on interest bearing
liabilities was the result of an increase of 93 basis points on Federal Home
Loan Bank and other borrowings, 68 basis points on certificates of deposit
$100,000 or greater, 58 basis points on Federal Funds purchased, 39 basis points
on money market accounts, 37 basis points on certificates of deposit less than
$100,000 and 22 basis points on NOW accounts. It is anticipated that the average
rate paid on interest bearing liabilities will continue to increase as fixed
rate certificates of deposits mature and are repriced in the current higher rate
environment.
The net interest margin (net interest income expressed as a percentage of
average earning assets) was 4.66% and 4.43% for the quarters ended March 31,
2000 and 1999, respectively. Fluctuations in net interest margins are also
affected by differences in the interest rate sensitivity of the Company's
earning assets and interest bearing liabilities.
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<PAGE> 14
NON-INTEREST INCOME
Non-interest income was $618,000 for the first quarter of 2000, generally level
with the $621,000 reported for the same period in 1999. The comparison in
non-interest income during the first quarter of 2000 compared to the same period
in 1999 was affected by a loss on sale on securities of $34,000 in the first
quarter 2000. Investment Center income increased $44,000 during the first
quarter 2000 compared to the same period in 1999 while Trust income declined
$12,000 as the Company no longer operates a Trust Division. All other
non-interest income categories remained relatively level during the first
quarter of 2000 compared to the same period in 1999.
NON-INTEREST EXPENSE
Total non-interest expense increased $582,000 during the first quarter 2000
compared to the same period in 1999. Salaries and employee benefits increased
$288,000 attributable primarily to staffing the Hendersonville office and
increasing staff in the investment, lending and operations areas. Occupancy
expense increased $106,000 during the first quarter of 2000 compared to the same
period in 1999, primarily due to the Company having established an office in
Hendersonville and increasing its leased premises at the Main Office located in
the L & C Tower due to expansions in the commercial lending and bank operations
areas. Data processing expense increased $5,000 as a result of increased volume
in deposit and loan accounts. Other operating expenses increased $192,000 during
the first quarter of 2000 compared to the same period in 1999. These increases
in other operating expenses were comprised primarily of a $47,000 increase in
expense in loan related areas to expand the Company's involvement in accounts
receivable financing and home equity lines of credit, $20,000 increase in FDIC
insurance assessments, $15,000 increase in other insurance expenses, $13,000
expense in goodwill and minority interest related to BON Leasing, $11,000 in
media advertising and other smaller amounts in network access services, postage,
check printing, stationery and supplies, bank security, meals and entertainment,
NSF and other losses. Most of these increases were a result of growth throughout
the Company. Non-interest expense, other than salaries and employee benefits,
increased $294,000, or 35.9%, during the first quarter of 2000 compared to the
same period in 1999 while total assets increased $69.1 million, or 27.7%, at
March 31, 2000 compared to March 31, 1999.
The Company plans further expansion in 2000 that will impact non-interest
expense in future periods. The Company has signed a letter of intent to lease
approximately 3,000 square feet of space at Carothers Road and Bakers Bridge
Road in the Cool Springs area of Williamson County for the purpose of
establishing a branch. It is anticipated that the new branch will open in the
third quarter of 2000. Strategic growth plans include further expansion of the
Company's investment services area offered in conjunction with LMFP, Inc. and
expansion of the Company's commercial lending and retail activities. These
expansions will result in increased expense in other support areas, but should
also have a positive long-term impact on interest income and non-interest
income. It is expected that the Company's non-interest expense will increase
during the remainder of 2000 as the Company implements its expansion plans. It
should be noted that economic conditions and other factors in the market could
further impact non-interest expense.
INCOME TAXES
During the first quarter of 2000, the Company recorded provision for income
taxes of $510,000 compared to $471,000 during the same period in 1999. The
increase in provisions for income taxes was the result of increased earnings.
Reference should be made to Note E to the financial statements.
NON-PERFORMING ASSETS AND RISK ELEMENTS
Non-performing assets, which include non-accrual loans, restructured loans and
other real estate owned, were $768,000 at March 31, 2000, an increase of
$236,000 from $532,000 at March 31, 1999, and an increase of $477,000 from the
$291,000 reported at December 31, 1999. 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 the
reporting period. Factors given consideration in establishing the allowance
include historical net charge-offs, changes in the credit risk, mix and volume
of the loan portfolio, and other relevant factors, such as the risk of loss on
particular loans, the level of non-performing assets as well as current and
-12-
<PAGE> 15
forecasted economic conditions. In the first quarter of 2000, the Company
recorded $210,000 in expense for provision of loan losses compared with $45,000
for the same period in 1999. Provisions for loan losses were deemed appropriate
due to growth in the loan/lease portfolios and the increased level of
non-performing assets. Net charge-offs during the first quarter of 2000 were
$12,000 compared to $82,000 in the first quarter of 1999. The Company evaluates
the credit risk of each customer on an individual and ongoing basis and, where
deemed appropriate, obtains collateral. Collateral values are monitored to
insure that they are maintained at appropriate levels. The largest component of
the Company's credit risk relates to its loan portfolio. The Company continues
to maintain its emphasis on underwriting standards and loan review procedures.
Asset quality, loan charge-off and recovery experience impact the level of the
allowance for loan losses. There were no loans 90 days or more past due and
still accruing interest at March 31, 2000 or 1999. Potential problem loans at
March 31, 2000 totaled approximately $455,000 compared with $225,000 at March
31, 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 March 31,
2000, was 100% in non-accrual loans which compares with 90.2% in non-accrual
loans and 9.8% in other real estate owned at March 31, 1999 and 100% in
non-accrual loans at December 31, 1999. The allowance for loan losses was $4.3
million at March 31, 2000, compared with $3.6 million at March 31, 1999, and
$4.1 million at December 31, 1999. The level of the allowance for loan losses is
monitored regularly by management and the Company's Board of Directors. The
level of this allowance and the amount of the provision are determined on a
quarter by quarter basis and, given the inherent uncertainties involved in the
estimation process, no assurance can be given as to the amount of the allowance
at any future date. As of March 31, 2000 the allocated and unallocated portions
of the allowance were $3.3 million and $1.0 million, respectively which compares
with $3.2 million and $.9 million, respectively at December 31, 1999.
-13-
<PAGE> 16
MARKET RISK MANAGEMENT
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. 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 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 under one
year and generally should not exceed one-half year. One measure of the Company's
exposure to changes in interest rates between assets and liabilities is shown in
the Company's March 31, 2000 gap table below:
<TABLE>
<CAPTION>
Expected Repricing or Maturity Date
--------------------------------------------------------------
Within One Three After
One to Three to Five Five
(Dollars In Thousands) Year Years Years Year Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Securities $ 18,486 $ 18,221 $12,437 $23,117 $ 72,261
Average rate 6.61% 6.90% 6.80% 6.59% 6.71%
Loans 130,761 32,073 45,736 9,402 217,972
Average rate 9.04% 8.88% 8.62% 8.46% 8.90%
Federal funds sold and cash 16,644 -- -- -- 16,644
Average rate 6.00% -- -- -- 6.00%
- ----------------------------------------------------------------------------------------------------------
Total interest-earning assets 165,891 50,294 58,173 32,519 306,877
Liabilities
Deposits 203,164 14,434 -- 2 217,600
Average rate 4.91% 5.68% -- 4.95% 4.96%
Federal Home Loan
Bank and other borrowings 15,810 -- -- -- 15,810
Average rate 6.09% -- -- -- 6.09%
Federal Funds Purchased 15,000 -- -- -- 15,000
Average rate 6.62% -- -- -- 6.62%
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 233,974 14,434 -- 2 248,410
- ----------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ (68,083) $ 35,860 $58,173 $32,517
==========================================================================================================
Cumulative interest rate
sensitivity gap $ (68,083) $(32,223) $25,950 $58,467
==========================================================================================================
</TABLE>
Management recommends appropriate levels of interest rate risk to be assumed
within limits approved by the Board of Directors regarding the maximum
fluctuations acceptable in the market value of equity and in earnings, assuming
sudden rate movements (rising or falling) up to 200 basis points. The Company's
policy establishes a maximum change in annual pre-tax net interest income with a
200 basis point change in rates to 15% while establishing a maximum change
allowable in pre-tax market value of equity to 16% in the same assumed rate
environment. The Company's primary objective in managing interest rate risk is
to minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital while structuring the Company's assets and
liabilities to obtain the maximum yield-cost spread. The Company relies
primarily on its asset liability structure to control interest rate risk. Based
on March 31, 2000 financials, historical repricing trends and management's
repricing assumptions, a 200 basis point change in rates would produce net
interest income variations of a 4.73% increase assuming rising rates and a 2.94%
decrease assuming falling rates. Additionally, the 200 basis point rate shock
would produce changes in the market value of equity of a increase of 6.59%
assuming rising rates and 6.25% decrease assuming falling rates.
-14-
<PAGE> 17
BALANCE SHEET
The Company's total assets at March 31, 2000, were $318.5 million, an increase
of $10.4 million, or 3.40%, from $308.1 million at December 31, 1999. This
increase was the result of a $12.5 million increase in total loans, $2.2 million
increase in federal funds sold and a $.3 million increase in accrued interest
and other assets. These increases were slightly offset by a decrease of $2.6
million in investment securities and a decrease of $1.7 million in cash and due
from banks. The growth in loans reflects the Company's efforts to expand its
commercial lending activities and branch locations to generate additional loan
volume and increase the level of loans, the Company's highest yielding asset.
The Company is continuing its efforts to increase loan volume while maintaining
its focus on credit quality as a part of its internal growth strategy.
Total deposits at March 31, 2000, were $238.5 million, an increase of $9.3
million, or 4.1%, from $229.1 million at December 31, 1999. The increase in
deposits was comprised of a $17.5 million increase in time certificates $100,000
or greater, $4.8 million increase in NOW accounts and an increase of $2.4
million in non-interest bearing demand deposits. These increases were partially
offset by a decrease of $15.8 million in money market accounts. The increase in
time certificates $100,000 and greater was primarily the result of an increase
in public funds while the decrease in money market accounts was primarily the
result of declines in the balances on accounts of a few large commercial
customers at March 31, 2000.
Shareholders' equity, excluding accumulated other comprehensive loss, decreased
$1.4 million to $46.9 million at March 31, 2000 from $48.3 million at December
31, 1999. This decrease resulted from the repurchase of stock that occurred in
the first quarter of 2000 under the Company's stock repurchase plan. The Company
recorded a dividend payment of $662,000 during the first quarter of 2000
compared with $295,000 for the same period in 1999. The increased dividend
payment reflected a $.10 per share increase in the dividend declared and was
somewhat offset by the decreased number of shares outstanding as a result of the
Company's stock repurchase plan. Unrealized losses on securities available for
sale, net of income taxes, were $1.1 million at March 31, 2000, compared to $1.0
million at December 31, 1999.
CAPITAL ADEQUACY AND LIQUIDITY
During the past 2 years the Company has experienced several changes in its
capital structure as 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 stock repurchase plans in 1999 and 2000. At March 31,
2000, the Company has repurchased 440,000 shares under their plans. Additional
capital was utilized in 1999 to purchase the majority interest in Bon Leasing.
Also, the Company expanded internally during 1999 and the first quarter of 2000
as it implemented its internal growth plans by expanding its lending
capabilities through the addition of loan officers and the establishment of
additional branch locations. The Company plans to continue the deployment of
capital through further expansion of its basic businesses and by making
investments in other appropriate long term business opportunities.
Shareholder's equity (excluding other comprehensive loss) at March 31, 2000, was
$46.9 million, or 14.7% of total assets, which compares with $51.2 million, or
20.5% of assets, at March 31, 1999 and $48.3 million, or 15.7% of total assets
at December 31, 1999. This calculation, when considered after the effect of the
Company's adoption of Statement of Financial Accounting Standards (SFAS) No.
115, was $45.8 million, or 14.4%, at March 31, 2000, which compares with $51.5
million, or 20.6%, at March 31, 1999 and $47.3 million, or 15.4%, of total
assets at December 31, 1999. The decrease in total equity during the first
quarter of 2000 resulted from the continued implementation of the Company's
stock repurchase plan.
-15-
<PAGE> 18
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. The Company reported dividend payments of $662,000 during the first
quarter of 2000 compared with $295,000 for the same period in 1999. The
quarterly dividend payment during the first quarter of 1999 was $.07 per share
with quarter dividend payments of $.13 per share in each subsequent quarter of
1999. The Company announced an increase in the quarterly dividend payment per
share of $.04 to $.17 per share for the dividend paid in the first quarter of
2000. It should be noted that the increases in the dividend payment amount per
share combined with the reduction in shares outstanding as a result of the stock
repurchase plan will affect the total amount of dividends paid. At March 31,
2000, the Company's Tier I and total capital ratios to adjusted assets were
19.45% and 16.76%, respectively, while its total risk based capital ratio was
20.70%. These ratios compare to Tier I and total capital ratios to adjusted
assets of 21.12% and 17.24%, respectively, at December 31, 1999 and a risk based
capital ratio at December 31, 1999 of 22.37%. Federal Deposit Insurance
Corporation Improvement Act minimum, primary and total capital ratios for "Well
Capitalized" banks are 4% and 8%, respectively.
The Company's principal sources of asset liquidity are marketable securities
available for sale and federal funds sold, as well as maturities of securities.
The estimated average maturity of securities was 5.93 years at March 31, 2000,
compared to 8.28 years at December 31, 1999. At March 31, 2000 and December 31,
1999, all securities were classified as available for sale.
Securities available for sale were $72.3 million at March 31, 2000, compared to
$74.9 million at December 31, 1999. Federal funds sold at March 31, 2000 were
$16.5 million compared to $14.3 million at December 31, 1999. Core deposits, a
relatively stable funding base, comprised 72.4% of total deposits at March 31,
2000, and 78.9% at December 31, 1999. Core deposits represent total deposits
excluding time certificates of $100,000 or greater.
-16-
<PAGE> 19
PART II
OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11 Statement regarding computation of earnings per share.
27 Financial Data Schedule (for SEC use only)
</TABLE>
(B) The following reports on Form 8-K were filed during the quarter ended
March 31, 2000.
March 15, 2000 to announce the authorization of a new Stock Repurchase
Plan for up to 500,000 shares of common stock.
March 15, 2000 to announce the expansion of management to include a new
President.
-17-
<PAGE> 20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
COMMUNITY FINANCIAL GROUP, INC.
Registrant
May 15, 2000 /s/ Mack S. Linebaugh, Jr.
Date ----------------------------------
Mack S. Linebaugh, Jr.
President, Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer
-18-
<PAGE> 21
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
QUARTERLY STATEMENT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2000
EXHIBITS
<PAGE> 1
EXHIBIT 11
COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---------- ----------
<S> <C> <C>
Basic Income Per Common Share (1)
Net income (in thousands) $ 832 $ 805
========== ==========
Net income per share $ .21 $ .19
========== ==========
Weighted average common shares outstanding 3,875,053 4,217,795
========== ==========
Diluted Income Per Common Share (2)
Net income (in thousands) $ 832 $ 805
========== ==========
Net income per share $ .21 $ .19
========== ==========
Weighted average common shares outstanding 3,920,275 4,296,416
========== ==========
</TABLE>
(1) Basic net income per share has been computed using the weighted average
number of common shares outstanding during each period presented.
(2) Diluted net income per share has been computed using the weighted
average number of common shares outstanding and the dilutive effect of
stock options outstanding during the periods presented.
-19-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,817
<INT-BEARING-DEPOSITS> 144
<FED-FUNDS-SOLD> 16,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,261
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 217,972
<ALLOWANCE> 4,260
<TOTAL-ASSETS> 318,535
<DEPOSITS> 238,490
<SHORT-TERM> 16,310
<LIABILITIES-OTHER> 3,474
<LONG-TERM> 14,500
0
0
<COMMON> 22,911
<OTHER-SE> 22,850
<TOTAL-LIABILITIES-AND-EQUITY> 318,535
<INTEREST-LOAN> 4,968
<INTEREST-INVEST> 1,241
<INTEREST-OTHER> 54
<INTEREST-TOTAL> 6,263
<INTEREST-DEPOSIT> 2,623
<INTEREST-EXPENSE> 2,911
<INTEREST-INCOME-NET> 3,352
<LOAN-LOSSES> 210
<SECURITIES-GAINS> (34)
<EXPENSE-OTHER> 2,418
<INCOME-PRETAX> 1,342
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 832
<EPS-BASIC> .21
<EPS-DILUTED> .21
<YIELD-ACTUAL> 4.66
<LOANS-NON> 768
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 455
<ALLOWANCE-OPEN> 4,062
<CHARGE-OFFS> (59)
<RECOVERIES> 47
<ALLOWANCE-CLOSE> 4,260
<ALLOWANCE-DOMESTIC> 3,258
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,002
</TABLE>
