-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HxhP9Ny8iq9lIj5COyHaUTFKPvbfvgYiIsorUQZzWCCzpDr9oraQHbLCzHGijDwF jqtvIXc4VHnv/A8CMfP86w== 0000950144-00-004180.txt : 20000331 0000950144-00-004180.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950144-00-004180 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000852677 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 621626938 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-28496 FILM NUMBER: 585946 BUSINESS ADDRESS: STREET 1: 401 CHURCH ST STREET 2: PO BOX 198986 CITY: NASHVILLE STATE: TN ZIP: 37219 BUSINESS PHONE: 6152712025 MAIL ADDRESS: STREET 1: PO BOX 198986 CITY: NASHVILLE STATE: TN ZIP: 37219-8986 10-K405 1 COMMUNITY FINANCIAL GROUP, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1999 ------------------------------------ Commission File Number 0-28496 ------------------------------------------- Community Financial Group, Inc. - ------------------------------------------------------------------------------- (Name of registrant as specified in its charter) Tennessee 62-1626938 - ---------------------------------- -------------------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 401 Church Street Nashville, Tennessee 37219-2213 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (615) 271-2000 -------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $6 per share - ------------------------------------------------------------------------------- (Title of Class) Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value (price at which the stock sold) of Community Financial Group, Inc., voting common stock held by non-affiliates as of March 9, 2000, was $42,159,137. 2 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
Outstanding at Class March 15, 2000 --------- -------------- Common stock $6 par value 3,831,191 shares
Documents Incorporated by Reference:
Document from which portions Part of Form 10-K to are incorporated by reference which incorporated ----------------------------- -------------------- 1. Annual Report to Shareholders for year Part I - Item 1 ended December 31, 1999 Part II - Items 5, 7 7A, and 8 2. Proxy Statement dated April 10, 2000 Part III - Items 10, to be filed with the Securities and 11, 12 and 13 Exchange Commission within 120 days after the fiscal year ended December 31, 1999
Referenced Form 10-K Item 1. Description of Business 3 Item 2. Description of Properties 10 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II Item 5. Market for Common Equity and Related Shareholder Matters 11 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis 13 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 13 Item 8. Financial Statements and Supplementary Data 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 PART III Item 10. Directors and Executive Officers of the Registrant 13 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 14 Item 13. Certain Relationships and Related Transactions 14 PART IV Item 14. Exhibits, List and Reports on Form 8-K 14 Signatures 19
-2- 3 ITEM 1 - DESCRIPTION OF BUSINESS On December 13, 1995, Community Financial Group, Inc. ("CFGI"), was incorporated as a Tennessee Corporation. CFGI also filed an application with the Board of Governors of the Federal Reserve System for prior approval to become a one bank holding company pursuant to Section 3(a)(1) of the Bank Holding Company Act of 1956, as amended. This application was filed on January 22, 1996, and approval was received on March 29, 1996. The holding company began operations April 30, 1996, following approval of a majority of the shareholders of The Bank of Nashville. As of December 31, 1999, CFGI owned The Bank of Nashville (The Bank) and its subsidiaries Machinery Leasing Company of North America (BON Leasing) and TBON - - Mooreland Joint Venture. CFGI and The Bank, including its subsidiaries, are collectively referred to herein as "the Company". The Bank was incorporated under the laws of the State of Tennessee, on July 10, 1989. The Bank was approved as a State Bank, is a member of the Federal Reserve System, and is insured by the Federal Deposit Insurance Corporation. The initial business day for the Bank was November 20, 1989. The Company now has a total of 80 employees. The Bank formed TBON-Mooreland Joint Venture on April 9, 1999 and on June 18, 1999 purchased a majority interest in BON Leasing. The present area and scope of the Company's activities include providing a full range of banking and related financial services, including commercial banking, consumer banking, financial and investment services, real estate finance, lease financing and title services. The Company has four traditional locations with its Main Office at 401 Church Street, the Green Hills office at 3770 Hillsboro Pike, the Brentwood office at 5105 Maryland Way and the Hendersonville office at 100 Maple Drive North. Additionally, these locations are complemented by the Company's "Bank on Call" mobile branches which operate throughout the market area with "at your office" banking convenience. LMFP, Inc., a subsidiary of Legg Mason Wood Walker, Inc., operates Investment Centers in the Company's Main Office and Green Hills locations which provide bank customers with convenient access to a wide array of investment products and fiduciary services. The Company is well capitalized as demonstrated by a total risk-based capital ratio of 22.4%, tier 1 risk-based capital ratio of 21.1% and tier 1 leverage ratio was 16.1% at December 31, 1999. Additionally, at year end 1999, the Bank's capital ratios reflected total risk based capital ratio at 14.1%, tier 1 risk-based capital ratio at 12.8% and tier 1 leverage ratio at 10.2%. These capital ratios exceed the current regulatory minimum requirements. The Company is focused on serving small/mid-sized businesses and individuals in the middle Tennessee market, with a primary service area of the Metro Nashville-Davidson County Metropolitan Statistical Area (MSA). Nashville, located in the north central part of the State, is the State's largest MSA. Situated midway between the Mississippi delta to the west, and the Great Smokey -3- 4 Mountains to the east, Metropolitan Nashville covers 533 square miles. Over half of the population of the United States is located within a 600 mile radius of the city, and the central location has contributed to the emergence of Nashville as an important transportation, tourism, and distribution center. Diversity is a key element of the Nashville economy with printing and publishing, healthcare, automobile manufacturing, financial services, real estate development and construction, education, government, entertainment, tourism, hospitality, manufacturing, warehousing, and various service sectors, all being major contributors to the economic vitality of the area. The activities in which the Company engages are very competitive. Generally, the Company competes with other banks and nonbank financial institutions located primarily in the Middle Tennessee market area. The principal methods of competition center around such aspects as interest rates on loans and deposits, decision making relationship management, customer services, and other service oriented fee based products. Most of the Company's competitors are regional and national corporations with substantially more assets and personnel than the Company. The Company actively competes for loans and deposits with other commercial banks, brokerage firms, leasing companies and credit unions. Consumer finance companies, department stores, mortgage brokers, and insurance companies are also significant competitors for various types of loans. There is also active competition for various types of fiduciary and investment business from other banks, trust companies, brokerage firms, investment companies, and others. The Company is headquartered in the downtown central business district of Nashville. The Company occupies space in the lower level, the second floor, the third floor and twenty-third floor of the L & C Tower, located at 401 Church Street, a location which serves as the Bank's Main Office. The Company now operates ATM's and cash dispensers in various locations throughout its market, serving local businesses and individuals as well as tourists. In 1996, the Company received regulatory approval to establish a mobile branch. The mobile branch brings traditional banking services to the Company's customers at their locations. Other full service branch offices, include the Green Hills office which opened in January 1997, the Brentwood office located in Maryland Farms in Brentwood, Tennessee which opened in September 1998, and the Hendersonville office which opened in May, 1999. If deemed appropriate, additional offices may be established subject to regulatory approval. During 1999, the Company declared dividends of $.46 per share which resulted in a dividend payout ratio of 53.49%. Other information relating to current banking issues and the regulatory environment are addressed in the 1999 Annual Report to Shareholders. -4- 5 The following schedules are provided in accordance with Guide 3 "Statistical Disclosure by Bank Holding Companies." All schedules, except those noted below, have been omitted since the required information is either not applicable or is incorporated by reference in the Company's 1999 Annual Report. - Schedule III-A - Types of Loans - Schedule III-B - Maturities and Sensitivities of Loans to Changes in Interest Rates - Schedule III-C - Risk Elements - Schedule IV-A - Analysis of the Allowance for Loan Losses Schedule IV-B - Allocation of the Allowance for Loan Losses - Schedule VI - Return on Equity and Assets - Schedule VII - Short-term Borrowings -5- 6 III. LOAN PORTFOLIO The following table presents a summary of loan types (net of unearned income) by categories for the last five years. SCHEDULE III-A TYPES OF LOANS
December 31, ----------------------------------------------------------------------- (In thousands) 1999 1998 1997 1996 1995 -------- -------- -------- -------- ------- Loans (net of unearned income of $2,171, $295, $297, $256 and $203 respectively) Commercial $ 70,166 $ 51,970 $ 38,571 $ 35,721 $40,657 Real estate - mortgage loans 102,476 79,455 71,055 58,763 48,648 Real estate - construction 19,688 14,667 9,426 9,467 5,952 Consumer 5,870 6,583 3,697 3,937 3,083 Lease financing 7,311 -- -- -- -- -------- -------- -------- -------- ------- $205,511 $152,675 $122,749 $107,888 $98,340 ======== ======== ======== ======== =======
Most of the Company's loan activity is with customers located in the Middle Tennessee region while leasing activities are nationwide. Generally, loans are secured by real estate, inventory, accounts receivable, stock, time certificates, or other assets and leases are secured by equipment. The loans/leases are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Real estate mortgage and construction loans reflected in the preceding schedule are comprised primarily of loans to commercial borrowers. At December 31, 1999, funded and unfunded commitments as classified by Standard Industry Classification codes include borrowers in the real estate industry approximating $27.3 million and $6.4 million, respectively, and loans to building contractors approximating $14.5 million and $11.3 million, respectively. At December 31, 1998, funded and unfunded loan commitments to borrowers in the real estate industry were approximately $27.2 million and $5.2 million, respectively, and loans to building contractors were approximately $8.8 million and $10.1 million, respectively. -6- 7 The following table presents the maturity distribution of loan categories at December 31, 1999 (in thousands). SCHEDULE III-B TYPES OF LOANS MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
One After One After Year But Within Five (In Thousands) Or Less Five Years Years Total ---------------------------------------------------------------- (Net of Unearned Income) Commercial $33,649 $32,451 $ 4,066 $ 70,166 Real estate - mortgage 20,061 28,962 53,453 102,476 Real estate - construction 6,538 2,490 10,660 19,688 Consumer 3,418 2,398 54 5,870 Lease financing 282 7,029 - 7,311 ------- ------- ------- -------- $63,948 $73,330 $68,233 $205,511 ======= ======= ======= ======== For maturities over one year: Fixed $64,134 Floating 77,429
The following table list risks elements from the loan portfolio for the last five years. SCHEDULE III-C RISK ELEMENTS
December 31, ---------------------------------------------------------------- (In thousands) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Nonaccrual loans $291 $408 $1,094 $579 $451 Past due ninety days and still accruing None None None None None Restructured loans None None None None None
-7- 8 SCHEDULE IV - A ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES The following table represents a recap of activity in the allowance for loan losses during the past five years.
(In Thousands) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- ALLOWANCE FOR LOAN LOSSES, JANUARY 1 $ 3,646 $ 3,128 $ 2,878 $ 3,034 $ 2,841 LOAN CHARGED OFF: Commercial (608) (41) (169) (450) (344) Real estate (129) (38) -- (243) -- Consumer (20) (5) -- (4) (1) Lease financing (15) -- -- -- -- --------- --------- --------- --------- -------- Total charge-offs (772) (84) (169) (697) (345) --------- --------- --------- --------- -------- RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF: Commercial 988 222 317 494 929 Real estate -- 2 -- 46 129 Consumer 2 250 2 1 -- --------- --------- --------- --------- -------- Total recoveries 990 474 319 541 1,058 --------- --------- --------- --------- -------- NET RECOVERIES (CHARGE-OFFS) 218 390 150 (156) 713 PROVISION CHARGED (CREDITED)TO OPERATIONS 106 128 100 -- (520) PURCHASED RESERVE OF BON LEASING 92 -- -- -- -- --------- --------- --------- --------- -------- ALLOWANCE FOR LOAN LOSSES, DECEMBER 31 $ 4,062 $ 3,646 $ 3,128 $ 2,878 $ 3,034 ========= ========= ========= ========= ======== LOANS, net of unearned income Year-end $ 205,511 $ 152,675 $ 122,749 $ 107,888 $ 98,340 Average during year $ 176,027 $ 133,660 $ 114,835 $ 102,895 $ 89,522 Allowance for loan losses to year-end loans, net of unearned income 1.98% 2.39% 2.55% 2.67% 3.09% Provision (credit) for loan losses to average loans, net of unearned income .06% .10% .09% -- (.58)% Net recoveries (charge-offs) to average loans, net of unearned income .12% .29% .09% (.15)% .80%
-8- 9 SCHEDULE IV - B ALLOCATION OF THE ALLOWANCE LOAN FOR LOSES The following table presents the allocation of the allowance for loan losses for the past five years.
December 31, --------------------------------------------------------------------- (In Thousands) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- BALANCE APPLICABLE TO: Commercial $1,663 $ 918 $ 916 $ 775 $ 735 Real estate - mortgage loans 1,160 1,006 967 900 730 Real estate - construction loans 212 133 128 140 55 Consumer 54 47 79 58 80 Lease financing 103 -- -- -- -- Unallocated 870 1,542 1,038 1,005 1,434 ------ ------ ------ ------ ------ $4,062 $3,646 $3,128 $2,878 $3,034 ====== ====== ====== ====== ====== PERCENT OF TOTAL ALLOCATION Commercial 41.0% 25.2% 29.3% 26.9% 24.2% Real estate - mortgage loans 28.6 27.6 30.9 31.3 24.1 Real estate - construction loans 5.2 3.6 4.1 4.9 1.8 Consumer 1.3 1.3 2.5 2.0 2.6 Lease financing 2.5 -- -- -- -- Unallocated 21.4 42.3 33.2 34.9 47.3 ------ ------ ------ ------ ------ 100.0% 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ====== ======
-9- 10 The following table presents the company's return on average equity and average assets for the last three years. SCHEDULE VI RETURN ON EQUITY AND ASSETS
1999 1998 1997 ---- ---- ---- Return on average assets 1.30% 1.23% 1.08% Return on average shareholders' equity (excluding accumulated other comprehensive income) 7.09 9.56 9.05 Dividend payout ratio 53.49 22.22 21.51 Average equity to average assets (excluding accumulated other comprehensive income) 18.34 12.88 11.92 Net interest margin 4.65 4.28 3.96
SCHEDULE VII SHORT-TERM BORROWINGS The following table details information on the Company's short-term borrowings for the last three years.
(Dollars in thousands) 1999 1998 1997 ---- ---- ---- Outstanding end of period $ 5,000 $ 8,000 $ -- Weighted average rate period end 5.25% 4.84% N/A Month-end maximum during the period 18,100 10,000 7,800 Period average $ 3,102 $ 574 $ 473 Weighted average rate paid 5.05% 5.11% 5.50%
The above mentioned borrowings represent federal funds overnight borrowings from correspondent banks. The term of the borrowings was for one day at the applicable overnight rate. ITEM 2 - DESCRIPTION OF PROPERTY The Company, located at 401 Church Street, Nashville, Tennessee, occupies a total of 15,296 square feet on four floors of the L&C Tower, a 31-story office building. The L&C Tower has a total of 158,907 gross square footage and is located on .391 acres. The Company's space is leased from LC Tower, L.L.C. (the "Landlord"). The lease, dated August 4, 1989, has an initial term of twenty years with three five-year renewal options. The Company occupies 4,670 square feet in the Glendale Shopping Center located at 3770 Hillsboro Pike, Nashville, Tennessee. The Company's space is leased from Coleman Partners, a Tennessee Partnership, with the lease, dated August 1, 1996, having an initial term of five years with three five-year renewal options. -10- 11 The Company occupies 4,000 square feet in The Bank of Nashville Building located at 5105 Maryland Way, Brentwood, Tennessee. The Company's space is leased from Graystone, LLC. The lease, dated August 4, 1997, and has an initial term of ten years with three five-year renewal options. The Company occupies 3,800 square feet in the newly constructed building located at 100 Maple Drive North in Hendersonville, Tennessee. The company owns the land and building, having purchased the land in June, 1998 and completed construction in April, 1999. ITEM 3 - LEGAL PROCEEDINGS None. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The following portion of the Company's 1999 Annual Report to Shareholders is incorporated herein by reference: Common Stock Information Page 50 -11- 12 ITEM 6 - SELECTED FINANCIAL DATA
(Dollars in thousands except per share) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Interest income $ 20,975 $ 16,591 $ 15,260 $ 12,899 $ 12,247 Interest expense 9,053 8,035 7,956 6,446 6,642 --------- --------- --------- --------- --------- Net interest income 11,922 8,556 7,304 6,453 5,605 Provision for loan losses 106 128 100 -- (520) --------- --------- --------- --------- --------- Net interest income after provision for loan losses 11,816 8,428 7,204 6,453 6,125 Non-interest income 2,675 1,805 1,421 927 722 Non-interest expense 8,845 6,071 5,236 4,665 4,301 --------- --------- --------- --------- --------- Income before income taxes 5,646 4,162 3,389 2,715 2,546 Income tax expense 2,145 1,581 1,331 168 32 --------- --------- --------- --------- --------- Net income $ 3,501 $ 2,581 $ 2,058 $ 2,547 $ 2,514 ========= ========= ========= ========= ========= Per Common Share: Earnings diluted $ 0.85 $ 0.78 $ 0.89 $ 1.15 $ 1.14 Earnings basic 0.86 1.08 0.93 1.16 1.15 Dividends paid 0.46 0.24 0.20 0.16 -- Market Price: High $ 18.13 $ 17.06 $ 15.13 $ 11.75 $ 10.75 Low 11.00 11.81 10.75 9.75 6.75 Close 12.75 12.63 15.00 11.25 10.75 Book value (excluding accumulated other comprehensive income) 12.31 12.06 10.74 10.00 9.00 Average Balances: Total Assets $ 269,137 $ 209,501 $ 190,766 $ 158,615 $ 149,008 Earning assets 256,648 200,245 184,257 154,503 145,377 Loans 176,027 133,660 114,835 102,895 89,522 Deposits 199,089 167,294 152,640 132,853 128,835 Long-term debt 15,376 12,144 12,651 2,745 -- Shareholders' equity 49,200 27,313 22,846 20,964 18,337 At December 31: Total Assets $ 308,106 $ 238,185 $ 204,887 $ 166,679 $ 152,800 Earnings assets 294,785 225,291 198,293 161,150 147,264 Loans 205,511 152,675 122,749 107,888 98,340 Allowance for loan losses 4,062 3,646 3,128 2,878 3,034 Deposits 229,141 162,553 164,099 133,270 130,534 Long-term debt 24,500 14,500 14,500 9,500 -- Shareholders' equity 47,315 51,717 24,052 22,085 20,012
-12- 13 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS The following portions of the 1999 Annual Report are herein incorporated by reference. Management's Discussion and Analysis of Results of Operations and Financial Condition on pages 8 through 27. ITEM 7A - QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following portions of the 1999 Annual Report are herein incorporated by reference. Management's Discussion and Analysis of Results of Operations and Financial Condition on pages 8 through 27. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following portions of the 1999 Annual Report are incorporated herein by reference. Financial Statements and Report of Independent Auditors on pages 28 through 46 and page 48. Quarterly Results of Operations on page 49. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors and the information regarding executive officers called for by this item is contained in the sections entitled "Election of Directors" and "Executive Officers" in the Company's proxy statement for its 2000 Annual Meeting of Shareholders, dated April 10, 2000, and is incorporated herein by reference. -13- 14 ITEM 11 - EXECUTIVE COMPENSATION The information called for by this item is contained in the section entitled "Compensation of Management and Other Information" in the Company's proxy statement for its 2000 Annual Meeting of Shareholders, dated April 10, 2000, and is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is contained in the section entitled "Stock Ownership" in the Company's proxy statement for its 2000 Annual Meeting of Shareholders dated April 10, 2000, and is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item is contained in the section entitled "Transactions with Directors and Executive Officers" in the Company's proxy statement for its 2000 Annual Meeting of Shareholders dated April 10, 2000, and is incorporated herein by reference. ITEM 14 - EXHIBITS, LIST AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements The following consolidated financial statements and the Report of KPMG LLP, Independent Auditors, are on pages 28 through 46 and page 48 of the 1999 Annual Report and are incorporated herein by reference. - Consolidated Balance Sheets at December 31, 1999 and 1998 - Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 - Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 - Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 - Notes to Consolidated Financial Statements -14- 15 (2) Exhibits 1. Not required. 2. Plan of acquisition, reorganization, arrangement, liquidation or succession. None 3. Articles of Incorporation and By-Laws, incorporated by reference to Exhibit 3 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 4. Instruments defining the rights of security holders, including indentures. 4.02 Form of specimen Certificate of Common Stock, incorporated by reference to Exhibit 4.02 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 4.04 Community Financial Group, Inc. and Registrar and Transfer Company, as Rights Agent, Shareholders Rights Agreement Dated as of January 21, 1998. Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-A dated January 26, 1998. 5. Not required. 6. Not required. 7. Not required. 8. Not required. 9. Voting Trust Agreement. None. 10. Material Contracts. 10.03 Option Agreements between The Bank of Nashville and Mack S. Linebaugh, Jr. dated September 2, 1992 and July 27, 1993, and Option Agreement dated July 16, 1996 between Community Financial Group, Inc., and Mack S. Linebaugh, Jr. Incorporated by reference to Exhibit 10.03 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 10.04 Option Agreements between The Bank of Nashville and Julian C. Cornett dated October 13, 1992 and October 13, 1993, and Option Agreement dated July 16, 1996 between Community Financial Group, Inc., and Julian C. Cornett. Incorporated by reference to Exhibit 10.04 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996.
-15- 16 (2) Exhibits - Continued 10.05 Lease Agreement dated July 19, 1989 between The Bank of Nashville and Metropolitan Life Insurance Company. Incorporated by reference to Exhibit 10.05 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. Metropolitan Life Insurance Company has been succeeded as landlord by LC Tower, L.L.C. 10.06 Lease Agreement dated August 1, 1996 between The Bank of Nashville and Coleman Partners, a Tennessee Partnership. Incorporated by reference to Exhibit 10.06 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 10.07 The Bank of Nashville Retirement Savings Plan. Incorporated by reference to Exhibit 10.07 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 10.08 Community Financial Group, Inc.'s Associates' Stock Purchase Plan. Incorporated by reference to Exhibit 10.08 to the Registrant's Annual Report Form 10-KSB for the year ended December 31, 1996. 10.09 Community Financial Group, Inc. 1997 Nonstatutory Stock Option Plan Incorporated by reference to Exhibit 10.9 to the Registrant's Form S-2 (SEC file 333-24309)dated April 1, 1997. 10.10 Lease Agreement dated August 4, 1997 between The Bank of Nashville and Graystone, LLC. Incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report Form 10KSB for the year ended December 31, 1997. 10.12 Financial Advisor Agreement dated May 1, 1998 between The Bank of Nashville and Harold J. Castner. Incorporated by reference to Exhibit 10.12 to the Registrant's Annual Report Form 10KSB for the year ended December 31, 1998. 10.13 Financial Advisor Agreement dated May 1, 1998 between The Bank of Nashville and Pamela F. Morris. Incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report Form 10KSB for the year ended December 31, 1998.
-16- 17 (2) Exhibits - Continued 10.14 Financial Advisor Promissory Note Repayment Agreement dated July 24, 1998 between The Bank of Nashville and Harold J. Castner, and Exhibit A Promissory Note. Incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report Form 10KSB for the year ended December 31, 1998. 10.15 Financial Advisor Promissory Note Repayment Agreement dated July 24, 1998 between The Bank of Nashville and Pamela F. Morris and Exhibit A Promissory Note. Incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report Form 10KSB for the year ended December 31, 1998. 10.18 Executive Employment Agreement between Community Financial Group, Inc., The Bank of Nashville and Mack S. Linebaugh, Jr. dated September 14, 1999. 10.19 Executive Employment Agreement between Community Financial Group, Inc., The Bank of Nashville and Julian C. Cornett dated September 14, 1999. 10.20 Executive Employment Agreement between Community Financial Group, Inc., The Bank of Nashville and Anne J. Cheatham dated September 14, 1999. 10.21 Executive Employment Agreement between Community Financial Group, Inc., The Bank of Nashville and T. Wayne Hood dated September 14, 1999. 10.22 Executive Employment Agreement between Community Financial Group, Inc., The Bank of Nashville and Joan B. Marshall dated September 14, 1999. 10.23 First Amendment to the Lease Agreement dated April 13, 1999 between The Bank of Nashville and LC Tower, LLC. 11. Statement re computation of per share earnings. 12. Statement re computation of ratios. Not applicable. 13. 1999 Annual Report to Shareholders. 14. Not required.
-17- 18 (2) Exhibits - Continued 15. Not required. 16. Letter re change in certifying accountant. Not applicable. 17. Not required. 18. Letter re change in accounting principles. Not applicable. 19. Not required. 20. Not required. 21. Subsidiaries of the registrant. 22. Published report regarding matters submitted to vote of security holders. None. 23. Consent of KPMG LLP 24. Power of Attorney. None. 25. Not required. 26. Not required. 27. Financial Data Schedule. 28. Information from reports furnished to state insurance regulatory authorities. Not applicable. 99. Additional Exhibits. None.
-18- 19 (b) Reports on Form 8-K None -19- 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE BANK OF NASHVILLE By: /s/ Mack S. Linebaugh, Jr. Date: March 28, 2000 -------------------------- Mack S. Linebaugh, Jr. Chairman of the Board, President, Chief Executive Officer and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons or behalf of the registrant and in the capacities and on the dates indicated. /s/ Mack S. Linebaugh, Jr. /s/ L. Leon Moore - -------------------------- ----------------- Mack S. Linebaugh, Jr. L. Leon Moore Chairman of the Board, Director President, Chief Executive Officer Dated March 28, 2000 and Chief Financial Officer Dated March 28, 2000 /s/ J. B. Baker, Jr. /s/ Perry W. Moskovitz - -------------------------- ---------------------- J. B. Baker, Jr. Perry W. Moskovitz Director Director Dated March 28, 2000 Dated March 28, 2000 /s/ Jo D. Federspiel /s/ C. Norris Nielsen - -------------------------- --------------------- Jo D. Federspiel C. Norris Nielsen Director Director Dated March 28, 2000 Dated March 28, 2000 -20- 21 SIGNATURES - Continued /s/ Richard H. Fulton /s/ David M. Resha - -------------------------- ------------------ Richard H. Fulton David M. Resha Director Director Dated March 28, 2000 Dated March 28, 2000 /s/ Edgar Thornton - ------------------ G. Edgar Thornton Director Dated March 28, 2000 -21- EX-10.18 2 EXECUTIVE EMPLOYMENT AGREEMENT 1 EXHIBIT 10.18 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement entered into this 14 day of September, 1999 by and among Community Financial Group, Inc., a Tennessee corporation (the "Company"), The Bank of Nashville, a banking corporation organized under the laws of the State of Tennessee (the "Bank"), and Mack S. Linebaugh, Jr. (the "Executive"). WITNESSETH: WHEREAS, the Company is a one-bank holding company which owns one hundred per cent (100%) of the outstanding stock of the Bank; WHEREAS, the Company and the Bank desire to retain the services of Executive on the terms and conditions set forth herein and, for purposes of effecting the same, the Boards of Directors of the Company and the Bank have approved this Employment Agreement and authorized its execution and delivery to the Executive on behalf of the Company and the Bank; WHEREAS, the Executive serves as the Chairman of the Board, President and Chief Executive Officer and a Director of the Company and, as such, is a key executive officer of the Company whose continued dedication, availability, advice and counsel to the Company is deemed important to the Company, the Board of Directors of the Company, and the present and future stockholders of the Company; WHEREAS, the Executive serves as the Chairman of the Board, President and Chief Executive Officer and a Director of the Bank and, as such, is a key executive officer of the Bank whose continued dedication, availability, advice and counsel to the Bank is deemed important to the Board of Directors of the Bank, the Bank and the Company; WHEREAS, the Company and the Bank wish to attract and retain well-qualified executives, and it is in the best interests of the Company, the Bank and the Executive, notwithstanding any change in control of the Company or the Bank, to secure the services of the Executive, whose experience and knowledge of the affairs of the Company and the Bank, and whose reputation and contacts in the industry, are extremely valuable to the Company and the Bank; and WHEREAS, the Company and the Bank consider the establishment and maintenance of a sound and vital management team to be part of their overall corporate strategy and to be essential to protecting and enhancing the best interests of the Bank, the Company, and its stockholders. NOW, THEREFORE, to assure the Company and the Bank of the Executive's continued dedication, the availability of Executive's advice and counsel to the Boards of Directors of the Company and the Bank, the availability of Executive's management skills to the Company and the Bank, and to induce the Executive to remain and continue in the employ of the Company and the Bank in Executive's current capacities, and for other good and valuable consideration, the receipt and adequacy of which each party hereby acknowledged, the Company, the Bank and the Executive hereby agree as follows: 1. EMPLOYMENT. The Company and the Bank agree to, and do hereby, employ Executive and Executive agrees to, and does hereby, accept such employment, all upon the terms and conditions hereinafter set forth. -22- 2 2. TERM: The initial term of employment under this Agreement shall be for a period of one (1) year, commencing on the date first above written and ending at the close of business one year from said date. This Agreement shall be automatically renewed for succeeding terms of one (1) year each, unless either party shall, at least thirty (30) days, but not more than one hundred eighty (180) days, prior to the expiration of any term, give written notice of his or its intention not to renew this Agreement. 3. EMPLOYMENT; DUTIES, AUTHORITY, AND RESPONSIBILITIES: (a) During the term of employment of the Executive by the Company and the Bank, the Executive shall devote Executive's full business time and attention to the rendition of services as Chairman, President and Chief Executive Officer and Director of the Company and as Chairman, President and Chief Executive Officer and Director of the Bank, and to the furtherance of the best interests of the Company and the Bank, and shall exert Executive's best efforts in the rendition of such services. The Executive agrees that in the rendition of such services and in all aspects of such employment Executive will comply with the policies, standards and regulations of the Company and the Bank as from time to time established by their respective Boards of Directors. The expenditure by the Executive of reasonable amounts of time for charitable, professional and similar activities is encouraged and shall not be deemed a breach of this Agreement provided such activities do not materially interfere with the services to be rendered to the Company and the Bank hereunder. (b) As Chairman, President and Chief Executive Officer of the Company, the Executive shall have the general powers and duties of supervision and management of the Company (the Company includes any and all subsidiaries, ventures and related business) which usually pertain to such offices and shall perform all such other duties as are properly required of Executive by the Board of Directors of the Company. In performing the services hereunder, the Executive shall be responsible to and shall report only to the Board of Directors of the Company. (c) The Board of Directors of the Company hereby grants the Executive the necessary authority and responsibility for the day-to-day operations of the Company and the implementation of the policies set by the Board of Directors of the Company. All officers of the Company shall be supervised by, be responsible to, and shall report, directly or indirectly, to the Executive pursuant to such reporting structure as shall be established from time to time by the Executive. A material reduction or limitation in these duties and responsibilities by the Company shall constitute a breach of this Agreement by the Company. In the event of any breach of any provision of this Agreement by the Company which breach is not cured within ten (10) days after written notice of the breach to the Company by the Executive shall entitle the Executive to terminate his employment by the Company pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Company and, at the option of Executive, to terminate his employment by the Bank pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Bank. Any such termination by the Executive of his employment by the Bank hereunder resulting from a breach of the terms of this Agreement shall be treated the same as a termination by the Bank without cause and governed by Section 9 below, unless such breach occurs in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, and constitutes Good Reason for the Executive to terminate Executive's employment, in which case it shall be governed by Section 15 below. (d) As Chairman, President and Chief Executive Officer of the Bank, the Executive shall have the general powers and duties of supervision and management of the Bank (the Bank includes any and all subsidiaries, ventures and related business) which usually pertain to such offices and shall perform all such other duties as are properly required of him by the Board of Directors. In performing the services hereunder, the Executive shall be responsible to and shall report only to the Board of Directors of the Bank. -23- 3 (e) The Board of Directors of the Bank hereby grants the Executive the necessary authority and responsibility for the day-to-day operations of the Bank and the implementation of the policies set by the Board of Directors of the Bank. All officers of the Bank shall be supervised by, be responsible to, and shall report, directly or indirectly, to the Executive pursuant to such reporting structure as shall be established from time to time by the Executive. A material reduction or limitation in these duties and responsibilities by the Bank shall constitute a breach of this Agreement by the Bank. In the event of any breach of any provision of this agreement by the Bank which breach is not cured within ten (10) days after written notice of the breach to the Bank by the Executive shall entitle the Executive to terminate his employment by the Bank pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Bank and, at the option of Executive, to terminate his employment by the Company pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Company. Any such termination by the Executive of his employment by the Bank hereunder resulting from a breach of the terms of this Agreement shall be treated as a termination by the Bank without cause and governed by Section 9 below, unless such breach occurs in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, and constitutes Good Reason for the Executive to terminate Executive's employment, in which case it shall be governed by Section 15 below. 4. COMPENSATION: The Bank agrees to pay Executive, and Executive agrees to accept, as compensation for all services rendered by him to the Company, the Bank and their affiliates during the period of his employment under this Agreement, base compensation at the annual rate of not less than $200,000, which shall be payable in accordance with the normal payroll policies of the Bank and shall be subject to all appropriate withholding taxes. 5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS EXPENSES AND MOVING EXPENSES: (a) During the term of this Agreement, Executive shall be entitled to participate in all pension, group insurance, hospitalization, deferred compensation, Company paid life insurance, or incentive plans, and any other benefit plan of the Company or the Bank presently in effect or hereafter adopted by the Company or the Bank and generally available to all employees of either organization of senior executive status (the "Benefit Plans"). (b) During the term of this Agreement, to the extent that such expenditures meet the requirements of the Internal Revenue Code for deductibility by the Company or the Bank for federal income tax purposes and are substantiated by the Executive as required by the Internal Revenue Service and policies of the Company and the Bank, the Bank shall reimburse the Executive promptly for all expenditures (including travel, entertainment, parking, business meetings, and the monthly costs, including dues, of maintaining memberships at appropriate clubs, including, but not limited to, Nashville City Club) made in accordance with rules and policies established from time to time by the Board of Directors of the Bank in pursuance and furtherance of the Company's and the Bank's business and good will. (c) During the term of this Agreement, in the event that the Company or the Bank relocates its principal executive offices to a location more than one hundred (100) miles from Nashville, Tennessee, or the Board of Directors of either the Company or the Bank requires the Executive to be based anywhere more than one hundred (100) miles from the Bank's principal executive offices, the Bank shall pay (or reimburse the Executive for) all reasonable moving expenses incurred by Executive relating to a change of Executive's principal residence in connection with such relocation, provided that the Executive furnishes the Bank with adequate records and documentary evidence for the substantiation of such reimbursement. -24- 4 6. ILLNESS: In the event Executive is unable to perform Executive's duties under this Agreement on a full-time basis for a period of six (6) consecutive months by reason of illness or other physical or mental disability, and at or before the end of such period Executive does not return to work on a full-time basis, the Company and the Bank may jointly terminate Executive's Employment pursuant to this Agreement without further or additional compensation being due the Executive from the Bank pursuant to this Agreement, except that the Executive shall be paid Executive's base compensation from the Bank at the rate in effect at the time of Executive's termination for a period of twelve (12) months from the date of the commencement of the Executive's inability to perform his duties, less any disability payments payable during such time under any disability plans maintained and paid for by the Bank, and Executive shall continue to participate in all Benefit Plans in effect at the time of Executive's termination for a period of twelve (12) months from the date of the commencement of the Executive's inability to perform his duties. 7. DEATH: In the event of the Executive's death during the term of this Agreement, Executive's estate, legal representatives or named beneficiaries (as directed by the Executive in writing) shall be paid Executive's base compensation from the Bank at the rate in effect at the time of the Executive's death under this Agreement for the period of twelve (12) months from the date of the Executive's death, less any amounts payable to Executive's estate or beneficiaries under life insurance policies on the life of Executive maintained and paid for by Bank. 8. TERMINATION BY COMPANY: Notwithstanding the provisions of Section 2 above, the Board of Directors of the Company may, in its sole discretion, terminate the Executive's employment with the Company under this Agreement at any time in any lawful manner by not less than thirty (30) days written notice to the Executive, in which event the Executive shall be entitled to elect to have such termination likewise constitute a termination of Executive's employment by the Bank. If Executive so elects, then unless such termination is for Cause as defined in Section 10 of this Agreement or unless the Executive's employment is terminated in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, Executive shall be entitled to the compensation provided for in Section 9 below. 9. TERMINATION BY BANK: Notwithstanding the provisions of Section 2 of this Agreement, the Board of Directors of the Bank may, in its sole discretion, terminate the Executive's employment with the Bank under this Agreement at any time in any lawful manner by not less than thirty (30) days written notice to the Executive (or, at the Bank's option, pay for such thirty days in lieu of notice) and in such event, unless the Bank terminates the Executive's employment with the Bank for Cause as defined in with Section 10 of this Agreement or, unless the Executive's employment is terminated in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, the Executive shall be paid, during the twelve (12) months following such termination at such times as payment was theretofore made, the base compensation that the Executive would have been entitled to receive during such period of time had such termination not occurred, such payments to be in addition to any payment in lieu of notice. Furthermore, the Bank shall pay to the Executive in equal monthly payments an amount sufficient to fully fund any Benefit Plans of the Bank, with respect to the Executive, commencing at the beginning of the first month following termination of Executive's employment with the Bank pursuant to this paragraph, and ending twelve (12) months after such termination. In the event that a payment made with respect to any benefit plan or program would otherwise violate the terms of the plan or program, an equivalent amount shall be paid directly to Executive. Executive shall owe no duty to mitigate these payments, and shall not be required to obtain or attempt to obtain alternate employment during such twelve (12) month period. If Executive obtains other gainful employment during such twelve (12) month period, the compensation and benefits received by Executive during said period from such other employment shall not reduce the payments otherwise due to Executive pursuant to this section. -25- 5 10. TERMINATION FOR CAUSE: (a) Notwithstanding the provisions of this Agreement, the Board of Directors of the Company may, in its sole discretion, terminate the Executive's employment with the Company for Cause. For the purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder: (i) because of the Executive's personal dishonesty, incompetence, willful misconduct, gross negligence, willful breach of fiduciary duty (including involving personal profit), failure to substantially perform stated duties described in Section 3 of this Agreement, willful violation of any material law, rule, regulation (other than traffic violations or similar offenses), willful violation of any final cease-and-desist order issued by any regulatory agency having jurisdiction over the Company or the Bank, or material breach by the Executive of any provision of this Agreement or any related agreement entered into by the Executive; or (ii) if the Board of Directors of the Bank terminates the employment of Executive with the Bank for Cause pursuant to subsection (c) of this Section 10. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith or without reasonable belief that his action or omission was in the best interest of the Company; provided that any act or omission to act on the Executive's behalf in reliance upon an opinion of counsel to either the Company or the Bank shall not be deemed to be "willful." Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been a resolution approved by a majority of the non-officer members of the Board of Directors of the Company finding that, in the good faith opinion of such majority, the Executive was guilty of conduct which is deemed to be Cause within the meaning of this paragraph, after notice to the Executive and an opportunity for him, together with his counsel, to be heard before such majority (with the Company Board retaining the right to deliberate without the Executive and his counsel present before and/or after such hearing). (b) If the Company terminates the Executive's employment with the Company for Cause in accordance with Section 10(a) of this Agreement, the Company shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation or benefits, insured or otherwise, that he would otherwise have been eligible to receive under any Benefit Plans of the Company through the date of such termination. (c) Notwithstanding the provisions of this Agreement, the Board of Directors of the Bank may, in its sole discretion, terminate the Executive's employment with the Bank for Cause. For the purposes of this Agreement, the Bank shall have "Cause" to terminate the Executive's employment hereunder: (i) because of the Executive's personal dishonesty, incompetence, willful misconduct, gross negligence, willful breach of fiduciary duty (including involving personal profit), failure to substantially perform stated duties described in Section 3 of this Agreement, willful violation of any material law, rule, regulation (other than traffic violations or similar offenses) , willful violation of any final cease-and-desist order issued by any regulatory agency having jurisdiction over the Company or the Bank, the imposition of any sanction upon the Executive by any such regulatory agency, or material breach by the Executive of any provision of this Agreement or any related agreement entered into by the Executive; or (ii) if the Board of Directors of the Company terminates Executive's employment with the Company for Cause pursuant to subsection (a) of this Section 10. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith or without reasonable belief that his action or omission was in the best interest of the Bank; provided that any act or omission to act on the Executive's behalf in reliance upon an opinion of counsel to either the Company or the Bank shall not be deemed to be "willful." Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been a resolution approved by a majority of the non-officer members of the Board of Directors of the Bank finding that, in the good faith opinion of such majority, the Executive was guilty of conduct which is deemed to be Cause within the meaning of this paragraph, after notice to the Executive and an opportunity for him, together with his counsel to be heard before such majority (with the Bank Board retaining the right to deliberate without the Executive and his counsel present before and/or after such hearing). -26- 6 (d) If the Bank terminates the Executive's employment with the Bank for Cause in accordance with Section 10(c) of this Agreement, the Bank shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation or benefits, insured or otherwise, which Executive would otherwise have been eligible to receive under any Benefit Plans of the Bank through the date of such termination. 11. TERMINATION BY THE EXECUTIVE: The Executive may terminate the Executive's employment with the Company or with the Bank hereunder at any time upon sixty (60) days written notice to the affected entity. If the Executive terminates the Executive's employment with either the Company or the Bank other than for breach of this Agreement as provided in Section 3, for Good Reason, in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, Executive shall be deemed to have voluntarily terminated Executive's employment with both the Company and the Bank ("Voluntary Termination"), and thereupon the Company and the Bank shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation and benefits, insured or otherwise, that he would otherwise have been eligible to receive under any Benefit Plans of the Company or the Bank through the date of such termination. 12. DEFINITION OF CHANGE OF CONTROL OF THE COMPANY: A "Change of Control" of the Company shall mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 ("Exchange Act") or such item thereof which may hereafter pertain to the same subject; provided that, and notwithstanding the foregoing, a Change of Control shall be deemed to have occurred if (i) any person (as that term is used in Sections 13(d) and 14(d) (2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the Company's then outstanding securities, or (ii) the Company shall cease to be a publicly owned corporation, as defined in the Exchange Act. 13. DEFINITION OF CHANGE OF CONTROL OF THE BANK: A "Change of Control" of the Bank shall mean any Change of Control of the Company, or any change or series of changes in circumstances which result in the Company ceasing to own, control, and vote an absolute majority of the voting securities of the Bank. 14. TERMINATION BY COMPANY OR BANK AFTER CHANGE IN CONTROL: If a Change of Control of the Company or a Change of Control of the Bank shall have occurred, this Agreement shall continue in full force and effect. If the Executive's Employment is terminated by the Company or the Bank within twelve (12) months after a Change of Control of the Company, as defined in Section 12 above, or a Change of Control of the Bank, as defined in Section 13 above, or in Contemplation of a Change of Control of either, as defined below, Executive shall be entitled to be paid an amount equal to two and ninety-nine hundredths (2.99) times the sum of Executive's annual base cash compensation plus the annual value of Executive's participation in all Benefit Programs in effect at the time of such termination. At Executive's option, the sums payable pursuant to this Section will be paid in full in a lump sum and without discount within thirty (30) days of the termination of Executive's employment, or in equal monthly installments over twelve (12) months. Any termination of Executive's employment hereunder during any period of time when the Board of Directors of the Company has formed an intent to offer the Bank for sale or to promote an acquisition of or merger of the Company or the Bank, or when the Company has knowledge that any person(s), entity or concern has taken steps reasonably calculated to effect a Change of Control of the Company shall constitute a termination of Executive's employment "In Contemplation of a Change of Control". The period of Contemplation of Change of Control shall continue until the Board of Directors of the Company no longer intends to promote an acquisition of or merger of the -27- 7 Company or the Bank, or until in the opinion of the Company's Board of Directors, the person(s), concern or entity has abandoned or terminated its efforts to effect a Change of Control of the Company, as applicable. Any good faith determination by the Company's Board of Directors that Board no longer has such an intent, or that the person(s), concern or entity has abandoned or terminated its efforts to effect a Change of Control of the Company shall be conclusive and binding on the Executive. Such determination shall be promptly communicated to the Executive in writing by the Chairman of the Compensation Committee or Vice Chairman of the Board of the Company. Notwithstanding the foregoing, any termination of the Executive by the Company or by the Bank within ninety (90) days prior to a Change of Control of the Company shall be conclusively presumed to have been in Contemplation of Change of Control. 15. TERMINATION BY EXECUTIVE FOR GOOD REASON; During the term of Executive's employment hereunder, the Executive may terminate his employment with both the Company and the Bank if the Executive has Good Reason, as defined below. Termination by the Executive of Executive's employment with either entity shall be deemed termination with both. For purposes of this Agreement, "Good Reason" shall mean: (i) The assignment of duties to the Executive by the Company or the Bank which (1) are significantly different from the Executive's duties immediately prior to the Change of Control, or (2) result in the Executive having significantly less authority and/or responsibility than Executive had as an executive officer of the Company or the Bank prior to the Change of Control, without the express written consent of Executive; (ii) The removal of the Executive from or any failure to re-elect Executive to the positions set forth in Section 3 above, except in connection with a termination of his employment by the Company or the Bank for Cause or Executive's resignation other than for Good Reason. (iii) A reduction of the Executive's base salary as in effect on the date of the Change of Control, unless the reduction in the Executive's salary is waived in writing by the Executive; (iv) The failure of the Company and the Bank collectively to provide the Executive with substantially the same fringe benefits (including paid vacations) that were provided to Executive immediately prior to the Change of Control, or with a package of fringe benefits that, though one or more of such benefits may vary from those in effect immediately prior to such Change of Control, is substantially comparable in all material respects to such fringe benefits taken as a whole; or (v) Requiring the Executive to perform a significant part of Executive's duties in locations more than one hundred (100) miles from Nashville, Tennessee. Further, and notwithstanding any other provision of this Agreement, the Executive may terminate his employment without Good Reason at any time within ninety (90) days after a Change of Control shall have occurred. 16. PAYMENTS ON TERMINATION: Upon termination of Executive's employment by the Company or the Bank, the Company and the Bank shall have the following payment obligations to Executive: (a) If the Executive's Employment is terminated due to illness of the Executive, the provisions of Section 6 shall apply. (b) If the Executive's Employment is terminated due to the death of the Executive, the provisions of Section 7 shall apply. -28- 8 (c) If the Executive's Employment is terminated by the Company other than for Cause, and not In Contemplation of a Change of Control of the Company or the Bank or within twelve months after a Change of Control of the Company or the Bank, the provisions of Section 8 shall apply, and therefore the payment provisions of Section 9 apply. (d) If the Executive's Employment is terminated by the Bank other than for Cause, and not In Contemplation of a Change of Control of the Company or the Bank or within twelve months after a Change of Control of the Company or the Bank, the provisions of Section 9 shall apply. (e) If the Executive's Employment is terminated by the Company for Cause, or by the Bank for Cause, the provisions of Section 10 shall apply. (f) If the Executive's Employment is terminated by the Executive as a result of a breach of the agreement by the Company or the Bank, the provisions of Section 3 apply, and therefore the payment provisions of Section 9 apply. (g) In the event of a Voluntary Termination of Executive's Employment as defined in Section 11, the provisions of Section 11 apply. (h) If the Executive's Employment is terminated by the Company or the Bank within twelve (12) months after a Change of Control of the Company, as defined in Section 12 above, or a Change of Control of the Bank, as defined in Section 13 above, or in Contemplation of a Change of Control of either, as defined in Section 14, the provisions of Section 14 shall apply. (i) If the Executive's Employment is terminated by the Executive for Good Reason, as defined in Section 15 above, the Executive's employment with the Company and with the Bank shall be deemed to have been terminated without Cause by the Company and by the Bank at the time of such termination by Executive for Good Reason. If such termination is during a period of Contemplation of Change of Control, or within twelve (12) months after a Change of Control, the provisions of Section 14 shall apply. (j) Termination of Executive's Employment by the Company or by the Bank or by the Executive shall be communicated by written Notice of Termination to the other parties hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision(s) in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. 17. CONFIDENTIALITY: In the course of the Executive's employment, the Company and the Bank may disclose or make known to the Executive, and the Executive may be given access to or may become acquainted with, certain information, including but not limited to confidential information which relates to or is useful in the businesses of the Company and the Bank and which is not available from public records or other generally available sources (collectively, "Confidential Information"), and which the Company or the Bank consider proprietary and desire to maintain confidential. During the term of this Agreement and at all times thereafter, the Executive shall not in any manner, either directly or indirectly, divulge, disclose or communicate to any person or firm, except to legal counsel for the Company or the Bank or otherwise to or for the benefit of the Company or the Bank as directed by the Company or the Bank, and except to the Executive's legal counsel in connection with the resolution of any dispute between the Executive and the Company or the Bank under this Agreement, any of the Confidential Information which Executive may have acquired in the course of or as an incident to Executive's employment by the Company or the Bank, the parties agreeing that such Confidential Information affects the successful and effective conduct of the business and their goodwill of the Company and the Bank, and that any material breach of the terms of this Section 17 is a material breach of this Agreement. -29- 9 18. COVENANT NOT TO COMPETE. During the Term of this Agreement and, if Executive terminates Executive's employment in a Voluntary Termination or for Good Reason, or if the Company or the Bank terminate Executive's employment in Contemplation of a Change of Control, or within twelve (12) months after a Change of Control, or for Cause, for the period of twelve (12) months following the termination of Executive's employment with the Company or the Bank, Executive agrees that Executive will not directly or indirectly own, become interested in, or become involved in any manner whatsoever in any business which is similar or competitive with any aspect of the business of the Company or the Bank as conducted at the time of such termination. Without limiting the foregoing, Executive agrees during the applicable period not to engage in the Banking or Leasing businesses, whether as an owner, partner, director, officer, employee, consultant, stockholder, agent, salesman, or in any other capacity for any person, partnership, firm, corporation or other entity without the express written consent of the President of the Company. Executive specifically acknowledges and agrees that the foregoing restriction on competition with the Company and the Bank will not prevent Executive from obtaining gainful employment following termination of Executive's employment with the Company and the Bank, and is a reasonable restriction upon Executive's ability to compete with the Company and the Bank, given the economic benefits afforded to Executive under this Agreement. 19. NO ENTICEMENT OF EMPLOYEES. Executive agrees that Executive will not, directly or indirectly, entice or induce, or attempt to entice or induce any employee of the Company or Bank to leave the employ of the Company or the Bank during the period covered by the Non-Competition provisions of Section 18 above. 20. NO SOLICITATION. Executive will not, directly or indirectly, solicit, entice or induce, or attempt to entice or induce any customer or user of the products or services of the Bank or the Company during the period covered by the Non-Competition provisions of Section 18 above. 21. REMEDIES. Executive acknowledges and agrees that the breach or threatened breach of any of the provisions of Sections 17, 18, 19 and 20 of this Agreement will cause irreparable harm to the Company and the Bank, and cannot be adequately compensated by the payment of damages. Accordingly, Executive covenants and agrees that the Company and the Bank, in addition to any other rights or remedies which they may have, will be entitled to such equitable and injunctive relief as may be available from any court of competent jurisdiction to restrain Executive from breaching or threatening to breach any of the provisions of this Sections 17, 18, 19 and 20, without posting bond or other surety. Such right to obtain injunctive relief may be exercised at the option of the Company or the Bank in addition to, concurrently with, prior to, after, or in lieu of the exercise of any other rights or remedies which the Company or the Bank may have as a result of any such breach or threatened breach. In addition to all other remedies, in the event of the breach or threatened breach of any of the provisions of Sections 17, 18, 19 or 20 of this Agreement, the Company and Bank shall be relieved of any obligation to continue payments to the Executive pursuant to the provisions of this agreement. -30- 10 22. NOTICES: For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Community Financial Group, Inc. 401 Church Street, 2nd Floor Nashville, TN 37219 Attention: Chairman of Compensation Committee with a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street, Suite 1600 P. O. Box 198062 Nashville, TN 37219 Attention: Patrick L. Alexander, Esq. If to the Bank: The Bank of Nashville 401 Church Street Nashville, TN 37219 Attention: Chairman of Compensation Committee with a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street, Suite 1600 P. O. Box 198062 Nashville, TN 37219 Attention: Patrick L. Alexander, Esq. If to the Executive: Mack S. Linebaugh, Jr. 400 Wilsonia Avenue Nashville, TN 37205 with a copy to: Gerrish & McCreary, P.C. Washington Square 222 Second Avenue North, Suite 424 Nashville, TN 37201 Attn: J. Franklin McCreary, Esq. or at such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. -31- 11 23. MODIFICATION; WAIVERS; APPLICABLE LAW: No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Executive, and on behalf of the Company by such officer as may be specifically designated by the Board of Directors of the Company after approval of the modification by the Board of Directors, and on behalf of the Bank by such officer as may be specifically designated by the Board of Directors of the Bank after approval of the modification by the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Tennessee. 24. INVALIDITY; ENFORCEABILITY: The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 25. ASSIGNMENTS: This Agreement is personal to the Executive, who may not assign his obligations hereunder. 26. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, the Bank, its successors and assigns and upon the Executive, and his personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 27. HEADINGS: Descriptive headings contained in this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision hereof. 28. ARBITRATION: Any dispute, controversy or claim arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators, in Nashville, Tennessee, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Unless otherwise provided in the rules of the American Arbitration Association, the arbitrators shall, in their award, allocate between the parties the costs of arbitration, which shall include reasonable attorneys' fees and expenses of the parties, as well as the arbitrator's fees and expenses, in such proportions as the arbitrators deem just. 29. ENTIRE AGREEMENT: This Agreement represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof, and supersedes or amends all other agreements, negotiations, understandings and representations (if any) made by and between the parties hereto; provided, however, that nothing herein shall affect in any way agreements granting or evidencing the Executive's options to acquire shares of the Company. -32- 12 30. REGULATORY AND OTHER PROCEEDINGS: The provisions of this Section 30 shall control as to continuing rights and obligations under this Agreement, notwithstanding any other provision of this Agreement, for as long as they are required to be included in employment contracts between an institution insured by the FDIC and its officers and as long as the Bank is such an insured institution. (a) If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the affairs of the Bank or the Company by a Notice served under applicable Federal or State statutes or regulations, the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank and the Company shall pay the Executive all of the compensation withheld while their obligations hereunder were suspended and reinstate their obligations which were suspended. (b) If the Executive is removed and/or permanently prohibited from participating in the conduct of the affairs of the Bank or the Company by an order issued under applicable Federal or State statutes or regulations, all obligations of the Company and the Bank under this Agreement shall terminate as of the effective date of the order, provided that vested rights of the contracting parties shall not be affected. (c) If the Company or the Bank become insolvent or taken over by regulatory entities, all obligations under this Agreement shall terminate as of the date of default, provided that this paragraph shall not affect any vested rights of the contracting parties. (d) All obligations under this Agreement may be terminated, except to the extent determined that continuation thereof is necessary for the continued operation of the Company or the Bank, by the FDIC at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank or approves a supervisory merger to resolve problems related to operation of the Bank, provided that any rights of the parties that have already vested shall not be affected by such action. 31. SURVIVAL. This agreement shall remain in effect notwithstanding the termination of Executive's employment hereunder, and in any case, the provisions of Sections 18, 19, and 20 shall survive any termination of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. Executive: /s/ Mack S. Linebaugh, Jr. ----------------------------------------- Mack S. Linebaugh, Jr. Community Financial Group, Inc. By: /s/ Julian B. Baker ----------------------------------------- Name: Julian B. Baker Title: Chairman, Compensation Committee of the Board of Directors The Bank of Nashville By: /s/ Julian B. Baker ----------------------------------------- Name: Julian B. Baker Title: Chairman, Compensation Committee of the Board of Directors -33- EX-10.19 3 EXECUTIVE EMPLOYMENT AGREEMENT 1 EXHIBIT 10.19 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement entered into this 14th day of September, 1999 by and among Community Financial Group, Inc., a Tennessee corporation (the "Company"), The Bank of Nashville, a banking corporation organized under the laws of the State of Tennessee (the "Bank"), and Julian C. Cornett (the "Executive"). WITNESSETH: WHEREAS, the Company is a one-bank holding company which owns one hundred per cent (100%) of the outstanding stock of the Bank; WHEREAS, the Company and the Bank desire to retain the services of Executive on the terms and conditions set forth herein and, for purposes of effecting the same, the Boards of Directors of the Company and the Bank have approved this Employment Agreement and authorized its execution and delivery to the Executive on behalf of the Company and the Bank; WHEREAS, the Executive serves as the Executive Vice President - Credit Administration of the Company and, as such, is a key executive officer of the Company whose continued dedication, availability, advice and counsel to the Company is deemed important to the Company, the Board of Directors of the Company, and the present and future stockholders of the Company; WHEREAS, the Executive serves as the Executive Vice President - Credit Administration of the Bank and, as such, is a key executive officer of the Bank whose continued dedication, availability, advice and counsel to the Bank is deemed important to the Board of Directors of the Bank, the Bank and the Company; WHEREAS, the Company and the Bank wish to attract and retain well-qualified executives, and it is in the best interests of the Company, the Bank and the Executive, notwithstanding any change in control of the Company or the Bank, to secure the services of the Executive, whose experience and knowledge of the affairs of the Company and the Bank, and whose reputation and contacts in the industry, are extremely valuable to the Company and the Bank; and WHEREAS, the Company and the Bank consider the establishment and maintenance of a sound and vital management team to be part of their overall corporate strategy and to be essential to protecting and enhancing the best interests of the Bank, the Company, and its stockholders. NOW, THEREFORE, to assure the Company and the Bank of the Executive's continued dedication, the availability of Executive's advice and counsel to the Boards of Directors of the Company and the Bank, the availability of Executive's management skills to the Company and the Bank, and to induce the Executive to remain and continue in the employ of the Company and the Bank in Executive's current capacities, and for other good and valuable consideration, the receipt and adequacy of which each party hereby acknowledged, the Company, the Bank and the Executive hereby agree as follows: 1. EMPLOYMENT. The Company and the Bank agree to, and do hereby, employ Executive and Executive agrees to, and does hereby, accept such employment, all upon the terms and conditions hereinafter set forth. -34- 2 2. TERM: The initial term of employment under this Agreement shall be for a period of one (1) year, commencing on the date first above written and ending at the close of business one year from said date. This Agreement shall be automatically renewed for succeeding terms of one (1) year each, unless either party shall, at least thirty (30) days, but not more than one hundred eighty (180) days, prior to the expiration of any term, give written notice of his or its intention not to renew this Agreement. 3. EMPLOYMENT; DUTIES, AUTHORITY, AND RESPONSIBILITIES: (a) During the term of employment of the Executive by the Company and the Bank, the Executive shall devote Executive's full business time and attention to the rendition of services as Executive Vice President - Credit Administration of the Company and as Executive Vice President - Credit Administration of the Bank, and to the furtherance of the best interests of the Company and the Bank, and shall exert Executive's best efforts in the rendition of such services. The Executive agrees that in the rendition of such services and in all aspects of such employment Executive will comply with the policies, standards and regulations of the Company and the Bank as from time to time established by their respective Boards of Directors. The expenditure by the Executive of reasonable amounts of time for charitable, professional and similar activities shall not be deemed a breach of this Agreement provided such activities do not materially interfere with the services to be rendered to the Company and the Bank hereunder. (b) As Executive Vice President - Credit Administration of the Company and the Bank, the Executive shall have the general powers and duties of supervision which usually pertain to such office and shall perform all such duties as are properly required of Executive by the Chief Executive Officer of the Company and the Bank. (c) If after a Change of Control occurs, a material reduction or limitation of the duties of the Executive that were in effect immediately prior to the Change of Control occurs, this action shall be considered a breach of this Agreement by the Company and the Bank. In the event of any breach of any provision of this Agreement by the Bank which breach is not cured within ten (10) days after written notice of the breach to the Bank by the Executive shall entitle the Executive to terminate his employment by the Bank pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Bank and, at the option of Executive, to terminate his employment by the Company pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Company. Any such termination by the Executive of his employment by the Bank hereunder resulting from a breach of the terms of this Agreement shall be treated as a termination by the Bank without cause and governed by Section 9 below, unless such breach occurs in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, and constitutes Good Reason for the Executive to terminate Executive's employment, in which case it shall be governed by Section 15 below. 4. COMPENSATION: The Bank agrees to pay Executive, and Executive agrees to accept, as compensation for all services rendered by him to the Company, the Bank and their affiliates during the period of his employment under this Agreement, base compensation at the annual rate of not less than $152,000, which shall be payable in accordance with the normal payroll policies of the Bank and shall be subject to all appropriate withholding taxes. 5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS EXPENSES AND MOVING EXPENSES: (a) During the term of this Agreement, Executive shall be entitled to participate in all pension, group insurance, hospitalization, deferred compensation, Company paid life insurance, or incentive plans, and any other benefit plan of the Company or the Bank presently in effect or hereafter adopted by the Company or the Bank and generally available to all employees of either organization of senior executive status (the "Benefit Plans"). -35- 3 (b) During the term of this Agreement, to the extent that such expenditures meet the requirements of the Internal Revenue Code for deductibility by the Company or the Bank for federal income tax purposes and are substantiated by the Executive as required by the Internal Revenue Service and policies of the Company and the Bank, the Bank shall reimburse the Executive promptly for all expenditures (including travel, entertainment, parking, business meetings, and the monthly costs, including dues, of maintaining memberships at appropriate clubs, including, but not limited to, Nashville City Club) made in accordance with rules and policies established from time to time by the Board of Directors of the Bank in pursuance and furtherance of the Company's and the Bank's business and good will. (c) During the term of this Agreement, in the event that the Company or the Bank relocates its principal executive offices to a location more than one hundred (100) miles from Nashville, Tennessee, or the Board of Directors of either the Company or the Bank requires the Executive to be based anywhere more than one hundred (100) miles from the Bank's principal executive offices, the Bank shall pay (or reimburse the Executive for) all reasonable moving expenses incurred by Executive relating to a change of Executive's principal residence in connection with such relocation, provided that the Executive furnishes the Bank with adequate records and documentary evidence for the substantiation of such reimbursement. 6. ILLNESS: In the event Executive is unable to perform Executive's duties under this Agreement on a full-time basis for a period of six (6) consecutive months by reason of illness or other physical or mental disability, and at or before the end of such period Executive does not return to work on a full-time basis, the Company and the Bank may jointly terminate Executive's Employment pursuant to this Agreement without further or additional compensation being due the Executive from the Bank pursuant to this Agreement, except that the Executive shall be paid Executive's base compensation from the Bank at the rate in effect at the time of Executive's termination for a period of twelve (12) months from the date of the commencement of the Executive's inability to perform his duties, less any disability payments payable during such time under any disability plans maintained and paid for by the Bank, and Executive shall continue to participate in all Benefit Plans in effect at the time of Executive's termination for a period of twelve (12) months from the date of the commencement of the Executive's inability to perform his duties. 7. DEATH: In the event of the Executive's death during the term of this Agreement, Executive's estate, legal representatives or named beneficiaries (as directed by the Executive in writing) shall be paid Executive's base compensation from the Bank at the rate in effect at the time of the Executive's death under this Agreement for the period of twelve (12) months from the date of the Executive's death, less any amounts payable to Executive's estate or beneficiaries under life insurance policies on the life of Executive maintained and paid for by Bank. 8. TERMINATION BY COMPANY: Notwithstanding the provisions of Section 2 above, the Board of Directors of the Company may, in its sole discretion, terminate the Executive's employment with the Company under this Agreement at any time in any lawful manner by not less than thirty (30) days written notice to the Executive, in which event the Executive shall be entitled to elect to have such termination likewise constitute a termination of Executive's employment by the Bank. If Executive so elects, then unless such termination is for Cause as defined in Section 10 of this Agreement or unless the Executive's employment is terminated in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, Executive shall be entitled to the compensation provided for in Section 9 below. -36- 4 9. TERMINATION BY BANK: Notwithstanding the provisions of Section 2 of this Agreement, the Board of Directors of the Bank may, in its sole discretion, terminate the Executive's employment with the Bank under this Agreement at any time in any lawful manner by not less than thirty (30) days written notice to the Executive (or, at the Bank's option, pay for such thirty days in lieu of notice) and in such event, unless the Bank terminates the Executive's employment with the Bank for Cause as defined in with Section 10 of this Agreement or, unless the Executive's employment is terminated in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, the Executive shall be paid, during the twelve (12) months following such termination at such times as payment was theretofore made, the base compensation that the Executive would have been entitled to receive during such period of time had such termination not occurred, such payments to be in addition to any payment in lieu of notice. Furthermore, the Bank shall pay to the Executive in equal monthly payments an amount sufficient to fully fund any Benefit Plans of the Bank, with respect to the Executive, commencing at the beginning of the first month following termination of Executive's employment with the Bank pursuant to this paragraph, and ending twelve (12) months after such termination. In the event that a payment made with respect to any benefit plan or program would otherwise violate the terms of the plan or program, an equivalent amount shall be paid directly to Executive. Executive shall owe no duty to mitigate these payments, and shall not be required to obtain or attempt to obtain alternate employment during such twelve (12) month period. If Executive obtains other gainful employment during such twelve (12) month period, the compensation and benefits received by Executive during said period from such other employment shall not reduce the payments otherwise due to Executive pursuant to this section. 10. TERMINATION FOR CAUSE: (a) Notwithstanding the provisions of this Agreement, the Board of Directors of the Company may, in its sole discretion, terminate the Executive's employment with the Company for Cause. For the purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder: (i) because of the Executive's personal dishonesty, incompetence, willful misconduct, gross negligence, willful breach of fiduciary duty (including involving personal profit), failure to substantially perform stated duties described in Section 3 of this Agreement, willful violation of any material law, rule, regulation (other than traffic violations or similar offenses), willful violation of any final cease-and-desist order issued by any regulatory agency having jurisdiction over the Company or the Bank, or material breach by the Executive of any provision of this Agreement or any related agreement entered into by the Executive; or (ii) if the Board of Directors of the Bank terminates the employment of Executive with the Bank for Cause pursuant to subsection (c) of this Section 10. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith or without reasonable belief that his action or omission was in the best interest of the Company; provided that any act or omission to act on the Executive's behalf in reliance upon an opinion of counsel to either the Company or the Bank shall not be deemed to be "willful." Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been a resolution approved by a majority of the non-officer members of the Board of Directors of the Company finding that, in the good faith opinion of such majority, the Executive was guilty of conduct which is deemed to be Cause within the meaning of this paragraph, after notice to the Executive and an opportunity for him, together with his counsel, to be heard before such majority (with the Company Board retaining the right to deliberate without the Executive and his counsel present before and/or after such hearing). (b) If the Company terminates the Executive's employment with the Company for Cause in accordance with Section 10(a) of this Agreement, the Company shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation or benefits, insured or otherwise, that he would otherwise have been eligible to receive under any Benefit Plans of the Company through the date of such termination. -37- 5 (c) Notwithstanding the provisions of this Agreement, the Board of Directors of the Bank may, in its sole discretion, terminate the Executive's employment with the Bank for Cause. For the purposes of this Agreement, the Bank shall have "Cause" to terminate the Executive's employment hereunder: (i) because of the Executive's personal dishonesty, incompetence, willful misconduct, gross negligence, willful breach of fiduciary duty (including involving personal profit), failure to substantially perform stated duties described in Section 3 of this Agreement, willful violation of any material law, rule, regulation (other than traffic violations or similar offenses) , willful violation of any final cease-and-desist order issued by any regulatory agency having jurisdiction over the Company or the Bank, the imposition of any sanction upon the Executive by any such regulatory agency, or material breach by the Executive of any provision of this Agreement or any related agreement entered into by the Executive; or (ii) if the Board of Directors of the Company terminates Executive's employment with the Company for Cause pursuant to subsection (a) of this Section 10. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith or without reasonable belief that his action or omission was in the best interest of the Bank; provided that any act or omission to act on the Executive's behalf in reliance upon an opinion of counsel to either the Company or the Bank shall not be deemed to be "willful." Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been a resolution approved by a majority of the non-officer members of the Board of Directors of the Bank finding that, in the good faith opinion of such majority, the Executive was guilty of conduct which is deemed to be Cause within the meaning of this paragraph, after notice to the Executive and an opportunity for him, together with his counsel to be heard before such majority (with the Bank Board retaining the right to deliberate without the Executive and his counsel present before and/or after such hearing). (d) If the Bank terminates the Executive's employment with the Bank for Cause in accordance with Section 10(c) of this Agreement, the Bank shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation or benefits, insured or otherwise, which Executive would otherwise have been eligible to receive under any Benefit Plans of the Bank through the date of such termination. 11. TERMINATION BY THE EXECUTIVE: The Executive may terminate the Executive's employment with the Company or with the Bank hereunder at any time upon sixty (60) days written notice to the affected entity. If the Executive terminates the Executive's employment with either the Company or the Bank other than for breach of this Agreement as provided in Section 3, for Good Reason, in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, Executive shall be deemed to have voluntarily terminated Executive's employment with both the Company and the Bank ("Voluntary Termination"), and thereupon the Company and the Bank shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation and benefits, insured or otherwise, that he would otherwise have been eligible to receive under any Benefit Plans of the Company or the Bank through the date of such termination. 12. DEFINITION OF CHANGE OF CONTROL OF THE COMPANY: A "Change of Control" of the Company shall mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 ("Exchange Act") or such item thereof which may hereafter pertain to the same subject; provided that, and notwithstanding the foregoing, a Change of Control shall be deemed to have occurred if (i) any person (as that term is used in Sections 13(d) and 14(d) (2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the Company's then outstanding securities, or (ii) the Company shall cease to be a publicly owned corporation, as defined in the Exchange Act. -38- 6 13. DEFINITION OF CHANGE OF CONTROL OF THE BANK: A "Change of Control" of the Bank shall mean any Change of Control of the Company, or any change or series of changes in circumstances which result in the Company ceasing to own, control, and vote an absolute majority of the voting securities of the Bank. 14. TERMINATION BY COMPANY OR BANK AFTER CHANGE IN CONTROL: If a Change of Control of the Company or a Change of Control of the Bank shall have occurred, this Agreement shall continue in full force and effect. If the Executive's Employment is terminated by the Company or the Bank within twelve (12) months after a Change of Control of the Company, as defined in Section 12 above, or a Change of Control of the Bank, as defined in Section 13 above, or in Contemplation of a Change of Control of either, as defined below, Executive shall be entitled to be paid an amount equal to two (2) times the sum of Executive's annual base cash compensation plus the annual value of Executive's participation in all Benefit Programs in effect at the time of such termination. At Executive's option, the sums payable pursuant to this Section will be paid in full in a lump sum and without discount within thirty (30) days of the termination of Executive's employment, or in equal monthly installments over twelve (12) months. Any termination of Executive's employment hereunder during any period of time when the Board of Directors of the Company has formed an intent to offer the Bank for sale or to promote an acquisition of or merger of the Company or the Bank, or when the Company has knowledge that any person(s), entity or concern has taken steps reasonably calculated to effect a Change of Control of the Company shall constitute a termination of Executive's employment "In Contemplation of a Change of Control." The period of Contemplation of Change of Control shall continue until the Board of Directors of the Company no longer intends to promote an acquisition of or merger of the Company or the Bank, or until in the opinion of the Company's Board of Directors, the person(s), concern or entity has abandoned or terminated its efforts to effect a Change of Control of the Company, as applicable. Any good faith determination by the Company's Board of Directors that Board no longer has such an intent, or that the person(s), concern or entity has abandoned or terminated its efforts to effect a Change of Control of the Company shall be conclusive and binding on the Executive. Such determination shall be promptly communicated to the Executive in writing by the Chief Executive of the Company or Chairman of the Board of the Company. Notwithstanding the foregoing, any termination of the Executive by the Company or by the Bank within ninety (90) days prior to a Change of Control of the Company shall be conclusively presumed to have been in Contemplation of Change of Control. 15. TERMINATION BY EXECUTIVE FOR GOOD REASON; During the term of Executive's employment hereunder, the Executive may terminate his employment with both the Company and the Bank if the Executive has Good Reason, as defined below. Termination by the Executive of Executive's employment with either entity shall be deemed termination with both. For purposes of this Agreement, "Good Reason" shall mean: (i) The assignment of duties to the Executive by the Company or the Bank which (1) are significantly different from the Executive's duties immediately prior to the Change of Control, or (2) result in the Executive having significantly less authority and/or responsibility than Executive had as an executive officer of the Company or the Bank prior to the Change of Control, without the express written consent of Executive; (ii) The removal of the Executive from or any failure to re-elect Executive to the positions set forth in Section 3 above, except in connection with a termination of his employment by the Company or the Bank for Cause or Executive's resignation other than for Good Reason. (iii) A reduction of the Executive's base salary as in effect on the date of the Change of Control, unless the reduction in the Executive's salary is waived in writing by the Executive; -39- 7 (iv) The failure of the Company and the Bank collectively to provide the Executive with substantially the same fringe benefits (including paid vacations) that were provided to Executive immediately prior to the Change of Control, or with a package of fringe benefits that, though one or more of such benefits may vary from those in effect immediately prior to such Change of Control, is substantially comparable in all material respects to such fringe benefits taken as a whole; or (v) Requiring the Executive to perform a significant part of Executive's duties in locations more than one hundred (100) miles from Nashville, Tennessee. Further, and notwithstanding any other provision of this Agreement, the Executive may terminate his employment without Good Reason at any time within ninety (90) days after a Change of Control shall have occurred. 16. PAYMENTS ON TERMINATION: Upon termination of Executive's employment by the Company or the Bank, the Company and the Bank shall have the following payment obligations to Executive: (a) If the Executive's Employment is terminated due to illness of the Executive, the provisions of Section 6 shall apply. (b) If the Executive's Employment is terminated due to the death of the Executive, the provisions of Section 7 shall apply. (c) If the Executive's Employment is terminated by the Company other than for Cause, and not In Contemplation of a Change of Control of the Company or the Bank or within twelve months after a Change of Control of the Company or the Bank, the provisions of Section 8 shall apply, and therefore the payment provisions of Section 9 apply. (d) If the Executive's Employment is terminated by the Bank other than for Cause, and not In Contemplation of a Change of Control of the Company or the Bank or within twelve months after a Change of Control of the Company or the Bank, the provisions of Section 9 shall apply. (e) If the Executive's Employment is terminated by the Company for Cause, or by the Bank for Cause, the provisions of Section 10 shall apply. (f) If the Executive's Employment is terminated by the Executive as a result of a breach of the agreement by the Company or the Bank, the provisions of Section 3 apply, and therefore the payment provisions of Section 9 apply. (g) In the event of a Voluntary Termination of Executive's Employment as defined in Section 11, the provisions of Section 11 apply. (h) If the Executive's Employment is terminated by the Company or the Bank within twelve (12) months after a Change of Control of the Company, as defined in Section 12 above, or a Change of Control of the Bank, as defined in Section 13 above, or in Contemplation of a Change of Control of either, as defined in Section 14, the provisions of Section 14 shall apply. (i) If the Executive's Employment is terminated by the Executive for Good Reason, as defined in Section 15 above, the Executive's employment with the Company and with the Bank shall be deemed to have been terminated without Cause by the Company and by the Bank at the time of such termination by Executive for Good Reason. If such termination is during a period of Contemplation of Change of Control, or within twelve (12) months after a Change of Control, the provisions of Section 14 shall apply. -40- 8 (j) Termination of Executive's Employment by the Company or by the Bank or by the Executive shall be communicated by written Notice of Termination to the other parties hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision(s) in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. 17. CONFIDENTIALITY: In the course of the Executive's employment, the Company and the Bank may disclose or make known to the Executive, and the Executive may be given access to or may become acquainted with, certain information, including but not limited to confidential information which relates to or is useful in the businesses of the Company and the Bank and which is not available from public records or other generally available sources (collectively, "Confidential Information"), and which the Company or the Bank consider proprietary and desire to maintain confidential. During the term of this Agreement and at all times thereafter, the Executive shall not in any manner, either directly or indirectly, divulge, disclose or communicate to any person or firm, except to legal counsel for the Company or the Bank or otherwise to or for the benefit of the Company or the Bank as directed by the Company or the Bank, and except to the Executive's legal counsel in connection with the resolution of any dispute between the Executive and the Company or the Bank under this Agreement, any of the Confidential Information which Executive may have acquired in the course of or as an incident to Executive's employment by the Company or the Bank, the parties agreeing that such Confidential Information affects the successful and effective conduct of the business and their goodwill of the Company and the Bank, and that any material breach of the terms of this Section 17 is a material breach of this Agreement. 18. COVENANT NOT TO COMPETE. During the Term of this Agreement and, if Executive terminates Executive's employment in a Voluntary Termination or for Good Reason, or if the Company or the Bank terminate Executive's employment in Contemplation of a Change of Control, or within twelve (12) months after a Change of Control, or for Cause, for the period of twelve (12) months following the termination of Executive's employment with the Company or the Bank, Executive agrees that Executive will not directly or indirectly own, become interested in, or become involved in any manner whatsoever in any business which is similar or competitive with any aspect of the business of the Company or the Bank as conducted at the time of such termination. Without limiting the foregoing, Executive agrees during the applicable period not to engage in the Banking or Leasing businesses, whether as an owner, partner, director, officer, employee, consultant, stockholder, agent, salesman, or in any other capacity for any person, partnership, firm, corporation or other entity without the express written consent of the President of the Company. Executive specifically acknowledges and agrees that the foregoing restriction on competition with the Company and the Bank will not prevent Executive from obtaining gainful employment following termination of Executive's employment with the Company and the Bank, and is a reasonable restriction upon Executive's ability to compete with the Company and the Bank, given the economic benefits afforded to Executive under this Agreement. 19. NO ENTICEMENT OF EMPLOYEES. Executive agrees that Executive will not, directly or indirectly, entice or induce, or attempt to entice or induce any employee of the Company or Bank to leave the employ of the Company or the Bank during the period covered by the Non-Competition provisions of Section 18 above. 20. NO SOLICITATION. Executive will not, directly or indirectly, solicit, entice or induce, or attempt to entice or induce any customer or user of the products or services of the Bank or the Company during the period covered by the Non-Competition provisions of Section 18 above. -41- 9 21. REMEDIES. Executive acknowledges and agrees that the breach or threatened breach of any of the provisions of Sections 17, 18, 19 and 20 of this Agreement will cause irreparable harm to the Company and the Bank, and cannot be adequately compensated by the payment of damages. Accordingly, Executive covenants and agrees that the Company and the Bank, in addition to any other rights or remedies which they may have, will be entitled to such equitable and injunctive relief as may be available from any court of competent jurisdiction to restrain Executive from breaching or threatening to breach any of the provisions of this Sections 17, 18, 19 and 20, without posting bond or other surety. Such right to obtain injunctive relief may be exercised at the option of the Company or the Bank in addition to, concurrently with, prior to, after, or in lieu of the exercise of any other rights or remedies which the Company or the Bank may have as a result of any such breach or threatened breach. In addition to all other remedies, in the event of the breach or threatened breach of any of the provisions of Sections 17, 18, 19 or 20 of this Agreement, the Company and Bank shall be relieved of any obligation to continue payments to the Executive pursuant to the provisions of this agreement. 22. NOTICES: For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Community Financial Group, Inc. 401 Church Street, 2nd Floor Nashville, TN 37219 Attention: Chief Executive Officer with a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street, Suite 1600 P. O. Box 198062 Nashville, TN 37219 Attention: Patrick L. Alexander, Esq. If to the Bank: The Bank of Nashville 401 Church Street Nashville, TN 37219 Attention: Chief Executive Officer with a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street, Suite 1600 P. O. Box 198062 Nashville, TN 37219 Attention: Patrick L. Alexander, Esq. -42- 10 If to the Executive: Julian C. Cornett 9311 Chesapeake Drive Brentwood, TN 37027 or at such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 23. MODIFICATION; WAIVERS; APPLICABLE LAW: No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Executive, and on behalf of the Company by such officer as may be specifically designated by the Board of Directors of the Company after approval of the modification by the Board of Directors, and on behalf of the Bank by such officer as may be specifically designated by the Board of Directors of the Bank after approval of the modification by the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Tennessee. 24. INVALIDITY; ENFORCEABILITY: The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 25. ASSIGNMENTS: This Agreement is personal to the Executive, who may not assign his obligations hereunder. 26. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, the Bank, its successors and assigns and upon the Executive, and his personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 27. HEADINGS: Descriptive headings contained in this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision hereof. 28. ARBITRATION: Any dispute, controversy or claim arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators, in Nashville, Tennessee, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Unless otherwise provided in the rules of the American Arbitration Association, the arbitrators shall, in their award, allocate between the parties the costs of arbitration, which shall include reasonable attorneys' fees and expenses of the parties, as well as the arbitrator's fees and expenses, in such proportions as the arbitrators deem just. -43- 11 29. ENTIRE AGREEMENT: This Agreement represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof, and supersedes or amends all other agreements, negotiations, understandings and representations (if any) made by and between the parties hereto; provided, however, that nothing herein shall affect in any way agreements granting or evidencing the Executive's options to acquire shares of the Company. 30. REGULATORY AND OTHER PROCEEDINGS: The provisions of this Section 30 shall control as to continuing rights and obligations under this Agreement, notwithstanding any other provision of this Agreement, for as long as they are required to be included in employment contracts between an institution insured by the FDIC and its officers and as long as the Bank is such an insured institution. (a) If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the affairs of the Bank or the Company by a Notice served under applicable Federal or State statutes or regulations, the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank and the Company shall pay the Executive all of the compensation withheld while their obligations hereunder were suspended and reinstate their obligations which were suspended. (b) If the Executive is removed and/or permanently prohibited from participating in the conduct of the affairs of the Bank or the Company by an order issued under applicable Federal or State statutes or regulations, all obligations of the Company and the Bank under this Agreement shall terminate as of the effective date of the order, provided that vested rights of the contracting parties shall not be affected. (c) If the Company or the Bank become insolvent or taken over by regulatory entities, all obligations under this Agreement shall terminate as of the date of default, provided that this paragraph shall not affect any vested rights of the contracting parties. (d) All obligations under this Agreement may be terminated, except to the extent determined that continuation thereof is necessary for the continued operation of the Company or the Bank, by the FDIC at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank or approves a supervisory merger to resolve problems related to operation of the Bank, provided that any rights of the parties that have already vested shall not be affected by such action. -44- 12 31. SURVIVAL. This agreement shall remain in effect notwithstanding the termination of Executive's employment hereunder, and in any case, the provisions of Sections 18, 19, and 20 shall survive any termination of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. Executive: /s/ Julian C. Cornett ------------------------------------------ Julian C. Cornett Community Financial Group, Inc. By: /s/ Mack S. Linebaugh, Jr. ------------------------------------------ Name: Mack S. Linebaugh, Jr. Title: President The Bank of Nashville By: /s/ Mack S. Linebaugh, Jr. ------------------------------------------ Name: Mack S. Linebaugh, Jr. Title: President The Bank of Nashville -45- EX-10.20 4 EXECUTIVE EMPLOYMENT AGREEMENT 1 EXHIBIT 10.20 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement entered into this 14th day of September, 1999 by and among Community Financial Group, Inc., a Tennessee corporation (the "Company"), The Bank of Nashville, a banking corporation organized under the laws of the State of Tennessee (the "Bank"), and Anne J. Cheatham (the "Executive"). WITNESSETH: WHEREAS, the Company is a one-bank holding company which owns one hundred per cent (100%) of the outstanding stock of the Bank; WHEREAS, the Company and the Bank desire to retain the services of Executive on the terms and conditions set forth herein and, for purposes of effecting the same, the Boards of Directors of the Company and the Bank have approved this Employment Agreement and authorized its execution and delivery to the Executive on behalf of the Company and the Bank; WHEREAS, the Executive serves as the Senior Vice President - Bank Administration of the Company and, as such, is a key executive officer of the Company whose continued dedication, availability, advice and counsel to the Company is deemed important to the Company, the Board of Directors of the Company, and the present and future stockholders of the Company; WHEREAS, the Executive serves as the Senior Vice President - Bank Administration of the Bank and, as such, is a key executive officer of the Bank whose continued dedication, availability, advice and counsel to the Bank is deemed important to the Board of Directors of the Bank, the Bank and the Company; WHEREAS, the Company and the Bank wish to attract and retain well-qualified executives, and it is in the best interests of the Company, the Bank and the Executive, notwithstanding any change in control of the Company or the Bank, to secure the services of the Executive, whose experience and knowledge of the affairs of the Company and the Bank, and whose reputation and contacts in the industry, are extremely valuable to the Company and the Bank; and WHEREAS, the Company and the Bank consider the establishment and maintenance of a sound and vital management team to be part of their overall corporate strategy and to be essential to protecting and enhancing the best interests of the Bank, the Company, and its stockholders. NOW, THEREFORE, to assure the Company and the Bank of the Executive's continued dedication, the availability of Executive's advice and counsel to the Boards of Directors of the Company and the Bank, the availability of Executive's management skills to the Company and the Bank, and to induce the Executive to remain and continue in the employ of the Company and the Bank in Executive's current capacities, and for other good and valuable consideration, the receipt and adequacy of which each party hereby acknowledged, the Company, the Bank and the Executive hereby agree as follows: 1. EMPLOYMENT. The Company and the Bank agree to, and do hereby, employ Executive and Executive agrees to, and does hereby, accept such employment, all upon the terms and conditions hereinafter set forth. 2. TERM: The initial term of employment under this Agreement shall be for a period of one (1) year, commencing on the date first above written and ending at the close of business one year from said date. This Agreement shall be automatically renewed for succeeding terms of one (1) year each, unless either party shall, at least thirty (30) days, but not more than one hundred eighty (180) days, prior to the expiration of any term, give written notice of her or its intention not to renew this Agreement. -46- 2 3. EMPLOYMENT; DUTIES, AUTHORITY, AND RESPONSIBILITIES: (a) During the term of employment of the Executive by the Company and the Bank, the Executive shall devote Executive's full business time and attention to the rendition of services as Senior Vice President - Bank Administration of the Company and as Senior Vice President - Bank Administration of the Bank, and to the furtherance of the best interests of the Company and the Bank, and shall exert Executive's best efforts in the rendition of such services. The Executive agrees that in the rendition of such services and in all aspects of such employment Executive will comply with the policies, standards and regulations of the Company and the Bank as from time to time established by their respective Boards of Directors. The expenditure by the Executive of reasonable amounts of time for charitable, professional and similar activities shall not be deemed a breach of this Agreement provided such activities do not materially interfere with the services to be rendered to the Company and the Bank hereunder. (b) As Senior Vice President - Bank Administration of the Company and the Bank, the Executive shall have the general powers and duties of supervision which usually pertain to such office and shall perform all such duties as are properly required of Executive by the Chief Executive Officer of the Company and the Bank. (c) If after a Change of Control occurs, a material reduction or limitation of the duties of the Executive that were in effect immediately prior to the Change of Control occurs, this action shall be considered a breach of this Agreement by the Company and the Bank. In the event of any breach of any provision of this Agreement by the Bank which breach is not cured within ten (10) days after written notice of the breach to the Bank by the Executive shall entitle the Executive to terminate her employment by the Bank pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Bank and, at the option of Executive, to terminate her employment by the Company pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Company. Any such termination by the Executive of her employment by the Bank hereunder resulting from a breach of the terms of this Agreement shall be treated as a termination by the Bank without cause and governed by Section 9 below, unless such breach occurs in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, and constitutes Good Reason for the Executive to terminate Executive's employment, in which case it shall be governed by Section 15 below. 4. COMPENSATION: The Bank agrees to pay Executive, and Executive agrees to accept, as compensation for all services rendered by her to the Company, the Bank and their affiliates during the period of her employment under this Agreement, base compensation at the annual rate of not less than $102,000, which shall be payable in accordance with the normal payroll policies of the Bank and shall be subject to all appropriate withholding taxes. 5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS EXPENSES AND MOVING EXPENSES: (a) During the term of this Agreement, Executive shall be entitled to participate in all pension, group insurance, hospitalization, deferred compensation, Company paid life insurance, or incentive plans, and any other benefit plan of the Company or the Bank presently in effect or hereafter adopted by the Company or the Bank and generally available to all employees of either organization of senior executive status (the "Benefit Plans"). -47- 3 (b) During the term of this Agreement, to the extent that such expenditures meet the requirements of the Internal Revenue Code for deductibility by the Company or the Bank for federal income tax purposes and are substantiated by the Executive as required by the Internal Revenue Service and policies of the Company and the Bank, the Bank shall reimburse the Executive promptly for all expenditures (including travel, entertainment, parking, business meetings, and the monthly costs, including dues, of maintaining memberships at appropriate clubs, including, but not limited to, Nashville City Club) made in accordance with rules and policies established from time to time by the Board of Directors of the Bank in pursuance and furtherance of the Company's and the Bank's business and good will. (c) During the term of this Agreement, in the event that the Company or the Bank relocates its principal executive offices to a location more than one hundred (100) miles from Nashville, Tennessee, or the Board of Directors of either the Company or the Bank requires the Executive to be based anywhere more than one hundred (100) miles from the Bank's principal executive offices, the Bank shall pay (or reimburse the Executive for) all reasonable moving expenses incurred by Executive relating to a change of Executive's principal residence in connection with such relocation, provided that the Executive furnishes the Bank with adequate records and documentary evidence for the substantiation of such reimbursement. 6. ILLNESS: In the event Executive is unable to perform Executive's duties under this Agreement on a full-time basis for a period of six (6) consecutive months by reason of illness or other physical or mental disability, and at or before the end of such period Executive does not return to work on a full-time basis, the Company and the Bank may jointly terminate Executive's Employment pursuant to this Agreement without further or additional compensation being due the Executive from the Bank pursuant to this Agreement, except that the Executive shall be paid Executive's base compensation from the Bank at the rate in effect at the time of Executive's termination for a period of twelve (12) months from the date of the commencement of the Executive's inability to perform her duties, less any disability payments payable during such time under any disability plans maintained and paid for by the Bank, and Executive shall continue to participate in all Benefit Plans in effect at the time of Executive's termination for a period of twelve (12) months from the date of the commencement of the Executive's inability to perform her duties. 7. DEATH: In the event of the Executive's death during the term of this Agreement, Executive's estate, legal representatives or named beneficiaries (as directed by the Executive in writing) shall be paid Executive's base compensation from the Bank at the rate in effect at the time of the Executive's death under this Agreement for the period of twelve (12) months from the date of the Executive's death, less any amounts payable to Executive's estate or beneficiaries under life insurance policies on the life of Executive maintained and paid for by Bank. 8. TERMINATION BY COMPANY: Notwithstanding the provisions of Section 2 above, the Board of Directors of the Company may, in its sole discretion, terminate the Executive's employment with the Company under this Agreement at any time in any lawful manner by not less than thirty (30) days written notice to the Executive, in which event the Executive shall be entitled to elect to have such termination likewise constitute a termination of Executive's employment by the Bank. If Executive so elects, then unless such termination is for Cause as defined in Section 10 of this Agreement or unless the Executive's employment is terminated in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, Executive shall be entitled to the compensation provided for in Section 9 below. -48- 4 9. TERMINATION BY BANK: Notwithstanding the provisions of Section 2 of this Agreement, the Board of Directors of the Bank may, in its sole discretion, terminate the Executive's employment with the Bank under this Agreement at any time in any lawful manner by not less than thirty (30) days written notice to the Executive (or, at the Bank's option, pay for such thirty days in lieu of notice) and in such event, unless the Bank terminates the Executive's employment with the Bank for Cause as defined in with Section 10 of this Agreement or, unless the Executive's employment is terminated in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, the Executive shall be paid, during the twelve (12) months following such termination at such times as payment was theretofore made, the base compensation that the Executive would have been entitled to receive during such period of time had such termination not occurred, such payments to be in addition to any payment in lieu of notice. Furthermore, the Bank shall pay to the Executive in equal monthly payments an amount sufficient to fully fund any Benefit Plans of the Bank, with respect to the Executive, commencing at the beginning of the first month following termination of Executive's employment with the Bank pursuant to this paragraph, and ending twelve (12) months after such termination. In the event that a payment made with respect to any benefit plan or program would otherwise violate the terms of the plan or program, an equivalent amount shall be paid directly to Executive. Executive shall owe no duty to mitigate these payments, and shall not be required to obtain or attempt to obtain alternate employment during such twelve (12) month period. If Executive obtains other gainful employment during such twelve (12) month period, the compensation and benefits received by Executive during said period from such other employment shall not reduce the payments otherwise due to Executive pursuant to this section. 10. TERMINATION FOR CAUSE: (a) Notwithstanding the provisions of this Agreement, the Board of Directors of the Company may, in its sole discretion, terminate the Executive's employment with the Company for Cause. For the purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder: (i) because of the Executive's personal dishonesty, incompetence, willful misconduct, gross negligence, willful breach of fiduciary duty (including involving personal profit), failure to substantially perform stated duties described in Section 3 of this Agreement, willful violation of any material law, rule, regulation (other than traffic violations or similar offenses), willful violation of any final cease-and-desist order issued by any regulatory agency having jurisdiction over the Company or the Bank, or material breach by the Executive of any provision of this Agreement or any related agreement entered into by the Executive; or (ii) if the Board of Directors of the Bank terminates the employment of Executive with the Bank for Cause pursuant to subsection (c) of this Section 10. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by her not in good faith or without reasonable belief that her action or omission was in the best interest of the Company; provided that any act or omission to act on the Executive's behalf in reliance upon an opinion of counsel to either the Company or the Bank shall not be deemed to be "willful." Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been a resolution approved by a majority of the non-officer members of the Board of Directors of the Company finding that, in the good faith opinion of such majority, the Executive was guilty of conduct which is deemed to be Cause within the meaning of this paragraph, after notice to the Executive and an opportunity for her, together with her counsel, to be heard before such majority (with the Company Board retaining the right to deliberate without the Executive and her counsel present before and/or after such hearing). (b) If the Company terminates the Executive's employment with the Company for Cause in accordance with Section 10(a) of this Agreement, the Company shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation or benefits, insured or otherwise, that she would otherwise have been eligible to receive under any Benefit Plans of the Company through the date of such termination. -49- 5 (c) Notwithstanding the provisions of this Agreement, the Board of Directors of the Bank may, in its sole discretion, terminate the Executive's employment with the Bank for Cause. For the purposes of this Agreement, the Bank shall have "Cause" to terminate the Executive's employment hereunder: (i) because of the Executive's personal dishonesty, incompetence, willful misconduct, gross negligence, willful breach of fiduciary duty (including involving personal profit), failure to substantially perform stated duties described in Section 3 of this Agreement, willful violation of any material law, rule, regulation (other than traffic violations or similar offenses) , willful violation of any final cease-and-desist order issued by any regulatory agency having jurisdiction over the Company or the Bank, the imposition of any sanction upon the Executive by any such regulatory agency, or material breach by the Executive of any provision of this Agreement or any related agreement entered into by the Executive; or (ii) if the Board of Directors of the Company terminates Executive's employment with the Company for Cause pursuant to subsection (a) of this Section 10. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by her not in good faith or without reasonable belief that her action or omission was in the best interest of the Bank; provided that any act or omission to act on the Executive's behalf in reliance upon an opinion of counsel to either the Company or the Bank shall not be deemed to be "willful." Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been a resolution approved by a majority of the non-officer members of the Board of Directors of the Bank finding that, in the good faith opinion of such majority, the Executive was guilty of conduct which is deemed to be Cause within the meaning of this paragraph, after notice to the Executive and an opportunity for her, together with her counsel to be heard before such majority (with the Bank Board retaining the right to deliberate without the Executive and her counsel present before and/or after such hearing). (d) If the Bank terminates the Executive's employment with the Bank for Cause in accordance with Section 10(c) of this Agreement, the Bank shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation or benefits, insured or otherwise, which Executive would otherwise have been eligible to receive under any Benefit Plans of the Bank through the date of such termination. 11. TERMINATION BY THE EXECUTIVE: The Executive may terminate the Executive's employment with the Company or with the Bank hereunder at any time upon sixty (60) days written notice to the affected entity. If the Executive terminates the Executive's employment with either the Company or the Bank other than for breach of this Agreement as provided in Section 3, for Good Reason, in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, Executive shall be deemed to have voluntarily terminated Executive's employment with both the Company and the Bank ("Voluntary Termination"), and thereupon the Company and the Bank shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation and benefits, insured or otherwise, that she would otherwise have been eligible to receive under any Benefit Plans of the Company or the Bank through the date of such termination. 12. DEFINITION OF CHANGE OF CONTROL OF THE COMPANY: A "Change of Control" of the Company shall mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 ("Exchange Act") or such item thereof which may hereafter pertain to the same subject; provided that, and notwithstanding the foregoing, a Change of Control shall be deemed to have occurred if (i) any person (as that term is used in Sections 13(d) and 14(d) (2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the Company's then outstanding securities, or (ii) the Company shall cease to be a publicly owned corporation, as defined in the Exchange Act. -50- 6 13. DEFINITION OF CHANGE OF CONTROL OF THE BANK: A "Change of Control" of the Bank shall mean any Change of Control of the Company, or any change or series of changes in circumstances which result in the Company ceasing to own, control, and vote an absolute majority of the voting securities of the Bank. 14. TERMINATION BY COMPANY OR BANK AFTER CHANGE IN CONTROL: If a Change of Control of the Company or a Change of Control of the Bank shall have occurred, this Agreement shall continue in full force and effect. If the Executive's Employment is terminated by the Company or the Bank within twelve (12) months after a Change of Control of the Company, as defined in Section 12 above, or a Change of Control of the Bank, as defined in Section 13 above, or in Contemplation of a Change of Control of either, as defined below, Executive shall be entitled to be paid an amount equal to one (1) times the sum of Executive's annual base cash compensation plus the annual value of Executive's participation in all Benefit Programs in effect at the time of such termination. At Executive's option, the sums payable pursuant to this Section will be paid in full in a lump sum and without discount within thirty (30) days of the termination of Executive's employment, or in equal monthly installments over twelve (12) months. Any termination of Executive's employment hereunder during any period of time when the Board of Directors of the Company has formed an intent to offer the Bank for sale or to promote an acquisition of or merger of the Company or the Bank, or when the Company has knowledge that any person(s), entity or concern has taken steps reasonably calculated to effect a Change of Control of the Company shall constitute a termination of Executive's employment "In Contemplation of a Change of Control." The period of Contemplation of Change of Control shall continue until the Board of Directors of the Company no longer intends to promote an acquisition of or merger of the Company or the Bank, or until in the opinion of the Company's Board of Directors, the person(s), concern or entity has abandoned or terminated its efforts to effect a Change of Control of the Company, as applicable. Any good faith determination by the Company's Board of Directors that Board no longer has such an intent, or that the person(s), concern or entity has abandoned or terminated its efforts to effect a Change of Control of the Company shall be conclusive and binding on the Executive. Such determination shall be promptly communicated to the Executive in writing by the Chief Executive of the Company or Chairman of the Board of the Company. Notwithstanding the foregoing, any termination of the Executive by the Company or by the Bank within ninety (90) days prior to a Change of Control of the Company shall be conclusively presumed to have been in Contemplation of Change of Control. 15. TERMINATION BY EXECUTIVE FOR GOOD REASON; During the term of Executive's employment hereunder, the Executive may terminate her employment with both the Company and the Bank if the Executive has Good Reason, as defined below. Termination by the Executive of Executive's employment with either entity shall be deemed termination with both. For purposes of this Agreement, "Good Reason" shall mean: (i) The assignment of duties to the Executive by the Company or the Bank which (1) are significantly different from the Executive's duties immediately prior to the Change of Control, or (2) result in the Executive having significantly less authority and/or responsibility than Executive had as an executive officer of the Company or the Bank prior to the Change of Control, without the express written consent of Executive; (ii) The removal of the Executive from or any failure to re-elect Executive to the positions set forth in Section 3 above, except in connection with a termination of her employment by the Company or the Bank for Cause or Executive's resignation other than for Good Reason. (iii) A reduction of the Executive's base salary as in effect on the date of the Change of Control, unless the reduction in the Executive's salary is waived in writing by the Executive; -51- 7 (iv) The failure of the Company and the Bank collectively to provide the Executive with substantially the same fringe benefits (including paid vacations) that were provided to Executive immediately prior to the Change of Control, or with a package of fringe benefits that, though one or more of such benefits may vary from those in effect immediately prior to such Change of Control, is substantially comparable in all material respects to such fringe benefits taken as a whole; or (v) Requiring the Executive to perform a significant part of Executive's duties in locations more than one hundred (100) miles from Nashville, Tennessee. Further, and notwithstanding any other provision of this Agreement, the Executive may terminate her employment without Good Reason at any time within ninety (90) days after a Change of Control shall have occurred. 16. PAYMENTS ON TERMINATION: Upon termination of Executive's employment by the Company or the Bank, the Company and the Bank shall have the following payment obligations to Executive: (a) If the Executive's Employment is terminated due to illness of the Executive, the provisions of Section 6 shall apply. (b) If the Executive's Employment is terminated due to the death of the Executive, the provisions of Section 7 shall apply. (c) If the Executive's Employment is terminated by the Company other than for Cause, and not In Contemplation of a Change of Control of the Company or the Bank or within twelve months after a Change of Control of the Company or the Bank, the provisions of Section 8 shall apply, and therefore the payment provisions of Section 9 apply. (d) If the Executive's Employment is terminated by the Bank other than for Cause, and not In Contemplation of a Change of Control of the Company or the Bank or within twelve months after a Change of Control of the Company or the Bank, the provisions of Section 9 shall apply. (e) If the Executive's Employment is terminated by the Company for Cause, or by the Bank for Cause, the provisions of Section 10 shall apply. (f) If the Executive's Employment is terminated by the Executive as a result of a breach of the agreement by the Company or the Bank, the provisions of Section 3 apply, and therefore the payment provisions of Section 9 apply. (g) In the event of a Voluntary Termination of Executive's Employment as defined in Section 11, the provisions of Section 11 apply. (h) If the Executive's Employment is terminated by the Company or the Bank within twelve (12) months after a Change of Control of the Company, as defined in Section 12 above, or a Change of Control of the Bank, as defined in Section 13 above, or in Contemplation of a Change of Control of either, as defined in Section 14, the provisions of Section 14 shall apply. (i) If the Executive's Employment is terminated by the Executive for Good Reason, as defined in Section 15 above, the Executive's employment with the Company and with the Bank shall be deemed to have been terminated without Cause by the Company and by the Bank at the time of such termination by Executive for Good Reason. If such termination is during a period of Contemplation of Change of Control, or within twelve (12) months after a Change of Control, the provisions of Section 14 shall apply. -52- 8 (j) Termination of Executive's Employment by the Company or by the Bank or by the Executive shall be communicated by written Notice of Termination to the other parties hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision(s) in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. 17. CONFIDENTIALITY: In the course of the Executive's employment, the Company and the Bank may disclose or make known to the Executive, and the Executive may be given access to or may become acquainted with, certain information, including but not limited to confidential information which relates to or is useful in the businesses of the Company and the Bank and which is not available from public records or other generally available sources (collectively, "Confidential Information"), and which the Company or the Bank consider proprietary and desire to maintain confidential. During the term of this Agreement and at all times thereafter, the Executive shall not in any manner, either directly or indirectly, divulge, disclose or communicate to any person or firm, except to legal counsel for the Company or the Bank or otherwise to or for the benefit of the Company or the Bank as directed by the Company or the Bank, and except to the Executive's legal counsel in connection with the resolution of any dispute between the Executive and the Company or the Bank under this Agreement, any of the Confidential Information which Executive may have acquired in the course of or as an incident to Executive's employment by the Company or the Bank, the parties agreeing that such Confidential Information affects the successful and effective conduct of the business and their goodwill of the Company and the Bank, and that any material breach of the terms of this Section 17 is a material breach of this Agreement. 18. COVENANT NOT TO COMPETE. During the Term of this Agreement and, if Executive terminates Executive's employment in a Voluntary Termination or for Good Reason, or if the Company or the Bank terminate Executive's employment in Contemplation of a Change of Control, or within twelve (12) months after a Change of Control, or for Cause, for the period of twelve (12) months following the termination of Executive's employment with the Company or the Bank, Executive agrees that Executive will not directly or indirectly own, become interested in, or become involved in any manner whatsoever in any business which is similar or competitive with any aspect of the business of the Company or the Bank as conducted at the time of such termination. Without limiting the foregoing, Executive agrees during the applicable period not to engage in the Banking or Leasing businesses, whether as an owner, partner, director, officer, employee, consultant, stockholder, agent, salesman, or in any other capacity for any person, partnership, firm, corporation or other entity without the express written consent of the President of the Company. Executive specifically acknowledges and agrees that the foregoing restriction on competition with the Company and the Bank will not prevent Executive from obtaining gainful employment following termination of Executive's employment with the Company and the Bank, and is a reasonable restriction upon Executive's ability to compete with the Company and the Bank, given the economic benefits afforded to Executive under this Agreement. 19. NO ENTICEMENT OF EMPLOYEES. Executive agrees that Executive will not, directly or indirectly, entice or induce, or attempt to entice or induce any employee of the Company or Bank to leave the employ of the Company or the Bank during the period covered by the Non-Competition provisions of Section 18 above. 20. NO SOLICITATION. Executive will not, directly or indirectly, solicit, entice or induce, or attempt to entice or induce any customer or user of the products or services of the Bank or the Company during the period covered by the Non-Competition provisions of Section 18 above. -53- 9 21. REMEDIES. Executive acknowledges and agrees that the breach or threatened breach of any of the provisions of Sections 17, 18, 19 and 20 of this Agreement will cause irreparable harm to the Company and the Bank, and cannot be adequately compensated by the payment of damages. Accordingly, Executive covenants and agrees that the Company and the Bank, in addition to any other rights or remedies which they may have, will be entitled to such equitable and injunctive relief as may be available from any court of competent jurisdiction to restrain Executive from breaching or threatening to breach any of the provisions of this Sections 17, 18, 19 and 20, without posting bond or other surety. Such right to obtain injunctive relief may be exercised at the option of the Company or the Bank in addition to, concurrently with, prior to, after, or in lieu of the exercise of any other rights or remedies which the Company or the Bank may have as a result of any such breach or threatened breach. In addition to all other remedies, in the event of the breach or threatened breach of any of the provisions of Sections 17, 18, 19 or 20 of this Agreement, the Company and Bank shall be relieved of any obligation to continue payments to the Executive pursuant to the provisions of this agreement. 22. NOTICES: For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Community Financial Group, Inc. 401 Church Street, 2nd Floor Nashville, TN 37219 Attention: Chief Executive Officer with a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street, Suite 1600 P. O. Box 198062 Nashville, TN 37219 Attention: Patrick L. Alexander, Esq. If to the Bank: The Bank of Nashville 401 Church Street Nashville, TN 37219 Attention: Chief Executive Officer with a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street, Suite 1600 P. O. Box 198062 Nashville, TN 37219 Attention: Patrick L. Alexander, Esq. -54- 10 If to the Executive: Anne J. Cheatham 111 Robin Springs Road Nashville, TN 37220 or at such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 23. MODIFICATION; WAIVERS; APPLICABLE LAW: No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Executive, and on behalf of the Company by such officer as may be specifically designated by the Board of Directors of the Company after approval of the modification by the Board of Directors, and on behalf of the Bank by such officer as may be specifically designated by the Board of Directors of the Bank after approval of the modification by the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Tennessee. 24. INVALIDITY; ENFORCEABILITY: The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 25. ASSIGNMENTS: This Agreement is personal to the Executive, who may not assign her obligations hereunder. 26. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, the Bank, its successors and assigns and upon the Executive, and her personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to her hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to her devisee, legatee or other designee or, if there is no such designee, to her estate. 27. HEADINGS: Descriptive headings contained in this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision hereof. 28. ARBITRATION: Any dispute, controversy or claim arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators, in Nashville, Tennessee, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Unless otherwise provided in the rules of the American Arbitration Association, the arbitrators shall, in their award, allocate between the parties the costs of arbitration, which shall include reasonable attorneys' fees and expenses of the parties, as well as the arbitrator's fees and expenses, in such proportions as the arbitrators deem just. -55- 11 29. ENTIRE AGREEMENT: This Agreement represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof, and supersedes or amends all other agreements, negotiations, understandings and representations (if any) made by and between the parties hereto; provided, however, that nothing herein shall affect in any way agreements granting or evidencing the Executive's options to acquire shares of the Company. 30. REGULATORY AND OTHER PROCEEDINGS: The provisions of this Section 30 shall control as to continuing rights and obligations under this Agreement, notwithstanding any other provision of this Agreement, for as long as they are required to be included in employment contracts between an institution insured by the FDIC and its officers and as long as the Bank is such an insured institution. (a) If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the affairs of the Bank or the Company by a Notice served under applicable Federal or State statutes or regulations, the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank and the Company shall pay the Executive all of the compensation withheld while their obligations hereunder were suspended and reinstate their obligations which were suspended. (b) If the Executive is removed and/or permanently prohibited from participating in the conduct of the affairs of the Bank or the Company by an order issued under applicable Federal or State statutes or regulations, all obligations of the Company and the Bank under this Agreement shall terminate as of the effective date of the order, provided that vested rights of the contracting parties shall not be affected. (c) If the Company or the Bank become insolvent or taken over by regulatory entities, all obligations under this Agreement shall terminate as of the date of default, provided that this paragraph shall not affect any vested rights of the contracting parties. (d) All obligations under this Agreement may be terminated, except to the extent determined that continuation thereof is necessary for the continued operation of the Company or the Bank, by the FDIC at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank or approves a supervisory merger to resolve problems related to operation of the Bank, provided that any rights of the parties that have already vested shall not be affected by such action. -56- 12 31. SURVIVAL. This agreement shall remain in effect notwithstanding the termination of Executive's employment hereunder, and in any case, the provisions of Sections 18, 19, and 20 shall survive any termination of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. Executive: /s/ Anne J. Cheatham ------------------------------------------ Anne J. Cheatham Community Financial Group, Inc. By: /s/ Mack S. Linebaugh, Jr. ------------------------------------------ Name: Mack S. Linebaugh, Jr. Title: President The Bank of Nashville By: /s/ Mack S. Linebaugh, Jr. ------------------------------------------ Name: Mack S. Linebaugh, Jr. Title: President The Bank of Nashville -57- EX-10.21 5 EXECUTIVE EMPLOYMENT AGREEMENT 1 EXHIBIT 10.21 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement entered into this 14th day of September, 1999 by and among Community Financial Group, Inc., a Tennessee corporation (the "Company"), The Bank of Nashville, a banking corporation organized under the laws of the State of Tennessee (the "Bank"), and T. Wayne Hood (the "Executive"). WITNESSETH: WHEREAS, the Company is a one-bank holding company which owns one hundred per cent (100%) of the outstanding stock of the Bank; WHEREAS, the Company and the Bank desire to retain the services of Executive on the terms and conditions set forth herein and, for purposes of effecting the same, the Boards of Directors of the Company and the Bank have approved this Employment Agreement and authorized its execution and delivery to the Executive on behalf of the Company and the Bank; WHEREAS, the Executive serves as the Senior Vice President and Trust Officer of the Company and, as such, is a key executive officer of the Company whose continued dedication, availability, advice and counsel to the Company is deemed important to the Company, the Board of Directors of the Company, and the present and future stockholders of the Company; WHEREAS, the Executive serves as the Senior Vice President and Trust Officer of the Bank and, as such, is a key executive officer of the Bank whose continued dedication, availability, advice and counsel to the Bank is deemed important to the Board of Directors of the Bank, the Bank and the Company; WHEREAS, the Company and the Bank wish to attract and retain well-qualified executives, and it is in the best interests of the Company, the Bank and the Executive, notwithstanding any change in control of the Company or the Bank, to secure the services of the Executive, whose experience and knowledge of the affairs of the Company and the Bank, and whose reputation and contacts in the industry, are extremely valuable to the Company and the Bank; and WHEREAS, the Company and the Bank consider the establishment and maintenance of a sound and vital management team to be part of their overall corporate strategy and to be essential to protecting and enhancing the best interests of the Bank, the Company, and its stockholders. NOW, THEREFORE, to assure the Company and the Bank of the Executive's continued dedication, the availability of Executive's advice and counsel to the Boards of Directors of the Company and the Bank, the availability of Executive's management skills to the Company and the Bank, and to induce the Executive to remain and continue in the employ of the Company and the Bank in Executive's current capacities, and for other good and valuable consideration, the receipt and adequacy of which each party hereby acknowledged, the Company, the Bank and the Executive hereby agree as follows: 1. EMPLOYMENT. The Company and the Bank agree to, and do hereby, employ Executive and Executive agrees to, and does hereby, accept such employment, all upon the terms and conditions hereinafter set forth. 2. TERM: The initial term of employment under this Agreement shall be for a period of one (1) year, commencing on the date first above written and ending at the close of business one year from said date. This Agreement shall be automatically renewed for succeeding terms of one (1) year each, unless either party shall, at least thirty (30) days, but not more than one hundred eighty (180) days, prior to the expiration of any term, give written notice of his or its intention not to renew this Agreement. -58- 2 3. EMPLOYMENT; DUTIES, AUTHORITY, AND RESPONSIBILITIES: (a) During the term of employment of the Executive by the Company and the Bank, the Executive shall devote Executive's full business time and attention to the rendition of services as Senior Vice President and Trust Officer of the Company and as Senior Vice President and Trust Officer of the Bank, and to the furtherance of the best interests of the Company and the Bank, and shall exert Executive's best efforts in the rendition of such services. The Executive agrees that in the rendition of such services and in all aspects of such employment Executive will comply with the policies, standards and regulations of the Company and the Bank as from time to time established by their respective Boards of Directors. The expenditure by the Executive of reasonable amounts of time for charitable, professional and similar activities shall not be deemed a breach of this Agreement provided such activities do not materially interfere with the services to be rendered to the Company and the Bank hereunder. (b) As Senior Vice President and Trust Officer of the Company and the Bank, the Executive shall have the general powers and duties of supervision which usually pertain to such offices and shall perform all such duties as are properly required of Executive by the Chief Executive Officer of the Company and the Bank. (c) If after a Change of Control occurs, a material reduction or limitation of the duties of the Executive that were in effect immediately prior to the Change of Control occurs, this action shall be considered a breach of this Agreement by the Company and the Bank. In the event of any breach of any provision of this Agreement by the Bank which breach is not cured within ten (10) days after written notice of the breach to the Bank by the Executive shall entitle the Executive to terminate his employment by the Bank pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Bank and, at the option of Executive, to terminate his employment by the Company pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Company. Any such termination by the Executive of his employment by the Bank hereunder resulting from a breach of the terms of this Agreement shall be treated as a termination by the Bank without cause and governed by Section 9 below, unless such breach occurs in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, and constitutes Good Reason for the Executive to terminate Executive's employment, in which case it shall be governed by Section 15 below. 4. COMPENSATION: The Bank agrees to pay Executive, and Executive agrees to accept, as compensation for all services rendered by him to the Company, the Bank and their affiliates during the period of his employment under this Agreement, base compensation at the annual rate of not less than $84,500, which shall be payable in accordance with the normal payroll policies of the Bank and shall be subject to all appropriate withholding taxes. 5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS EXPENSES AND MOVING EXPENSES: (a) During the term of this Agreement, Executive shall be entitled to participate in all pension, group insurance, hospitalization, deferred compensation, Company paid life insurance, or incentive plans, and any other benefit plan of the Company or the Bank presently in effect or hereafter adopted by the Company or the Bank and generally available to all employees of either organization of senior executive status (the "Benefit Plans"). -59- 3 (b) During the term of this Agreement, to the extent that such expenditures meet the requirements of the Internal Revenue Code for deductibility by the Company or the Bank for federal income tax purposes and are substantiated by the Executive as required by the Internal Revenue Service and policies of the Company and the Bank, the Bank shall reimburse the Executive promptly for all expenditures (including travel, entertainment, parking, business meetings, and the monthly costs, including dues, of maintaining memberships at appropriate clubs, including, but not limited to, Nashville City Club) made in accordance with rules and policies established from time to time by the Board of Directors of the Bank in pursuance and furtherance of the Company's and the Bank's business and good will. (c) During the term of this Agreement, in the event that the Company or the Bank relocates its principal executive offices to a location more than one hundred (100) miles from Nashville, Tennessee, or the Board of Directors of either the Company or the Bank requires the Executive to be based anywhere more than one hundred (100) miles from the Bank's principal executive offices, the Bank shall pay (or reimburse the Executive for) all reasonable moving expenses incurred by Executive relating to a change of Executive's principal residence in connection with such relocation, provided that the Executive furnishes the Bank with adequate records and documentary evidence for the substantiation of such reimbursement. 6. ILLNESS: In the event Executive is unable to perform Executive's duties under this Agreement on a full-time basis for a period of six (6) consecutive months by reason of illness or other physical or mental disability, and at or before the end of such period Executive does not return to work on a full-time basis, the Company and the Bank may jointly terminate Executive's Employment pursuant to this Agreement without further or additional compensation being due the Executive from the Bank pursuant to this Agreement, except that the Executive shall be paid Executive's base compensation from the Bank at the rate in effect at the time of Executive's termination for a period of twelve (12) months from the date of the commencement of the Executive's inability to perform his duties, less any disability payments payable during such time under any disability plans maintained and paid for by the Bank, and Executive shall continue to participate in all Benefit Plans in effect at the time of Executive's termination for a period of twelve (12) months from the date of the commencement of the Executive's inability to perform his duties. 7. DEATH: In the event of the Executive's death during the term of this Agreement, Executive's estate, legal representatives or named beneficiaries (as directed by the Executive in writing) shall be paid Executive's base compensation from the Bank at the rate in effect at the time of the Executive's death under this Agreement for the period of twelve (12) months from the date of the Executive's death, less any amounts payable to Executive's estate or beneficiaries under life insurance policies on the life of Executive maintained and paid for by Bank. 8. TERMINATION BY COMPANY: Notwithstanding the provisions of Section 2 above, the Board of Directors of the Company may, in its sole discretion, terminate the Executive's employment with the Company under this Agreement at any time in any lawful manner by not less than thirty (30) days written notice to the Executive, in which event the Executive shall be entitled to elect to have such termination likewise constitute a termination of Executive's employment by the Bank. If Executive so elects, then unless such termination is for Cause as defined in Section 10 of this Agreement or unless the Executive's employment is terminated in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, Executive shall be entitled to the compensation provided for in Section 9 below. 9. TERMINATION BY BANK: Notwithstanding the provisions of Section 2 of this Agreement, the Board of Directors of the Bank may, in its sole discretion, terminate the Executive's employment with the Bank under this Agreement at any time in any lawful manner by not less than thirty (30) days written notice to the Executive (or, at the Bank's option, pay for such thirty days in lieu of notice) and in such event, unless the Bank terminates the Executive's employment with the Bank for Cause as defined in with Section 10 of this Agreement or, unless the Executive's employment is terminated in -60- 4 Contemplation of a Change of Control or within twelve (12) months after a Change of Control, the Executive shall be paid, during the twelve (12) months following such termination at such times as payment was theretofore made, the base compensation that the Executive would have been entitled to receive during such period of time had such termination not occurred, such payments to be in addition to any payment in lieu of notice. Furthermore, the Bank shall pay to the Executive in equal monthly payments an amount sufficient to fully fund any Benefit Plans of the Bank, with respect to the Executive, commencing at the beginning of the first month following termination of Executive's employment with the Bank pursuant to this paragraph, and ending twelve (12) months after such termination. In the event that a payment made with respect to any benefit plan or program would otherwise violate the terms of the plan or program, an equivalent amount shall be paid directly to Executive. Executive shall owe no duty to mitigate these payments, and shall not be required to obtain or attempt to obtain alternate employment during such twelve (12) month period. If Executive obtains other gainful employment during such twelve (12) month period, the compensation and benefits received by Executive during said period from such other employment shall not reduce the payments otherwise due to Executive pursuant to this section. 10. TERMINATION FOR CAUSE: (a) Notwithstanding the provisions of this Agreement, the Board of Directors of the Company may, in its sole discretion, terminate the Executive's employment with the Company for Cause. For the purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder: (i) because of the Executive's personal dishonesty, incompetence, willful misconduct, gross negligence, willful breach of fiduciary duty (including involving personal profit), failure to substantially perform stated duties described in Section 3 of this Agreement, willful violation of any material law, rule, regulation (other than traffic violations or similar offenses), willful violation of any final cease-and-desist order issued by any regulatory agency having jurisdiction over the Company or the Bank, or material breach by the Executive of any provision of this Agreement or any related agreement entered into by the Executive; or (ii) if the Board of Directors of the Bank terminates the employment of Executive with the Bank for Cause pursuant to subsection (c) of this Section 10. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith or without reasonable belief that his action or omission was in the best interest of the Company; provided that any act or omission to act on the Executive's behalf in reliance upon an opinion of counsel to either the Company or the Bank shall not be deemed to be "willful." Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been a resolution approved by a majority of the non-officer members of the Board of Directors of the Company finding that, in the good faith opinion of such majority, the Executive was guilty of conduct which is deemed to be Cause within the meaning of this paragraph, after notice to the Executive and an opportunity for him, together with his counsel, to be heard before such majority (with the Company Board retaining the right to deliberate without the Executive and his counsel present before and/or after such hearing). (b) If the Company terminates the Executive's employment with the Company for Cause in accordance with Section 10(a) of this Agreement, the Company shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation or benefits, insured or otherwise, that he would otherwise have been eligible to receive under any Benefit Plans of the Company through the date of such termination. -61- 5 (c) Notwithstanding the provisions of this Agreement, the Board of Directors of the Bank may, in its sole discretion, terminate the Executive's employment with the Bank for Cause. For the purposes of this Agreement, the Bank shall have "Cause" to terminate the Executive's employment hereunder: (i) because of the Executive's personal dishonesty, incompetence, willful misconduct, gross negligence, willful breach of fiduciary duty (including involving personal profit), failure to substantially perform stated duties described in Section 3 of this Agreement, willful violation of any material law, rule, regulation (other than traffic violations or similar offenses) , willful violation of any final cease-and-desist order issued by any regulatory agency having jurisdiction over the Company or the Bank, the imposition of any sanction upon the Executive by any such regulatory agency, or material breach by the Executive of any provision of this Agreement or any related agreement entered into by the Executive; or (ii) if the Board of Directors of the Company terminates Executive's employment with the Company for Cause pursuant to subsection (a) of this Section 10. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith or without reasonable belief that his action or omission was in the best interest of the Bank; provided that any act or omission to act on the Executive's behalf in reliance upon an opinion of counsel to either the Company or the Bank shall not be deemed to be "willful." Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been a resolution approved by a majority of the non-officer members of the Board of Directors of the Bank finding that, in the good faith opinion of such majority, the Executive was guilty of conduct which is deemed to be Cause within the meaning of this paragraph, after notice to the Executive and an opportunity for him, together with his counsel to be heard before such majority (with the Bank Board retaining the right to deliberate without the Executive and his counsel present before and/or after such hearing). (d) If the Bank terminates the Executive's employment with the Bank for Cause in accordance with Section 10(c) of this Agreement, the Bank shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation or benefits, insured or otherwise, which Executive would otherwise have been eligible to receive under any Benefit Plans of the Bank through the date of such termination. 11. TERMINATION BY THE EXECUTIVE: The Executive may terminate the Executive's employment with the Company or with the Bank hereunder at any time upon sixty (60) days written notice to the affected entity. If the Executive terminates the Executive's employment with either the Company or the Bank other than for breach of this Agreement as provided in Section 3, for Good Reason, in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, Executive shall be deemed to have voluntarily terminated Executive's employment with both the Company and the Bank ("Voluntary Termination"), and thereupon the Company and the Bank shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation and benefits, insured or otherwise, that he would otherwise have been eligible to receive under any Benefit Plans of the Company or the Bank through the date of such termination. 12. DEFINITION OF CHANGE OF CONTROL OF THE COMPANY: A "Change of Control" of the Company shall mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 ("Exchange Act") or such item thereof which may hereafter pertain to the same subject; provided that, and notwithstanding the foregoing, a Change of Control shall be deemed to have occurred if (i) any person (as that term is used in Sections 13(d) and 14(d) (2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the Company's then outstanding securities, or (ii) the Company shall cease to be a publicly owned corporation, as defined in the Exchange Act. -62- 6 13. DEFINITION OF CHANGE OF CONTROL OF THE BANK: A "Change of Control" of the Bank shall mean any Change of Control of the Company, or any change or series of changes in circumstances which result in the Company ceasing to own, control, and vote an absolute majority of the voting securities of the Bank. 14. TERMINATION BY COMPANY OR BANK AFTER CHANGE IN CONTROL: If a Change of Control of the Company or a Change of Control of the Bank shall have occurred, this Agreement shall continue in full force and effect. If the Executive's Employment is terminated by the Company or the Bank within twelve (12) months after a Change of Control of the Company, as defined in Section 12 above, or a Change of Control of the Bank, as defined in Section 13 above, or in Contemplation of a Change of Control of either, as defined below, Executive shall be entitled to be paid an amount equal to one (1) times the sum of Executive's annual base cash compensation plus the annual value of Executive's participation in all Benefit Programs in effect at the time of such termination. At Executive's option, the sums payable pursuant to this Section will be paid in full in a lump sum and without discount within thirty (30) days of the termination of Executive's employment, or in equal monthly installments over twelve (12) months. Any termination of Executive's employment hereunder during any period of time when the Board of Directors of the Company has formed an intent to offer the Bank for sale or to promote an acquisition of or merger of the Company or the Bank, or when the Company has knowledge that any person(s), entity or concern has taken steps reasonably calculated to effect a Change of Control of the Company shall constitute a termination of Executive's employment "In Contemplation of a Change of Control." The period of Contemplation of Change of Control shall continue until the Board of Directors of the Company no longer intends to promote an acquisition of or merger of the Company or the Bank, or until in the opinion of the Company's Board of Directors, the person(s), concern or entity has abandoned or terminated its efforts to effect a Change of Control of the Company, as applicable. Any good faith determination by the Company's Board of Directors that Board no longer has such an intent, or that the person(s), concern or entity has abandoned or terminated its efforts to effect a Change of Control of the Company shall be conclusive and binding on the Executive. Such determination shall be promptly communicated to the Executive in writing by the Chief Executive of the Company or Chairman of the Board of the Company. Notwithstanding the foregoing, any termination of the Executive by the Company or by the Bank within ninety (90) days prior to a Change of Control of the Company shall be conclusively presumed to have been in Contemplation of Change of Control. 15. TERMINATION BY EXECUTIVE FOR GOOD REASON; During the term of Executive's employment hereunder, the Executive may terminate his employment with both the Company and the Bank if the Executive has Good Reason, as defined below. Termination by the Executive of Executive's employment with either entity shall be deemed termination with both. For purposes of this Agreement, "Good Reason" shall mean: (i) The assignment of duties to the Executive by the Company or the Bank which (1) are significantly different from the Executive's duties immediately prior to the Change of Control, or (2) result in the Executive having significantly less authority and/or responsibility than Executive had as an executive officer of the Company or the Bank prior to the Change of Control, without the express written consent of Executive; (ii) The removal of the Executive from or any failure to re-elect Executive to the positions set forth in Section 3 above, except in connection with a termination of his employment by the Company or the Bank for Cause or Executive's resignation other than for Good Reason. (iii) A reduction of the Executive's base salary as in effect on the date of the Change of Control, unless the reduction in the Executive's salary is waived in writing by the Executive; -63- 7 (iv) The failure of the Company and the Bank collectively to provide the Executive with substantially the same fringe benefits (including paid vacations) that were provided to Executive immediately prior to the Change of Control, or with a package of fringe benefits that, though one or more of such benefits may vary from those in effect immediately prior to such Change of Control, is substantially comparable in all material respects to such fringe benefits taken as a whole; or (v) Requiring the Executive to perform a significant part of Executive's duties in locations more than one hundred (100) miles from Nashville, Tennessee. Further, and notwithstanding any other provision of this Agreement, the Executive may terminate his employment without Good Reason at any time within ninety (90) days after a Change of Control shall have occurred. 16. PAYMENTS ON TERMINATION: Upon termination of Executive's employment by the Company or the Bank, the Company and the Bank shall have the following payment obligations to Executive: (a) If the Executive's Employment is terminated due to illness of the Executive, the provisions of Section 6 shall apply. (b) If the Executive's Employment is terminated due to the death of the Executive, the provisions of Section 7 shall apply. (c) If the Executive's Employment is terminated by the Company other than for Cause, and not In Contemplation of a Change of Control of the Company or the Bank or within twelve months after a Change of Control of the Company or the Bank, the provisions of Section 8 shall apply, and therefore the payment provisions of Section 9 apply. (d) If the Executive's Employment is terminated by the Bank other than for Cause, and not In Contemplation of a Change of Control of the Company or the Bank or within twelve months after a Change of Control of the Company or the Bank, the provisions of Section 9 shall apply. (e) If the Executive's Employment is terminated by the Company for Cause, or by the Bank for Cause, the provisions of Section 10 shall apply. (f) If the Executive's Employment is terminated by the Executive as a result of a breach of the agreement by the Company or the Bank, the provisions of Section 3 apply, and therefore the payment provisions of Section 9 apply. (g) In the event of a Voluntary Termination of Executive's Employment as defined in Section 11, the provisions of Section 11 apply. (h) If the Executive's Employment is terminated by the Company or the Bank within twelve (12) months after a Change of Control of the Company, as defined in Section 12 above, or a Change of Control of the Bank, as defined in Section 13 above, or in Contemplation of a Change of Control of either, as defined in Section 14, the provisions of Section 14 shall apply. (i) If the Executive's Employment is terminated by the Executive for Good Reason, as defined in Section 15 above, the Executive's employment with the Company and with the Bank shall be deemed to have been terminated without Cause by the Company and by the Bank at the time of such termination by Executive for Good Reason. If such termination is during a period of Contemplation of Change of Control, or within twelve (12) months after a Change of Control, the provisions of Section 14 shall apply. -64- 8 (j) Termination of Executive's Employment by the Company or by the Bank or by the Executive shall be communicated by written Notice of Termination to the other parties hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision(s) in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. 17. CONFIDENTIALITY: In the course of the Executive's employment, the Company and the Bank may disclose or make known to the Executive, and the Executive may be given access to or may become acquainted with, certain information, including but not limited to confidential information which relates to or is useful in the businesses of the Company and the Bank and which is not available from public records or other generally available sources (collectively, "Confidential Information"), and which the Company or the Bank consider proprietary and desire to maintain confidential. During the term of this Agreement and at all times thereafter, the Executive shall not in any manner, either directly or indirectly, divulge, disclose or communicate to any person or firm, except to legal counsel for the Company or the Bank or otherwise to or for the benefit of the Company or the Bank as directed by the Company or the Bank, and except to the Executive's legal counsel in connection with the resolution of any dispute between the Executive and the Company or the Bank under this Agreement, any of the Confidential Information which Executive may have acquired in the course of or as an incident to Executive's employment by the Company or the Bank, the parties agreeing that such Confidential Information affects the successful and effective conduct of the business and their goodwill of the Company and the Bank, and that any material breach of the terms of this Section 17 is a material breach of this Agreement. 18. COVENANT NOT TO COMPETE. During the Term of this Agreement and, if Executive terminates Executive's employment in a Voluntary Termination or for Good Reason, or if the Company or the Bank terminate Executive's employment in Contemplation of a Change of Control, or within twelve (12) months after a Change of Control, or for Cause, for the period of twelve (12) months following the termination of Executive's employment with the Company or the Bank, Executive agrees that Executive will not directly or indirectly own, become interested in, or become involved in any manner whatsoever in any business which is similar or competitive with any aspect of the business of the Company or the Bank as conducted at the time of such termination. Without limiting the foregoing, Executive agrees during the applicable period not to engage in the Banking or Leasing businesses, whether as an owner, partner, director, officer, employee, consultant, stockholder, agent, salesman, or in any other capacity for any person, partnership, firm, corporation or other entity without the express written consent of the President of the Company. Executive specifically acknowledges and agrees that the foregoing restriction on competition with the Company and the Bank will not prevent Executive from obtaining gainful employment following termination of Executive's employment with the Company and the Bank, and is a reasonable restriction upon Executive's ability to compete with the Company and the Bank, given the economic benefits afforded to Executive under this Agreement. 19. NO ENTICEMENT OF EMPLOYEES. Executive agrees that Executive will not, directly or indirectly, entice or induce, or attempt to entice or induce any employee of the Company or Bank to leave the employ of the Company or the Bank during the period covered by the Non-Competition provisions of Section 18 above. 20. NO SOLICITATION. Executive will not, directly or indirectly, solicit, entice or induce, or attempt to entice or induce any customer or user of the products or services of the Bank or the Company during the period covered by the Non-Competition provisions of Section 18 above. -65- 9 21. REMEDIES. Executive acknowledges and agrees that the breach or threatened breach of any of the provisions of Sections 17, 18, 19 and 20 of this Agreement will cause irreparable harm to the Company and the Bank, and cannot be adequately compensated by the payment of damages. Accordingly, Executive covenants and agrees that the Company and the Bank, in addition to any other rights or remedies which they may have, will be entitled to such equitable and injunctive relief as may be available from any court of competent jurisdiction to restrain Executive from breaching or threatening to breach any of the provisions of this Sections 17, 18, 19 and 20, without posting bond or other surety. Such right to obtain injunctive relief may be exercised at the option of the Company or the Bank in addition to, concurrently with, prior to, after, or in lieu of the exercise of any other rights or remedies which the Company or the Bank may have as a result of any such breach or threatened breach. In addition to all other remedies, in the event of the breach or threatened breach of any of the provisions of Sections 17, 18, 19 or 20 of this Agreement, the Company and Bank shall be relieved of any obligation to continue payments to the Executive pursuant to the provisions of this agreement. 22. NOTICES: For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Community Financial Group, Inc. 401 Church Street, 2nd Floor Nashville, TN 37219 Attention: Chief Executive Officer with a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street, Suite 1600 P. O. Box 198062 Nashville, TN 37219 Attention: Patrick L. Alexander, Esq. If to the Bank: The Bank of Nashville 401 Church Street Nashville, TN 37219 Attention: Chief Executive Officer with a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street, Suite 1600 P. O. Box 198062 Nashville, TN 37219 Attention: Patrick L. Alexander, Esq. -66- 10 If to the Executive: T. Wayne Hood 408 Honeysuckle Circle Franklin, TN 37067 or at such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 23. MODIFICATION; WAIVERS; APPLICABLE LAW: No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Executive, and on behalf of the Company by such officer as may be specifically designated by the Board of Directors of the Company after approval of the modification by the Board of Directors, and on behalf of the Bank by such officer as may be specifically designated by the Board of Directors of the Bank after approval of the modification by the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Tennessee. 24. INVALIDITY; ENFORCEABILITY: The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 25. ASSIGNMENTS: This Agreement is personal to the Executive, who may not assign his obligations hereunder. 26. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, the Bank, its successors and assigns and upon the Executive, and his personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 27. HEADINGS: Descriptive headings contained in this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision hereof. 28. ARBITRATION: Any dispute, controversy or claim arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators, in Nashville, Tennessee, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Unless otherwise provided in the rules of the American Arbitration Association, the arbitrators shall, in their award, allocate between the parties the costs of arbitration, which shall include reasonable attorneys' fees and expenses of the parties, as well as the arbitrator's fees and expenses, in such proportions as the arbitrators deem just. -67- 11 29. ENTIRE AGREEMENT: This Agreement represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof, and supersedes or amends all other agreements, negotiations, understandings and representations (if any) made by and between the parties hereto; provided, however, that nothing herein shall affect in any way agreements granting or evidencing the Executive's options to acquire shares of the Company. 30. REGULATORY AND OTHER PROCEEDINGS: The provisions of this Section 30 shall control as to continuing rights and obligations under this Agreement, notwithstanding any other provision of this Agreement, for as long as they are required to be included in employment contracts between an institution insured by the FDIC and its officers and as long as the Bank is such an insured institution. (a) If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the affairs of the Bank or the Company by a Notice served under applicable Federal or State statutes or regulations, the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank and the Company shall pay the Executive all of the compensation withheld while their obligations hereunder were suspended and reinstate their obligations which were suspended. (b) If the Executive is removed and/or permanently prohibited from participating in the conduct of the affairs of the Bank or the Company by an order issued under applicable Federal or State statutes or regulations, all obligations of the Company and the Bank under this Agreement shall terminate as of the effective date of the order, provided that vested rights of the contracting parties shall not be affected. (c) If the Company or the Bank become insolvent or taken over by regulatory entities, all obligations under this Agreement shall terminate as of the date of default, provided that this paragraph shall not affect any vested rights of the contracting parties. (d) All obligations under this Agreement may be terminated, except to the extent determined that continuation thereof is necessary for the continued operation of the Company or the Bank, by the FDIC at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank or approves a supervisory merger to resolve problems related to operation of the Bank, provided that any rights of the parties that have already vested shall not be affected by such action. -68- 12 31. SURVIVAL. This agreement shall remain in effect notwithstanding the termination of Executive's employment hereunder, and in any case, the provisions of Sections 18, 19, and 20 shall survive any termination of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. Executive: /s/ T. Wayne Hood ------------------------------------------- T. Wayne Hood Community Financial Group, Inc. By: /s/ Mack S. Linebaugh, Jr. ------------------------------------------- Name: Mack S. Linebaugh, Jr. Title: President The Bank of Nashville By: /s/ Mack S. Linebaugh, Jr. ------------------------------------------- Name: Mack S. Linebaugh, Jr. Title: President The Bank of Nashville -69- EX-10.22 6 EXECUTIVE EMPLOYMENT AGREEMENT 1 EXHIBIT 10.22 EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement entered into this 14th day of September, 1999 by and among Community Financial Group, Inc., a Tennessee corporation (the "Company"), The Bank of Nashville, a banking corporation organized under the laws of the State of Tennessee (the "Bank"), and Joan B. Marshall (the "Executive"). WITNESSETH: WHEREAS, the Company is a one-bank holding company which owns one hundred per cent (100%) of the outstanding stock of the Bank; WHEREAS, the Company and the Bank desire to retain the services of Executive on the terms and conditions set forth herein and, for purposes of effecting the same, the Boards of Directors of the Company and the Bank have approved this Employment Agreement and authorized its execution and delivery to the Executive on behalf of the Company and the Bank; WHEREAS, the Executive serves as the Senior Vice President and Corporate Secretary of the Company and, as such, is a key executive officer of the Company whose continued dedication, availability, advice and counsel to the Company is deemed important to the Company, the Board of Directors of the Company, and the present and future stockholders of the Company; WHEREAS, the Executive serves as the Senior Vice President and Corporate Secretary of the Bank and, as such, is a key executive officer of the Bank whose continued dedication, availability, advice and counsel to the Bank is deemed important to the Board of Directors of the Bank, the Bank and the Company; WHEREAS, the Company and the Bank wish to attract and retain well-qualified executives, and it is in the best interests of the Company, the Bank and the Executive, notwithstanding any change in control of the Company or the Bank, to secure the services of the Executive, whose experience and knowledge of the affairs of the Company and the Bank, and whose reputation and contacts in the industry, are extremely valuable to the Company and the Bank; and WHEREAS, the Company and the Bank consider the establishment and maintenance of a sound and vital management team to be part of their overall corporate strategy and to be essential to protecting and enhancing the best interests of the Bank, the Company, and its stockholders. NOW, THEREFORE, to assure the Company and the Bank of the Executive's continued dedication, the availability of Executive's advice and counsel to the Boards of Directors of the Company and the Bank, the availability of Executive's management skills to the Company and the Bank, and to induce the Executive to remain and continue in the employ of the Company and the Bank in Executive's current capacities, and for other good and valuable consideration, the receipt and adequacy of which each party hereby acknowledged, the Company, the Bank and the Executive hereby agree as follows: 1. EMPLOYMENT. The Company and the Bank agree to, and do hereby, employ Executive and Executive agrees to, and does hereby, accept such employment, all upon the terms and conditions hereinafter set forth. 2. TERM: The initial term of employment under this Agreement shall be for a period of one (1) year, commencing on the date first above written and ending at the close of business one year from said date. This Agreement shall be automatically renewed for succeeding terms of one (1) year each, unless either party shall, at least thirty (30) days, but not more than one hundred eighty (180) days, prior to the expiration of any term, give written notice of her or its intention not to renew this Agreement. -70- 2 3. EMPLOYMENT; DUTIES, AUTHORITY, AND RESPONSIBILITIES: (a) During the term of employment of the Executive by the Company and the Bank, the Executive shall devote Executive's full business time and attention to the rendition of services as Senior Vice President and Corporate Secretary of the Company and as Senior Vice President and Corporate Secretary of the Bank, and to the furtherance of the best interests of the Company and the Bank, and shall exert Executive's best efforts in the rendition of such services. The Executive agrees that in the rendition of such services and in all aspects of such employment Executive will comply with the policies, standards and regulations of the Company and the Bank as from time to time established by their respective Boards of Directors. The expenditure by the Executive of reasonable amounts of time for charitable, professional and similar activities shall not be deemed a breach of this Agreement provided such activities do not materially interfere with the services to be rendered to the Company and the Bank hereunder. (b) As Senior Vice President and Corporate Secretary of the Company and the Bank, the Executive shall have the general powers and duties of supervision which usually pertain to such offices and shall perform all such duties as are properly required of Executive by the Chief Executive Officer of the Company and the Bank. (c) If after a Change of Control occurs, a material reduction or limitation of the duties of the Executive that were in effect immediately prior to the Change of Control occurs, this action shall be considered a breach of this Agreement by the Company and the Bank. In the event of any breach of any provision of this Agreement by the Bank which breach is not cured within ten (10) days after written notice of the breach to the Bank by the Executive shall entitle the Executive to terminate her employment by the Bank pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Bank and, at the option of Executive, to terminate her employment by the Company pursuant to this Agreement by not less than sixty (60) days written notice to the Board of Directors of the Company. Any such termination by the Executive of her employment by the Bank hereunder resulting from a breach of the terms of this Agreement shall be treated as a termination by the Bank without cause and governed by Section 9 below, unless such breach occurs in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, and constitutes Good Reason for the Executive to terminate Executive's employment, in which case it shall be governed by Section 15 below. 4. COMPENSATION: The Bank agrees to pay Executive, and Executive agrees to accept, as compensation for all services rendered by her to the Company, the Bank and their affiliates during the period of her employment under this Agreement, base compensation at the annual rate of not less than $75,000, which shall be payable in accordance with the normal payroll policies of the Bank and shall be subject to all appropriate withholding taxes. 5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS EXPENSES AND MOVING EXPENSES: (a) During the term of this Agreement, Executive shall be entitled to participate in all pension, group insurance, hospitalization, deferred compensation, Company paid life insurance, or incentive plans, and any other benefit plan of the Company or the Bank presently in effect or hereafter adopted by the Company or the Bank and generally available to all employees of either organization of senior executive status (the "Benefit Plans"). -71- 3 (b) During the term of this Agreement, to the extent that such expenditures meet the requirements of the Internal Revenue Code for deductibility by the Company or the Bank for federal income tax purposes and are substantiated by the Executive as required by the Internal Revenue Service and policies of the Company and the Bank, the Bank shall reimburse the Executive promptly for all expenditures (including travel, entertainment, parking, business meetings, and the monthly costs, including dues, of maintaining memberships at appropriate clubs, including, but not limited to, Nashville City Club) made in accordance with rules and policies established from time to time by the Board of Directors of the Bank in pursuance and furtherance of the Company's and the Bank's business and good will. (c) During the term of this Agreement, in the event that the Company or the Bank relocates its principal executive offices to a location more than one hundred (100) miles from Nashville, Tennessee, or the Board of Directors of either the Company or the Bank requires the Executive to be based anywhere more than one hundred (100) miles from the Bank's principal executive offices, the Bank shall pay (or reimburse the Executive for) all reasonable moving expenses incurred by Executive relating to a change of Executive's principal residence in connection with such relocation, provided that the Executive furnishes the Bank with adequate records and documentary evidence for the substantiation of such reimbursement. 6. ILLNESS: In the event Executive is unable to perform Executive's duties under this Agreement on a full-time basis for a period of six (6) consecutive months by reason of illness or other physical or mental disability, and at or before the end of such period Executive does not return to work on a full-time basis, the Company and the Bank may jointly terminate Executive's Employment pursuant to this Agreement without further or additional compensation being due the Executive from the Bank pursuant to this Agreement, except that the Executive shall be paid Executive's base compensation from the Bank at the rate in effect at the time of Executive's termination for a period of twelve (12) months from the date of the commencement of the Executive's inability to perform her duties, less any disability payments payable during such time under any disability plans maintained and paid for by the Bank, and Executive shall continue to participate in all Benefit Plans in effect at the time of Executive's termination for a period of twelve (12) months from the date of the commencement of the Executive's inability to perform her duties. 7. DEATH: In the event of the Executive's death during the term of this Agreement, Executive's estate, legal representatives or named beneficiaries (as directed by the Executive in writing) shall be paid Executive's base compensation from the Bank at the rate in effect at the time of the Executive's death under this Agreement for the period of twelve (12) months from the date of the Executive's death, less any amounts payable to Executive's estate or beneficiaries under life insurance policies on the life of Executive maintained and paid for by Bank. 8. TERMINATION BY COMPANY: Notwithstanding the provisions of Section 2 above, the Board of Directors of the Company may, in its sole discretion, terminate the Executive's employment with the Company under this Agreement at any time in any lawful manner by not less than thirty (30) days written notice to the Executive, in which event the Executive shall be entitled to elect to have such termination likewise constitute a termination of Executive's employment by the Bank. If Executive so elects, then unless such termination is for Cause as defined in Section 10 of this Agreement or unless the Executive's employment is terminated in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, Executive shall be entitled to the compensation provided for in Section 9 below. 9. TERMINATION BY BANK: Notwithstanding the provisions of Section 2 of this Agreement, the Board of Directors of the Bank may, in its sole discretion, terminate the Executive's employment with the Bank under this Agreement at any time in any lawful manner by not less than thirty -72- 4 (30) days written notice to the Executive (or, at the Bank's option, pay for such thirty days in lieu of notice) and in such event, unless the Bank terminates the Executive's employment with the Bank for Cause as defined in with Section 10 of this Agreement or, unless the Executive's employment is terminated in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, the Executive shall be paid, during the twelve (12) months following such termination at such times as payment was theretofore made, the base compensation that the Executive would have been entitled to receive during such period of time had such termination not occurred, such payments to be in addition to any payment in lieu of notice. Furthermore, the Bank shall pay to the Executive in equal monthly payments an amount sufficient to fully fund any Benefit Plans of the Bank, with respect to the Executive, commencing at the beginning of the first month following termination of Executive's employment with the Bank pursuant to this paragraph, and ending twelve (12) months after such termination. In the event that a payment made with respect to any benefit plan or program would otherwise violate the terms of the plan or program, an equivalent amount shall be paid directly to Executive. Executive shall owe no duty to mitigate these payments, and shall not be required to obtain or attempt to obtain alternate employment during such twelve (12) month period. If Executive obtains other gainful employment during such twelve (12) month period, the compensation and benefits received by Executive during said period from such other employment shall not reduce the payments otherwise due to Executive pursuant to this section. 10. TERMINATION FOR CAUSE: (a) Notwithstanding the provisions of this Agreement, the Board of Directors of the Company may, in its sole discretion, terminate the Executive's employment with the Company for Cause. For the purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder: (i) because of the Executive's personal dishonesty, incompetence, willful misconduct, gross negligence, willful breach of fiduciary duty (including involving personal profit), failure to substantially perform stated duties described in Section 3 of this Agreement, willful violation of any material law, rule, regulation (other than traffic violations or similar offenses), willful violation of any final cease-and-desist order issued by any regulatory agency having jurisdiction over the Company or the Bank, or material breach by the Executive of any provision of this Agreement or any related agreement entered into by the Executive; or (ii) if the Board of Directors of the Bank terminates the employment of Executive with the Bank for Cause pursuant to subsection (c) of this Section 10. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by her not in good faith or without reasonable belief that her action or omission was in the best interest of the Company; provided that any act or omission to act on the Executive's behalf in reliance upon an opinion of counsel to either the Company or the Bank shall not be deemed to be "willful." Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been a resolution approved by a majority of the non-officer members of the Board of Directors of the Company finding that, in the good faith opinion of such majority, the Executive was guilty of conduct which is deemed to be Cause within the meaning of this paragraph, after notice to the Executive and an opportunity for her, together with her counsel, to be heard before such majority (with the Company Board retaining the right to deliberate without the Executive and her counsel present before and/or after such hearing). (b) If the Company terminates the Executive's employment with the Company for Cause in accordance with Section 10(a) of this Agreement, the Company shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation or benefits, insured or otherwise, that she would otherwise have been eligible to receive under any Benefit Plans of the Company through the date of such termination. -73- 5 (c) Notwithstanding the provisions of this Agreement, the Board of Directors of the Bank may, in its sole discretion, terminate the Executive's employment with the Bank for Cause. For the purposes of this Agreement, the Bank shall have "Cause" to terminate the Executive's employment hereunder: (i) because of the Executive's personal dishonesty, incompetence, willful misconduct, gross negligence, willful breach of fiduciary duty (including involving personal profit), failure to substantially perform stated duties described in Section 3 of this Agreement, willful violation of any material law, rule, regulation (other than traffic violations or similar offenses) , willful violation of any final cease-and-desist order issued by any regulatory agency having jurisdiction over the Company or the Bank, the imposition of any sanction upon the Executive by any such regulatory agency, or material breach by the Executive of any provision of this Agreement or any related agreement entered into by the Executive; or (ii) if the Board of Directors of the Company terminates Executive's employment with the Company for Cause pursuant to subsection (a) of this Section 10. For purposes of this paragraph, no act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by her not in good faith or without reasonable belief that her action or omission was in the best interest of the Bank; provided that any act or omission to act on the Executive's behalf in reliance upon an opinion of counsel to either the Company or the Bank shall not be deemed to be "willful." Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been a resolution approved by a majority of the non-officer members of the Board of Directors of the Bank finding that, in the good faith opinion of such majority, the Executive was guilty of conduct which is deemed to be Cause within the meaning of this paragraph, after notice to the Executive and an opportunity for her, together with her counsel to be heard before such majority (with the Bank Board retaining the right to deliberate without the Executive and her counsel present before and/or after such hearing). (d) If the Bank terminates the Executive's employment with the Bank for Cause in accordance with Section 10(c) of this Agreement, the Bank shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation or benefits, insured or otherwise, which Executive would otherwise have been eligible to receive under any Benefit Plans of the Bank through the date of such termination. 11. TERMINATION BY THE EXECUTIVE: The Executive may terminate the Executive's employment with the Company or with the Bank hereunder at any time upon sixty (60) days written notice to the affected entity. If the Executive terminates the Executive's employment with either the Company or the Bank other than for breach of this Agreement as provided in Section 3, for Good Reason, in Contemplation of a Change of Control or within twelve (12) months after a Change of Control, Executive shall be deemed to have voluntarily terminated Executive's employment with both the Company and the Bank ("Voluntary Termination"), and thereupon the Company and the Bank shall have no obligation to make any further payments to or provide benefits for the Executive, provided that the Executive shall be entitled to receive any accrued compensation and benefits, insured or otherwise, that she would otherwise have been eligible to receive under any Benefit Plans of the Company or the Bank through the date of such termination. 12. DEFINITION OF CHANGE OF CONTROL OF THE COMPANY: A "Change of Control" of the Company shall mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 ("Exchange Act") or such item thereof which may hereafter pertain to the same subject; provided that, and notwithstanding the foregoing, a Change of Control shall be deemed to have occurred if (i) any person (as that term is used in Sections 13(d) and 14(d) (2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the Company's then outstanding securities, or (ii) the Company shall cease to be a publicly owned corporation, as defined in the Exchange Act. -74- 6 13. DEFINITION OF CHANGE OF CONTROL OF THE BANK: A "Change of Control" of the Bank shall mean any Change of Control of the Company, or any change or series of changes in circumstances which result in the Company ceasing to own, control, and vote an absolute majority of the voting securities of the Bank. 14. TERMINATION BY COMPANY OR BANK AFTER CHANGE IN CONTROL: If a Change of Control of the Company or a Change of Control of the Bank shall have occurred, this Agreement shall continue in full force and effect. If the Executive's Employment is terminated by the Company or the Bank within twelve (12) months after a Change of Control of the Company, as defined in Section 12 above, or a Change of Control of the Bank, as defined in Section 13 above, or in Contemplation of a Change of Control of either, as defined below, Executive shall be entitled to be paid an amount equal to one (1) times the sum of Executive's annual base cash compensation plus the annual value of Executive's participation in all Benefit Programs in effect at the time of such termination. At Executive's option, the sums payable pursuant to this Section will be paid in full in a lump sum and without discount within thirty (30) days of the termination of Executive's employment, or in equal monthly installments over twelve (12) months. Any termination of Executive's employment hereunder during any period of time when the Board of Directors of the Company has formed an intent to offer the Bank for sale or to promote an acquisition of or merger of the Company or the Bank, or when the Company has knowledge that any person(s), entity or concern has taken steps reasonably calculated to effect a Change of Control of the Company shall constitute a termination of Executive's employment "In Contemplation of a Change of Control." The period of Contemplation of Change of Control shall continue until the Board of Directors of the Company no longer intends to promote an acquisition of or merger of the Company or the Bank, or until in the opinion of the Company's Board of Directors, the person(s), concern or entity has abandoned or terminated its efforts to effect a Change of Control of the Company, as applicable. Any good faith determination by the Company's Board of Directors that Board no longer has such an intent, or that the person(s), concern or entity has abandoned or terminated its efforts to effect a Change of Control of the Company shall be conclusive and binding on the Executive. Such determination shall be promptly communicated to the Executive in writing by the Chief Executive of the Company or Chairman of the Board of the Company. Notwithstanding the foregoing, any termination of the Executive by the Company or by the Bank within ninety (90) days prior to a Change of Control of the Company shall be conclusively presumed to have been in Contemplation of Change of Control. 15. TERMINATION BY EXECUTIVE FOR GOOD REASON; During the term of Executive's employment hereunder, the Executive may terminate her employment with both the Company and the Bank if the Executive has Good Reason, as defined below. Termination by the Executive of Executive's employment with either entity shall be deemed termination with both. For purposes of this Agreement, "Good Reason" shall mean: (i) The assignment of duties to the Executive by the Company or the Bank which (1) are significantly different from the Executive's duties immediately prior to the Change of Control, or (2) result in the Executive having significantly less authority and/or responsibility than Executive had as an executive officer of the Company or the Bank prior to the Change of Control, without the express written consent of Executive; (ii) The removal of the Executive from or any failure to re-elect Executive to the positions set forth in Section 3 above, except in connection with a termination of her employment by the Company or the Bank for Cause or Executive's resignation other than for Good Reason. -75- 7 (iii) A reduction of the Executive's base salary as in effect on the date of the Change of Control, unless the reduction in the Executive's salary is waived in writing by the Executive; (iv) The failure of the Company and the Bank collectively to provide the Executive with substantially the same fringe benefits (including paid vacations) that were provided to Executive immediately prior to the Change of Control, or with a package of fringe benefits that, though one or more of such benefits may vary from those in effect immediately prior to such Change of Control, is substantially comparable in all material respects to such fringe benefits taken as a whole; or (v) Requiring the Executive to perform a significant part of Executive's duties in locations more than one hundred (100) miles from Nashville, Tennessee. Further, and notwithstanding any other provision of this Agreement, the Executive may terminate her employment without Good Reason at any time within ninety (90) days after a Change of Control shall have occurred. 16. PAYMENTS ON TERMINATION: Upon termination of Executive's employment by the Company or the Bank, the Company and the Bank shall have the following payment obligations to Executive: (a) If the Executive's Employment is terminated due to illness of the Executive, the provisions of Section 6 shall apply. (b) If the Executive's Employment is terminated due to the death of the Executive, the provisions of Section 7 shall apply. (c) If the Executive's Employment is terminated by the Company other than for Cause, and not In Contemplation of a Change of Control of the Company or the Bank or within twelve months after a Change of Control of the Company or the Bank, the provisions of Section 8 shall apply, and therefore the payment provisions of Section 9 apply. (d) If the Executive's Employment is terminated by the Bank other than for Cause, and not In Contemplation of a Change of Control of the Company or the Bank or within twelve months after a Change of Control of the Company or the Bank, the provisions of Section 9 shall apply. (e) If the Executive's Employment is terminated by the Company for Cause, or by the Bank for Cause, the provisions of Section 10 shall apply. (f) If the Executive's Employment is terminated by the Executive as a result of a breach of the agreement by the Company or the Bank, the provisions of Section 3 apply, and therefore the payment provisions of Section 9 apply. (g) In the event of a Voluntary Termination of Executive's Employment as defined in Section 11, the provisions of Section 11 apply. (h) If the Executive's Employment is terminated by the Company or the Bank within twelve (12) months after a Change of Control of the Company, as defined in Section 12 above, or a Change of Control of the Bank, as defined in Section 13 above, or in Contemplation of a Change of Control of either, as defined in Section 14, the provisions of Section 14 shall apply. -76- 8 (i) If the Executive's Employment is terminated by the Executive for Good Reason, as defined in Section 15 above, the Executive's employment with the Company and with the Bank shall be deemed to have been terminated without Cause by the Company and by the Bank at the time of such termination by Executive for Good Reason. If such termination is during a period of Contemplation of Change of Control, or within twelve (12) months after a Change of Control, the provisions of Section 14 shall apply. (j) Termination of Executive's Employment by the Company or by the Bank or by the Executive shall be communicated by written Notice of Termination to the other parties hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision(s) in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. 17. CONFIDENTIALITY: In the course of the Executive's employment, the Company and the Bank may disclose or make known to the Executive, and the Executive may be given access to or may become acquainted with, certain information, including but not limited to confidential information which relates to or is useful in the businesses of the Company and the Bank and which is not available from public records or other generally available sources (collectively, "Confidential Information"), and which the Company or the Bank consider proprietary and desire to maintain confidential. During the term of this Agreement and at all times thereafter, the Executive shall not in any manner, either directly or indirectly, divulge, disclose or communicate to any person or firm, except to legal counsel for the Company or the Bank or otherwise to or for the benefit of the Company or the Bank as directed by the Company or the Bank, and except to the Executive's legal counsel in connection with the resolution of any dispute between the Executive and the Company or the Bank under this Agreement, any of the Confidential Information which Executive may have acquired in the course of or as an incident to Executive's employment by the Company or the Bank, the parties agreeing that such Confidential Information affects the successful and effective conduct of the business and their goodwill of the Company and the Bank, and that any material breach of the terms of this Section 17 is a material breach of this Agreement. 18. COVENANT NOT TO COMPETE. During the Term of this Agreement and, if Executive terminates Executive's employment in a Voluntary Termination or for Good Reason, or if the Company or the Bank terminate Executive's employment in Contemplation of a Change of Control, or within twelve (12) months after a Change of Control, or for Cause, for the period of twelve (12) months following the termination of Executive's employment with the Company or the Bank, Executive agrees that Executive will not directly or indirectly own, become interested in, or become involved in any manner whatsoever in any business which is similar or competitive with any aspect of the business of the Company or the Bank as conducted at the time of such termination. Without limiting the foregoing, Executive agrees during the applicable period not to engage in the Banking or Leasing businesses, whether as an owner, partner, director, officer, employee, consultant, stockholder, agent, salesman, or in any other capacity for any person, partnership, firm, corporation or other entity without the express written consent of the President of the Company. Executive specifically acknowledges and agrees that the foregoing restriction on competition with the Company and the Bank will not prevent Executive from obtaining gainful employment following termination of Executive's employment with the Company and the Bank, and is a reasonable restriction upon Executive's ability to compete with the Company and the Bank, given the economic benefits afforded to Executive under this Agreement. 19. NO ENTICEMENT OF EMPLOYEES. Executive agrees that Executive will not, directly or indirectly, entice or induce, or attempt to entice or induce any employee of the Company or Bank to leave the employ of the Company or the Bank during the period covered by the Non-Competition provisions of Section 18 above. -77- 9 20. NO SOLICITATION. Executive will not, directly or indirectly, solicit, entice or induce, or attempt to entice or induce any customer or user of the products or services of the Bank or the Company during the period covered by the Non-Competition provisions of Section 18 above. 21. REMEDIES. Executive acknowledges and agrees that the breach or threatened breach of any of the provisions of Sections 17, 18, 19 and 20 of this Agreement will cause irreparable harm to the Company and the Bank, and cannot be adequately compensated by the payment of damages. Accordingly, Executive covenants and agrees that the Company and the Bank, in addition to any other rights or remedies which they may have, will be entitled to such equitable and injunctive relief as may be available from any court of competent jurisdiction to restrain Executive from breaching or threatening to breach any of the provisions of this Sections 17, 18, 19 and 20, without posting bond or other surety. Such right to obtain injunctive relief may be exercised at the option of the Company or the Bank in addition to, concurrently with, prior to, after, or in lieu of the exercise of any other rights or remedies which the Company or the Bank may have as a result of any such breach or threatened breach. In addition to all other remedies, in the event of the breach or threatened breach of any of the provisions of Sections 17, 18, 19 or 20 of this Agreement, the Company and Bank shall be relieved of any obligation to continue payments to the Executive pursuant to the provisions of this agreement. 22. NOTICES: For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: Community Financial Group, Inc. 401 Church Street, 2nd Floor Nashville, TN 37219 Attention: Chief Executive Officer with a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street, Suite 1600 P. O. Box 198062 Nashville, TN 37219 Attention: Patrick L. Alexander, Esq. If to the Bank: The Bank of Nashville 401 Church Street Nashville, TN 37219 Attention: Chief Executive Officer with a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street, Suite 1600 P. O. Box 198062 Nashville, TN 37219 Attention: Patrick L. Alexander, Esq. -78- 10 If to the Executive: Joan B. Marshall 88 Blue Ridge Trace Hendersonville, TN 37075 or at such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 23. MODIFICATION; WAIVERS; APPLICABLE LAW: No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Executive, and on behalf of the Company by such officer as may be specifically designated by the Board of Directors of the Company after approval of the modification by the Board of Directors, and on behalf of the Bank by such officer as may be specifically designated by the Board of Directors of the Bank after approval of the modification by the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Tennessee. 24. INVALIDITY; ENFORCEABILITY: The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 25. ASSIGNMENTS: This Agreement is personal to the Executive, who may not assign her obligations hereunder. 26. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns, the Bank, its successors and assigns and upon the Executive, and her personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to her hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to her devisee, legatee or other designee or, if there is no such designee, to her estate. 27. HEADINGS: Descriptive headings contained in this Agreement are for convenience only and shall not control or affect the meaning or construction of any provision hereof. 28. ARBITRATION: Any dispute, controversy or claim arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators, in Nashville, Tennessee, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Unless otherwise provided in the rules of the American Arbitration Association, the arbitrators shall, in their award, allocate between the parties the costs of arbitration, which shall include reasonable attorneys' fees and expenses of the parties, as well as the arbitrator's fees and expenses, in such proportions as the arbitrators deem just. -79- 11 29. ENTIRE AGREEMENT: This Agreement represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof, and supersedes or amends all other agreements, negotiations, understandings and representations (if any) made by and between the parties hereto; provided, however, that nothing herein shall affect in any way agreements granting or evidencing the Executive's options to acquire shares of the Company. 30. REGULATORY AND OTHER PROCEEDINGS: The provisions of this Section 30 shall control as to continuing rights and obligations under this Agreement, notwithstanding any other provision of this Agreement, for as long as they are required to be included in employment contracts between an institution insured by the FDIC and its officers and as long as the Bank is such an insured institution. (a) If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the affairs of the Bank or the Company by a Notice served under applicable Federal or State statutes or regulations, the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank and the Company shall pay the Executive all of the compensation withheld while their obligations hereunder were suspended and reinstate their obligations which were suspended. (b) If the Executive is removed and/or permanently prohibited from participating in the conduct of the affairs of the Bank or the Company by an order issued under applicable Federal or State statutes or regulations, all obligations of the Company and the Bank under this Agreement shall terminate as of the effective date of the order, provided that vested rights of the contracting parties shall not be affected. (c) If the Company or the Bank become insolvent or taken over by regulatory entities, all obligations under this Agreement shall terminate as of the date of default, provided that this paragraph shall not affect any vested rights of the contracting parties. (d) All obligations under this Agreement may be terminated, except to the extent determined that continuation thereof is necessary for the continued operation of the Company or the Bank, by the FDIC at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank or approves a supervisory merger to resolve problems related to operation of the Bank, provided that any rights of the parties that have already vested shall not be affected by such action. -80- 12 31. SURVIVAL. This agreement shall remain in effect notwithstanding the termination of Executive's employment hereunder, and in any case, the provisions of Sections 18, 19, and 20 shall survive any termination of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. Executive: /s/ Joan B. Marshall ---------------------------------------- Joan B. Marshall Community Financial Group, Inc. By: /s/ Mack S. Linebaugh, Jr. ---------------------------------------- Name: Mack S. Linebaugh, Jr. Title: President The Bank of Nashville By: /s/ Mack S. Linebaugh, Jr. ---------------------------------------- Name: Mack S. Linebaugh, Jr. Title: President The Bank of Nashville -81- EX-10.23 7 FIRST AMENDMENT TO THE LEASE AGREEMENT 1 EXHIBIT 10.23 FIRST AMENDMENT TO LEASE AGREEMENT THE BANK OF NASHVILLE L & C TOWER NASHVILLE, TENNESSEE APRIL 13, 1999 This First Amendment to the Lease Agreement ("First Amendment") dated and effective this 13th day of April, 1999 by and between The Bank of Nashville ("Tenant") and LC Tower, LLC, successor in interest to Metropolitan Life Insurance Company ("Landlord") is hereby made a part thereof of the Lease Agreement dated July 19, 1989 as previously amended by the Letter Agreement dated March 29, 1993 ("Lease") by and between Landlord and Tenant. WHEREAS, Landlord and Tenant entered into the Lease for certain premises located on the second and third floor and basement consisting of approximately 15,296 Square Feet Net Rentable Areas ("Premises") in the building commonly known as the L&C Tower located at 401 Church Street, Nashville, Tennessee 37219 ("Building"); and WHEREAS, Tenant desires to expand its Premises on the third floor and twenty-third floor in the Building; and WHEREAS, Tenant desires to amend and extend its Lease Term for the period September 1, 1999 through August 31, 2009; and WHEREAS, Landlord is willing to amend and extend the Lease under certain terms and conditions. Unless specifically defined herein, the terms used in the First Amendment to Lease will have the meanings defined in the Lease. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants contained herein, and for other mutual benefits as noted herein, the receipt and sufficiency, LC Tower, LLC, as Landlord and The Bank of Nashville, as Tenant wish to amend said Lease as follows: 1. The second paragraph of Article 1. LEASED PREMISES of the Lease is amended effective September 1, 1999 by deleting the existing language in its entirety and replacing with the following: Space on the Lower, Second, Third, and Twenty-third floor levels of the Building indicated as being part of the Leased Premises on the Floor Plans attached hereto as Exhibit A, which shall be deemed to contain a total of 21,536 square feet of Net Rentable Area (SF NRA) consisting of 6,865 SF NRA on the Second Floor ("Second Floor Premises"), 6,768 SF NRA on the Third Floor ("Third Floor Premises"), 3,713 SF NRA on the Lower Level/Basement ("Basement Premises") and effective November 1, 1999 -82- 2 The Bank of Nashville First Amendment to Lease Page 2 - ------------------------ on the twenty-third floor 4,190 SF NRA ("Twenty-third Floor Premises"). The Second Floor Premises, Third Floor Premises and Twenty-third Floor Premises shall collectively be referred to as "Tower Premises". The Tower Premises and Basement Premises shall collectively be referred to as "Premises" or "Leased Premises". 2. Article 2. TERM, of the Lease is amended and extended as follows: TERM. Beginning September 1, 1999, this Lease shall be extended for an additional term of ten (10) years, commencing on the 1st day of September, 1999 and ending on the 31st day of August, 2009 for the Basement Premises, Second Floor Premises and Third Floor Premises (hereinafter sometimes referred to as the "Leased Term" or "Term"), unless sooner terminated or extended as provided herein. The Twenty-third Floor Premises shall be for the term of nine (9) years ten (10) months, commencing on the 1st day of November, 1999 and ending on the 31st day of August, 2009, unless sooner terminated or extended as provided herein. If the Landlord is unable to give possession of the Twenty-third Floor Premises on the date of the commencement of the aforesaid Lease Term by reason of holding over of any prior tenant or tenants or for any other reasons, an abatement or diminution of the rent to be paid hereunder shall be allowed Tenant under such circumstances until possession is given to Tenant, but nothing herein shall operate to extend the initial Term of the Lease beyond the agreed expiration date, and said abatement in rent shall be the full extent of Landlord's liability to Tenant for any loss or damage to Tenant on account of said delay in obtaining possession of the Twenty-third Floor Premises. 3. Article 38. TEMPORARY RELOCATION OF TENANT, of the Lease is deleted in its entirety. 4. Article 45. BROKERAGE, of the Lease is deleted in its entirety and replaced with the following: Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction, other than First Management Services, Inc., and Grubb & Ellis / Centennial, Inc., and Tenant agrees to indemnify and hold Landlord harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. The provision of this paragraph shall survive the termination of this Lease. -83- 3 The Bank of Nashville First Amendment to Lease Page 3 - ------------------------ 5. Article 48. ENVIRONMENTAL HAZARDS, of the Lease is deleted in its entirety. 6. Appendix A THE PREMISES of the Lease is amended effective September 1, 1999 by deleting the existing language and replacing with the following (see attached floor plans): Basement Floor Premises of the L&C Tower 3,713 SF NRA 3% common area factor included Second Floor Premises of the L&C Tower 6,865 SF NRA 3% common area factor included Third Floor Premises of the L&C Tower 6,768 SF NRA 3% common area factor included Twenty-third Floor Premises of the L&C Tower 4,190 SF NRA 12.5% common area factor included 7. Appendix B-1 RATE SCHEDULE of the Lease is amended to provide for the base rent beginning September 1, 1999:
2nd Floor 3rd Floor 23rd Floor Basement Premises Premises Premises Premises --------- --------- ---------- -------- 09/01/99 - 08/31/00 Yr 1 $17.40/RSF $15.00/RSF $13.50/RSF* $7.00/RSF 09/01/00 - 08/31/01 Yr 2 $17.75/RSF $15.30/RSF $13.77/RSF $7.00/RSF 09/01/01 - 08/31/02 Yr 3 $18.10/RSF $15.61/RSF $14.05/RSF $7.00/RSF 09/01/02 - 08/31/03 Yr 4 $18.47/RSF $15.92/RSF $14.33/RSF $7.00/RSF 09/01/03 - 08/31/04 Yr 5 $18.83/RSF $16.24/RSF $14.61/RSF $7.00/RSF 09/01/04 - 08/31/05 Yr 6 $19.21/RSF $16.56/RSF $14.91/RSF $7.00/RSF 09/01/05 - 08/31/06 Yr 7 $19.60/RSF $16.89/RSF $15.20/RSF $7.00/RSF 09/01/06 - 08/31/07 Yr 8 $19.99/RSF $17.23/RSF $15.51/RSF $7.00/RSF 09/01/07 - 08/31/08 Yr 9 $20.39/RSF $17.57/RSF $15.82/RSF $7.00/RSF 09/01/08 - 08/31/09 Yr 10 $20.79/RSF $17.93/RSF $16.13/RSF $7.00/RSF
*The Twenty-third Floor Premises' rent commencing, November 1, 1999 shall increase to the next Lease Year's rate on September 1 of each subsequent Lease Year. -84- 4 The Bank of Nashville First Amendment to Lease Page 4 - ------------------------ 8. Appendix B-2 OPTION SPACE of the Lease is amended effective September 1, 1999 by deleting the existing language and replacing with the following FIRST RIGHT OF OPTION (AVAILABILITY) FOR FOURTH FLOOR PREMISES: Tenant shall have a one-time First Right of Option for the Fourth Floor Tower (6,768 RSF) should the existing tenant as of this lease amendment signing (State of Tennessee) choose not to renew ("Option Space"). Upon the State of Tennessee's notice of non-renewal, Landlord shall first offer to Tenant the right to lease the Option Space at the then current rate for the Twenty-third Floor Premises. Tenant shall have twenty (20) business days after receipt of written notice of the availability within which to notify Landlord (a) if it will lease the Option Space at the then current rates for the Twenty-third Floor Premises, and (b) if Tenant exercises its option to take the Option Space, whether it will give back the Twenty-third Floor Premises. If Tenant exercises its option to take the Option Space, Tenant shall occupy the Option Space within forty-five (45) days after the State of Tennessee vacates the fourth floor. If Tenant exercises its option to give back the Twenty-third Floor Premises, Tenant shall vacate the Twenty-third Floor Premises and return it to Landlord in "broom clean" condition upon occupying the Option Space. Landlord and Tenant agree that Tenant shall be responsible for all relocation costs and all tenant improvement costs to the Option Space; Tenant shall accept the Option Space in "as-is" condition. No written response from Tenant within twenty (20) business days after receipt of written notice of the availability shall be deemed to mean that Tenant has waived its First Right of Option and Tenant shall keep the Twenty-third Floor Premises and not take the Fourth Floor Option Space. 9. Appendix C OPTIONS of the Lease is amended effective September 1, 1999 by deleting the existing language for Option to Extend, Option to Expand, Right of First Refusal, and Basement Vault and Anteroom in its entirety and replacing with the following OPTION TO RENEW: Provided Tenant is not in default, Tenant shall have the right to three (3) five-year renewal options at a rate which shall be mutually determined by Landlord and Tenant as follows: If Tenant desires to exercise its Option to Renew, it shall notify Landlord no later than twelve (12) months prior to the expiration of the then current Term. Within one (1) month after such notification, Landlord shall notify Tenant of its determination of the current rate, which will include the Base Rent. If Tenant agrees with such determination, it shall so notify Landlord. If Tenant does not agree, then during the thirty (30) day period following Landlord's notice to Tenant of the rate, Landlord and Tenant shall negotiate to determine a mutually acceptable rate. If such parties are unable to reach agreement as to such rate within said thirty (30) day period, this renewal option will be of no -85- 5 The Bank of Nashville First Amendment to Lease Page 5 - ------------------------ force or effect and the Lease will terminate. If the parties do reach agreement as to such rate within said period, then the Term shall be extended for the appropriate period, upon the same terms and conditions set forth in the Lease, except that the Base Rent shall be as mutually determined and except that there shall be no Tenant Improvement Allowance (unless such items are agreed to by Landlord and Tenant). 10. Appendix E ANYTIME TELLER MACHINE AND NIGHT DEPOSITORY of the Lease is amended effective September 1, 1999 by deleting the existing language in its entirety and replacing with the following: Tenant shall keep its anytime teller machine and night depository ("ATM") at its current location of the Building as noted on the attached first floor plan "Appendix E". There shall be no rental cost. The ATM shall remain the sole property of the Tenant and shall be removed by Tenant at the expiration of the term of this Lease, with the building's interior and exterior being restored to its condition existing prior to the installation of the ATM at Tenant's cost. 11. Appendix G BASEMENT STORAGE of the Lease is amended effective September 1, 1999 by deleting the existing language in its entirety and replacing with the following: BASEMENT STORAGE. Landlord will provide, at no cost to Tenant, space in the basement for storing paper as required by regulation. That space is designated as Appendix "G". 12. Appendix H DAMAGES of the Lease is deleted in its entirety. 13. Appendix I LOADING DOCK SECURITY of the Lease is deleted in its entirety. 14. Appendix J (SPACE PLANNING) of the Lease is deleted in its entirety. 15. Appendix K (POTENTIAL CONTRACTORS) of the Lease is deleted in its entirety. 16. Appendix L (BLANK) of the Lease is deleted in its entirety. 17. Exhibit A of the Lease is amended effective September 1, 1999 by replacing the existing floor plans with the attached floor plans initialed by both parties for the Basement Premises, Second Floor Premises, Third Floor Premises and Twenty-third Floor Premises. 18. Landlord shall renovate Third Floor Premises Restrooms to a finish standard comparable to restrooms on the floors occupied by the State of Tennessee, to -86- 6 The Bank of Nashville First Amendment to Lease Page 6 - ------------------------ include new sinks, counters, mirrors, water closets, urinals, floor tile, ceramic tile and paint grade finish on walls. 19. Exhibit B of the Lease and referenced meeting notes from the original construction are amended effective September 1, 1999 by deleting the existing language in its entirety and replacing with the following Work Letter: WORK LETTER. A. Initial Plan. Tenant will perform certain leasehold improvement work in the Tower Premises in substantial accordance with the plans to be prepared by Infrastructure, Inc. (collectively "Initial Plan"), a copy of which shall be attached as Schedule 1. Such work, as shown in the Initial Plan and as more fully detailed in the Working Drawings (as defined and described in Paragraph B below), shall be hereinafter referred to as the "Work". All plans, drawings, specifications and other details describing the Work which have been or are hereafter furnished by or on behalf of Tenant shall be subject to Landlord's approval, which Landlord agrees shall not be unreasonably withheld, delayed or conditioned. Landlord shall not be deemed to have acted unreasonably if it withholds its approval of any plans, specifications, drawings, or other details or of any Additional Work (as defined in Paragraph E below) because, in Landlord's reasonable opinion, the Work, as described in any such item, or the Additional Work, as the case may be: (a) is likely to adversely affect the Building systems, the structure of the Building or the safety of the Building and/or its occupants; (b) might impair Landlord's ability to furnish services to Tenant or other tenants in the building; (c) would increase the cost of operating the building; (d) would violate any governmental laws, rules or ordinances (or interpretations thereof); (e) contains or uses hazardous or toxic materials or substances; (f) would adversely affect the appearance of the building; (g) might adversely affect another tenant's premises; (h) is prohibited by any ground lease affecting the Building or any mortgage, trust deed or other instrument encumbering the Building; or (i) is likely to be substantially delayed because of unavailability or shortage of labor or materials necessary to perform such work or the difficulties or unusual nature of such work. The foregoing reasons, however, shall not be the only reasons for which Landlord may withhold its approval, whether or not such other reasons are similar or dissimilar to the foregoing. Neither the approval by Landlord of the Work or the Initial Plan or any other plans, drawings, specifications or other items associated with the Work nor Landlord's monitoring of the Work shall constitute any warranty by Landlord to Tenant of the adequacy of the design for Tenant's intended use of the Premises. B. Working Drawings; performance of the Work. (1) If not included as part of the Initial Plan attached hereto, Tenant shall prepare or cause to be prepared final working drawings and -87- 7 The Bank of Nashville First Amendment to Lease Page 7 - ------------------------ specifications for the Work (the "Working Drawings") based on and consistent with the Initial Plan and the other plans, drawings, specifications, finish details and other information furnished by Tenant to Landlord and approved by Landlord pursuant to Paragraph A above. The Working Drawings shall incorporate final mechanical, electrical and plumbing plans, and shall include a final telephone layout and special electrical connections, if any. So long as the Working Drawings are consistent with the Initial Plan, Landlord shall approve the Working Drawings within five (5) days after receipt of same from Tenant by initialing and returning to Tenant each sheet of the Working Drawings or by executing Landlord's approval form then in use, whichever method of approval Landlord may designate. (2) The parties acknowledge that Landlord is not an architect or engineer, and that the Work will be designed and performed by independent architects, engineers and contractors, selected by Tenant, subject to Landlord's prior written approval. Accordingly, Landlord shall have no liability to Tenant under the Lease for any errors or omissions in the Initial Plan and the Working Drawings and for any defects in the Work. In the event of such errors, omissions, or defects, Landlord shall cooperate in any action Tenant desires to bring any architects, engineers or contractors. (3) Upon Landlord's approval, Tenant shall promptly commence with the construction of the Work and thereafter diligently prosecute the same to completion. All Work shall be in full compliance with the Americans with Disabilities Act and with any and all applicable local building codes and regulations. Except as may be otherwise provided in the Initial Plan or Working Drawings, the Work will be performed using materials, quantities and procedures which are then generally in use by Landlord as building standards, or better. (4) Notwithstanding any other provision of this Work Letter, Landlord and Tenant agree as follows: (a) Tenant's contractors must perform in such a manner as to not cause or permit to be caused a material default or breach of any term, condition, rule or regulation of the Lease or this Work Letter by Tenant. (b) Tenant and Tenant's contractors shall maintain at all times during the construction for the Work and for the benefit of Landlord, its officers and employees, such insurance as Landlord may reasonably require, including, without limitation, such hazard, builder's risk, worker's compensation and other similar insurance as is required under the laws of the State of Tennessee or any political subdivision thereof. (c) Tenant shall deliver or cause to be delivered to Landlord prior to the commencement of construction of any of the -88- 8 The Bank of Nashville First Amendment to Lease Page 8 - ------------------------ Work, (i) certificates of such insurance as is required hereunder and such certificates shall name Landlord as an additional insured and contain provisions that the policies shall not be cancelled without thirty (30) days prior written notice to Landlord: (ii) evidence that any and all governmental permits and licenses required for the construction of the Work have been duly secured and remain in full force and effect; and (iii) such other similar assurances which Landlord may reasonably require from time to time. (d) To the extent that Tenant pays directly, or causes to be paid, any contractors, supplier or materialmen, Landlord may from time to time require from evidence of payment to all such parties during the course of construction of the Work and at the completion, Tenant shall deliver to Landlord a waiver of or release of liens signed by all contractors, suppliers, or materialmen. (5) During the construction period, Landlord shall have the right, but not the obligation to inspect the Premises, and all improvements made to the Premises comprising the Work to reasonably determine whether the Work is satisfactory. If any Work does not comply with the Working Drawings, Landlord shall, within twenty-four (24) hours of Landlord's inspection, notify Tenant in writing of such noncompliance, including the specifics thereof, whereupon Landlord may require non-complying portions of the Work to be removed and reconstructed to so comply. No such inspection by Landlord, or failure to inspect by Landlord, shall make Landlord liable in any manner to Tenant under the Lease for any defects, errors or omissions in connection with the Work or any errors or omissions in the Initial Plan or Working Drawings. C. Landlord's Contribution. "Cost of the Work" means all costs and expenses of the Work, including, without limitation, (i) the cost of the Initial Plan and Working Drawings, (ii) the cost of all labor (including overtime) and materials constituting the Work, (iii) general conditions (including rubbish removal, hoisting permits, temporary facilities, safety and protection, cleaning, tools, blueprints and reproduction, telephone, temporary power, field supervision and the like); (iv) the cost of premiums for worker's compensation, public liability, casualty and other insurance charged by contractors; (v) contractors' charges for overhead and fees; and (vi) architectural and engineering fees. (1) Provided that Tenant has satisfied the requirements set forth above and below and is not in default under the Lease or the Workletter, Landlord shall make a contribution, on the terms hereinafter set forth, equal to One Hundred Forty-two Thousand Five Hundred Eighty-four and no/100 -89- 9 The Bank of Nashville First Amendment to Lease Page 9 - ------------------------ Dollars ($142,584.00) (based upon $8.00 per square foot of rentable area of the Tower Premises (the "Landlord's Contribution")) toward the Cost of the Work under the Workletter. Subject to the limitations hereinafter set forth, Landlord's contribution shall also be applied towards Tenant's cost for architectural design and mechanical drawings. Landlord shall not be liable for more than the Landlord's Contribution. Any amount of the tenant allowance not utilized by the Tenant in the improvement of the Tower Premises shall be applied to base rent. There shall be no tenant improvement allowance for the Basement Premises. (2) Landlord shall make periodic progress payments (usually monthly) of the Landlord's Contribution toward the Cost of the Work as work progresses under the Workletter, within thirty (30) days after presentation by Tenant to Landlord of invoices for the Cost of the Work and duly executed waivers of liens from all contractors, subcontractors and materialmen furnishing labor, equipment or materials for the performance of the Work. (3) After payment of any amounts toward the Cost of the Work under the Workletter, Landlord may pay the Landlord's Contribution to Tenant, or Landlord may, in its discretion, make or cause to be made (through the construction escrow or otherwise) payment directly to Tenant's contractors or vendors or jointly with Tenant, in progress payments as described above. Landlord may use the Landlord's Contribution to reimburse or pay itself amounts owed by Tenant pursuant to the provisions of the Workletter. (4) Notwithstanding any other provision of this Lease, the payment of the Landlord's Contribution shall be subject to Landlord's right to set-off. D. Lease Provisions. The terms and provisions of the Lease, insofar as they are applicable to this Workletter, are hereby incorporated herein by reference. E. Miscellaneous. (1) Except as herein expressly set forth in the Work Letter or in the Lease, Landlord has no agreement with Tenant and has no obligation to do any other work with respect to the Premises. Any additional work or alterations to the Premises desired by Tenant after the Commencement Date shall be subject to the provisions of the Lease. This Work Letter sets forth the entire agreement of Tenant and Landlord regarding the Work. (2) If final working drawings and specifications are included as part of the Initial Plan attached hereto, then whenever the term "Working Drawings" is used in this Agreement such term shall be deemed to refer to -90- 10 The Bank of Nashville First Amendment to Lease Page 10 - ------------------------ the Initial Plan and all supplemental plans and specifications approved by Landlord. (3) If the Initial Plan or Working Drawings for the Work require the construction and installation of more fire hose cabinets, telephone closets, or electrical closets than the number regularly provided Landlord in the core of the Building, then Tenant will pay to Landlord all costs and expenses incurred by Landlord for the construction and installation of such additional fire hose cabinets, telephone closets, or electrical closets. (4) Landlord or Landlord's beneficiary is entitled to all available investment tax credits, if any, for Work paid for and property acquired by Landlord pursuant to the Lease and this Work Letter. Nothing in the Lease or this Work Letter shall be construed as agreement by Landlord to pass any investment tax credits through to Tenant. (5) Time is of the essence of this Work Letter. (6) Tenant's failure to pay when due any amounts owed by Tenant under this Work Letter, or Tenant's failure to perform any other obligation of Tenant under this Work Letter, will constitute a default by Tenant under the Lease, and Landlord will have all the rights and remedies granted to Landlord under the Lease for failure by Tenant to perform its obligations under the Lease. Landlord's failure to pay when due any amounts owed by Landlord under this Work Letter, or Landlord's failure to perform any other obligation of Landlord under this Work Letter, will constitute a default by Landlord under the Lease, and Tenant will have all the rights and remedies granted to Tenant under the Lease for failure by Landlord to perform its obligations under the Lease. (7) All words and phrases in this Work Letter have the same meanings given to them in the Lease, unless otherwise specifically stated in this Work Letter. (8) All representations, warranties, covenants, and conditions contained in this Work Letter shall survive the completion of the Work and the payment by Landlord of the Cost of Work and Landlord's Contribution. All other terms and conditions in the Lease dated July 19, 1989 and the Letter Agreement dated March 29, 1993 not amended by this First Amendment shall remain in full force and effect and shall apply to the Premises. -91- 11 The Bank of Nashville First Amendment to Lease Page 11 - ------------------------ IN WITNESS WHEREOF, the parties hereto, have executed this Agreement in triplicate on the date and year first above written. WITNESS: LANDLORD: LC TOWER, L.L.C. a Delaware limited liability company By: PERIDOT, INC. MANAGER /s/ Marija Tatic By: /s/ Craig Caffareili, V.P. - --------------------------- --------------------------------- WITNESS: TENANT: THE BANK OF NASHVILLE /s/ Anne J. Cheatham By: /s/ Mack S. Linebaugh, Jr. - --------------------------- --------------------------------- Mack S. Linebaugh, Jr. Chairman and President -92- 12 EXHIBIT "A-1" Design Collective Incorporated - -------------------------------------------------------------------------------- consultants for architecture, interiors and graphic design. A National Design Alliance Nashville, TN Columbus, OH Cleveland, OH (Floor Plans) BANK OF NASHVILLE 3605 S.F. ------------------------------- GROSS USABLE 3605 S.F. BASEMENT LEVEL L & C Tower First Management Services - -------------------------------------------------------------------------------- MARCH 1993 NOT TO SCALE -93- 13 EXHIBIT "A-2" Design Collective Incorporated - -------------------------------------------------------------------------------- consultants for architecture, interiors and graphic design. A National Design Alliance Nashville, TN Columbus, OH Cleveland, OH (Floor Plans) BANK OF NASHVILLE 6665 S.F. ------------------------------- GROSS USABLE 6665 S.F. 2nd FLOOR L & C Tower First Management Services - -------------------------------------------------------------------------------- MARCH 1993 NOT TO SCALE -94- 14 EXHIBIT "A-3" Design Collective Incorporated - -------------------------------------------------------------------------------- consultants for architecture, interiors and graphic design. A National Design Alliance Nashville, TN Columbus, OH Cleveland, OH (Floor Plans) BANK OF NASHVILLE 4643 S.F. EXPANSION 1928 S.F. ------------------------------- GROSS USABLE 6571 S.F. 3rd FLOOR L & C Tower First Management Services - -------------------------------------------------------------------------------- MARCH 1993 NOT TO SCALE -95- 15 EXHIBIT "A-4" Design Collective Incorporated - -------------------------------------------------------------------------------- L & C Tower consultants for space planning Nashville, TN and interior design DCI NO. 93508.00 (Floor Plans) 23RD FLOOR PLAN First Management Services Building Stacking Plan -96- 16 APPENDIX "A-1" Design Collective Interiors - -------------------------------------------------------------------------------- consultants for architecture, interiors and graphic design. A National Design Alliance Nashville, TN Columbus, OH Cleveland, OH (Floor Plans) BANK OF NASHVILLE 3605 S.F. ------------------------------- GROSS USABLE 3605 S.F. BASEMENT LEVEL L & C Tower First Management Services - -------------------------------------------------------------------------------- MARCH 1993 NOT TO SCALE -97- 17 APPENDIX "A-2" Design Collective Incorporated - -------------------------------------------------------------------------------- consultants for architecture, interiors and graphic design. A National Design Alliance Nashville, TN Columbus, OH Cleveland, OH (Floor Plans) BANK OF NASHVILLE 6665 S.F. ------------------------------- GROSS USABLE 6665 S.F. 2nd FLOOR L & C Tower First Management Services - -------------------------------------------------------------------------------- MARCH 1993 NOT TO SCALE -98- 18 APPENDIX "A-3" Design Collective Incorporated - -------------------------------------------------------------------------------- consultants for architecture, interiors and graphic design. A National Design Alliance Nashville, TN Columbus, OH Cleveland, OH (Floor Plans) BANK OF NASHVILLE 4643 S.F. EXPANSION 1928 S.F. ------------------------------- GROSS USABLE 6571 S.F. 3rd FLOOR L & C Tower First Management Services - -------------------------------------------------------------------------------- MARCH 1993 NOT TO SCALE -99- 19 APPENDIX "A-4" Design Collective Interiors - -------------------------------------------------------------------------------- L & C Tower consultants for space planning Nashville, TN and interior design DCI NO. 93508.00 (Floor Plans) 23RD FLOOR PLAN First Management Services Building Stacking Plan -100- 20 APPENDIX "G" Design Collective Incorporated - -------------------------------------------------------------------------------- consultants for architecture, interiors and graphic design. A National Design Alliance Nashville, TN Columbus, OH Cleveland, OH Storage for Storing Paper (Floor Plans) BANK OF NASHVILLE 3605 S.F. ------------------------------- GROSS USABLE 3605 S.F. BASEMENT LEVEL L & C Tower First Management Services - -------------------------------------------------------------------------------- MARCH 1993 NOT TO SCALE -101- EX-11 8 STATEMENT OF RE COMPUTATION 1 EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS COMMUNITY FINANCIAL GROUP, INC.
Year Ended December 31, --------------------------------------------------- 1999 1998 1997 --------- ---------- ----------- Income Per Common Share - ----------------------- Basic (1) ----- Net income (in thousands) $ 3,501 $ 2,581 $ 2,058 ========== ========= ========== Net income per share $ .86 $ 1.08 $ .93 ---------- ---------- ---------- Weighted average common shares outstanding 4,067,522 2,393,576 2,205,043 ========== ========== ========== Income Per Common Share, - ------------------------ Diluted (2) ------- Net income (in thousands) $ 3,501 $ 2,581 $ 2,058 ========== ========== =========== Net income per share $ .85 $ .78 $ .89 ========== ========== =========== Weighted average common share Outstanding 4,129,069 3,321,228 2,323,580 ========== ========== ===========
(1) Basic net income per share has been computed using the weighted average number of common shares outstanding during each year presented. See Note L to the Company's consolidated financial statements included in the Annual Report to Shareholders for the year ended December 31, 1999 incorporated herein by reference. (2) Diluted net income per share has been computed using the weighted average number of common shares outstanding and the dilutive effect of stock options and warrants outstanding during the years presented. See Note L to the Company's consolidated financial statements included in the Annual Report to Shareholders for the year ended December 31, 1999 incorporated herein by reference. -102- EX-13 9 1999 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW Community Financial Group, Inc. (CFGI) is a registered bank holding company under the Federal 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 and a majority interest in The Bank's subsidiary company Machinery Leasing Company of North America, Inc., (BON Leasing). The Bank is a state-chartered bank incorporated in 1989 under the laws of the state of Tennessee. On April 30, 1996, CFGI executed a plan of exchange with The Bank, whereby CFGI became the parent holding company of The Bank. In January, 1998, the Company's Board of Directors adopted a shareholder rights plan which authorizes the distribution of a dividend of one common share purchase right for each outstanding share of CFGI's common stock. The rights will be exercisable only if a person or group acquires fifteen percent or more of CFGI's common stock or announces a tender offer, the consummation of which will result in ownership by a person or group of fifteen percent or more of the common stock. The rights are designed to ensure that all of CFGI's shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers, squeeze-outs, open market accumulations, and other abusive tactics to gain control of the Company without paying all shareholders an appropriate control premium. The holding company's structure provides flexibility for expansion of the Company's banking business through acquisition of other financial institutions and for the addition of banking related services. During 1998, the Company expanded its arrangement with LMFP to offer certain investment services while discontinuing most traditional trust services. During 1999, the Company created a title agency through a joint venture with Mooreland Title Company, LLC of Brentwood, Tennessee (TBON-Mooreland Joint Venture, LLC), and purchased a majority interest in Machinery Leasing Company of North America, Inc. The Company experienced a significant change in its capital structure during 1998 as it received $25 million in new capital from the exercise of warrants. The accompanying consolidated financial statements and notes are considered to be an integral part of this analysis and should be read in conjunction with the narrative. This discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and the selected financial highlights presented elsewhere in this report. To the extent that the statements in this discussion relate to the plans, objectives, or future performance of the Company, these statements may be deemed to be forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and the current economic environment. Actual strategies and results of future periods may differ materially from those currently expected due to various risks and uncertainties. The Company's primary base of operation is located in the L & C Tower at 401 Church Street, Nashville, Tennessee, 37219. The Bank has 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 and investment services. -103- 2 The primary service area of the Company is centered around Nashville, Tennessee and encompasses an eight county area. The Company competes with existing area commercial banks and other area financial institutions, insurance companies, consumer finance companies, brokerage firms, credit unions and other business entities which have been active in pursuing traditional banking markets. Due to the rapid economic growth of the Company's market area and consolidation in the financial services industry, additional competition is expected to continue from new entrants to the Company's market. Although the Company has fewer physical locations than many of its competitors, it has continued its commitment to providing customers maximum convenience by allowing consumers to access their accounts through competitors' ATM's throughout the state of Tennessee at no charge. This is accomplished through a program whereby the Company rebates any surcharges imposed on its customers by ATM providers within the state of Tennessee when accounts are accessed by a Bank of Nashville ATM or MasterMoney card. The Company's assets were $308.1 million at December 31, 1999, compared to $238.2 million at December 31, 1998, representing an increase of 29.4%. Shareholders' equity decreased $3.9 million from $51.2 million at December 31, 1998 to $47.3 million at December 31, 1999. A majority of the decrease in shareholders' equity resulted from the Company having repurchased 304,500 shares in a Stock Repurchase Plan authorized by the Company's Board of Directors in March, 1999. During 1999, shareholders were paid dividends of $.46 per share compared to dividends totaling $.24 per share in 1998. The Company reported net income of $3.5 million, up 36% from $2.6 million reported in 1998. Basic earnings per share were $.86 per share in 1999 compared to $1.08 in 1998 while diluted earnings per share in 1999 were $.85 compared to $.78 in 1998. The decrease in basic earnings per share in 1999 compared to 1998 resulted from an increased number of shares outstanding due to the exercise of warrants which occurred primarily in late 1998, the impact of which was partially offset by the implementation of the Stock Repurchase Plan during 1999. Return on average shareholders' equity (exclusive of other comprehensive income) was 7.09% in 1999 compared to 9.56% in 1998, reflecting the increase in equity due to the exercise of warrants in late 1998. Return on average assets for the year ended December 31, 1999 was 1.30% compared to 1.23% in 1998. During 1999, the Company continued its expansion and growth plans by internal growth within The Bank and expansions into related lines of business. This growth included opening the Hendersonville branch location and expanding its lending activities. During 1999, the Company continued its focus on asset quality while expanding its lending activities in accordance with its long-term strategic plan. The maintenance of an adequate level for the allowance for loan losses was reflected by a provision for losses of $106,000 reported in 1999, a period in which net recoveries were $218,000. This provision expense was deemed appropriate considering the Company's loan growth and comprehensive analysis of the allocated and unallocated portions of the loan loss reserve in conjunction with a detailed analysis of the quality of the Company's loan portfolio. Nonperforming assets as a percentage of loans and foreclosed properties declined from .30% in 1998 to .14% in 1999. During 1999, net nonperforming assets decreased $169,000, or 36.7%, to $291,000 at December 31, 1999, from $460,000 at year end 1998, while total loans increased $52.8 million, or 34.6%, from $152.7 million at December 31, 1998 to $205.5 million at year end 1999. A more detailed analysis of nonperforming assets and the provision for loan losses is presented under the caption, "Provision for Loan Losses" and "Nonperforming Assets and Risk Elements". During 1999, deposits increased $66.6 million, or 41.0%, to $229.1 million at December 31, 1999 from $162.6 million at December 31, 1998. Average deposits increased $31.8 million, or 19.0%, in 1999 compared to 1998. All categories of deposits increased at December 31, 1999, compared to December 31, 1998 with money market accounts and time certificates of deposit reflecting the largest increases. The net loan to deposit ratio at December 31, 1999 was 89.7% compared to 93.9% at December 31, 1998 while net loans to assets ratio was 66.7% at year end 1999 compared to 64.1% at December 31, 1998. The Company's high capital ratio continues to make it appropriate to maintain a higher than average loan to deposit ratio when considering the overall net loans to assets ratio. -104- 3 NET INTEREST INCOME Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. Net interest income increased 39.3% to $11.9 million in 1999 from $8.6 million in 1998. Total interest income increased $4.4 million, or 26.4%, in 1999 compared to 1998, while total interest expense increased $1.0 million, or 12.7%, in 1999 compared to 1998. The increase in total interest income is attributable primarily to a 28.2% increase in average earning assets and a shift in the mix of these assets as the growth was comprised primarily of a $42.4 million increase in average loans and leases. Additionally, average investment securities increased $9.3 million while average interest earning cash and federal funds sold increased $4.7 million in 1999 compared to 1998. The rate earned on average earning assets in 1999 declined 11 basis points when compared to 1998. During 1999, the average rate paid on interest-bearing liabilities declined 34 basis points when compared to the prior year. The volume of average interest-bearing liabilities increased $34.4 million, or 21.0%, in 1999 compared to 1998. This increase in average interest-bearing liabilities was comprised of a $14.1 million increase in average money market accounts, $6.1 million increase in certificates of deposit less than $100,000, $5.4 million increase in certificates of deposit $100,000 or greater, $5.8 million increase in Federal Home Loan Bank and other borrowings, and a $3.0 million increase in average NOW accounts. The declines reflected in rates paid on average interest-bearing liabilities during 1999 is not expected to continue as declines were primarily a result of a lower rate environment during the first half of 1999 while the last six months of 1999 reflected rate increases which have resulted in higher costs of funds. The following two schedules present an analysis of net interest income and the detail of income due to the fluctuations in volumes and rates. -105- 4 AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
1999 1998 ---------------------------------- ----------------------------------- Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Balance Expense* Rates* Balance Expense* Rates* (Dollars In Thousands) ASSETS Loans (net of unearned income): Commercial $ 60,245 $ 5,382 8.93% $ 43,137 $ 3,983 9.32% Real Estate - mortgage 89,321 8,018 8.98 72,627 6,649 9.15 Real Estate - construction 16,586 1,525 9.19 12,288 1,132 9.21 Consumer 5,854 609 10.40 5,608 627 11.18 Lease financing 4,021 461 11.46 -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Total loans (net of unearned income) 176,027 15,995 9.09 133,660 12,391 9.27 - ------------------------------------------------------------------------------------------------------------------------ Securities 68,421 4,374 6.39 59,117 3,833 6.48 Federal funds sold and cash 12,200 626 5.13 7,468 384 5.14 ======================================================================================================================== Total earning assets $ 256,648 $ 20,995 8.18% $200,245 $16,608 .29% Allowance for loan losses (3,945) (3,389) Cash and due from banks 11,032 9,449 Premises and equipment, net 3,324 1,670 Accrued interest and other assets 2,078 1,526 - ------------------------------------------------------------------------------------------------------------------------ Total assets $ 269,137 $209,501 - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY NOW accounts $ 14,222 $ 413 2.90% $ 11,190 $ 367 3.28% Money market accounts 92,059 3,783 4.11 77,982 3,463 4.44 Time certificates less than $100,000 37,687 2,031 5.39 31,551 1,809 5.73 Time certificates $100,000 and greater 35,533 1,894 5.33 30,162 1,692 5.61 Federal Funds Purchased 3,102 156 5.05 574 29 5.11 Federal Home Loan Bank and other debt 15,376 776 5.04 12,144 675 5.56 - ------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities $ 197,979 $ 9,053 4.57% $163,603 $ 8,035 4.91% Non-interest bearing demand deposits 19,588 16,409 Accounts payable and accrued liabilities 2,370 2,176 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 219,937 182,188 - ------------------------------------------------------------------------------------------------------------------------ Shareholders' equity 49,200 27,313 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 269,137 $209,501 - ------------------------------------------------------------------------------------------------------------------------ Interest income/earning assets* 8.18% 8.29% Interest expense/earning assets 3.53 4.01 - ------------------------------------------------------------------------------------------------------------------------ Net interest margin* 4.65% 4.28% ========================================================================================================================
*Fully taxable equivalent basis. Nonaccrual loans are included in average loans and average earning assets. Consequently, yields on these items are lower than they would have been if all loans had earned at their contractual rate of interest. Had nonaccrual loans earned income at the contractual rate, interest income of $10,000, $29,000 and $32,000 would have been recognized during 1999, 1998 and 1997, respectively. -106- 5
1997 ----------------------------------------------- Interest Average Average Income/ Yields/ Balance Expense* Rates* ----------------------------------------------- $ 36,889 $ 3,438 9.32% 65,102 6,002 9.22 9,102 849 9.33 3,742 435 11.62 -- -- -- ----------------------------------------------- 114,835 10,724 9.34 ----------------------------------------------- 61,587 4,128 6.70 8,105 417 5.14 ----------------------------------------------- $184,527 $15,269 8.27% (3,006) 6,633 1,040 1,572 ----------------------------------------------- $190,766 =============================================== $ 6,856 $ 253 3.69% 67,216 3,205 4.77 35,186 2,061 5.86 29,294 1,693 5.78 473 26 5.50 12,651 718 5.68 ----------------------------------------------- $151,676 $ 7,956 5.25% 14,088 2,156 ----------------------------------------------- 167,920 ----------------------------------------------- 22,846 ----------------------------------------------- $190,766 =============================================== 8.27% 4.31 ----------------------------------------------- 3.96% ===============================================
-107- 6 ANALYSIS OF CHANGES IN NET INTEREST INCOME
1999 Compared to 1998 1998 Compared to 1997 Increase(Decrease)Due to Increase(Decrease)Due to (In Thousands)(1) Rate Volume Net Rate Volume Net - -------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $(250) $3,854 $ 3,604 $ (78) $ 1,745 $ 1,667 Securities (50) 596 546 (131) (164) (295) Federal funds sold and cash 5 238 243 1 (34) (33) - -------------------------------------------------------------------------------------------------------------------- Total Interest Income (295) 4,688 4,393 (208) 1,547 1,339 - -------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: NOW accounts (45) 91 46 (31) 145 114 Money market accounts (272) 592 320 (231) 489 258 Time certificates under $100,000 (113) 336 223 (45) (207) (252) Time certificates $100,000 and over (88) 290 202 (50) 49 (1) Federal funds purchased (1) 128 127 6 (2) 4 Federal Home Loan Bank and other debt (66) 167 101 (28) (16) (44) - -------------------------------------------------------------------------------------------------------------------- Total Interest Expense (585) 1,604 1,019 (379) 458 79 - -------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $ 290 $3,084 $ 3,374 $ 171 $ 1,089 $ 1,260 ====================================================================================================================
(1) Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. These rates are calculated on a fully taxable equivalent basis. Volume change is calculated as change in volume multipled by the old rate while rate change is change in rate multipled by the old volume. The rate/volume change is allocated between volume change and rate change at the ratio each component bears to the absolute value of their total. Nonaccrual and 90 days or more past due loans are included in average loans for which changes due to rates and volume are computed. Trends in net interest income are commonly evaluated in terms of average rates, using the net interest margin and the net interest spread. The net interest margin, or the net yield on earning assets, is computed by dividing net interest income by average earning assets. This ratio represents the difference between the average yield on average earning assets and average rate paid for all funds used to support those assets, including both interest-bearing and non-interest-bearing sources of funds. The Company's net interest margin increased by 37 basis points to 4.65% in 1999, primarily resulting from an increase in the volume of average earning assets and a shift in the mix of earning assets from investments to higher yielding loans combined with an overall decrease in rates paid during 1999 on deposits. A higher average loan to deposit ratio also contributed to the overall improvement in the net interest margin in 1999 compared to 1998. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly, while the timing for repricing of both the asset and liability remain the same; both impact net interest income. It should be noted, therefore, that a matched interest sensitivity position, by itself, will not ensure maximum net interest income. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the types of investments that should be made and at what maturity. Using this analysis, management from time to time assumes calculated interest sensitivity gap positions in an effort to maximize net interest income based upon short and long term anticipated movements in general level of interest rates. The Company's current "negative gap" position in the short-term (one year or less) creates some exposure to higher rates but positions it to benefit in a declining interest rate -108- 7 environment. Negative gap is used to describe the interest sensitivity position when a company's rate sensitive liabilities are repricing faster than its rate sensitive assets. See "Liquidity and Asset/Liability Management" section. The interest rate spread measures the difference between the average yield on earning assets and average rate paid on interest-bearing sources of funds. The interest rate spread eliminates the impact of non-interest-bearing funds and gives a direct perspective on the effect of the market interest rate movement. During 1999, the Company's interest rate spread increased compared with 1998. The following table presents an analysis of the Company's interest rate spread and net yield on earning assets.
Years Ended December 31 1999 1998 - -------------------------------------------------------------------------------------------------------------- Rate earned on interest earning assets 8.18% 8.29% Rate paid on interest-bearing liabilities 4.57% 4.91% Interest rate spread 3.61% 3.38% Net yield on earning assets 4.65% 4.28%
The increased level of earning assets and the decline in the average rate paid on interest-bearing liabilities together with a shift in the mix of earning assets resulted in a higher level of net interest income in 1999 compared to 1998. The positive impact of the increased level of earning assets, particularly in the area of loans, was somewhat offset by growth in interest-bearing liabilities. PROVISION FOR LOAN LOSSES The Company maintains an allowance for loan losses at a level, which, in management's evaluation, is adequate to cover estimated losses on loans/leases based on available information at the end of each reporting period. Considerations in establishing the allowance include historical net charge-offs, changes in the credit risk, mix and volume of the loan portfolio, and other relevant factors, such as the risk of loss on particular loans, the level of nonperforming assets, and current and forecasted economic conditions. A more detailed discussion of nonperforming assets is presented under the caption "Nonperforming Assets and Risk Elements". In 1999, the Company recorded $106,000 in expense for provision for loan losses, compared with $128,000 in 1998. Despite a decline in nonperforming assets and net recoveries for 1999, this provision was deemed appropriate due to the growth in the portfolio. Net recoveries were $218,000 in 1999 compared to $390,000 in 1998. The allowance for loan losses was 2.0% of loans/leases at December 31, 1999, compared to 2.4% at the same date in 1998. Nonperforming assets as a percent of loans and foreclosed properties declined from .3% at year end 1998 to .1% at December 31, 1999. Net recoveries of $218,000 in 1999 resulted from charge-offs of $772,000 and recoveries of $990,000 reflecting continued collection efforts on loans charged-off in prior periods. In 1998, net recoveries of $390,000 were the result of charge-offs of $84,000 and recoveries of $474,000. Management will continue to evaluate the level of the allowance for loan losses and will determine what additional adjustments, if any, are necessary. Continued growth in the loan portfolio will be a factor in this evaluation, as well as the quality of the portfolio and other external and internal factors. The level of the allowance and the amount of the provision are determined on a quarter by quarter basis and, given the inherent uncertainties involved in the estimation process, no assurance can be given as to the amount of the provision and the level of the allowance at any future date. Management anticipates that there will be increased provision expense in 2000 due primarily to growth in the portfolio; however, the specific amount will be determined on a quarter by quarter basis as all factors are evaluated. Changes in circumstances affecting the various factors considered by the Company in establishing the level of the allowance could significantly affect the amount of the provision deemed to be warranted. -109- 8 As a financial institution that assumes lending and credit risks as a principal element of its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, the Company consistently applies a comprehensive methodology and procedural discipline which is updated on a quarterly basis at the subsidiary bank and leasing company level to determine both the adequacy of the allowance for loan losses and the necessity for charging provisions against earnings. The allowance for loan losses is based on assessments of the probable estimated losses inherent in the portfolios. The allowance for loan losses is comprised of an allocated and unallocated portion. Both portions of the allowance are available to support inherent losses in the portfolios. The allocated allowance is determined for each classification of both performing and nonperforming loans/leases within the portfolios. This methodology includes: - The application of allowance allocations for commercial loans, consumer loans, leases, and real estate loans is calculated by using weighted average loss rates over a defined time horizon based upon the analysis of the Company's historical averages of actual net loan charge-offs incurred within the portfolios by credit quality grade. The Company has established minimum loss factors for certain credit grade categories. - A detailed review of all criticized, nonperforming, and impaired loans/leases is performed to determine if any specific allowance allocations are required on an individual credit where management has identified significant conditions or circumstances exist that indicate the probability that a loss may be incurred in excess of the amount determined by the application of the historical loss methodology. The unallocated allowance is established for loss exposure that exists in the remainder of the portfolios but has yet to be identified and to compensate for the uncertainty in estimating loan losses, including the possibility of changes in risk ratings of credits. The unallocated allowance is based upon management's evaluation of various conditions, the effects of which are not directly measured in determining the allocated allowance. The evaluation of the inherent loss related to these conditions involves a higher degree of uncertainty because they are not associated with specific problem credits or portfolio segments. The unallocated allowance represents prudent recognition of the fact that allowance estimates, by definition, lack precision. The conditions evaluated in connection with the unallocated allowance include the following conditions as of the balance sheet date: - Changes in interest rates - Changes in lending policy and procedure - National and local economic conditions - Trends in loan volumes and terms of loans in the portfolio - Changes in the experience of personnel - Recent levels of, and trends in, delinquencies and nonaccruals - Loan review evaluation of the credit process - Credit concentrations and changes in the mix of the loan portfolio - Competition, legal, and regulatory requirements - Peer comparisons Management reviews these conditions quarterly in discussion with its loan officers. If any of the conditions is evidenced by a specifically identified problem loan or portfolio segment as of the evaluation date, management's estimate of the effect of this condition may be reflected in the allocated allowance applicable to the credit or portfolio segment. Where a specifically identifiable problem credit or portfolio segment as of the evaluation does not evidence any of these conditions, management's evaluation of the probable loss concerning this condition is reflected in the unallocated allowance. Management believes that, in most instances, the impact of these events on the collectibility of the applicable credit has not yet -110- 9 been reflected in the level of nonperforming loans/leases or in the internal risk grading process regarding these credits. Accordingly, our evaluation of the probable losses related to these factors is reflected in the unallocated allowance. The Company does not weigh the unallocated allowance among segments of the portfolio. The following specific factors are reflected in management's estimate of the unallocated allowance: - Concentration of real estate dependent loans o Continued concern in health care related industries - Improved geographic diversity of the portfolio resulting from the acquisition of Machinery Leasing Company in 1999 - A gradually changing mix of loans which reflects more consumer products being offered through the Company's branch network - Credit quality remains strong, with nonperforming assets and delinquencies maintained at a low level - As the Company has experienced growth, additional support staff has been added and the management of credit risk continues to be refined - The local economic environment is strong and continues to outperform national trends in terms of job growth, low unemployment, housing sales, start-up businesses and corporate relocations Primarily due to growth in the loan portfolio, the allocated portion of the reserves has increased, and the unallocated portion of the reserves has declined. The total allowance as a percentage of loans and leases has decreased from 2.4% at the end of 1998 to 2.0% at the end of 1999 but continues to remain higher than The Bank's peer group. Nonperforming assets as a percent of loans has decreased over the past three years from 1.0% in 1997 to .30% in 1998 to .14% in 1999 reflecting the overall quality of the portfolio that has been maintained during periods of significant loan growth. While total charge-offs increased in 1999 and recoveries declined, delinquencies continue to be extremely moderate. Although it is unlikely that future recoveries will match the rate of recent years, management believes that the allowance for loan losses is appropriate due to the strength of the local economy, minimal delinquencies, and the overall strength in the credit quality of the portfolio. Management is aware that the Company has been operating in an extremely beneficial economic environment. The Company will continue to evaluate both the allocated and unallocated portions of the reserves maintaining an awareness that, by virtue of its high capital level, the Company has the ability to make larger loans, thereby increasing the possibility of a loan having a larger adverse impact than may be the case in peer group companies. Management will continue to carefully evaluate the unallocated allowance and will ensure that it remains prudent and consistent with regulatory requirements. After completion of the process discussed above, the Company's Board of Directors evaluates the adequacy of the allowance and establishes the provision level for the current quarter. The Company believes that the procedural discipline, systematic methodology and comprehensive documentation of this quarterly process is in full compliance with all regulatory requirements and provides appropriate support for accounting and reporting purposes. The Company believes that the allocation of its allowance for loan losses is reasonable. -111- 10 The following table represents a recap of activity in the allowance for loan losses during the past two years.
SUMMARY OF LOAN LOSS EXPERIENCE (In Thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------ ALLOWANCE FOR LOAN LOSSES, JANUARY 1 $3,646 $ 3,128 LOANS CHARGED OFF: Commercial (608) (41) Real estate (129) (38) Consumer (20) (5) Lease financing (15) -- - ------------------------------------------------------------------------------------------------------------ Total charge-offs (772) (84) - ------------------------------------------------------------------------------------------------------------ RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF: Commercial 988 222 Real estate -- 2 Consumer 2 250 - ------------------------------------------------------------------------------------------------------------ Total recoveries 990 474 - ------------------------------------------------------------------------------------------------------------ NET RECOVERIES 218 390 - ----------------------------------------------------------------------------------------------------------- PROVISION CHARGED TO OPERATIONS 106 128 - ------------------------------------------------------------------------------------------------------------ PURCHASED RESERVE OF BON LEASING 92 -- - ------------------------------------------------------------------------------------------------------------ ALLOWANCE FOR LOAN LOSSES, DECEMBER 31 $ 4,062 $ 3,646 - ------------------------------------------------------------------------------------------------------------ Loans, net of unearned income Year-end $ 205,511 $ 152,675 Average during year $ 176,027 $ 133,660 Allowance for loan losses to year-end loans, net of unearned income 2.0% 2.4% Provision for loan losses to average loans, net of unearned income .1% .1% Net recoveries to average loans, net of unearned income .1% .3%
The following table presents the allocation of the allowance for loan losses for the past two years
ALLOCATION OF THE ALLOWANCE LOAN FOR LOSSES (In Thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------ BALANCE APPLICABLE TO: Commercial $ 1,663 $ 918 Real estate - mortgage loans 1,160 1,006 Real estate - construction loans 212 133 Consumer 54 47 Lease financing 103 -- Unallocated 870 1,542 - ------------------------------------------------------------------------------------------------------------ $ 4,062 $ 3,646 ============================================================================================================ PERCENT OF TOTAL ALLOCATION Commercial 41.0% 25.2% Real estate - mortgage loans 28.6 27.6 Real estate - construction loans 5.2 3.6 Consumer 1.3 1.3 Lease financing 2.5 -- Unallocated 21.4 42.3 ============================================================================================================ 100.0% 100.0% ============================================================================================================
-112- 11 NON-INTEREST INCOME Total non-interest income was $2.7 million in 1999, reflecting an increase of 48.2% from $1.8 million reported in 1998. Non-interest income, less non-recurring income (gains/losses on sale of securities and other real estate owned), increased $927,000, or 53.8% from 1998. Investment center income increased $683,000, or 103.2%, during 1999 compared to the prior year. This increase reflected the Company's expansion of its arrangement with LMFP, Inc.(LMFP) that occurred in mid-1998 and its continued emphasis on offering certain investment services at the Main Office and Green Hills Office through this arrangement. This increase in investment center income was partially offset by a decline in trust income of $131,000 during 1999 compared to 1998 which occurred as the Company continued the implementation of its decision to discontinue most traditional trust services and redirect those efforts into the expanded investment services department provided in conjunction with LMFP. Service fee income increased $330,000 during 1999 compared to 1998 primarily as a result of increased numbers of transaction accounts generated through the Company's branches. Additionally, other non-interest income increased $42,000 in 1999 compared to 1998. The Company reported a net loss on the sale of securities available for sale of $5,000 in 1999 compared to a net gain on sale of securities available for sale of $52,000 in 1998. These transactions resulted from balance sheet management strategies to adjust the estimated average maturities of the Company's securities portfolio. Gains on sale of other real estate owned were $29,000 in both 1999 and 1998. NON-INTEREST EXPENSE During 1999, the Company expanded its services evidenced by a 29.4% growth in total assets. A new branch location was established in the Hendersonville area, continued expansion of investment services provided in conjunction with LMFP, expansion of "Bank on Call" mobile branching, expansion of lending activities through the addition of lending and support staff, the Company's introduction of Internet banking and the acquisition of BON Leasing contributed to the increases in non-interest expenses in 1999. Total non-interest expense increased $2.8 million, or 45.7%, from $6.1 million in 1998 to $8.8 million in 1999. Total non-interest expense represented 3.3% of average total assets in 1999, compared to 2.9% in 1998. The non-interest expense to assets ratio is an industry measure of the Company's ability to control its overhead. Growth in the investment center area which impacts both non-interest income and non-interest expense does not result in increased average assets. Control of non-interest expense is essential to profit maximization; therefore, all non-interest expense categories have been and will continue to be closely managed through strategic and financial planning, as well as being monitored by management through regular measurements. However, management will continue to implement its strategic plan, expanding geographic locations and product lines, as appropriate, as well as emphasizing internal growth and the expansion of the investment services area to provide greater future opportunities. Effective management of expenses while expanding business lines and experiencing growth in traditional service offerings is a focus of the Company's management. During 1999, salaries and employee benefits increased $1.3 million, or 39.6%, primarily due to additional personnel employed to deliver investment services and staff branch locations. Non-interest expense in both 1999 and 1998 included expenses related to the Company's Year 2000 efforts. Occupancy expense increased $468,000, or 56.4% in 1999 compared to 1998 as a result of a full year of expenses related to the Company's Brentwood Office and the establishment of the Hendersonville Office in April, 1999 as well as an increase in the leased space at the Company's Main Office in the L & C Tower. Other operating expenses increased $976,000 during the 1999 compared to 1998. Included in these increases was an increase of $192,000 in advertising, $182,000 in NSF and other losses resulting from fraudulent deposit activity, $121,000 in expense related to new loan products, $86,000 in telephone and network access expenses, $66,000 in audit, tax and accounting expense related primarily to Year 2000 and the acquisition of BON Leasing and $59,000 in security and protection expense. Non-interest expense, other than salaries and employee benefits, increased $1.4 million, or 53.2%, during 1999 compared to 1998, while assets grew $69.9 million. -113- 12 During the second quarter of 1999, the Company opened its Hendersonville location and in September, 1999 the Company expanded its leased facilities in the L & C Tower to further accommodate growth. Other planned expenses relate to the expansion of the Company's delivery systems and service locations and include additional mobile branch service employees and equipment, an investment in Internet banking systems for commercial customers and Internet cash management as well as consulting and legal expenses related to expansion of additional lines of business. Other than these planned expenses, management anticipates only minimal growth in most non-expense categories during 2000. During 1999, costs related to Year 2000 were approximately $120,000 and it is expected that there will be only minimal expense related to this project during Year 2000. It should be noted that economic conditions and other factors in the market could further impact non-interest expense in future periods. INCOME TAXES During the 1999, the Company recorded income tax expense of $2.1 million compared to $1.6 million during 1998. The effective tax rate was approximately 38% for both 1999 and 1998. The Company continues to explore strategies which would lower the effective tax rate while being consistent with its profit goals. EARNING ASSETS Average earning assets increased $56.4 million, or 28.2% in 1999 from 1998. This increase was comprised of a $42.4 million increase in loans, $9.3 million increase in investments and a $4.7 million increase in federal funds sold. These changes reflected both the growth in loans and the subsequent change in the mix of average earning assets which occurred during 1999 when compared to 1998. During 1999, the mix of average assets reflected loans at 68.6%, investment securities at 26.7%, and federal funds sold at 4.7%. This compares with the mix in 1998 which reflected loans at 66.8%, investments at 29.5% and federal funds sold at 3.7%. The shift in mix of earning assets during 1999 from investments to higher-yielding loans contributed to higher net interest income as the percentage of loans to total earning assets increased. The positive impact of this shift was partially offset by an increase in federal funds sold which yield a lower rate than investments. The increase in federal funds sold during 1999 resulted primarily from the implementation of the Company's Year 2000 liquidity plan. The mix of earning assets is monitored on a continuous basis with adjustments made in other areas based on the availability of quality loans. An analysis of the 31.7% increase in average total loans outstanding in 1999 compared to 1998 reflects a 24.7% increase in average real estate mortgage and real estate construction loans, a 39.7% increase in commercial loans, a 4.4% increase in consumer loans and the addition of $4.0 million in BON Leasing. The loan portfolio table below shows the classification of loans by major categories at December 31, 1999 and 1998. Real estate mortgage and construction loans are primarily commercial as opposed to one to four family residential. LOAN PORTFOLIO
December 31 Change from Prior Year (Dollars In Thousands) 1999 %Total 1998 %Total Amount % - --------------------------------------------------------------------------------------------------------------------- LOAN CATEGORIES Commercial $ 70,166 34.1% $ 51,970 34.0% $ 18,196 35.0% Real Estate/ Mortgage Loans 102,476 49.9 79,455 52.1 23,021 29.0 Real Estate/ Construction Loans 19,688 9.6 14,667 9.6 5,021 34.2 Consumer 5,870 2.9 6,583 4.3 (713) Lease financing 7,311 3.5 -- -- 7,311 N/A ---------------------------------------------------------------------------------------- Total Loans $205,511 100.0% $152,675 100.0% $ 52,836 34.6% ========================================================================================
-114- 13 The loan portfolio mix continues to reflect the Company's efforts to service its target market of small and mid-sized businesses in its community; however, with the addition of branch locations and BON Leasing, consumer loans and leases have been increasing as well. The condition of the economy and competitive environment of the Company's market, as well as management focus on asset quality, impact the Company's ability to increase loans. Both economic conditions and loan growth remained strong during 1999; however, the market continued to be very competitive as its supply of available credit often outpaced quality loan demand. At December 31, 1999, both loan demand and the local economy remained relatively strong. The Company has not invested in loans, which would be considered highly leveraged transactions ("HLT") as defined by the Federal Reserve Board and other regulatory agencies. Loans made by companies for recapitalization or acquisition (including acquisitions by management or employees) which result in a material change in the financial structure to highly leveraged condition are considered HLT loans. The Company has no foreign loans. The Company's securities are held as available for sale and provide for liquidity needs while contributing to profitability. During 1999, the Company discontinued a leveraging strategy which was begun in 1996; however, in late 1999, the Board of Directors approved an additional leveraging strategy which had not been implemented at year end. Leveraging strategies utilized by the Company are comprised of Federal Home Loan Bank secured borrowings used to fund matched investments of U. S. Government and Municipal securities. Such strategies require careful monitoring and measurement of the interest rate risk, but have the potential for providing significant contributions to net interest income. See the "Liquidity and Asset/Liability Management" section. The composition of the securities portfolio reflects an investment strategy of maximizing portfolio yields commensurate with risk and liquidity considerations. The primary objective of the Company's investment strategy is to maintain an appropriate level of liquidity and to provide a tool to assist in controlling the Company's interest rate position while, at the same time, producing adequate levels of interest income. Securities held as available for sale are carried on the Company's balance sheet at estimated fair value. As a result, the Company recognized a decrease in equity of $987,000 for unrealized losses on securities held as available for sale, net of tax, at December 31, 1999, which compares with an increase of $340,000 for unrealized gains on these securities at year end 1998. During 1999, gross securities sales were $8,203,000 and pay-downs, including pre-payments, were $52,153,000, representing 12.0% and 76.2%, respectively, of the average total investment portfolio for the year. Net losses associated with the sale of securities available for sale during 1999 were $5,000 compared with net gains of $52,000 during 1998. Total average investments increased $9.3 million, or 15.7%, during 1999 compared to 1998, while total securities at year end 1999 were $74.9 million compared to $71.7 million at year end 1998. The average yield on investment securities was 6.39% in 1999 and 6.48% in 1998. The following table contains the carrying amount of the securities portfolio at the end of each of the last two years. SECURITIES AVAILABLE FOR SALE
December 31 (In Thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government agencies $36,514 $35,900 Securities of states and political subdivisions 2,200 1,309 Collateralized mortgage obligations 33,307 31,721 Equity securities 2,856 2,732 - ----------------------------------------------------------------------------------------------------------------------- Total $74,877 $71,662 =======================================================================================================================
-115- 14 The maturities and average weighted yield of the Company's investment portfolio at the end of 1999 are presented in the following table using primarily the estimated expected life. The average stated maturity of the collateralized mortgage obligations was 10.4 years and the estimated life was 3.2 years at year end 1999. All securities were held as available for sale. DEBT SECURITIES AVAILABLE FOR SALE MATURITY SCHEDULE
December 31, 1999 - ------------------------------------------------------------------------------------------------------ Within After 1 But After 5 But 1 Year Within 5 Years Within 10 Years (Dollars In Thousands) Amount Yield Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of U.S. Government agencies $4,866 7.0% $23,350 6.8% $ 8,298 7.0% Securities of states and political subdivisions -- -- 366 5.5 1,834 5.3 - ------------------------------------------------------------------------------------------------------ Total $4,866 7.0% $23,716 6.8% $10,132 6.7% ======================================================================================================
The previous table excludes collateralized mortgage obligations at an estimated fair value of $33.3 million and investments in equity securities which have no stated maturity. Maturities of collateralized mortgage obligations can be expected to differ from scheduled maturities due to the pre-payment or early call privileges of the issuer. Average federal funds sold increased from $7.5 million in 1998 to $12.2 million in 1999 as the Company implemented its Year 2000 liquidity plan. Federal funds sold represent a short-term investment used primarily for liquidity purposes in the Company's asset liability management strategy. DEPOSITS During 1999, the Company's volume and mix of liabilities shifted as average shareholders' equity increased $21.9 million, or 80.1%, and average other borrowings increased $5.8 million, or 45.3%. The portion of average liabilities and shareholders' equity represented by deposits, the primary source of funding for the Company, was 74.0% in 1999, a decrease from 79.9% during 1998. This decrease resulted from additional shareholders' equity. Average deposits increased $31.8 million, or 19.0%, in 1999 compared to 1998. At December 31, 1999, total deposits were $229.1 million, an increase of $66.6 million, or 41.0%, from the $162.6 million reported at December 31, 1998. Growth was reflected in all deposit categories at year end 1999 compared to December 31, 1998. At December 31, 1999, compared to the same period in 1998, non-interest-bearing demand deposits increased $.5 million or 2.8%, NOW accounts increased $2.7 million, or 19.8%, money market accounts increased $20.6 million, or 28.9%, time certificates less than $100,000 increased $26.6 million, or 95.9%, and time certificates $100,000 or greater increased $16.2 million, or 50.3%. The shift in the mix of deposits reflects the Company's branch expansion as consumer NOW accounts, money market accounts and time certificates increased during 1999. This shift also reflected the successful results of an advertising campaign in the summer of 1999 promoting time certificates of deposit. The Company has opened a new branch location in each of the last three years, which together with the expansion of mobile branching services and Internet banking has provided additional opportunities for the expansion of both commercial and consumer banking relationships. The average rate paid on all deposit categories declined during 1999 compared to 1998; however, rates increased significantly during the last six months of 1999 compared to the first six months of 1999. -116- 15 The deposit mix at December 31, 1999 reflects the changes that occurred during the year as well as temporary year end fluctuations with non-interest-bearing deposits at 8.1%, NOW accounts at 7.0%, money market accounts at 40.1%, time certificates less than $100,000 at 23.7% and time deposits $100,000 or greater at 21.1%. This compares to a deposit mix at year end 1998 which reflected non-interest-bearing accounts at 11.1%, NOW at 8.2%, money market accounts at 43.8%, time deposits less than $100,000 at 17.1% and time deposits $100,000 or greater at 19.8%. The shift in the mix of the Company's deposit base reflects its branch expansions and the certificate of deposit campaigns which were conducted during 1999, resulting in additional consumer deposits in NOW accounts and certificates of deposit as well as the expansion of the Company's commercial deposit base. Maturities of time deposits of $100,000 or more issued by the Company at December 31, 1999 are summarized in the following table. MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
(In Thousands) ------------------------------------------------------------------------------- Three months or less $11,268 Over three through six months 13,868 Over six through twelve months 17,003 Over twelve months 6,228 ------------------------------------------------------------------------------- Total $48,367 -------------------------------------------------------------------------------
At year end 1999, the Company had total borrowings of $29.5 million comprised of $24.5 million in Federal Home Loan Bank borrowings and $5.0 million in federal funds purchased. This compares with borrowings of $22.5 million at year end 1998, which were comprised of $14.5 million in Federal Home Loan Bank borrowings and $8.0 million in federal funds purchased. The average volume of these borrowings during 1999 was $18.5 million compared to $12.7 million during 1998 with an average rate paid on borrowed funds during 1999 of 5.04% compared to 5.54% in 1998. The average rate paid on average total interest-bearing liabilities was 4.57% in 1999 compared with 4.91% in 1998. The ratio of average loans, net of unearned income, to average total deposits was 88.4% in 1999, compared with 79.9% in 1998. This higher average loan to average deposit ratio reflected the increase average loans, which occurred during 1999. A significant increase in average shareholders' equity during 1999 compared to 1998 made it appropriate for the Company to have a higher loan to average deposit ratio. The loan to deposit ratio at December 31, 1999 was 89.7% compared to 93.9% at year end 1998. Most financial institutions manage the loan to deposit ratio considering also the capital to assets ratio. The Company's management has considered its capital ratio in conjunction with maintaining a higher average loan to deposit ratio. LIQUIDITY AND ASSET/LIABILITY MANAGEMENT The Company's asset liability management process actively involves the Board of Directors and members of senior management. The asset liability committee of Board of Directors meets at least quarterly to review strategies and the volume and mix of assets as well as funding sources. Decisions relative to different types of securities are based upon the assessment of various economic and financial factors, including, but not limited to interest rate risk, liquidity and capital adequacy. Interest rate sensitivity is a function of the repricing characteristics of the Company's portfolio of earning assets and interest-bearing liabilities. These repricing characteristics are the time frames within which interest-bearing assets and liabilities are subject to a change in interest rate either by replacement, repricing or maturity of the instrument. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of change in market interest rates. Effective interest rate management seeks to ensure that both assets and liabilities respond to changes in interest rate movements similarly to minimize the effect on net interest income by these fluctuations. Management utilizes computer interest rate simulation models and analysis to determine the Company's interest rate sensitivity. Management also evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the appropriate mix and repricing characteristics of assets and liabilities. -117- 16 In addition to ongoing monitoring of interest rate sensitivity, the Company may, from time to time, enter into various interest rate contracts to augment the management of the Company's interest sensitivity. The Company also utilizes certain leveraging strategies within risk tolerance guidelines established by its Board of Directors for the purpose of increasing net income. Such strategies involve the utilization of borrowings to fund investment securities with similar maturities or repricing characteristics which result in an acceptable interest rate spread. Although the Company discontinued a leveraging strategy during the early part of 1999, the Board of Directors approved an additional strategy in the fall of 1999 which has yet to be implemented. Leveraging strategies are carefully monitored by the Company's Board of Directors who have established parameters for matching investment purchases with Federal Home Loan Bank borrowings. During periods when these strategies are implemented, a matched investment income report is reviewed monthly by the Company's Board of Directors in an effort to manage risk. Additionally, the Asset Liability Committee of the Company's Board of Directors has established a maximum level of borrowing/investment at present of $10,000,000. While leveraging strategies contribute to increases in net interest income, they also have the effect of lowering the net interest margin and increasing the Company's exposure to interest rate risk. Managing and regularly monitoring interest rate risk associated with leveraging strategies are the responsibility of both management and the Company's Board of Directors. At December 31, 1999, the Company had borrowings totaling $29.5 million compared to $22.5 million at December 31, 1998. None of the borrowings reflected at December 31, 1999, were used to fund investment securities. The following interest rate gap table reflects the Company's rate sensitivity position at December 31, 1999. The carrying amount of interest rate sensitive assets and liabilities is presented in the periods in which they next reprice to market rate or mature and is summed to show the interest rate sensitivity gap. To reflect anticipated pre-payments, certain investments are included in the table based on estimated rather than contractual maturity dates.
Expected Repricing or Maturity Date -------------------------------------------------------------------------- Within One Two After One to Two to Five Five Year Years Years Years Total (Dollars In Thousands) 1999 - ------------------------------------------------------------------------------------------------------------------------- Assets Securities $ 6,603 $ 12,953 $38,756 $ 16,565 $ 74,877 Average rate 7.03% 6.78% 6.67% 6.67% 6.72% Net loans $ 144,964 $ 9,457 $37,594 $ 13,496 $205,511 Average rate 8.92% 8.88% 8.62% 8.46% 8.83% Federal funds sold and cash $ 14,397 $ -- $ -- $ -- $ 14,397 Average rate 5.13% -- -- -- 5.13% - ------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 165,964 $ 22,410 $76,350 $ 30,061 $294,785 Liabilities Deposits $ 195,827 $ 8,242 $ 6,590 $ 2 $210,661 Average rate 4.64% 5.68% 5.99% 4.95% 4.73% Federal Home Loan Bank and other debt $ 24,500 $ 5,000 $ -- $ -- $ 29,500 Average rate 6.01% 4.45% -- -- 5.75% - ------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 220,327 $ 13,242 $ 6,590 $ 2 $240,161 - ------------------------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap $ (54,363) $ 9,168 $69,760 $ 30,059 $ 54,624 ========================================================================================================================= Cumulative interest rate sensitivity gap $ (54,363) $(45,195) $24,565 $ 54,624 =========================================================================================================================
-118- 17 Liquidity is the ability of the financial institution to meet the needs of its customers and creditors. High levels of liquidity reduce earnings as liquidity is normally obtained at a net interest cost as a result of generally lower yields on short-term, interest-earning assets and the higher interest expense usually associated with the extension of deposit maturities. During the last six months of 1999, the Company maintained a significantly higher liquidity position than would normally be the case as a part of its Year 2000 liquidity plan. The Company's principal sources of asset liquidity are marketable securities available for sale and federal funds sold as well as the maturity of securities. The estimated average maturity of securities was 8.3 years at December 31, 1999 compared to 7.0 years at December 31, 1998. Securities available for sale were $74.9 million at December 31, 1999, compared to $71.7 million at December 31, 1998. The Company had net federal funds sold at December 31, 1999 of $9.3 million compared to federal funds purchased of $8.0 million at December 31, 1998. Core deposits, a relatively stable funding base, represented 78.9% of total deposits at December 31, 1999, and 80.2% total deposits at year end 1998. Core deposits are defined as total deposits, less time certificates of deposit $100,000 or greater. Liquidity is strengthened and reinforced by maintaining a relatively stable funding base which is achieved by providing relationship banking, extending contractual maturities of liabilities and reducing reliance on volatile short-term purchase funds. Maintaining acceptable levels of liquidity has been an ongoing consideration of the Company's Asset Liability Committee and is regularly monitored and adjusted, as appropriate. It is recognized that maintaining an acceptable level of liquidity becomes even more important during periods of economic uncertainty and volatile financial markets. Due to the uncertainty of the Year 2000 Event, the Company maintained additional liquidity during the last quarter of 1999. Due to the commercial nature of the Company's target market, liabilities and loans are evaluated relative to industry concentration and volatility. At December 31, 1999, approximately 17.1% of deposits were related to the construction industry, 5.6% were related to the insurance industry, while 3.5% were related to local governments and public utilities and 3.1% to real estate development/investment industries. These areas are the Company's largest deposit concentrations and represent significant industries within the Company's market. These deposits are primarily reflected in the Company's demand deposits and interest-bearing money market accounts and are deposits of relationship commercial customers which, by their nature, are concentrated in a fewer number of customer relationships than would be the case for consumer deposit funding sources. MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages 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 interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Company's exposure to changes in interest rates between assets and liabilities is shown in the Company's gap table under the "Liquidity and Asset/Liability Management" caption. At least quarterly, the Asset/Liability Committee (ALCO) of the Board of Directors reviews interest rate risk considering results compared to policy, current rate and economic forecasts, 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 those 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. -119- 18 Management recommends the appropriate levels of interest rate risk to be assumed within limits approved by the ALCO and the Board of Directors as to the maximum fluctuations acceptable in the market value of equity and in earnings assuming sudden interest rate movements (rising or falling) up to 200 basis points. The Company's policy establishes the maximum change in annual pre-tax interest income with a 200 basis point change in rates to 15% while establishing the maximum change allowable in pre-tax market value of capital 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 asset/liability structure to obtain the maximum yield-cost spread. The Company relies primarily on its asset/liability structure to control interest rate risk. Based on December 31, 1999 financial data, a 200 basis point change in rates would produce net interest income variations of a .8% increase assuming falling rates and a 2.5% decrease assuming rising rates. Additionally, the 200 basis point rate shock would produce changes in the market value of equity of a decrease of 9.4% assuming rising rates and a 9.1% increase assuming falling rates. The Company continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management believes that hedging instruments currently available are not cost effective to the Company, and therefore, has focused its efforts on increasing the Company's yield-cost spread through growth opportunities. The following table shows the Company's financial instruments that are sensitive to change in interest rates, categorized by expected maturity and the instrument's fair value at December 31, 1999. Market risk sensitive instruments are generally defined as derivatives and other financial instruments both on balance sheet and off balance sheet.
Average Expected Maturity/Principal Repayment Interest ------------------------------------- Rate There- Total Fair (Dollars In Millions) 2000 2001 2002 2003 2004 After Balance Value Interest-Sensitive Assets: Fed funds sold and cash 5.13% $ 14.4 $ -- $ -- $ -- $ -- $ -- $ 14.4 $ 14.4 Loans (1) 8.83 145.0 9.5 10.4 7.4 19.7 13.5 205.5 204.2 Investment Securities 6.48 6.6 13.0 11.6 23.6 3.5 16.6 74.9 74.9 Interest-Sensitive Liabilities: Deposits 4.73 195.8 8.2 5.7 .6 .4 -- 210.7 211.8 FHLB and other debt 5.75 24.5 5.0 -- -- -- -- 29.5 29.5 Interest-Sensitive Off balance sheet Items: (2) Commitments to extend credit 8.69 66.3 * Unused lines of credit 12.13 3.5 * - -------------------------------------------------------------------------------------------------------------------------
(1) Loans are not reduced for the allowance for loan losses. (2) Total balance equals the notional amount of off-balance sheet items and interest rates are the weighted average interest rates of the underlying loans or commitments. *The estimated fair value of these items was not significant. -120- 19 Expected maturities are contractual maturities adjusted for prepayments of principal. The Company uses certain assumptions to estimate fair values and expected maturities. For assets, expected maturities are based upon contractual maturities, projected repayments, and estimated prepayments of principal. The actual maturities of these instruments could vary substantially if future prepayments differ from the Company's historical experience. NONPERFORMING ASSETS AND RISK ELEMENTS Nonperforming assets, which include nonaccrual loans, restructured loans, and other real estate owned, were $291,000 at December 31, 1999, compared with $460,000 at December 31, 1998. The following table represents the composition of nonperforming assets at December 31, 1999 and 1998. NONPERFORMING ASSETS
December 31 (Dollars In Thousands) 1999 1998 NONPERFORMING ASSETS: Nonaccrual loans $291 $408 Restructured loans -- -- Other real estate owned -- 52 ------------------------------------------------------------------------------------ Total $291 $460 ------------------------------------------------------------------------------------ Nonperforming assets as a percent of total loans plus other real estate owned .14% .30% ------------------------------------------------------------------------------------
There were no loans 90 days or more past due at December 31, 1999 and 1998 that were not included in the nonaccrual category. During 1999, $928,000 of loans were transferred from earning status to nonaccrual status and there were no advances made on nonaccrual loans. This compares to $925,000 of loans transferred from earning status to nonaccrual status in 1998. In 1999 and 1998 there were $1,045,000 and $1,611,000, respectively, of loans transferred from nonaccrual status primarily due to the repayment of principal. In 1999, there were no loans removed from nonaccrual status and placed in other real estate owned compared to one loan removed from nonaccrual status and placed in other real estate owned during 1998. The Company had no other real estate owned at December 31, 1999 compared to $52,000 in other real estate owned at December 31, 1998. During 1999, loans totaling $772,000 were charged-off with recoveries reported of $990,000 compared to charge-offs of $84,000 and recoveries of $474,000 in 1998. These charge-offs and recoveries resulted in net recoveries during 1999 of $218,000 compared to net recoveries in 1998 of $390,000. The Company evaluates the credit risk of each customer on an individual and ongoing basis and, where deemed appropriate, obtains collateral. Collateral values are monitored to ensure that they are maintained at appropriate levels. The largest component of the Company's credit risk relates to the loan portfolio. During 1999, the Company continued its emphasis on underwriting standards and loan review procedures. As discussed in the section, "Provision for Loan Losses", asset quality and loan charge-offs and recovery experience impact the level of the allowance for loan losses maintained. At December 31, 1999 and 1998, other potential problem loans totaled $349,000 and $256,000, respectively. Other potential problem loans consist of loans that are currently not considered nonperforming, but where information about possible credit problems has caused the Company to have 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 nonperforming assets. The composition of nonperforming assets at December 31, 1999 was 100% in nonaccrual loans which compares with 11.3% in other real estate owned and 88.7% in nonaccrual loans at December 31, 1998. The largest nonaccrual loan at December 31, 1999 was $218,000. -121- 20 At December 31, 1999, the Company's allowance for loan losses was $4.1 million, or 2.0%, of total loans compared with $3.6 million, or 2.4%, at December 31, 1998. The level of the allowance for loan losses is monitored regularly by management and the Company's Board of Directors. YEAR 2000 (Y2K) During 1999, management and the Board of Directors continued its emphasis on Year 2000, carefully monitoring all systems as well as investments and large customer relationships to ensure the Company was not exposed to risks that could negatively impact the Company as a result of the century date change. The Company's diligence in recognizing and addressing technological and financial risk to both the Company and its customers in relation to the approach of a new millennium resulted in a successful year end with no Y2K reportable events. During the first quarter of 2000, the Company is continuing the implementation of its Year 2000 plan by conducting post-Y2K event activities which include further assessments of Y2K impact on customers and monitoring additional dates in internal systems. The costs related to Year 2000 during 1999 were approximately $120,000 and there is little financial impact expected during Year 2000. Throughout 1999, the Company continued its Y2K customer awareness and communications program. CAPITAL STRENGTH The Company experienced a significant change in its capital structure in 1998 as 2.0 million warrants were exercised resulting in a $25.0 million increase in capital. There are no remaining warrants outstanding. This additional capital was employed during 1999 in investment securities and to implement a stock repurchase plan authorized by the Board of Directors as well as in internal growth and investments in other longer-term business strategies. SHAREHOLDERS' EQUITY Shareholders' equity (excluding other comprehensive income) at December 31, 1999, was $48.3 million, or 15.7% of total assets, which compares with $50.8 million, or 21.3% of total assets at December 31, 1998. This calculation, when considered after the effect of the Company's adoption of Statement of Financial Accounting Standards (SFAS) No. 115, was $47.3 million, or 15.4%, at December 31, 1999, which compares with $51.2 million, or 21.5% of total assets at December 31, 1998. The decrease in total equity during 1999 primarily resulted from the Company having repurchased 304,500 shares of its stock under a Stock Repurchase Plan authorized by the Board of Directors in March, 1999. The decline in capital as a percentage of total assets resulted from this re-purchase of stock, dividends paid and a growth of 29.4% in total assets during 1999. These factors were partially offset by increased earnings. Certain capital statistics are shown in the following chart: CAPITAL STATISTICS
December 31 (Dollars In Thousands) 1999 1998 Total assets $308,106 $238,185 - ------------------------------------------------------------------------------------------ Total shareholders' equity 47,315 51,171 - ------------------------------------------------------------------------------------------ Total shareholders' equity to total assets 15.4% 21.5% - ------------------------------------------------------------------------------------------
The additional capital generated in 1998 provided opportunities for the Company during 1999 and will continue to do so in future years. However, the increased number of shares outstanding in 1999 reduced basic earnings per share on a comparative basis and will continue to do so until the Company has the opportunity to fully deploy the additional capital effectively through continued expansion of its basic businesses and investments in other appropriate longer-term business opportunities. -122- 21 The Company's capital ratios continue to exceed all regulatory requirements and currently its ratios indicate 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 in 1999 of $1,881,000 which compares with dividend payments in 1998 of $569,000. Total dividend payments made in 1999 were $.46 per share compared to total dividend payments in 1998 of $.24 per share. In January, the Company announced an increase of $.04 per share in the quarterly dividend payment to $.17 per share, to be paid the first quarter of 2000. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Statement 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 133" was issued deferring the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The pronouncement did not impact the presentation of the Company's consolidated financial statements or disclosure. MANAGEMENT'S DISCUSSION AND ANALYSIS 1998 VS. 1997 The narrative which follows is management's discussion and analysis of 1998 results of operations of the Company compared to 1997. Net income for 1998 was $2.6 million, or basic earnings per share of $1.08 in 1998 compared to $2.1 million, or $.93 basic earnings per share in 1997. Diluted earnings per share were $.78 in 1998 compared to $.89 in 1997. The decrease in diluted earnings per share resulted from warrants outstanding during 1998, all of which were either exercised or expired at December 31, 1998. The Company experienced a significant change in its capital structure in 1998 as 2.0 million warrants, each representing the right to acquire a common share at a price of $12.50, were exercised. In 1998, proceeds generated from the exercise of warrants totaled $25.0 million and the Company ended the year with 4.2 million common shares outstanding. The increased number of shares outstanding resulting from the exercise of warrants will continue to reduce basic earnings per share on comparative basis until the Company has the opportunity to more effectively employ the additional capital to enhance profitability. Return on average shareholders' equity (exclusive of other comprehensive income) was 9.56% in 1998 compared to 9.05% in 1997, while the return on average assets for 1998 and 1997 were 1.23% and 1.08%, respectively. During 1998, the Company continued its focus on asset quality while expanding its service locations and product lines in accordance with its long-term strategic plan. The maintenance of an adequate level for the allowance for loan losses was reflected by a provision for loan losses of $128,000 being reported in 1998, a period in which net recoveries were $390,000. This provision expense was deemed to be prudent in light of the Company's loan growth despite a decline of $767,000 in the level of nonperforming assets at year end 1998 when compared to the same period in 1997. The Company reported $100,000 in 1997 for provision for loan losses a period in which net recoveries were $150,000. -123- 22 In January 1998, the Company's Board of Directors adopted a Shareholder's Rights Plan which authorizes the distribution of a dividend of one common share purchase right for each outstanding share of CFGI's common stock. The rights will be exercised only if a person or group acquires 15% or more of CFGI's common stock or announces a tender offer, the consummation of which will result in ownership by a person or group of 15% or more of the common stock. The rights are designed to ensure that all of CFGI's shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers, squeeze-outs, open market accumulations, and other abusive tactics to gain control of the Company without paying all shareholders an appropriate control premium. The Company's assets were $238.2 million at December 31, 1998, compared to $204.9 million at December 31, 1997, representing an increase of 16.3%. Shareholders' equity increased $27.1 million, an increase of 112.8% from the $24.1 million at December 31, 1997. This increase included $25.0 million in equity capital resulting from the exercise of warrants during 1998. Loans, net of unearned income, increased $29.9 million, or 24.4%, at year end 1998 compared to the same period in 1997. At December 31, 1998, total deposits were $162.6 million, a decline of .9% from the $164.1 million reflected at December 31, 1997. The slight decline in deposits at year end 1998 compared to 1997 was the result of a temporary decline in money market accounts combined with a decline in time certificates of deposit that resulted from a strategic decision to utilize additional shareholders' equity rather than higher rate certificates of deposit to fund earning assets. The ratio of average loans, net of unearned income, to average total deposits was 79.9% in 1998, compared to 75.2% in 1997. This higher loan to deposit ratio reflected the increase in average loans, which occurred in 1998. The loan to deposit ratio at December 31, 1998 was 93.9% compared to 74.8% year end 1997. The Company's management considered its capital ratio in its determination to maintain a higher loan to deposit ratio. NET INTEREST INCOME Net interest income increased 17.1% to $8.6 million in 1998 from $7.3 million in 1997. Total interest income increased $1.3 million, or 8.7% in 1998 compared to 1997, while total interest expense increased $.1 million, or 1.0% compared to 1997. The increase in total interest income is attributable primarily to an 8.5% increase in average earning assets and a shift in the mix of these assets as the growth was comprised primarily of an $18.8 million increase in average loans. This increase in loans was partially offset by a decline of $2.5 million in the volume of average investments and $.6 million in other earning asset categories. Additionally, the rate earned on average earning assets in 1998 increased 2 basis points compared to 1997, reflecting a shift in the mix of these assets as loans, the Company's highest yielding asset, reflected an increase while other categories declined. Average interest-bearing liabilities increased $11.9 million, or 7.9%, in 1998 compared to 1997. This increase in average interest-bearing liabilities was comprised of a $10.8 million increase in average money market accounts, $4.3 million increase in average NOW accounts and a $.9 million increase in CD's $100,000 or greater, while CD's less that $100,000 declined $3.6 million and Federal Home Loan Bank and other borrowings declined $.4 million. The average rate paid on interest-bearing liabilities decreased 34 basis points in 1998 compared to 1997. The decline in rates paid was reflected in all categories of interest-bearing liabilities. The Company's net interest margin increased by 32 basis points to 4.28% in 1998, primarily as a result of the shift in the mix of earning assets from investments to higher yielding loans combined with an overall decrease in the deposit rates paid during 1998. A higher average loan to average deposit ratio also contributed to the improvement in the net interest margin in 1998 compared to 1997. The interest rate spread increased to 3.38% in 1998 from 3.02% in 1997. The shift in the mix of earning assets together with the increased level of earning assets and the decline in the average rate paid on interest-bearing liabilities resulted in a higher level of net interest income. The positive impact of the increased level of earning assets particularly in the area of loans was somewhat offset by growth in interest-bearing liabilities. -124- 23 PROVISION FOR LOAN LOSSES In 1998, the Company recorded $128,000 in expense for provision for loan losses, compared with $100,000 in 1997. This provision for loan losses was deemed appropriate due to the growth in the loan portfolio despite net recoveries for 1998 and decline in nonperforming assets. The allowance for loan losses was 2.4% of loans at December 31, 1998, compared to 2.5% of loans at the same date in 1997. This decline in percentage resulted from a 24.4% increase in the loan portfolio. Net recoveries of $390,000 in 1998 resulted from charge-offs of $84,000 and recoveries of $474,000 reflecting continued collection efforts on loans charged-off in prior periods. In 1997, net recoveries of $150,000 were the result of charge-offs of $169,000 and recoveries of $319,000. The level of the allowance and the amount of the provision are determined on a quarter by quarter basis and, given the inherent uncertainties involved in the estimation process, no assurance can be given as to the amount of the provision or the level of the allowance at any future date. NON-INTEREST INCOME Total non-interest income was $1.8 million in 1998, reflecting an increase of 27.0% from $1.4 million reported in 1997. Non-interest income, less non-recurring income (gains/losses on sale of securities and other real estate), increased $311,000, or 22.0%, from 1997. Investment center income increased $555,000 as the Company expanded its arrangement with LM Financial Partners, Inc. to offer certain investment services through the addition of two investment advisors at the Green Hills Office in May, 1998. Service fee income increased $128,000 due primarily to an increased number of transaction accounts. Additionally, other income increased $49,000 in 1998 compared to 1997. These increases were partially offset by decreases of $313,000 in trust income and $108,000 in income from previously foreclosed assets. Both the increases in investment center income and the decline in trust income resulted from a decision made in late 1997 to restructure how investment services were offered by discontinuing most traditional trust services and redirecting the Company's efforts into an expanded investment services department provided in conjunction with LM Financial Partners, Inc. This decision impacted both non-interest income and non-interest expense. The Company reported a net gain on sale of securities available for sale of $52,000 in 1998 compared with $2,000 in 1997. Gains on sale of other real estate owned were $29,000 in 1998 and $6,000 in 1997. NON-INTEREST EXPENSE A new branch location established in the Maryland Farms area of Brentwood, Tennessee, expansion of investment services provided in conjunction with LM Financial Partners, Inc., expansion of Bank-on-Call mobile branching, upgrades of the Company's computer systems and expenses related to the Company's Year 2000 project contributed to increases in non-interest expenses in 1998. Total non-interest expense increased 15.9% from $5.2 million in 1997 to $6.1 million in 1998. Non-interest expense represented 2.9% of average total assets in 1998 compared to 2.7% in 1997. During 1998, salaries and employee benefits increased $684,000, or 25.6%, primarily due to the additional personnel employed to deliver investment services, staffing of the Company's Brentwood location, expansion of the Company's mobile branch service and the addition of personnel in the technology and operations area, some of whom were actively involved in the Year 2000 project. Occupancy expense increased $119,000, or 16.7%, in 1998 compared to 1997 as a result of the establishment of the Company's Brentwood Office in September, 1998. Other operating expenses increased $117,000 during 1998 compared to 1997. These increases in non-interest expense were partially offset by decreases in other non-interest expense categories. Advertising and marketing expense declined $47,000, or 24.6%, in 1998 compared to 1997 as a result of reduced utilization of media expense related to the opening of the Brentwood Office compared to the media expense incurred with the opening of the Green Hills Office in 1997. Audit tax and accounting expense and data processing expenses declined $7,000 and $18,000, respectively, in 1998 compared to 1997 primarily as a result of the Company's decision to discontinue its trust department. Non-interest expense, other than salaries and benefits, increased $151,000, or 5.9% during 1998 compared to 1997, while assets grew $33.3 million. During the second quarter of 1998, the Company -125- 24 purchased property in Hendersonville, Tennessee and began construction of the new branch office scheduled to open in the spring of 1999. Other than planned expenses related to the expansion of locations and additional lines of business, only minimal growth in most non-interest expense categories is anticipated in 1999. During 1998, costs related to Year 2000 were approximately $115,000 and were projected to be approximately $135,000 during 1999. INCOME TAXES During 1998, the Company recorded provision for income taxes of $1.6 million compared to $1.3 million during 1997. During 1998, reported earnings were impacted by a franchise tax accrual of $63,000 resulting largely from additional capital generated by the exercise of the Company's warrants during the fourth quarter of 1998. The effective tax rate was approximately 38.0% for 1998 and 39.0% for 1997. CAPITAL STRENGTH The Company experienced a material change in its capital structure in 1998 as 2.0 million warrants, each representing the right to acquire a common share at a price of $12.50, were exercised resulting in the addition of $25.0 million in new equity capital. Since all warrants had an expiration date of December 31, 1998, there are no remaining warrants outstanding. Management and the Board of Directors have recognized the potential for additional capital and have reviewed both long-term and short-term strategies considering the appropriate deployment of additional capital. The majority of the additional capital was received during the last week of 1998; therefore, management implemented its short-term investment strategy and with the Board of Directors began evaluating appropriate longer-term business opportunities. SHAREHOLDERS' EQUITY Shareholders' equity (excluding other comprehensive income) at December 31, 1998, was $50.8 million, or 21.3% of total assets, which compares with $23.8 million, or 11.6% of total assets at December 31, 1997. The increase in total equity during 1998 primarily resulted from the proceeds ($25.0 million) from the issuance of common stock as warrants were exercised; however, 1998 earnings, net of dividends paid, as well as the slight increase ($46,000) in the unrealized gain on securities available for sale at year end 1998 compared with year end 1997 further contributed to the increase in total equity. The Company's capital ratios are significantly in excess of industry standards and Federal Deposit Insurance Corporation Improvement Act ("FDICIA") minimum ratios. -126- 25 CONSOLIDATED BALANCE SHEETS
December 31 (Dollars In Thousands) 1999 1998 ASSETS Cash and due from banks $ 11,483 $ 13,243 Federal funds sold 14,300 -- Securities: Available for sale (amortized cost of $76,467 and $71,113, respectively) 74,877 71,662 Loans (net of unearned income of $2,171 and $295, respectively): Commercial 70,166 51,970 Real estate - mortgage loans 102,476 79,455 Real estate - construction loans 19,688 14,667 Consumer 5,870 6,583 Lease financing 7,311 -- - ----------------------------------------------------------------------------------------- Loans, net of unearned income 205,511 152,675 Less allowance for loan losses (4,062) (3,646) - ----------------------------------------------------------------------------------------- Total net loans 201,449 149,029 - ----------------------------------------------------------------------------------------- Premises and equipment, net 3,529 2,726 Accrued interest and other assets 2,468 1,525 - ----------------------------------------------------------------------------------------- Total Assets $308,106 $238,185 - ----------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Non-interest-bearing demand deposits $18,480 $ 17,980 Interest-bearing deposits NOW accounts 16,019 13,368 Money market accounts 91,892 71,263 Time certificates less than $100,000 54,383 27,757 Time certificates of $100,000 and greater 48,367 32,185 - ----------------------------------------------------------------------------------------- Total Deposits 229,141 162,553 - ----------------------------------------------------------------------------------------- Federal Home Loan Bank borrowings 24,500 14,500 Federal funds purchased 5,000 8,000 Accounts payable and accrued liabilities 2,150 1,961 - ----------------------------------------------------------------------------------------- Total Liabilities 260,791 187,014 - ----------------------------------------------------------------------------------------- Commitments and contingencies (Notes F, I, J, K and M) SHAREHOLDERS' EQUITY: Common stock, $6 par value; authorized 50,000,000 shares; issued and outstanding 3,923,640 in 1999 and 4,216,531 in 1998 23,542 25,299 Additional paid-in capital 17,381 19,773 Retained earnings 7,379 5,759 Accumulated other comprehensive (loss) income, net of tax (987) 340 - ----------------------------------------------------------------------------------------- Total Shareholders' Equity 47,315 51,171 - ----------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $308,106 $238,185 - -----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. -127- 26 CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 (In Thousands, Except Per Share Data) 1999 1998 1997 INTEREST INCOME: Interest and fees on loans $ 15,995 $12,391 $10,724 Interest on federal funds sold 611 374 398 Interest on balances with banks 15 10 19 Interest on securities: U.S. Treasury securities -- 54 151 Other U.S. government agency obligations 4,101 3,557 3,825 States and political subdivisions - nontaxable 67 57 20 Other securities 186 148 123 - ----------------------------------------------------------------------------------------------------------------------------- Total interest income 20,975 16,591 15,260 - ----------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest-bearing demand deposits 4,196 3,830 3,458 Time deposits less than $100,000 2,031 1,809 2,061 Time deposits $100,000 and over 1,894 1,692 1,693 Federal funds purchased 156 29 26 Federal Home Loan Bank borrowings 776 675 718 - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense 9,053 8,035 7,956 - ----------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 11,922 8,556 7,304 Provision for loan losses 106 128 100 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 11,816 8,428 7,204 NON-INTEREST INCOME: Service fee income 879 549 421 Trust income 93 224 537 Investment Center income 1,345 662 107 Gain (loss) on sale of securities, net (5) 52 2 Income from foreclosed assets 3 -- 108 Gain on sale of other real estate owned 29 29 6 Other 331 289 240 - ----------------------------------------------------------------------------------------------------------------------------- Total non-interest income 2,675 1,805 1,421 - ----------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits 4,687 3,357 2,673 Occupancy expense 1,298 830 711 Audit, tax and accounting 262 196 203 Advertising expense 336 144 191 Data processing expense 175 187 205 Other operating expenses 2,087 1,357 1,253 - ----------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 8,845 6,071 5,236 - ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes 5,646 4,162 3,389 Income tax expense 2,145 1,581 1,331 - ----------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 3,501 $ 2,581 $ 2,058 - ----------------------------------------------------------------------------------------------------------------------------- Net income per share - ----------------------------------------------------------------------------------------------------------------------------- Basic $ .86 $ 1.08 $ .93 Diluted .85 .78 .89 Weighted average common shares outstanding - ----------------------------------------------------------------------------------------------------------------------------- Basic 4,068 2,394 2,205 Diluted 4,129 3,321 2,324 - -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. -128- 27 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated Other Additional Comprehensive Common Paid-In Retained (Loss) Income, Stock Capital Earnings Net Of Tax Total (Dollars In Thousands, Except Per Share Amounts) BALANCE, JANUARY 1, 1997 $ 13,215 $ 6,676 $ 2,130 $ 64 $ 22,085 Comprehensive Income: Net Income -- -- 2,058 -- Other comprehensive income -- -- -- 230 Total Comprehensive Income -- -- -- -- 2,288 Issuance of Common Stock (9,947 shares) 60 60 -- -- 120 Cash dividends - $.20 per share -- -- (441) -- (441) - ----------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1997 13,275 6,736 3,747 294 24,052 Comprehensive Income: Net Income -- -- 2,581 -- Other comprehensive income -- -- -- 46 Total Comprehensive Income -- -- -- -- 2,627 Issuance of common stock (2,004,111 shares) 12,024 13,037 -- -- 25,061 Cash dividends - $.24 per share -- -- (569) -- (569) - ----------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 25,299 19,773 5,759 340 51,171 Comprehensive Income: Net Income -- -- 3,501 -- Other comprehensive loss -- -- -- (1,327) Total Comprehensive Income -- -- -- -- 2,174 Issuance of Common Stock (11,829 shares) 70 85 -- -- 155 Repurchase of common stock (304,500 shares) (1,827) (2,477) -- -- (4,304) Cash dividends - $.46 per share -- -- (1,881) -- (1,881) - ----------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 $ 23,542 $ 17,381 $ 7,379 $ (987) $ 47,315 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. -129- 28 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 (In Thousands) 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $ 20,809 $ 16,487 $ 15,020 Fees received 2,675 1,805 1,419 Interest paid (8,469) (8,476) (7,422) Cash paid to suppliers and associates (10,869) (6,982) (6,488) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,146 2,834 2,529 - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities: Available for sale 8,203 3,102 2,479 Maturities of securities: Available for sale 52,153 33,599 19,404 Purchase of securities: Available for sale (65,648) (42,252) (41,235) Net cash paid for BON Leasing (1,250) -- -- Loans originated to customers, net (46,541) (29,484) (14,578) Capital expenditures (1,361) (2,093) (469) - --------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (54,444) (37,128) (34,399) - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand, NOW, and money market deposits 23,780 5,679 15,206 Net (decrease) increase in time certificates 42,808 (7,225) 15,623 Advance from Federal Home Loan Bank 10,000 5,000 5,000 Repayment of advance from Federal Home Loan Bank and other debt (4,720) (5,000) -- Proceeds from issuance of common stock 155 25,061 120 Repurchase of common stock (4,304) -- -- Dividends paid (1,881) (569) (441) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 65,838 22,946 35,508 - --------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents 15,540 (11,348) 3,638 Cash and cash equivalents at beginning of year 5,243 16,591 12,953 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 20,783 $ 5,243 $ 16,591 - ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. -130- 29 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31 (In Thousands) 1999 1998 1997 Reconciliation of net income to net cash provided by operating activities: Net income $ 3,501 $ 2,581 $ 2,058 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 695 404 399 Provision for loan losses 106 128 100 Provision for deferred income taxes (161) (15) 124 (Gain) loss on sale of securities 5 (52) (2) Loss on disposal of equipment -- 26 -- Gain on sale of other real estate owned (29) (29) (6) Stock dividend income (117) (112) (87) Changes in assets and liabilities: Increase (decrease) in accrued interest and other assets (1,064) 192 (508) Increase (decrease) in accounts payable and accrued liabilities 1,210 (289) 451 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 4,146 $ 2,834 $ 2,529 - -------------------------------------------------------------------------------------------------------------------- Supplemental disclosures: Change in unrealized gain (loss) on securities available for sale, net of taxes $ (1,327) $ 46 $ 230 Foreclosures of loans during the year -- 52 133 Cash paid for: Income taxes $ 2,186 $ 1,516 $ 1,211 Interest $ 8,468 $ 8,476 $ 7,422
See accompanying notes to consolidated financial statements. -131- 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description 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 100% of TBON-Mooreland Joint Venture, LLC and an 80% interest in Machinery Leasing Company of North America, Inc. (BON Leasing). The Bank is a state-chartered bank incorporated in 1989 under the laws of the state of Tennessee. On April 30, 1996, CFGI executed a plan of exchange with The Bank, whereby CFGI became the parent holding company of The Bank. The Bank primarily provides commercial banking services to small business customers located in the Metropolitan Nashville, Tennessee market. The Bank competes with numerous financial institutions within its market place. BON Leasing buys, sells and leases machinery and equipment. TBON-Mooreland Joint Venture underwrites title insurance on The Bank's loans. Consolidation and Basis of Presentation The consolidated financial statements include the accounts of CFGI and The Bank and its subsidiaries BON Leasing and TBON-Mooreland Joint Venture (collectively the Company) after elimination of material intercompany accounts and transactions. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to general practices within the banking industry. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Following is a summary of the more significant accounting policies of the Company. Cash and Cash Equivalents Cash and highly liquid investments with maturities of three months or less when purchased are considered to be cash and cash equivalents. Cash and cash equivalents consist primarily of cash and due from banks and federal funds sold net of federal funds purchased. Securities Securities are designated as held to maturity, available for sale, or trading at the time of acquisition. Held to maturity securities are carried at amortized cost and adjusted for amortization of premiums and accretion of discounts using a method that approximates the level-yield method. Trading account securities are carried at fair value with gains and losses, determined using the specific identification method, recognized currently in the income statement. The Company does not have securities designated as trading securities or as held to maturity. As of December 31, 1999 and 1998, the Company has classified its entire securities portfolio as available for sale. Available for sale securities are reported at fair value. If a decline in value is considered to be -132- 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued other than temporary, the securities are written down to fair value and the amount of the writedown is included in earnings. Unrealized gains and losses on securities available for sale are reflected in a separate shareholders' equity account, net of applicable income taxes, and in other comprehensive income. The adjusted cost of a specific security sold is used to compute the gain or loss on the sale of that security. Security purchases and sales are recorded on their trade date. Gains and losses on the sale of securities available for sale are included in non-interest income. Purchased premiums and discounts are amortized and accreted into interest income on a constant yield over the life of the securities taking into consideration current prepayment assumptions. During 1998, the Company purchased stock as an equity investment in American Growth Finance, Inc., a factoring company. This investment is carried as an equity security available for sale at cost which approximates fair value. Loans Loans are carried at the principal amount outstanding net of unearned income. Interest income on loans and amortization of unearned income is computed by methods which result in level rates of return on principal amounts outstanding. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to contractual terms of the loan agreement. When a loan is considered impaired, the amount of the impairment is based on the present value of the expected future cash flows at the loan's effective interest rate, at the loan's market price or fair value of collateral if the loan is collateral-dependent. Impairment losses are included in the allowance for loan losses through a charge to provision for loan losses. Interest income is accrued on loans except when doubt as to collectability exists, in which case the respective loans are placed on nonaccrual status. The decision to place a loan on nonaccrual status is based on an evaluation of the borrower's financial condition, collateral liquidation value, and other factors that affect the borrower's ability to pay. At the time a loan is placed on nonaccrual status, the accrued but unpaid interest is charged against current income. Thereafter, interest on nonaccrual loans is recognized as interest income only as received, unless the collectability of outstanding principal is doubtful, in which case such interest received is applied as a reduction of principal until the principal has been recovered, and is recognized as interest income thereafter. Loan origination, commitment fees and certain direct origination costs are deferred and amortized over the contractual life of the related loans, adjusted for prepayments, as a yield adjustment. BON Leasing generally leases machinery under noncancelable, full payment leases which provide, through rentals, for full recovery of the cost of the machinery leased. For financial statement purposes, such leases are accounted for as direct financing leases whereby the contracts receivable and unearned interest income are recorded when lease contracts become effective. Unearned income for this type of lease is computed on the aggregate rentals less the cost of the machinery and is recognized as income over the life of the lease by the interest method. For income tax purposes, the Company reports lease income under the operating -133- 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Loans - Continued lease method or under the installment sales method, depending on the terms of the contract. When the operating lease method is used, depreciation is computed by the declining-balance or MACRS method. The allowance for possible losses is provided to cover losses incurred in the collection of existing contracts receivable and the disposal of the related machinery. Allowance for Loan Losses An allowance for loan losses reflects an amount which, in management's judgment, is adequate to provide for estimated loan losses. Management's evaluation of the loan portfolio consists of evaluating current delinquencies, the adequacy of underlying collateral, current economic conditions, risk characteristics, and management's internal credit review process. The allowance is established through a provision charged against earnings. Loans are charged off as soon as they are determined to be uncollectible. Recoveries of loans previously charged off are added to the allowance. While management uses available information to recognize losses on loans, future adjustments in the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as part of their examinations, periodically review the Company's allowance for loan losses. Such agencies may require the Company to adjust the allowance based on their judgment and information available to them at the time of their examinations. Other Real Estate Owned Other real estate owned includes property acquired in situations in which the Company has physical possession of a debtor's assets (collateral). Such assets are carried at the lower of cost or fair value less estimated cost to sell and are included in other assets. Cost includes the fair value of the property at the time of foreclosure, foreclosure expense and expenditures for subsequent improvements. Losses arising from the acquisition of such property are charged against the allowance for loan losses. Declines in value subsequent to foreclosure are recorded as a valuation allowance. Provisions for subsequent declines or losses from disposition of such property are recognized in non-interest expense. Premises and Equipment Premises and equipment is stated at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization are computed using the straight-line method over the estimated lives of those assets. Leasehold improvements are amortized over the lease terms or the estimated lives, whichever is less. The estimated lives are as follows:
Years ----- Leasehold improvements 3 - 20 Furniture and equipment 3 - 10
-134- 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Goodwill For business combinations accounted for as purchases, the net assets have been adjusted to their estimated fair values as of the respective acquisition dates and are amortized over the life of the specific asset. The excess of the purchase price over the net assets acquired (goodwill) is recorded in other assets and is being amortized on a straight-line basis over 15 years. The carrying value of the excess of the purchase price over net assets acquired is periodically reviewed for impairment. If this review indicates that the goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of the discounted cash flows with a corresponding charge to earnings. Income Taxes The Company accounts for income taxes in accordance with the asset and liability method of accounting. Under such method, deferred tax assets and liabilities are recognized for the estimated future tax effects attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Earnings Per Common Share (EPS) Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator). The denominator used in computing diluted EPS reflects the dilutive effect of options and warrants outstanding. Business Segments The Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information" on December 31, 1998. The Statement establishes standards for the way public business enterprises report information about operating segments in annual financial statements. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and assess performance. The Company operates in one business segment, commercial banking, and has no additional individually significant business segments. Stock-Based Compensation The Company accounts for all stock-based compensation plans under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation cost for stock-based awards is measured by the excess, if any, of the fair market value of the stock, at the time the option is granted, over the amount the employee is required to pay. Compensation cost for the Company is measured at the grant date as all options are fixed awards. -135- 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Financial Instruments The Company enters into interest rate floor agreements as part of its asset/liability management program. Fees paid upon inception of these agreements are deferred and amortized over the life of the agreements. Income or expense derived from these agreements is recognized in interest income during the period earned. Comprehensive Income The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on January 1, 1998. SFAS No. 130 establishes standards for reporting comprehensive income which includes net income and other comprehensive income, non-owner related transactions in equity. SFAS No. 130 requires only additional disclosures in the consolidated financial statements. During 1999, 1998 and 1997 the only component of comprehensive income, other than net income, is unrealized gains or losses on securities available for sale, net of taxes. Reclassifications Certain reclassifications have been made in the consolidated financial statements for prior years to conform with the 1999 presentation. 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 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 and 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 excess of the purchase price over the fair value of the net assets acquired was $215,000 and was recorded as goodwill. During 1999, the company recorded amortization of $8,000. C. CASH RESTRICTIONS The Company is required to maintain reserves in the form of average vault cash and balances with the Federal Reserve Bank. The average amounts of these balances maintained during the years ended December 31, 1999 and 1998, were $4,254,000 and $3,204,000, respectively. The required balance at December 31, 1999 was $4,599,000. -136- 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS D. SECURITIES The amortized cost, gross unrealized gains and losses, and estimated fair values of securities at December 31, 1999 and 1998 were as follows:
Available for Sale ----------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In Thousands) 1999 U.S. Treasury Securities and Obligations of U.S. Government agencies $ 37,219 $ 64 $ 769 $ 36,514 Collateralized mortgage obligations 34,102 13 808 33,307 Securities of states and political subdivisions 2,290 6 96 2,200 Equity securities 2,856 -- -- 2,856 ----------------------------------------------------------------------------------------------------------------- $ 76,467 $ 83 $ 1,673 $ 74,877 =================================================================================================================
Available for Sale ----------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In Thousands) 1998 U.S. Treasury Securities and Obligations of U.S. Government agencies $ 35,356 $ 544 $ -- $ 35,900 Collateralized mortgage obligations 31,758 85 122 31,721 Securities of states and political subdivisions 1,267 42 -- 1,309 Equity securities 2,732 -- -- 2,732 ------------------------------------------------------------------------------------------------------------------ $ 71,113 $ 671 $ 122 $ 71,662 ==================================================================================================================
Proceeds from sales of debt securities during 1999, 1998, and 1997 were $8.2 million, $3.1 million and $2.5 million, respectively. Gross gains of $16 thousand, $52 thousand and $5 thousand and gross losses of $21 thousand, zero and $3 thousand were realized on those sales in 1999, 1998 and 1997, respectively. The amortized cost and fair value of debt securities by contractual maturity at December 31, 1999, are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. -137- 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED D. SECURITIES - CONTINUED Collateralized mortgage obligations with a weighted average effective yield of 6.64% are disclosed as a separate line item due to staggered maturity dates. Investments in equity securities are excluded as they have no stated maturity date.
Available for Sale -------------------------------- Estimated Amortized Fair Cost Value (In Thousands) December 31, 1999 Due in one year or less $ 1,025 $ 1,024 Due after one year through five years 21,616 21,519 Due after five years through ten years 5,478 5,324 Due after ten years 11,390 10,847 -------------------------------------------------------------------------------------------------- 39,509 38,714 Collateralized mortgage obligations 34,102 33,307 -------------------------------------------------------------------------------------------------- $ 73,611 $ 72,021 ==================================================================================================
Securities with an aggregate amortized cost of approximately $31.0 million and $35.7 million were pledged to secure public deposits, Federal Home Loan Bank borrowings and for other purposes as required by law at December 31, 1999 and 1998, respectively. E. LOANS AND ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses is as follows:
Year Ended December 31 ---------------------------------------- (In Thousands) 1999 1998 1997 -------- -------- -------- Balance, January 1 $ 3,646 $ 3,128 $ 2,878 Provision charged to operations 106 128 100 Purchased allowance of BON Leasing 92 -- -- Loans charged off, net of recoveries of $990, $474 and $319, in 1999, 1998, and 1997, respectively 218 390 150 -------- -------- -------- Balance, December 31 $ 4,062 $ 3,646 $ 3,128 ======== ======== ========
At December 31, 1999 and 1998, loans on nonaccrual status amounted to $291,000 and $408,000, respectively. The effect of nonaccrual loans was to reduce interest income by approximately $10,000 in 1999, $29,000 in 1998, and $32,000 in 1997. There were no material commitments to lend additional funds to customers whose loans were classified as nonaccrual at December 31, 1999 and 1998. The Company had no impaired loans at December 31, 1999. The Company's recorded investment in impaired loans and the related valuation allowance were $108,000 and $17,000, respectively, at December 31, 1998. The valuation allowance is included in the allowance for loan losses on the consolidated balance sheets. At December 31, 1998 there were no impaired loans without an accompanying valuation allowance. -138- 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED E. LOANS AND ALLOWANCE FOR LOAN LOSSES - CONTINUED The average recorded investment in impaired loans for the years ended December 31, 1999, 1998 and 1997 was $83,000, $143,000 and $390,000, respectively. Interest payments received on impaired loans are recorded as reductions in principal outstanding or recoveries of principal previously charged off. Once the entire principal has been collected any additional payments received are recognized as interest income. No interest income was recognized on impaired loans in 1999 or 1998. In the ordinary course of business, the Company makes loans to directors, executive officers, and principal shareholders, including related interests. In management's opinion, these loans are made on substantially the same terms, including interest and collateral, as those prevailing at the time for comparable transactions with other borrowers and they did not involve more than the normal risk of uncollectability or present other unfavorable features at the time such loans were made. During 1999, $1.7 million of new loans were made while repayments and other reductions totaled $1.6 million. Outstanding loans to executive officers and directors, including their associates and affiliated companies, were $5.5 million and $5.4 million at December 31, 1999 and 1998, respectively. Unfunded lines to executive officers and directors were $6.4 million and $4.0 million at December 31, 1999 and 1998, respectively. The directors, executive officers and principal shareholders also maintain deposits with the Company. The terms of these deposit contracts are comparable to those available to other depositors. The amount of these deposits totaled $2.0 million and $2.5 million at December 31, 1999 and 1998, respectively. F. PREMISES AND EQUIPMENT Premises and equipment is summarized as follows:
December 31 (In Thousands) 1999 1998 Land $ 638 $ 638 Leasehold improvements 967 978 Furniture and equipment 2,641 2,023 Building and improvements 1,039 298 --------------------------------------------------------------------------------------------------- 5,285 3,937 Less accumulated depreciation and amortization (1,756) (1,211) --------------------------------------------------------------------------------------------------- Premises and equipment, net $ 3,529 $ 2,726 ===================================================================================================
The Company occupies space under noncancelable operating leases. The leases provide annual escalating rents for periods through 2009 with options for renewals. Rent expense is recognized in equal monthly amounts over the lease term. Rent expense was $357,000, $345,000 and $284,000 for 1999, 1998 and 1997, respectively. -139- 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED F. PREMISES AND EQUIPMENT Future lease payments under noncancelable operating leases at December 31, 1999 are payable as follows:
(In Thousands) -------------- 2000 $ 543 2001 486 2002 414 2003 366 2004 333 ---------------------------------------------- $2,142 ==============================================
G. INCOME TAXES Actual income tax expense for the years ended December 31, 1999, 1998 and 1997 differed from an "expected" tax expense (computed by applying the U.S. Federal corporate tax rate of 34% to income before income taxes)as follows:
(In Thousands) 1999 1998 1997 Computed "expected" tax expense $1,928 $1,415 $1,152 State taxes, net of federal benefit 215 163 135 Other 2 3 44 -------------------------------------------------------------------------------------------- Total income tax expense $2,145 $1,581 $1,331 ============================================================================================
The components of income tax expense (benefit) were as follows:
(In Thousands) 1999 1998 1997 Current income tax expense (benefit): Federal $ 1,947 $ 1,347 $ 1,107 State 359 249 100 -------------------------------------------------------------------------------------------- 2,306 1,596 1,207 -------------------------------------------------------------------------------------------- Deferred income tax expense (benefit): Federal (127) (13) 20 State (34) (2) 104 -------------------------------------------------------------------------------------------- (161) (15) 124 -------------------------------------------------------------------------------------------- Total income tax expense $ 2,145 $ 1,581 $ 1,331 ============================================================================================
-140- 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS G. INCOME TAXES- CONTINUED Significant temporary differences and carryforwards that give rise to the deferred tax assets and liabilities are as follows:
December 31 (In Thousands) 1999 1998 Deferred tax assets: Unrealized loss on securities available for sale $ 604 $ -- Deferred fees, principally due to timing differences in the recognition of income 207 141 Net operating loss carryforwards 195 -- Premises and equipment, principally due to differences in depreciation methods 22 -- Other 12 4 ----------------------------------------------------------------------------------------- Total gross deferred tax assets 1,040 145 ========================================================================================= Deferred tax liabilities: Unrealized gain on securities available for sale -- (209) Discount on securities deferred for tax purposes (57) (130) Loans, principally due to provision for loan losses (57) (126) Leases, principally due to differences in basis acquired and the recognition of income (234) -- Premises and equipment, principally due to differences in depreciation methods -- (17) Other (104) (63) ----------------------------------------------------------------------------------------- Total gross deferred tax liabilities (452) (545) ----------------------------------------------------------------------------------------- Net deferred tax assets (liabilities) $ 588 $ (400) =========================================================================================
It is more likely than not that the results of the Company's future operations will generate sufficient taxable income to realize the deferred tax assets. H. LONG TERM DEBT AND LINES OF CREDIT The Bank maintains an arrangement with the Federal Home Loan Bank of Cincinnati to provide for certain borrowing needs of The Bank. The arrangement requires The Bank to hold stock in the Federal Home Loan Bank and requires The Bank to pledge investment securities or loans, to be held by the Federal Home Loan Bank, as collateral. During 1999, $10,000,000, with interest payable at 6.0% was advanced under this agreement. During 1998, loans totaling $5,000,000 were advanced and repaid. At December 31, 1999 and 1998 indebtedness under the arrangement totaled $24,500,000 and $14,500,000, respectively. Advances of $10,000,000 mature in February, 2000, $9,500,000 mature in September, 2001 and $5,000,000 mature in November 2003. The interest rate on $9,500,000 of the advances is tied to the one-month LIBOR rate and adjusts periodically. Interest on the $5,000,000 advance is at 4.45% for two years and then adjusts quarterly to the three month LIBOR rate. -141- 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS H. LONG TERM DEBT AND LINES OF CREDIT - CONTINUED Interest is payable monthly. The maximum advances outstanding were $24,500,000 and $14,500,000, the average balances outstanding were $15,158,000 and $12,144,000 and the weighted average rates were 5.56% and 5.00% for the years ended 1999 and 1998, respectively. The Bank has pledged investment securities with a fair market value of approximately $14.8 million at December 31, 1999 as collateral under terms of the loan agreement. On December 31, 1999 and 1998, the Company had available for its use $34.5 million and $26.5 million, respectively, of unsecured short-term bank lines of credit. Such short-term lines serve as backup for loan and investment needs. There are no compensating balance requirements. These lines facilitate federal funds borrowings and bear a rate equal to the current lending rate for federal funds purchased. Amounts outstanding under these lines of credit at December 31, 1999 and 1998 were $5.0 million and $8.0 million, respectively. I. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheets. The contract amounts of those instruments reflect the extent of involvement and the related credit risk the Company has in particular classes of financial instruments. The Company, through regular reviews of these arrangements, does not anticipate any material losses as a result of these transactions. At December 31, 1999 and 1998 unused lines of credit were approximately $66.3 million and $58.2 million, respectively, with the majority generally having terms at origination of one year. Additionally, the Company had standby letters of credit of $3,516,000 and $4,832,000 at December 31, 1999 and 1998, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amounts of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management's credit evaluation of the customer. Standby letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most guarantees extend from one to two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. -142- 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS J. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK Most of the Company's business activity is with customers located in the Middle Tennessee region. Generally, loans are secured by stocks, real estate, time certificates, or other assets. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. The Company grants residential, consumer, and commercial loans to customers throughout the Middle Tennessee region. Real estate mortgage and construction loans reflected in the accompanying consolidated balance sheets are comprised primarily of loans to commercial borrowers. At December 31, 1999, funded and unfunded commitments as classified by Standard Industry Classification codes include borrowers in the real estate industry of approximating $27.3 million and $6.4 million, respectively, and to building contractors of approximately $14.5 million and $11.3 million, respectively. At December 31, 1998 funded and unfunded loan commitments to borrowers in the real estate industry were approximately $27.2 million and $5.2 million, respectively, and to building contractors were approximating $8.8 million and $10.1 million, respectively. K. EMPLOYEE BENEFITS The Company maintains for its employees an Associates Stock Purchase Plan and a Retirement Savings Plan 401(K). The Retirement Savings Plan 401(K) provides for the maximum deferral of employee compensation allowable by the IRS under provisions of Section 401(A) and 401(K). The Plan is available to all associates who meet the plan eligibility requirements. The Company provides various levels of employer matching of contributions up to 4% of the associate's compensation. Employer contributions are invested exclusively in the Company's common stock. Associates fully vest in the employer's contributions after three years of service as defined in the Plan. Total plan expense for 1999, 1998 and 1997 was approximately $119,000, $88,000 and $77,000, respectively. In 1997, the Board of Directors adopted the 1997 Nonstatutory Stock Option Plan which reserved 150,000 shares of the Company's common stock for use under the Plan (plus 10% of any additional shares of stock issued after the effective date of the Plan). Stock issued pursuant to the Plan may be either authorized but unissued shares or shares held in the treasury of the Company. Options are granted at an option price of no less than the fair market value of the stock immediately preceding the date of grant. Each grant of an option shall be evidenced by a stock option agreement specifying the number of shares, the exercise price, and a vesting schedule. During 1999, 1998 and 1997, 106,900 options, 45,177 options, and 22,450 options, respectively, were granted under the Plan. The Associates Stock Purchase Plan (ASPP), under which 100,000 shares of the Company's common stock may be issued, allows associates to purchase the Company's common stock through payroll deductions at 84% of the existing market value, not to fall below par value. The difference between the purchase price and the market value on the date of issue is recorded as compensation expense. Compensation expense of $25,000, $16,000 and $9,000 was recorded in 1999, 1998 and 1997, respectively. Incidental expenses regarding the administration of the plan are paid by the Company. -143- 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS K. EMPLOYEE BENEFITS - CONTINUED As of December 31, 1999, the Company's Board of Directors had approved the issuance of stock options to purchase 249,527 shares of the Company's common stock. Compensation expense was not recorded in connection with the issuance of these options as the option price was equal to or exceeded the market price of the Company's common stock at the date of grant. The following table presents information on stock options:
Total Weighted Option Exercisable Option Average Shares Options Price Range Price ------- ----------- ------------ ---------- Options outstanding at January, 1, 1997 75,000 57,000 $6.00-10.125 $ 7.26 Granted 22,450 4,490 $ 11.625 $ 11.625 Options that became exercisable -- 9,000 $7.00-10.125 $ 8.10 - -------------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1997 97,450 70,490 $6.00-11.625 $ 8.28 Granted 45,177 9,035 $ 14.75 $ 14.75 Options that became exercisable -- 7,490 $7.125-11.625 $ 11.02 - -------------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1998 142,627 87,015 $6.00-14.75 $ 10.32 Granted 106,900 21,380 $12.42-12.88 $ 12.71 Options that became exercisable -- 16,525 $10.625-11.625 $ 13.06 Options exercised (220) (220) $11.625-11.625 Options expired (1,130) (430) $11.625-14.75 $ 13.84 - -------------------------------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1999 248,177 124,270 $6.00-14.75 $ 11.33
The stock options have five year vesting schedules and become exercisable in full in the event of a merger, sale or change in majority control of the Company. The options expire during the years 2002 through 2009. The weighted average price of the options at December 31, 1999 was $11.33 and the weighted average remaining life was approximately 7.3 years. The Company accounts for its stock option plan and ASPP in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense related to stock options would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Had the Company used the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company would have recognized, as expense over the vesting period, the fair value of all stock-based awards on the date of grant. The Company has elected to continue to apply the provisions of APB No. 25. As such, proforma disclosures of net income and earnings per share as if the fair value based method of SFAS No. 123 had been used, are as follows: -144- 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS K. EMPLOYEE BENEFITS - CONTINUED
1999 1998 1997 Net income - as reported $3,501,000 $2,581,000 $2,058,000 Net income - proforma $3,401,000 $2,543,000 $2,045,000 Earnings per share: Basic As reported $ .86 $ 1.08 $ .93 Proforma $ .84 $ 1.06 $ .93 Diluted As reported $ .85 $ .78 $ .89 Proforma $ .82 $ .77 $ .88 ======================================================================================================
The weighted average fair values of options granted during 1999, 1998 and 1997 were $5.09, $5.79 and $3.95 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997 Expected dividend yield 3.61% 2.13% 1.78% Expected stock price volatility 25% 22% 20% Risk-free interest rate 5.07% 5.66% 6.64% Expected life of options(years) 5 5 5 ======================================================================================================
L. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE The Company can issue common stock pursuant to various plans such as employee stock purchase, contributions to the 401(K) plan, and payment of directors' fees. Under these plans, 11,609, 7,304 and 4,417 shares were issued during 1999, 1998 and 1997, respectively. At December 31, 1997, warrants to purchase 4,739,397 shares of CFGI's common stock at a price of $12.50 per share were outstanding. During 1998 and 1997, warrants for 1,996,807 shares and 5,530 shares were exercised with proceeds of $24,960,087 and $69,125, respectively. The unexercised warrants expired on December 31, 1998. -145- 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS L. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE - CONTINUED The following table is a reconciliation of net income and average shares outstanding used in calculating basic and diluted earnings per share.
Year Ended December 31 (Dollars in Thousands, Except Per Share Data) 1999 1998 1997 Net income available to common shareholders $ 3,501 $ 2,581 $ 2,058 - --------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding Basic 4,067,522 2,393,576 2,205,043 Dilutive effect of: Options 61,547 40,090 30,687 Warrants* -- 887,562 87,850 - --------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding Diluted 4,129,069 3,321,228 2,323,580 =========================================================================================================================== Net income per share: Basic $ .86 $ 1.08 $ .93 Diluted $ .85 $ .78 $ .89 - ---------------------------------------------------------------------------------------------------------------------------
*The warrants were dilutive beginning in the fourth quarter of 1997. In January, 1998, the Company's Board of Directors adopted a Shareholder Rights Plan which authorizes the distribution of a dividend of one common share purchase right for each outstanding share of CFGI's common stock. The rights will be exercisable only if a person or group acquires 15% or more of CFGI's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15% or more of the common stock. The rights are designed to assure that all of CFGI's shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender takeovers, squeeze outs, open market accumulations and other abusive tactics to gain control of the Company without paying all shareholders an appropriate control premium. If the Company were acquired in a merger or other business combination transaction, each right would entitle its holder to purchase, at the right's then current exercise price, a number of the acquiring company's common shares having a market value of twice such a price. In addition, if a person or group acquires 15% or more of CFGI's common stock, each right would entitle its holder (other than the acquiring person or members of the acquiring group) to purchase, at the rights then current exercise price, a number of CFGI's common shares having a market value of twice that price. After a person or group acquires beneficial ownership of 15% or more of CFGI's common stock and before an acquisition of 50% or more of the common stock, the Board of Directors would exchange the rights (other than rights owned by the acquiring person or group), in whole or in part, at an exchange ratio of one share of common stock per right. -146- 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS L. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE - CONTINUED Until a person or group has acquired beneficial ownership of 15% or more of CFGI's common stock, the rights will be redeemable for $.01 per right at the option of the Board of Directors. The rights are intended to enable all CFGI's shareholders to realize the long-term value of their investment in the Company. The Company believes they will not prevent a takeover, but should encourage anyone seeking to acquire the Company to negotiate with the Board prior to attempting a takeover. M. RESTRICTIONS ON RETAINED EARNINGS, REGULATORY MATTERS AND LITIGATION In order to declare dividends The Bank must transfer a minimum of ten percent of current net income from retained earnings to additional paid-in capital until additional paid-in capital equals common stock. The Bank transferred $290,000 and $258,000 from retained earnings to surplus during 1999 and 1998, respectively. At December 31, 1999, approximately $8.5 million of The Bank's retained earnings were available for dividend declaration and payment to its shareholder CFGI (parent company), without regulatory approval. Accordingly, approximately $19,884,000 of the Company's investment in The Bank is restricted as to the payment of dividends. CFGI and The Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and The Bank must meet specific capital guidelines that involve quantitative measures of the Company's and The Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and The Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes the Company and The Bank meet all capital adequacy requirements to which it is subject as of December 31, 1999. As of December 31, 1999, the most recent notification from the Federal Reserve Bank categorized The Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, The Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed The Bank's category. -147- 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS M. RESTRICTIONS ON RETAINED EARNINGS, REGULATORY MATTERS AND LITIGATION - CONTINUED The Company's and The Bank's actual capital amounts and ratios are also presented in the table. CAPITAL RATIOS
CFGI The Bank December 31 December 31 (Dollars In Thousands) 1999 1998 1999 1998 CAPITAL COMPONENTS TIER 1 CAPITAL: Shareholders' equity $ 47,315 $ 51,171 $ 28,380 $ 26,474 Unrealized loss (gain) on securities 987 (340) 824 (340) Goodwill (207) -- (207) -- Minority interest 168 -- 168 -- - -------------------------------------------------------------------------------------------------------------------------- Total Tier 1 capital 48,263 50,831 29,165 26,134 TIER 2 CAPITAL: Allowable allowance for loan losses 2,872 2,113 2,854 2,107 Total capital $ 51,135 $ 52,944 $ 32,019 $ 28,241 - -------------------------------------------------------------------------------------------------------------------------- Risk-adjusted assets $ 228,552 $ 167,527 $ 227,092 $ 166,997 Quarterly average assets $ 299,219 $ 220,645 $ 284,740 $ 220,398
Regulatory CFGI The Bank Minimum December 31 December 31 1999 1998 1999 1998 ---- ---- ---- ---- CAPITAL RATIOS Total risk-based capital ratio 8% 22.4% 31.6% 14.1% 16.9% Tier 1 risk-based capital ratio 4% 21.1% 30.3% 12.8% 15.6% Tier 1 leverage ratio 4% 16.1% 23.0% 10.2% 11.9%
There are from time to time legal proceedings pending against the Company. In the opinion of management, liabilities, if any, arising from such proceedings presently pending would not have a material adverse effect on the consolidated financial statements of the Company. -148- 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS N. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments for both on and off-balance sheet assets and liabilities for which it is practicable to estimate fair value. The techniques used for this valuation are significantly affected by the assumptions used, including the amount and timing of future cash flows and the discount rate. Such estimates involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. Accordingly, the aggregate fair value amounts presented are not meant to represent the underlying value of the Company. The following table presents the carrying amounts and the estimated fair value of the Company's financial instruments at December 31:
Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value (In Thousands) 1999 1998 Financial assets: Cash, due from banks, and federal funds sold $ 25,783 $ 25,783 $ 13,243 $ 13,243 Investment securities 74,877 74,877 71,662 71,662 Loans, net of unearned income 205,511 204,228 152,675 153,113 Financial liabilities: Deposits 229,141 230,094 162,553 162,893 Federal Home Loan Bank and other borrowings 29,500 29,502 22,500 22,676 --------------------------------------------------------------------------------------------------------- Contractual Contractual or Estimated or Estimated Notional Fair Notional Fair Amounts Value Amounts Value ------- ------- (In Thousands) 1999 1998 Off-balance items: Interest rate floors Commitments to extend credit $66,299 * $58,207 * Standby letters of credit 3,516 * 4,832 * ---------------------------------------------------------------------------------------------------------
* The estimated fair value of these items was not significant at December 31, 1999 or 1998. -149- 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS N. FAIR VALUE OF FINANCIAL INSTRUMENTS The following summary presents the methodologies and assumptions used to estimate the fair value of the Company's financial instruments presented above. Cash, Due from Banks and Federal Funds Sold For cash, due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value. These instruments expose the Company to limited credit risk and carry interest rates which approximate market. Investment Securities In estimating fair values, management makes use of prices or dealer quotes for U.S. Treasury securities, other U.S. government agency securities, and collateralized mortgage obligations, securities of states and political subdivisions, and equity securities. As required, securities available for sale are recorded at fair value. Loans The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities adjusted for differences in loan characteristics. The risk of default is measured as an adjustment to the discount rate, and no future interest income is assumed for nonaccrual loans. The fair value of loans does not include the value of the customer relationship or the right to fees generated by the account. Deposit Liabilities The fair value of deposits with no stated maturities (which includes demand deposits, NOW accounts, and money market deposits) is the amount payable on demand at the reporting date. The fair value of fixed-rate certificates of deposit is estimated using a discounted cash flow model based on the rates currently offered for deposits of similar maturities. The fair value of variable rate certificates of deposit would approximate their carrying value because these investments reprice with market rates. SFAS No. 107 requires deposit liabilities with no stated maturity to be reported at the amount payable on demand without regard for the inherent funding value of these instruments. The Company believes that significant value exists in this funding source. Federal Home Loan Bank and Other Borrowings The fair value of Federal Home Loan Bank borrowings is estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. -150- 49 O. OTHER COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income" was adopted by the Company on January 1, 1998. SFAS No. 130 establishes standards for reporting comprehensive income. Comprehensive income includes net income and other comprehensive income which is defined as nonowner related transactions in equity. Prior periods have been reclassified to reflect the provisions of SFAS No. 130. The statement requires the Company's unrealized gains and losses (net of tax) on securities available for sale to be included in other comprehensive income. The amounts of other comprehensive income included in equity along with the related tax effect are set forth in the following table:
Tax Gain (Loss) Expense Net of Before Tax (Credit) Tax (Dollars In Thousands) Year ended December 31, 1999 Net unrealized loss on securities available for sale arising during 1999 $ (2,134) $ (810) (1,324) Less: Reclassification adjustment for net losses included in net income (5) (2) (3) ------------------------------------------------------------------------------------------ Other comprehensive income $ (2,139) $ (812) $ (1,327) ------------------------------------------------------------------------------------------ Year ended December 31, 1998 Net unrealized gain on securities available for sale arising during 1998 $ 127 $ 49 $ 78 Less: Reclassification adjustment for net gains included in net income 52 20 32 ------------------------------------------------------------------------------------------ Other comprehensive income $ 75 $ 29 $ 46 ------------------------------------------------------------------------------------------ Year ended December 31, 1997 Net unrealized gain on securities available for sale arising during 1997 $ 373 $ 142 $ 231 Less: Reclassification adjustment for net gains included in net income 2 1 1 ------------------------------------------------------------------------------------------ Other comprehensive income $ 371 $ 141 $ 230 ------------------------------------------------------------------------------------------
-151- 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS P. PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for Community Financial Group, Inc., (Parent Company only) as of December 31, 1999 and 1998, and for the years ended December 31, 1999, 1998 and 1997 was as follows:
Condensed Balance Sheets December 31 (In thousands) 1999 1998 Assets Cash $ 7,783 $ 14,229 Investment in bank subsidiary, at cost adjusted for equity in earnings 28,380 26,474 Securities available for sale (Amortized cost of $11,166 and $10,490, respectively) 10,903 10,490 Other assets 298 24 -------------------------------------------------------------------------------------------------- Total Assets $ 47,364 $ 51,217 -------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Other liabilities $ 49 $ 46 -------------------------------------------------------------------------------------------------- Total Liabilities 49 46 Total Shareholders' Equity 47,315 51,171 -------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 47,364 $ 51,217 --------------------------------------------------------------------------------------------------
Condensed Income Statements Year Ended Year Ended Year Ended December 31 December 31 December 31 (In Thousands) 1999 1998 1997 Income Dividends from bank subsidiary $ -- $ 133 $ 530 Interest income 919 1 -- --------------------------------------------------------------------------------------------------- Total income 919 134 530 --------------------------------------------------------------------------------------------------- Expenses Other expenses 225 186 165 Total expenses 225 186 165 --------------------------------------------------------------------------------------------------- Income (loss) before income taxes 694 (52) 365 Increase(decrease) to consolidated income taxes arising from parent company taxable income 264 (70) (63) Equity in undistributed earnings of subsidiary bank 3,071 2,563 1,630 --------------------------------------------------------------------------------------------------- Net income $ 3,501 $ 2,581 $ 2,058 ---------------------------------------------------------------------------------------------------
-152- 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS P. PARENT COMPANY FINANCIAL INFORMATION - CONTINUED Statements of Cash Flows
Year Ended Year Ended Year Ended December 31 December 31 December 31 (In Thousands) 1999 1998 1997 Operating activities Net income $ 3,501 $ 2,581 $ 2,058 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of bank subsidiary (3,071) (2,563) (1,630) Loss on sale of securities 20 -- -- Depreciation and amortization 56 -- -- Decrease (increase) in other assets (270) 9 28 Increase (decrease) in other liabilities 3 45 (17) ----------------------------------------------------------------------------------------------------- Net cash provided by operating activities 239 72 439 ----------------------------------------------------------------------------------------------------- Investment activities Proceeds from sales of securities: Available for sale 5,126 -- -- Purchases of securities Available for sale (30,832) (10,490) -- Maturities of securities: Available for sale 25,051 -- -- ----------------------------------------------------------------------------------------------------- Cash used by investing activities (655) (10,490) -- ----------------------------------------------------------------------------------------------------- Financing activities Repurchase of Company's common stock (4,304) -- -- Proceeds from issuance of common stock 155 25,061 120 Cash dividends paid (1,881) (569) (441) ----------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (6,030) 24,492 (321) ----------------------------------------------------------------------------------------------------- Increase (decrease) in cash (6,446) 14,074 118 Cash beginning of year 14,229 155 37 ----------------------------------------------------------------------------------------------------- Cash end of year $ 7,783 $ 14,229 $ 155 -----------------------------------------------------------------------------------------------------
-153- 52 REPORT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Community Financial Group, Inc. and subsidiaries (the Company) is responsible for preparing the accompanying consolidated financial statements in accordance with generally accepted accounting principles. The amounts therein are based on management's best estimates and judgments. Management has also prepared other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. The Company maintains a system of internal accounting control which it believes, taken as a whole, is sufficient to provide reasonable assurance that assets are properly safeguarded and that transactions are executed in accordance with proper authorization and are recorded and reported properly. In establishing and maintaining any system of internal accounting control, estimates and judgments are required to assess the relative costs and expected benefits. The Company also maintains a program that independently assesses the effectiveness of their internal controls. The Company's consolidated financial statements have been audited by independent certified public accountants. Their Independent Auditors' Report, which follows, is based on an audit made in accordance with generally accepted auditing standards and expresses an opinion as to the fair presentation of the Company's consolidated financial statements. In performing their audit, the Company's independent certified public accountants consider the Company's internal control to the extent they deem necessary in order to issue their opinion on the consolidated financial statements. The Board of Directors pursues its oversight role for the consolidated financial statements through the Audit Committee, which consists solely of outside directors. The Audit Committee meets periodically with both management and the independent auditors to assure that each is carrying out its responsibilities. /s/Mack S. Linebaugh, Jr. - ------------------------- Mack S. Linebaugh, Jr. Chairman of the Board President and CEO -154- 53 Independent Auditors' Report The Board of Directors and Shareholders Community Financial Group, Inc.: We have audited the accompanying consolidated balance sheets of Community Financial Group, Inc. and subsidiaries (the Company) as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community Financial Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/KPMG LLP Nashville, Tennessee January 26, 2000 -155- 54 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES (UNAUDITED) CONSOLIDATED QUARTERLY FINANCIAL DATA
1999 Three Months Ended - --------------------------------------------------------------------------------------------------------------- (In Thousands, except per share data) December 31 September 30 June 30 March 31 - --------------------------------------------------------------------------------------------------------------- Interest income $6,163 $5,617 $4,803 $4,392 Interest expense 2,781 2,503 1,913 1,856 - --------------------------------------------------------------------------------------------------------------- Net interest income 3,382 3,114 2,890 2,536 Provision for loan losses 52 6 3 45 Non-interest income 752 693 609 621 Non-interest expense 2,367 2,480 2,162 1,836 - --------------------------------------------------------------------------------------------------------------- Income before income taxes 1,715 1,321 1,334 1,276 Provision for income taxes 640 510 524 471 - --------------------------------------------------------------------------------------------------------------- Net income $1,075 $ 811 $ 810 $ 805 - --------------------------------------------------------------------------------------------------------------- Income per share: Basic $ .27 $ .20 $ .20 $ .19 Diluted .27 .20 .19 .19 - --------------------------------------------------------------------------------------------------------------- Weighted Average Common Shares Outstanding Basic 3,930 3,996 4,127 4,218 Diluted 3,991 4,096 4,178 4,296 - ---------------------------------------------------------------------------------------------------------------
-156- 55 COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARIES (UNAUDITED) CONSOLIDATED QUARTERLY FINANCIAL DATA
1998 Three Months Ended - --------------------------------------------------------------------------------------------------------------- (In Thousands, except per share data) December 31 September 30 June 30 March 31 - --------------------------------------------------------------------------------------------------------------- Interest income $4,251 $4,162 $4,132 $4,046 Interest expense 1,981 1,973 2,063 2,018 - --------------------------------------------------------------------------------------------------------------- Net interest income 2,270 2,189 2,069 2,028 Provision for loan losses 25 25 39 39 Non-interest income 572 578 359 296 Non-interest expense 1,687 1,695 1,444 1,245 - --------------------------------------------------------------------------------------------------------------- Income before income taxes 1,130 1,047 945 1,040 Provision for income taxes 422 403 356 400 - --------------------------------------------------------------------------------------------------------------- Net income $ 708 $ 644 $ 589 $ 640 - --------------------------------------------------------------------------------------------------------------- Income per share: Basic $ .28 $ .26 $ .25 $ .29 Diluted .17 .23 .17 .22 - --------------------------------------------------------------------------------------------------------------- Weighted Average Common Shares Outstanding Basic 2,540 2,457 2,363 2,214 Diluted 4,250 2,754 3,414 2,867 - ---------------------------------------------------------------------------------------------------------------
-157- 56 COMMON STOCK INFORMATION The common stock of Community Financial Group, Inc., is traded on Nasdaq Stock Market(R) under the symbol CFGI. As of December 31, 1999, there were 432 shareholders of record of CFGI common stock. The following table sets forth the Company's high and low prices during each quarter for the past two years.
Market Price Dividends ------------------------------------------------------------------------------ 1999 High Low ------------------------------------------------------------------------------ First quarter $16.38 $11.00 $.07 Second quarter 18.13 12.75 .13 Third quarter 15.25 14.00 .13 Fourth quarter 16.63 12.75 .13
Market Price Dividends ------------------------------------------------------------------------------ 1998 High Low ------------------------------------------------------------------------------ First quarter $15.00 $13.69 $.06 Second quarter 17.00 14.00 .06 Third quarter 15.00 12.06 .06 Fourth quarter 12.88 11.81 .06
Quarterly stock price quotations were provided by the Nasdaq Stock Market(R), and reflect prices without retail markup, markdown or commissions and may not reflect actual transactions. -158- EX-21 10 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
State of Name Under Which Subsidiary Incorporation Does Business ---------- ------------- ----------------- The Bank of Nashville Tennessee The Bank of Nashville Subsidiaries of the Bank TBON-Mooreland Joint TBON-Mooreland Joint Venture Tennessee Venture Machinery Leasing Company BON Leasing of North America, Inc. Tennessee
-159- EX-23 11 CONSENT OF KPMG LLP 1 Exhibit 23 KPMG LLP 1900 Nashville City Center Nashville, TN 37219-1735 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT The Board of Directors Community Financial Group, Inc.: We consent to incorporation by reference in the registration statement (No. 333-24309) on Form S-3 as amended of Community Financial Group, Inc. of our report dated January 11, 2000, relating to the consolidated balance sheets of Community Financial Group, Inc. as of December 31, 1999, and 1998, and the related consolidated statements of income, shareholders' equity and comprehenive income, and cash flows for each of the years in the three-year period ended December 31, 1999 which report appears in the December 31, 1999 annual report on Form 10-K of Community Financial Group, Inc. /s/ KPMG LLP Nashville, Tennessee March 28, 2000 -160- EX-27 12 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 11,483 97 14,300 0 74,877 0 0 205,511 4,062 308,106 229,141 5,000 2,150 24,500 0 0 23,542 23,773 308,106 15,995 4,354 626 20,975 8,121 9,053 11,922 106 (5) 8,845 5,646 5,646 0 0 3,501 .86 .85 4.65 291 0 0 349 3,646 772 990 4,062 3,192 0 870
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