<PAGE>   1
                                                                      EXHIBIT 13


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS 
OF OPERATIONS AND FINANCIAL CONDITION

Overview

         Community Financial Group, Inc. (CFGI), is a bank holding company which
         was formed on April 30, 1996 and is the parent company of its
         wholly-owned subsidiary, The Bank of Nashville (The Bank), collectively
         referred to as the Company. The Bank is a state chartered bank
         incorporated in 1989 under the laws of the State of Tennessee. On April
         30, 1996, following regulatory and shareholder approval, CFGI executed
         a plan of exchange with The Bank, whereby CFGI became the parent bank
         holding company of The Bank. Under the agreement, each share of the
         common stock of The Bank was exchanged for one share of CFGI, and each
         outstanding warrant and each outstanding option to purchase common
         shares of The Bank automatically became warrants and options to
         purchase shares of CFGI. The balances and activity for the periods
         prior to April 30, 1996, are those of The Bank only. The 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.

         The purpose of this discussion is to focus on significant changes in
         the financial condition and results of operations of the Company during
         the past two years. This discussion and analysis is intended to
         supplement and highlight information contained in the accompanying
         consolidated financial statements and the selected financial data
         presented elsewhere in this report.

         During the past two years, management has focused on maintaining
         overall asset quality, providing superior personalized customer service
         and beginning the implementation of a clearly defined strategic
         expansion of its delivery systems and locations. Additionally,
         attention to developing and maintaining a strong sales culture within
         the Company continues to result in the expansion and diversification of
         the Company's customer base. New products and services have been
         introduced to select segments of the customer base while additional
         enhancements have been added to existing products and services. During
         1996, the Company began offering on-line cash management services
         through "Bank On-Line" to its commercial customers and providing debit
         card services through "MasterMoney" to its consumer base. During 1995,
         the Company expanded its delivery system by establishing ATM's and
         commercial depositories at Cummins Station and on Music Valley Drive
         bringing the total number of such locations at year end 1995 to four.
         These systems were further expanded during 1996 as a cash dispenser was
         installed in Green Hills Mall. During 1996, the Company established a
         mobile branching service, "Bank-on-Call", which provides the
         convenience of "at-your-door" banking service. Also, during 1996, the
         Company received approval to open its first branch location in Green
         Hills at the Glendale Center. The Green Hills office opened on January
         23, 1997. The establishment of "Bank-on-Call" services and the opening
         of the Company's first branch location are key strategies and very
         important to long-term growth plans. During 1996, the Company continued
         its commitment to providing bank customers access to their accounts
         through competitors' ATM's at no charge within the State of Tennessee
         by implementing a program of rebating any surcharges imposed by ATM
         providers within the State of Tennessee when accessed by a Bank of
         Nashville ATM or MasterMoney card.

         The Company's assets were $166.7 million at December 31, 1996, compared
         to $152.8 million at December 31, 1995. Shareholders' equity was $22.1
         million at year end 1996 compared to $20.0 million at year end 1995.
         The Company paid dividends of $.16 per share in 1996 by declaring four
         quarterly dividends of $.04 per share each. There were no dividends
         paid during 1995. The Company reported earnings of $2.5 million or
         $1.15 per share for 1996. Earnings for 1995 were $2.5 million or $1.14
         per share, but benefited from a $520,000 negative provision for
         possible loan losses, while no provision was reported in 1996.
         Additionally, earnings were impacted in 1996 as the Company recorded a
         $168,000 provision for income taxes compared to only $32,000 recorded
         in 1995 as a result of utilizing all of the Federal net operating loss
         carryforwards in 1996. Return on average shareholders' equity
         (exclusive of SFAS 115 adjustments) was 12.18% in 1996 compared to
         13.54% in 1995 while return on average assets for 1996 and 1995 was
         1.61% and 1.69%, respectively.

         The maintenance of asset quality and management's assessment of the
         level of the allowance for possible loan losses were reflected in no
         provision for possible loan losses being recorded in 1996, a period in
         which net charge-offs were $156,000. During 1995, the Company
         experienced net recoveries of $713,000 which resulted in management's
         decision to reduce its allowance for possible loan losses by recording
         a net negative provision for possible loan losses of $520,000. During
         1996, net nonperforming assets increased 28.4% to


6
<PAGE>   2
         $579,000 from $451,000 at year end 1995 while total loans increased
         9.7% from $98.3 million at December 31, 1995 to $107.9 million at
         December 31, 1996. The results of the Company's focus on maintaining
         asset quality continues to be reflected in these statistics. A more
         detailed analysis of nonperforming assets and the provision for
         possible loan losses is presented under the captions, "Provisions for
         Possible Loan Losses" and "Nonperforming Assets and Risk Elements."
         Deposits increased $2.8 million, or 2.1%, from $130.5 million at year
         end 1995 to $133.3 million at year end 1996. The net loan to deposit
         ratio increased from 73.0% at year end 1995 to 78.8% at year end 1996,
         resulting primarily from a significant increase in net loans, $9.7
         million, which, among other things, reflects the Company's business
         development efforts during 1996.

         Income taxes of $168,000 were recorded during 1996 which compares to
         only $32,000 recorded during 1995 as the Company benefited from the use
         of net operating loss carryforwards during 1995 and 1996. As a result
         of management's evaluation of the likelihood of receiving a tax benefit
         from the net operating loss carryforward utilizing the more likely than
         not standard, the Company maintained a valuation allowance to offset
         the net deferred tax assets in 1995. All federal NOL's were utilized in
         1996.

Net Interest Income

         Net interest income is the principal component of the Company's income
         stream and represents the difference or spread between interest income
         generated from earning assets and the interest expense paid on
         liabilities. 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 for 1996 increased 15.1% from 1995. This increase
         resulted primarily from a 6.3% increase in average earning assets which
         was partially offset by a 4.8% increase in average interest bearing
         liabilities. Additionally, net interest income was impacted by a
         decline of 7 basis points in the average rate earned on earning assets
         which was more than offset by a 41 basis point decline in the average
         rate paid on interest bearing liabilities. The following two schedules
         present an analysis of net interest income and the detail of changes in
         interest income, interest expense and the resulting net interest income
         due to the fluctuations in volume and rates.

                                                                               7
<PAGE>   3
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

<TABLE>
<CAPTION>
                                                      1996                               1995
                                       ---------------------------------    --------------------------------
                                                    Interest     Average               Interest      Average
                                        Average     Income/      Yields/     Average    Income/      Yields/
                                        Balance     Expense       Rates      Balance    Expense       Rates
------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------------------------------------------------
<S>                                    <C>          <C>           <C>       <C>         <C>           <C>
ASSETS 
Loans (net of unearned income):
  Commercial                           $ 39,858     $ 3,762        9.44%    $ 37,511    $ 3,764       10.03%
  Real Estate - mortgage                 52,895       4,836        9.14       46,505      4,270        9.18
  Real Estate - construction              8,144         770        9.45        3,702        363        9.81
  Consumer                                1,998         201       10.06        1,804        229       12.68
------------------------------------------------------------------------------------------------------------
    Total loans (net of
     unearned income)                   102,895       9,569        9.30       89,522      8,626        9.64
------------------------------------------------------------------------------------------------------------
Securities                               45,163       3,016        6.68       49,444      3,259        6.59
Federal funds sold                        6,445         314        4.88        6,411        362        5.65
------------------------------------------------------------------------------------------------------------

    Total earning assets               $154,503     $12,899        8.35%    $145,377    $12,247        8.42%

Allowance for possible
  loan losses                            (3,124)                              (2,888)
Cash and due from banks                   4,971                                4,263
Premises and equipment, net                 624                                  663
Accrued interest and
  other assets                            1,641                                1,593
------------------------------------------------------------------------------------------------------------

                                       $158,615                             $149,008
============================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY

NOW accounts                           $  5,610     $   140        2.50%    $  5,120    $   145        2.83%
Money market accounts                    59,169       2,813        4.75       48,495      2,538        5.23
Time certificates less
  than $100,000                          29,982       1,782        5.94       34,749      2,109        6.07
Time certificates
  $100,000 and greater                   27,431       1,563        5.70       30,905      1,850        5.99
Federal Home Loan Bank and
  other borrowings                        2,745         148        5.37           --         --          --
------------------------------------------------------------------------------------------------------------
  Total interest-bearing
   liabilities                         $124,937     $ 6,446        5.16%    $119,269    $ 6,642        5.57%

Non-interest bearing demand
  deposits                               10,661                                9,566
Accounts payable and accrued
  liabilities                             2,053                                1,836
------------------------------------------------------------------------------------------------------------
    Total liabilities                   137,651                              130,671
------------------------------------------------------------------------------------------------------------

Shareholders' equity                     20,964                               18,337
------------------------------------------------------------------------------------------------------------

                                       $158,615                             $149,008
============================================================================================================

Interest income/earning assets                                     8.35%                               8.42%
Interest expense/earning assets                                    4.17                                4.57
------------------------------------------------------------------------------------------------------------
Net interest margin                                                4.18%                               3.85%
============================================================================================================
</TABLE>

         Nonaccrual and 90 days or more past due loans are included in average
         loans and average earning assets. Consequently, yields on these items
         are lower than they would have been if all loans had earned at their
         contractual rate of interest. Had nonaccrual and 90 days or more past
         due loans earned income at the contractual rate, interest income of
         $74,000 and $78,000 would have been recognized during 1996 and 1995,
         respectively.

8
<PAGE>   4
         ANALYSIS OF CHANGES IN NET INTEREST INCOME

<TABLE>
<CAPTION>
                                  1996 Compared to 1995           1995 Compared to 1994
                               Increase (Decrease) Due to      Increase (Decrease) Due to
------------------------------------------------------------------------------------------
(IN THOUSANDS) (1)             RATE     VOLUME       NET       RATE     VOLUME        NET
------------------------------------------------------------------------------------------
<S>                         <C>        <C>        <C>        <C>        <C>        <C>    
INTEREST INCOME:
  Loans                     $  (310)   $ 1,253    $   943    $   746    $ 1,469    $ 2,215
  Securities                     43       (286)      (243)       564        160        724
  Federal funds sold            (50)         2        (48)       117       (184)       (67)
------------------------------------------------------------------------------------------

    Total Interest Income      (317)       969        652      1,427      1,445      2,872
------------------------------------------------------------------------------------------

INTEREST EXPENSE:
  NOW Accounts                  (18)        13         (5)        19        (13)         6
  Money Market Accounts        (248)       523        275        661        274        935
  Time certificates
    under $100,000              (43)      (284)      (327)       368         (9)       359
  Time certificates
    $100,000 and over           (87)      (200)      (287)       448        141        589
Federal Home Loan Bank
   and other borrowings          --        148        148         --         --         --
------------------------------------------------------------------------------------------

  Total Interest Expense       (396)       200       (196)     1,496        393      1,889
------------------------------------------------------------------------------------------

NET INTEREST INCOME         $    79    $   769    $   848    $   (69)   $ 1,052    $   983
==========================================================================================
</TABLE>

         (1)      Changes in net interest income are attributed to either
                  changes in average balances (volume change) or changes in
                  average rates (rate change) for earning assets and sources of
                  funds on which interest is received or paid. 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.

         Interest income increased $.7 million, or 5.3%, in 1996 compared to
         1995. This increase resulted from a 6.3% increase in the volume of
         average earning assets, the effect of which was slightly diminished by
         a 7 basis point decline in the average rate earned on these assets.
         Average loans increased 14.9%, average investments declined 8.7%, while
         average Fed Funds sold remained level. Interest income on loans
         increased 10.9%, from 1995 to 1996, as a result of the increased volume
         of loans outstanding which was partially offset by a decline in the
         average interest rate earned on those loans of 34 basis points.
         Interest income on investment securities decreased 7.5% from 1995 to
         1996, as a result of a 8.7% decline in the volume of securities that
         was partially offset by a 9 basis point increase in the average rate
         earned on investment securities. Interest income on Federal Funds sold
         declined 13.3% in 1996 compared to 1995 as a result of a 78 basis point
         decline in the average rate earned on these funds. Generally, total
         earning assets reflected an increase in interest income which resulted
         primarily from growth in loans and a shift in asset mix from
         investments to higher yielding loans.

         Total interest expense decreased 3.0% in 1996 due to a 41 basis point
         decrease in the average rate paid on interest bearing liabilities which
         was partially offset by an increase of 4.8% in the average volume of
         these liabilities. The increase in average volume of interest bearing
         liabilities was the result of a 22.0% increase in average Money Market
         Investment Account balances and a 9.6% increase in average NOW Account
         balances as well as $2.7 million in average borrowed funds in 1996
         compared to no borrowed funds during 1995. These increases were
         partially offset by volume declines of 13.7% in average balances for
         certificates of deposit less than $100,000 and 11.2% in certificates of
         deposit $100,000 or greater. The decrease in rates paid on interest
         bearing liabilities was reflected in all areas with the largest
         declines in rates paid on Money Market Investment Accounts.

         Trends in net interest income are commonly evaluated in terms of
         average rates, using the net interest margin and the interest rate
         spread. The net interest margin, or the net yield on earning assets, is
         computed by dividing net interest income by average earning assets.
         This ratio represents the difference between the average yield on
         average earning assets and the average rate paid for all funds used to
         support those earning

                                                                               9
<PAGE>   5
         assets, including both interest bearing and non-interest bearing
         sources of funds. The Company's net interest margin increased 33 basis
         points to 4.18% in 1996, primarily as the result of a decline in
         deposit rates, a higher loan to deposit ratio and the impact of shifts
         in the mix of earning assets to higher yielding loans.

         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 the liability
         remain the same, both impact net interest income. It should be noted,
         therefore, that a matched interest sensitivity position, by itself,
         will not ensure maximum net interest income. Management continually
         evaluates the condition of the economy, the pattern of market interest
         rates and other economic data to determine the types of investments
         that should be made and at what maturity. Using this analysis,
         management from time to time assumes calculated interest sensitivity
         gap positions to maximize net interest income based upon anticipated
         movement in the general level of interest rates. During the fourth
         quarter of 1996, net interest income benefited from a leveraging
         strategy implemented late in the third quarter which consisted of
         matching Federal Home Loan Bank borrowings to fund the purchase of
         additional investment securities. While this strategy contributed to
         increasing net interest income, it also has the effect of lowering the
         net interest margin. See "Liquidity and Asset/Liability" section.

         The interest rate spread measures the difference between the average
         yield on earning assets and the average rate paid on interest bearing
         sources of funds. The interest rate spread eliminates the impact of
         non-interest bearing funds and gives a direct perspective on the effect
         of market interest rate movement. During 1996, the interest rate spread
         improved compared with 1995. The following table presents an analysis
         of the Company's interest rate spread and net yield on earning assets.

<TABLE>
<CAPTION>
                                                                  Years Ended December 31
                  -------------------------------------------------------------------
                                                                      1996      1995
                  -------------------------------------------------------------------
                  <S>                                                 <C>       <C>
                  Rate earned on interest earning assets              8.35%     8.42%
                  Rate paid on interest bearing liabilities           5.16%     5.57%
                  Interest rate spread                                3.19%     2.85%
                  Net yield on earning assets                         4.18%     3.85%
</TABLE>

         Total interest income in 1996 compared to 1995 increased $652,000. The
         increased level of earning assets combined with the shift and mix of
         earning assets and interest bearing liabilities resulted in a higher
         level of net interest income. Total interest expense decreased in 1996
         compared to 1995 by $196,000. Average interest bearing liabilities
         increased only 4.8% while average earning assets increased 6.3%. The
         average rate paid on interest bearing liabilities decreased 41 basis
         points in 1996 compared to 1995 while the average rate earned on
         earning assets decreased only 7 basis points. The average rate paid on
         all interest bearing liabilities in 1996 was 5.2% compared with 5.6% in
         1995.

Provision for Possible Loan Losses

         The Company maintains an allowance for possible loan losses at a level
         that, in management's evaluation, is adequate to cover estimated losses
         on loans based on available information at the end of each reporting
         period. Considerations in establishing the allowance include historical
         net charge-offs, changes in the credit risk, mix, and volume of the
         loan portfolio, and other relevant factors, such as the risk of loss on
         particular loans, the level of nonperforming assets, and economic
         conditions. A more detailed discussion of nonperforming assets is
         presented under the caption, "Nonperforming Assets and Risk Elements."

         In 1996, the Company recorded no provision for possible loan losses,
         compared with a net negative provision of $520,000 in 1995. The 1995
         negative provision resulted primarily from the Company having recorded
         recoveries of previously charged-off loans in excess of current year
         charge-offs in the amount of $713,000. In 1996, the Company recorded
         net charge-offs of $156,000. The allowance for possible loan losses was
         2.7% of loans at December 31, 1996, compared to 3.1% of loans at the
         same date in 1995. The decision to record no provision for possible
         loan losses in 1996 as well as the recording of a negative provision in
         1995 reflect management's evaluation of the adequacy of the allowance
         for possible loan losses considering various factors, including the
         level of loans outstanding, economic conditions, and an assessment of
         portfolio quality and risk characteristics. The decision in 1995 to
         record negative provisions was primarily due to continued improvement
         in the overall quality of the Company's loan portfolio, including
         continued performance of those loans previously categorized as
         substandard or special mention by the Company's internal loan rating

10
<PAGE>   6
         system, and increases in the level of the allowance for possible loan
         losses as a result of significant net recoveries.

         Management will continue to evaluate the level of the allowance for
         possible loan losses and will determine what additional adjustments, if
         any, are necessary. Continued growth in the loan portfolio will be a
         factor in this evaluation, as well as the quality of this 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 allowance at
         any future date. It is anticipated that there will be a provision
         expense in 1997; however, the specific amount cannot be determined at
         this time. Changes in circumstances affecting the various factors
         considered by the Company in establishing the level of the allowance
         could significantly affect whether a provision is warranted in 1997,
         and the amount thereof.

         The following table represents a recap of activity in the allowance for
         possible loan losses during the past two years.

         SUMMARY OF LOAN LOSS EXPERIENCE

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
(IN THOUSANDS)                                            1996          1995
-------------------------------------------------------------------------------
<S>                                                    <C>           <C>      
ALLOWANCE FOR POSSIBLE LOAN LOSSES, JANUARY 1          $   3,034     $   2,841

LOANS CHARGED OFF:
  Commercial                                                (450)         (344)
  Real estate                                               (243)            _
  Consumer                                                    (4)           (1)
-------------------------------------------------------------------------------

  Total charge-offs                                         (697)         (345)
-------------------------------------------------------------------------------

RECOVERIES OF LOANS PREVIOUSLY CHARGED OFF:
  Commercial                                                 494           929
  Real estate                                                 46           129
  Consumer                                                     1             _
-------------------------------------------------------------------------------

    Total recoveries                                         541         1,058
-------------------------------------------------------------------------------

NET (CHARGE-OFFS) RECOVERIES                                (156)          713
-------------------------------------------------------------------------------

PROVISION CREDITED TO OPERATIONS                               _          (520)
-------------------------------------------------------------------------------

ALLOWANCE FOR POSSIBLE LOAN LOSSES, DECEMBER 31        $   2,878     $   3,034
===============================================================================

Loans, net of unearned income
  Year-end                                             $ 107,888     $  98,340
  Average during year                                  $ 102,895     $  89,522

Allowance for possible loan losses
  to year-end loans, net of unearned income                  2.7%          3.1%

Provision credited for possible loan
  losses to average loans, net of
  unearned income                                             --           (.6%)


Net charge-offs (recoveries) to
  average loans, net of unearned income                       .2%          (.8%)
</TABLE>

         Net charge-offs in 1996 were $156,000 compared to net recoveries in
         1995 of $713,000. Gross recoveries in 1996 were $541,000 compared to
         $1,058,000 in 1995. These recoveries reflect the Company's efforts to
         aggressively pursue the collection of loans charged-off in prior
         periods.

                                                                              11
<PAGE>   7
Non-Interest Income

         Total non-interest income of $927,000 in 1996 reflects an increase of
         28.4% in comparison with $722,000 reported in 1995. Non-interest
         income, less nonrecurring income (gains/losses on sale of securities
         and other real estate), increased 35.0%, or $238,000 from 1995. Trust
         income increased $80,000, or 25.1%, in 1996 compared to 1995 as a
         result of an increase in assets under management, an increase in the
         number of fee based services provided and fee increases. The Company's
         arrangement with BFP Financial Partners, Inc. to offer certain
         investment services resulted in an increase of $22,000, or 44%, in
         income in 1996 compared to 1995.

         Income from foreclosed assets no longer carried on the Company's books
         increased $93,000, or 251.4% in 1996 compared to 1995. These increases
         in non-interest income were partially offset by a decrease of $16,000,
         or 7.7%, in service fee income during 1996 compared to 1995. The
         Company recorded a net loss on sale of securities available for sale of
         $2,000 in 1996 compared with a net loss of $11,000 in 1995. These
         transactions are a result of a balance sheet management strategy to
         reposition the estimated average maturity of the Company's securities
         portfolio. Gains on sale of foreclosed assets of $11,000 were reported
         in 1996 compared to $53,000 in 1995.

Non-Interest Expense

         Strategic decisions made to expand the Company's locations and delivery
         system during 1996 by establishing "Bank-on-Call", a mobile branching
         service, and to establish a branch location in Green Hills at the
         Glendale Center, as well as the installation of a cash dispenser in
         Green Hills Mall, and the upgrading of existing ATM and commercial
         depository locations caused increased expenses. However, these are key
         strategies and very important to the Company's long-term growth plan.
         Total non-interest expense increased 8.5% to $4.7 million in 1996 from
         $4.3 million in 1995. Non-interest expense represented 2.94% of average
         total assets in 1996 compared to 2.89% in 1995. The non-interest
         expense to assets ratio is an industry measure of a bank's ability to
         control its overhead. Control of non-interest expense is essential to
         profit maximization; therefore, all non-interest expense categories
         have been and will continue to be closely monitored by management
         through budgetary planning and regular measurement. During 1996,
         salaries and employee benefits increased $257,000, or 11.8%, to $2.4
         million from $2.2 million in 1995. This increase resulted primarily
         from an increased number of employees which included the staffing of
         the mobile branch service and the employment of staff for the Green
         Hills location during the fourth quarter of 1996. Other staff additions
         were made in the loan and bank operations areas. Occupancy expense
         increased $73,000, or 14.9%, primarily as a result of expenses related
         to the establishment of the Green Hills office. Data processing expense
         increased $30,000, or 16.8%, as a result of the Company's expansion of
         its ATM program. Legal expense increased $27,000 or 81.8%, to $60,000
         in 1996 compared to $33,000 in 1995. This increase related primarily to
         the formation of the bank holding company, CFGI. These increases in
         non-interest expense items were partially offset by a decrease in FDIC
         insurance expense of $157,000 in 1996 compared to 1995. This decrease
         was the result of premium decreases announced by the FDIC in 1995 as
         well as a reduction in the Company's assessment rate during 1995
         resulting from an improved overall condition. The premium paid during
         1996 reflected full benefit of these adjustments which were implemented
         during 1995. Other operating expenses during 1996 increased 10.5%
         reflecting the overall growth of the Company. At December 31, 1996, the
         Company had 52 employees (one employee per $3.2 million in assets)
         compared with 42 employees (one employee per $3.6 million in assets) at
         December 31, 1995.

         Non-personnel related expenses for 1996 were $2.2 million compared to
         $2.1 million for 1995. Management currently anticipates minimal growth
         in most non-interest expense categories during 1997 other than expenses
         related to the expansion of the Company's delivery systems and service
         locations. However, economic and other factors in the market which the
         Company operates could adversely affect noninterest expense in 1997.

Income Taxes

         During 1996, the Company fully utilized the Federal tax loss
         carryforwards which had benefited income in prior years and continued
         to do so for a portion of 1996. Reported earnings in 1996 and 1995
         reflect the use of these net operating loss carryforwards. As a result
         of having exhausted the Federal tax loss carryforwards, the Company
         recorded a $168,000 provision for income taxes in 1996 compared to only
         $32,000 in 1995. As a result of management's evaluation of the
         likelihood of receiving a tax benefit from the net operating loss
         carryforwards utilizing the more likely than not standard, the Company
         maintained a valuation allowance to

12
<PAGE>   8
         offset the net deferred tax assets during both 1996 and 1995. Having
         fully utilized the Federal net operating loss caryforwards, it is
         anticipated that the 1997 effective tax rate will more closely
         approximate the applicable statutory income tax rates. Reference should
         be made to Note G of the financial statements.

Earning Assets

         Average earning assets in 1996 increased 6.3% from 1995. This increase
         was the result of a 14.9% increase in average loans, the effect of
         which was partially offset by a 8.7% decline in average investment
         securities. The average earning asset mix continued to change during
         1996 with loans at 66.6%, securities at 29.2%, and Federal Funds sold
         at 4.2% compared to a mix in 1995 which reflected loans at 61.6%,
         securities at 34.0%, and Federal Funds sold at 4.4% of the total
         average earning assets. This shift in the mix of earning assets during
         1996 contributed to the higher net interest income as the percentage of
         loans to total earning assets increased. This growth in loans began in
         the third quarter of 1994 and continued throughout 1995 and 1996. The
         mix of earning assets is monitored on a continuous basis with
         adjustments made in other areas based on the availability of quality
         loan demand.

         The 14.9% increase in average total loans in 1996 was primarily the
         result of a 21.6% increase in average real estate mortgage and real
         estate construction loans. The loan portfolio table below shows the
         classification of loans by major categories at December 31, 1996 and
         1995. Real estate mortgage and construction loans are primarily
         commercial as opposed to 1-4 family residential.

         LOAN PORTFOLIO

<TABLE>
<CAPTION>
                                         December 31         Change from Prior Year
--------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)      1996     % TOTAL     1995     % TOTAL    AMOUNT       %
--------------------------------------------------------------------------------------
<S>                      <C>           <C>     <C>          <C>     <C>         <C>   
LOAN CATEGORIES

Commercial               $ 35,721      33.1    $40,657      41.4    $(4,936)    (12.1)
Real Estate/
  Mortgage loans           58,763      54.5     48,648      49.5     10,115      20.8
Real Estate/
  Construction loans        9,467       8.8      5,952       6.0      3,515      59.1
Consumer                    3,937       3.6      3,083       3.1        854      27.7
--------------------------------------------------------------------------------------

    Total Loans          $107,888     100.0    $98,340     100.0    $ 9,548       9.7
======================================================================================
</TABLE>

         The loan portfolio mix continues to reflect the Company's efforts to
         serve its target market of small and mid-sized businesses in its
         community. The condition of the economy is further reflected in the
         loan portfolio mix with commercial loans continuing during 1996, the
         growth which began in the latter half of 1994 and continued throughout
         1995. As economic conditions and loan demand remained strong, the
         growth of commercial loans continued during 1996. Throughout 1995 and
         1996, the local economy demonstrated more strength than was reflected
         by the national economy. In an attempt to encourage economic activity,
         the Federal Reserve Bank adjusted interest rates during 1995 and early
         1996; however, no further adjustments occurred after February 1996. At
         year end 1996, loan demand appeared to be weakening slightly; however,
         it would still be considered strong. Concerns about the future of
         interest rates and the level of the Federal deficit continue to be
         reflected in a cautious approach to expansion by many small businesses.

         The Company has not invested in loans that would be considered highly
         leveraged transactions ("HLT") as defined by the Federal Reserve Board
         and other regulatory agencies. Loans made by companies for
         recapitalization or acquisition (including acquisitions by management
         or employees) which result in a material change in the borrower's
         financial structure to a highly leveraged condition are considered HLT
         loans. The Company has no foreign loans.

         The Company's securities held as available for sale provide for
         liquidity needs while contributing to profitability. During 1996, the
         Company began the implementation of a leveraging strategy which was
         comprised of Federal Home Loan Bank secured borrowings used to fund
         matched investments of U. S. Government and municipal securities. Such
         strategies require careful monitoring and measurement of interest rate
         risk but have the potential for providing significant contributions to
         net interest income. See the "Liquidity and Asset/Liability Management"
         section. The composition of the securities portfolio reflects an
         investment strategy of maximizing portfolio yields commensurate with
         risk and liquidity considerations. The primary objectives of the
         Company's investment strategies are to maintain an appropriate level of

                                                                              13
<PAGE>   9
         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. There were no classification changes of the
         Company's securities during 1996; however, during the fourth quarter of
         1995, the Company transferred securities previously classified as held
         to maturity to the available for sale category during a one time window
         of opportunity provided by the Financial Accounting Standards Board
         under SFAS No. 115 to make such adjustments in the classification of a
         financial institutions investments. Securities held as available for
         sale pursuant to SFAS No. 115, are carried on the Company's balance
         sheet at estimated fair value. As a result, the Company recognized an
         increase in equity of $64,000 for unrealized gains on securities held
         as available for sale, net of tax at December 31, 1996, which compares
         with an increase of $279,000 at year end 1995. During 1996, gross
         securities sales were $6.0 million and paydowns, including prepayments,
         were $9.6 million, representing 13.3% and 21.3%, respectively, of the
         average total portfolio for the year. Net losses associated with the
         sale of securities available for sale during 1996 were $2,000 compared
         with net losses in 1995 of $11,000. Total average securities decreased
         8.7% during 1996 compared to 1995, while total securities at year end
         1996 were 3.1% less than year end 1995. The average yield on investment
         securities was 6.7% and 6.6% in 1996 and 1995, respectively. The
         following table contains the carrying amount of the securities
         portfolio at the end of each of the last two years.

         SECURITIES AVAILABLE FOR SALE

<TABLE>
<CAPTION>
                                                                 December 31
--------------------------------------------------------------------------------
(IN THOUSANDS)                                                 1996        1995
--------------------------------------------------------------------------------
<S>                                                          <C>         <C>    
U.S. Treasury Securities and
  Obligations of U.S. Government Agencies                    $22,714     $28,381
Securities of states and political subdivisions                  368          --
Collateralized Mortgage Obligations                           21,694      18,745
Other                                                          1,661         798
--------------------------------------------------------------------------------
  Total                                                      $46,437     $47,924
================================================================================
</TABLE>

         The maturities and average weighted yields of the Company's investment
         portfolio at the end of 1996 are presented in the following table using
         primarily the estimated expected life. While the average stated
         maturity of the mortgage backed securities was 4.8 years, the estimated
         life is 3.4 years. At year end 1996, all securities were held as
         available for sale.

         DEBT SECURITIES AVAILABLE FOR SALE MATURITY SCHEDULE

<TABLE>
<CAPTION>
                                                 December 31, 1996
                               ------------------------------------------------------
                                     Within           After 1 But        After 5 But
                                     1 Year           Within 5 Yrs      Within 10 Yrs
-------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)          AMOUNT    YIELD    AMOUNT       YIELD  AMOUNT   YIELD
-------------------------------------------------------------------------------------
<S>                            <C>         <C>     <C>          <C>     <C>      <C>
U.S. Treasury
  Securities and
  Obligations of U.S.
Government Agencies            $ 6,723     6.5%    $15,990      7.16%   $ --      --
Securities of states
  political subdivisions            --      --          --        --     368     7.6%
-------------------------------------------------------------------------------------

  Total                        $ 6,723     6.5%    $15,990      7.16%   $368     7.6%
=====================================================================================
</TABLE>

         The above table excludes collateralized mortgage obligations at an
         estimated fair value of $21.7 million and investments in Federal
         Reserve Bank stock and Federal Home Loan Bank stock with an estimated
         fair value of $1.7 million. Maturities of collateralized mortgage
         obligations can be expected to differ from scheduled maturities due to
         the prepayment or early call privileges of the issuer. Federal Reserve
         Bank stock and Federal Home Loan Bank stock are equity securities with
         no stated maturity.

         Average Federal Funds sold remained relatively level during 1996
         compared to 1995. At December 31, 1996, Federal Funds sold were $6.8
         million reflecting an increase of $5.8 million, or 582.5%, from
         December 31, 1995. Federal Funds sold represent a short-term investment
         used primarily for liquidity purposes in the Company's asset/liability
         management strategies.

14
<PAGE>   10
Deposits

         The Company's volume and mix of liabilities in 1996 reflected business
         development efforts, asset/liability management strategies, general
         economic conditions and the interest rate environment, as well as
         changes in the Company's asset level and the competitive environment.
         During 1996, the portion of average liabilities and stockholders'
         equity represented by deposits, the primary source of funding for the
         Company, stood at 83.8%, a decrease from 86.5% in 1995. Year end
         deposit balances increased 2.1%, or $2.7 million in 1996 compared to
         the same period in 1995. The increase in year end deposits was a result
         of a 26.6% increase in Money Market Accounts and a 38.3% increase in
         non-interest bearing deposits. These increases were partially offset by
         a decline of 23.5% in certificates of deposit less than $100,000, 16.4%
         in certificates of deposit $100,000 and greater, and 20.4% in NOW
         Accounts. Average Money Market Account and NOW Account deposits
         increased 22.0% and 9.6%, respectively, in 1996 compared to 1995 while
         average certificates of deposit declined 12.6% in 1996 compared to
         1995. The average rate paid on interest bearing liabilities decreased
         41 basis points in 1996 compared to 1995. This decrease in rate further
         reflected the shift in mix of the Company's deposit account types as
         funds shifted from higher yielding certificates of deposit to lower
         rate Money Market and NOW Accounts.

         The deposit mix at December 31, 1996 reflected the changes that
         occurred during the year with non-interest bearing deposits at 9.6%,
         NOW Accounts at 3.7%, Money Market Accounts at 48.1%, time deposits
         under $100,000 at 19.8%, and time deposits $100,000 or greater at
         18.8%. This compares to a mix at year end 1995 which reflected
         non-interest bearing deposits at 7.0%, NOW Accounts at 4.7%, Money
         Market Accounts at 38.8%, time deposits under $100,000 at 26.5%, and
         time deposits $100,000 or greater at 23.0%. This shift in the mix of
         the Company's deposit base reflects continuing efforts to expand the
         customer base in transaction accounts, as well as the competitive
         interest rate environment. Maturities of certificates of deposit of
         $100,000 or more issued by the Company at December 31, 1996, are
         summarized in the following table:


         MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 AND OVER

<TABLE>
<CAPTION>
                  --------------------------------------------------
                  (IN THOUSANDS)
                  --------------------------------------------------
                  <S>                                        <C>
                  Three months or less                       $ 7,112
                  Over three through six months                8,356
                  Over six through twelve months               2,291
                  Over twelve months                           7,362
                  --------------------------------------------------
                   Total                                     $25,121
                  ==================================================
</TABLE>

         At year end 1996, the Company had Federal Home Loan Bank borrowings of
         $9.5 million compared to no borrowed funds at year end 1995. The
         average rate paid on average total interest bearing liabilities was
         5.2% in 1996 compared with 5.6% in 1995. This decrease in the average
         rate paid on interest bearing liabilities reflected the shift in the
         mix of deposits and included borrowed funds. The decrease in the
         average rate on interest bearing deposits reflected lower rates and
         shorter maturities of certificates of deposit which originated or
         renewed in 1996. In 1996 compared to 1995, the average rate paid on NOW
         Accounts decreased 33 basis points, the average rate on Money Market
         Accounts decreased 48 basis points, the average rate on certificates of
         deposit less than $100,000 decreased 13 basis points and the average
         rate on certificates of deposit $100,000 or greater decreased 29 basis
         points. These rates are reflective not only of rates being offered, but
         also of the maturity schedule of certificates of deposit which were
         originated in prior periods.

         The ratio of average loans, net of unearned income and allowance for
         possible loan losses to average total deposits was 75.1% in 1996,
         compared to 67.2% in 1995. This higher loan to deposit ratio reflected
         the increase in net loans outstanding which continued in 1996. The net
         loan to deposit ratio at December 31, 1996 was 78.8%, compared to 73.0%
         at year end 1995.

                                                                              15
<PAGE>   11
Liquidity and Asset/Liability Management

         The Company's asset/liability management process actively involved the
         Board of Directors and members of senior management. The
         Asset/Liability Committee of the Board of Directors meets monthly 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 assets and
         liabilities. These repricing characteristics are the timeframes within
         which interest bearing assets and liabilities are subject to change in
         interest rate either by replacement, repricing or maturity of the
         instrument. Interest rate sensitivity management focuses on the
         maturity structure of assets and liabilities and their repricing
         characteristics during periods of change in market interest rates.
         Effective interest rate risk management seeks to ensure that both
         assets and liabilities respond to changes in interest rate movement
         similarly to minimize the effect on net interest income. Management
         utilizes computer interest rate simulation models and analysis to
         determine the Company's interest rate sensitivity. Management also
         evaluates the condition of the economy, the pattern of market interest
         rates, and other economic data to determine the appropriate mix and
         repricing characteristics of assets and liabilities. In addition to
         ongoing monitoring of interest rate sensitivity, the Company may enter
         into various interest rate contracts to augment the management of the
         Company's interest sensitivity. These contracts are used to supplement
         the Company's objectives relating to its interest sensitivity position.
         The interest rate risk factor in these contracts is considered in the
         overall interest management strategy of the Company.

         The Company also utilizes certain leveraging strategies within risk
         tolerance guidelines established by its Board of Directors for the
         purpose of increasing net income. Such strategies involve the
         utilization of borrowings to fund investment securities with similar
         maturities or repricing characteristics which result in an acceptable
         interest rate spread. During 1996, management and the Board of
         Directors reviewed the risks and advantages of utilizing a leveraging
         strategy for the purpose of increasing net interest income. Several
         scenarios were carefully analyzed by the Company's investment advisor,
         designated representatives of the Board of Directors and management
         with final recommendation presented to the full Board of Directors for
         approval. Parameters were established for matching investment purchases
         with Federal Home Loan Bank borrowings. The Board established a maximum
         level of borrowings/investments of $25 million to be assumed over a
         period of 18 months and implemented in increments not to exceed $5
         million in each phase. Pro formas were reviewed resulting in the
         establishment of guidelines on interest rate risk as well as the types
         and quality of investments to be considered for purchase. Proformas
         include evaluating the impact of interest rate changes from 25 to 300
         basis points. Monitoring by the Board of Director's on a monthly basis
         and reporting guidelines were established to measure the results of
         each phase over time. On a monthly basis a matched investment income
         report is reviewed by the Board of Director's in an effort to manage
         risk. The Asset Liability Committee of the Company's Board of Directors
         reviews these results each month. The Board of Directors, after
         assessing risks and results, must preapprove each additional phase of
         this strategy prior to implementation. During the fourth quarter of
         1996, net interest income benefited from the implementation of a
         portion of this approved strategy of matching Federal Home Loan Bank
         borrowings to fund the purchase of additional investment securities.
         While this strategy contributes to an increase in net interest income,
         it also has the effect of lowering the net interest margin and
         increasing the Company's exposure to interest rate risk. Managing and
         regularly monitoring the interest rate risk associated with the
         leveraging strategy are the responsibility of both management and the
         Company's Board of Directors. Liquidity and asset/liability strategies
         include the utilization of borrowings from the Federal Home Loan Bank
         or drawing on correspondent bank lines of credit to satisfy liquidity
         or funding needs. At December 31, 1996, the Company had borrowings
         totaling $9.5 million from the Federal Home Loan Bank. Approximately $5
         million of these borrowings were used to fund investment securities.
         There were no borrowings at December 31, 1995.

         At December 31, 1996 and 1995, the Company had interest rate floor
         contracts with a combined notional value of $8 million which expire in
         1997 and 1998. These contracts were purchased to protect against
         declining interest rates. These contracts were purchased during 1992
         and 1993, and have resulted in interest income when evaluated on a life
         to date basis. The Company recorded net interest expense on these
         contracts of approximately $21,000 in both 1996 and 1995.

         The following interest rate gap table reflects the Company's rate
         sensitive position at December 31, 1996. The carrying amount of
         interest rate sensitive assets and liabilities are presented in the
         periods in which they next reprice to market rates or mature and are
         summed to show the interest rate sensitivity gap. To reflect
         anticipated prepayments, certain investments are included in the table
         based on estimated rather than contractual maturity dates.

16
<PAGE>   12

<TABLE>
<CAPTION>
                                                        Expected Repricing or Maturity Date
                                         ---------------------------------------------------------------
                                            Within      One to         Two to     After Five
                                           One Year    Two Years     Five Years      Years       Total
       -------------------------------------------------------------------------------------------------
       (DOLLARS IN THOUSANDS)                                           1996
       -------------------------------------------------------------------------------------------------
       <S>                               <C>           <C>           <C>          <C>          <C>
       Assets
          Debt and equity securities     $  16,615     $  14,461     $  13,332    $   2,029    $  46,437
          Average rate                        6.48%         6.84%         7.22%        6.81%         6.8%
          Net interest-earning loans        63,790         2,387        29,138       12,573      107,888
          Average rate                        8.96%         9.43%         9.04%        8.55%        8.95%
          Other                              6,825            --            --           --        6,825
          Average rate                        5.25%           --%           --%          --%        5.25%
       -------------------------------------------------------------------------------------------------

       Total interest-bearing assets        87,230        16,848        42,470       14,602      161,150
       Liabilities
        Deposits                           100,143        13,846         6,513           46      120,548
        Average rate                          4.83%         6.05%         6.34%        7.03%        5.07%
        Federal Home Loan
        Bank Borrowings                      9,500            --            --           --        9,500
        Average rate                          5.34%           --            --           --         5.34%
       -------------------------------------------------------------------------------------------------
       Total interest-bearing
        liabilities                        109,643        13,846         6,513           46      130,048
       -------------------------------------------------------------------------------------------------

       Interest rate sensitivity gap     $ (22,413)    $   3,002     $  35,957    $  14,556
       =================================================================================================
       Cumulative interest rate
        sensitivity gap                  $ (22,413)    $ (19,411)    $  16,546    $  31,102
       =================================================================================================
</TABLE>

         Liquidity is the ability of a financial institution to meet the needs
         of its customers and creditors. High levels of liquidity reduce
         earnings, as liquidity is normally obtained at a net interest cost as a
         result of generally lower yields on short-term, interest earning assets
         and the higher interest expense usually associated with the extension
         of deposit maturities. The Asset/Liability Committee of the Company
         determined it to be appropriate during 1996 to maintain a slightly
         lower level of liquidity in short-term instruments compared to 1995
         since asset quality continued to remain strong, the percentage of
         nonperforming loans to total loans remained relatively level, and
         profitability increased. Management continually assesses the Company's
         liquidity position and makes necessary adjustments to maintain a higher
         or lower level of liquidity based on internal projections, external
         economic conditions, and the Company's strategic plan.

         Liquidity is strengthened and reinforced by maintaining a relatively
         stable funding base which is achieved by providing relationship
         banking, extending contractual maturities of liabilities and reducing
         reliance on volatile short-term purchased funds. Maintaining acceptable
         levels of liquidity has been an ongoing consideration of the Company's'
         Asset/Liability Committee and is regularly monitored and adjusted, as
         appropriate. It is recognized that maintaining an acceptable level of
         liquidity becomes even more important during periods of economic
         uncertainty and volatile financial markets.

         Due to the commercial nature of the Company's target market,
         liabilities and loans are evaluated relative to industry concentration
         and volatility. At December 31, 1996, approximately 24% of deposits
         were related to the construction and real estate development
         industries, while 4% were related to both the health care and the real
         estate property management industries. These areas are the Company's
         largest deposit concentrations and represent significant industries
         within the Nashville area. These deposits are primarily reflected in
         the Company's demand deposit and interest bearing Money Market Account
         totals and are deposits of relationship commercial customers, which by
         their nature are concentrated in a fewer number of customer
         relationships than would be the case for consumer deposit funding
         sources. At December 31, 1996 all investment securities were classified
         as available for sale. The Company utilized a one time window of
         opportunity in late 1995 to adjust its investment portfolio
         classifications by transferring securities from the held to maturity
         classification to the available for sale classification. These
         classifications are defined in SFAS No. 115 and require the Company to
         segregate its securities portfolio and account for any market value
         fluctuations in securities classified as available for sale through the
         equity section of the balance sheet. Footnote C of the notes to the
         consolidated financial statements shows the components of the
         securities portfolio and maturities.

                                                                              17
<PAGE>   13
Nonperforming Assets and Risk Elements

         Nonperforming assets, which include nonaccrual loan, restructured
         loans, and other real estate owned, were $579,000 at December 31, 1996,
         compared with $451,000 at December 31, 1995. The following table
         presents the composition of nonperforming assets at December 31, 1996
         and 1995.

         NONPERFORMING ASSETS

<TABLE>
<CAPTION>
                                                                  December 31
         -----------------------------------------------------------------------
         (DOLLARS IN THOUSANDS)                                  1996      1995
         -----------------------------------------------------------------------
         <S>                                                     <C>       <C>
           NONPERFORMING ASSETS:
             Nonaccrual loans                                    $579      $451
             Restructured loans                                    --        --
             Other real estate owned                               --        --
         -----------------------------------------------------------------------
                                                                  579       451

             Less allowance for other real estate owned            --        --
         -----------------------------------------------------------------------

             Total                                               $579      $451
         =======================================================================
           Nonperforming assets as a percent of
             total loans plus other real estate owned             0.5%      0.5%
         =======================================================================
</TABLE>

         There were no loans 90 days or more past due at December 31, 1996 and
         1995 that were not included in the nonaccrual category.

         During 1996, $1,968,000 of loans were transferred from earning status
         to nonaccrual status, and there were no advances on nonaccrual loans.
         This compares to $1,458,000 of loans transferred from earning status to
         nonaccrual status in 1995. In 1996 and 1995 there were no loans removed
         from nonaccrual status and placed in other real estate owned. During
         1996 loans totaling $697,000 were charged-off with recoveries reported
         of $541,000 resulting in net charge-offs for the year of $156,000
         compared to loans charged-off in 1995 of $345,000 and recoveries of
         $1,058,000 resulting in net recoveries of $713,000.

         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
         an appropriate level. The largest component of the Company's credit
         risk relates to the loan portfolio. During 1996, the Company continued
         its emphasis on underwriting standards and loan review procedures.
         These processes, coupled with aggressive collection efforts, continue
         to be reflected in the level of nonperforming assets and the level of
         recoveries of previously charged-off loans. In 1996 and 1995, levels of
         charged-off loans and nonperforming assets reflected, among other
         things, the effectiveness of the Company's credit administration area.
         As discussed in the section, "Provision for Possible Loan Losses",
         asset quality and loan charge-off and recovery experience impact the
         level of the allowance for possible loan losses maintained.

         At December 31, 1996 and 1995, other potential problem loans totaled
         $84,000 and $386,000, respectively. Other potential problem loans
         consist of loans that are currently not considered nonperforming, but
         where information about possible credit problems has caused the Company
         to have serious doubts as 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. With respect to nonperforming
         assets at December 31, 1996, the following should be noted: the
         allowance for possible loan loss represented 497% of nonperforming
         loans. This compares with the allowance for possible loan losses at
         673% of nonperforming loans at December 31, 1995. The composition of
         net nonperforming assets at December 31, 1996 and 1995 was 100% in
         nonaccrual loans. The largest nonperforming loan at December 31, 1996
         was $250,000. Improvements made in asset quality during the past three
         years has allowed management to focus more on expanding delivery
         systems and locations while developing new products and services and
         aggressively soliciting new relationships in our local market.

         At December 31, 1996, the Company's allowance for possible loan losses
         was $2.9 million, or 2.7%, of total loans compared with $3.0 million,
         or 3.1%, at December 31, 1995.

         The level of the allowance for possible loan losses and the amount of
         the provision are determined on a quarter by quarter basis and, given
         the inherent uncertainties involved in the estimation process, no
         assurance can be given as to the amount of the allowance at any future
         date.

18
<PAGE>   14
Capital Strength


         Total shareholders' equity (excluding the SFAS No. 115 adjustment) at 
         December 31, 1996, was $22.0 million, or 13.2%, of total assets, which 
         compares with $19.7 million, or 12.9%, at December 31, 1995. This 
         calculation, when made after considering the effect of the Company's 
         adoption of SFAS No. 115, was $22.1 million, or 13.3%, at December 31, 
         1996, which compares with $20.0 million, or 13.1%, of total assets at  
         December 31, 1995. The adoption of SFAS No. 115 issued by the 
         Financial Accounting Standards Board is reflected in the Company's 
         shareholders' equity at December 31, 1996 and 1995, net of applicable 
         income taxes, and identified as unrealized gain (loss) on securities 
         available for sale, net of taxes. The increase in total equity is 
         primarily a result of 1996 earnings net of dividends paid and is 
         partially offset by a reduction in the unrealized gain on securities 
         available for sale of $215,000 at year end 1996 compared with 
         $279,000 at year end 1995.  The Company's capital position continues 
         to be strong. Certain capital statistics are shown in the following 
         chart:

PRIMARY AND TOTAL CAPITAL

<TABLE>
<CAPTION>
                                                                   December 31
         -----------------------------------------------------------------------------
          (Dollars In Thousands)                                 1996           1995
         -----------------------------------------------------------------------------
         <S>                                            <C>              <C>
         Total assets                                   $      166,679   $     152,800
         =============================================================================

         Total shareholders' equity                             22,085          20,012
         =============================================================================

         Total shareholders' equity to total assets               13.2%           13.1%
         =============================================================================
</TABLE>


         The Federal Reserve Board adopted a regulation which defines capital 
         measures and the thresholds for each of the five capital categories 
         defined in the Federal Deposit Insurance Corporation Improvement Act 
         of 1991.  The regulation applies to the both the Company and its 
         wholly-owned subsidiary, which is a state chartered bank and a member 
         of the Federal Reserve System.  The regulation requires minimum levels 
         of capital within five capital categories which are determined by 
         applying various risk ratings to categories of assets and certain off 
         balance sheet items.  This regulation classifies capital in two tiers,
         referred as Tier 1 and Tier 2.  Under risk based capital requirements, 
         total capital consists of Tier 1 capital (essentially, common equity 
         less certain intangibles) and Tier 2 capital (essentially, a portion 
         of the allowance for possible loan losses and certain qualifying 
         debt).  This regulation requires state chartered member banks to 
         maintain certain minimum capital ratios as shown in the following 
         chart:

         CAPITAL RATIOS

<TABLE>
<CAPTION>                                                                 CFGI                    The Bank
                                                                       December 31               December 31
         -------------------------------------------------------------------------------------------------------
          (Dollars In Thousands)                                    1996         1995         1996         1995
         -------------------------------------------------------------------------------------------------------
         <S>                                                     <C>           <C>       <C>            <C>
         CAPITAL COMPONENTS
          TIER 1 CAPITAL:
           Shareholders' equity                                  $ 22,085      $  --     $ 22,005       $ 20,012
           Disallowed portion of deffered tax assets                   --         --           --           (143)
           Unrealized (gain) on securities AFS                        (64)        --          (64)          (279)
         -------------------------------------------------------------------------------------------------------
              Total Tier 1 capital                                 22,021         --       21,941         19,590

          TIER 2 CAPITAL:
           Allowable allowance for possible loan losses             1,443         --        1,453          1,270
         -------------------------------------------------------------------------------------------------------
              Total capital                                      $ 23,464         --     $ 23,394       $ 20,860
         =======================================================================================================

         Risk-adjusted assets                                    $113,971         --     $114,854       $ 99,802
         Quarterly average assets                                $167,111         --     $167,052       $152,907
</TABLE>

<TABLE>
<CAPTION>
                                                     FDICIA
                                                     Minimum              December 31             December 31
                                                     Ratios            1996         1995       1996         1995
                                                     ------            ----         ----       ----         ----
         <S>                                         <C>               <C>           <C>       <C>          <C>
         CAPITAL RATIOS                              
            Total risk-based capital ratio           6-10%             20.6%         --        20.4%        20.9%
            Tier 1 risk-based capital ratio          3- 6%             19.3%         --        19.1%        19.6%
            Tier 1 leverage ratio                    2- 5%             13.2%         --        13.1%        12.8%
</TABLE>
                                                                              19

<PAGE>   15

         The Company's capital ratios have continually exceeded all regulatory 
         requirements for all capital ratios as demonstrated in the chart 
         above.  The Company reported dividend payments in 1996 of $352,000
         while no dividend had been recorded in prior years.
        
         The Board of Directors of The Bank and its shareholders approved
         a plan of exchange with CFGI whereby CFGI became the parent holding
         company of The Bank. This exchange was effective April 30, 1996. Each
         share of common stock of The Bank was exchanged for one share of common
         stock of CFGI, and each outstanding warrant and each outstanding option
         to purchase common shares of The Bank automatically became warrants and
         options to purchase shares of CFGI. This exchange of shares consummated
         the formation of the holding company and received the approval of The
         Bank's shareholders, the Board of Governors of the Federal Reserve
         System and the Tennessee Department of Financial Institutions.

Management's Discussion and Analysis 1995 vs. 1994

         The narrative which follows is management's discussion and analysis of
         1995 results of operations of the Company compared to 1994.

         Net income for 1995 was $2.5 million or $1.14 per share compared with 
         net income for 1994 of $2.0 million or $.92 per share.  Return on
         average assets for 1995 and 1994 was 1.69% and 1.48%, respectively.
         Return on average shareholders' equity (excluding the SFAS No. 115
         adjustment) improved to 13.54% in 1995 compared to 12.8% in 1994. Total
         assets increased 4.6% to $152.8 million at December 31, 1995, compared
         with the same period in 1994. During 1995, loans, net of unearned
         income, increased $17.3 million, or 21.3%, to $98.3 million at December
         31, 1995, compared with $81.1 million at year end 1994. Deposits
         increased $2.2 million, or 1.7%, from $128.3 million at year end 1994
         to $130.5 million at year end 1995. The net loan to deposit ratio
         increased from 61.0% at year end 1994 to 73.0% at year end 1995
         resulting primarily from a significant increase in loans, $17.3
         million, which, among other things, reflected the Company's business
         development efforts during 1995.

         Reported earnings reflected the use of net operating loss 
         carryforwards and, as such, no significant income taxes were recorded
         in either 1995 or 1994. As a result of management's evaluation of the
         likelihood of receiving a tax benefit from the net operating loss
         carryforward utilizing the more than likely than not standard, the
         Company maintained a valuation allowance to offset the net deferred tax
         assets.

Net Interest Income

         Net interest income for 1995 increased 21.3% from 1994.  This increase 
         resulted primarily from an 11.4% increase in average earning assets 
         which was partially offset by a 7.9% increase in average interest 
         bearing liabilities. Additionally, net interest income was impacted 
         by an increase of 124 basis points in the average rate earned on 
         earning assets while the average rate paid on interest bearing 
         liabilities increased 127 basis points. Interest income increased $2.9
         million, or 30.6%, in 1995 compared to 1994. This increase resulted
         from an 11.4% increase in the volume of the average earning assets, the
         effect of which was enhanced by the increase in average interest rate
         earned on these assets. Average loans increased 21.4%, average
         investment securities increased 6.0%, while average Fed Funds sold
         declined 36.6%. Interest income on loans increased 34.6% from 1994 to
         1995, as a result of increased volume of loans outstanding and an
         increase in the average interest rate earned on loans of 95 basis
         points. Interest income on investment securities increased 28.6% from
         1994 to 1995, as a result of the 6% increase in the volume of
         securities and a 115 basis point increase in the  average rate earned
         on investment securities. These increases were  partially offset by a
         15.6% decline in interest income on Federal Funds sold during a year in
         which the average rate earned on Federal Funds sold increased 141 basis
         points offset by a 37% decrease in average volume in 1995 compared to
         1994. Generally, earning assets reflected the increase in interest
         income due to growth in loans and a shift in the mix from Federal Funds
         sold to higher yielding loans and investments coupled with a higher
         average interest rate environment.

         Total interest expense increased 39.7% in 1995 due to a higher level 
         of interest bearing liabilities and a 127 basis point increase in
         the average rate paid on interest bearing liabilities. The increase in
         the average volume of interest bearing liabilities was the result of a
         15.4% increase in average Money Market Investment Account balances and
         a 10.4% increase in average balances for certificates of deposit
         $100,000 or greater. These increases were partially offset by volume
         decline of 9.2% and .5% in NOW Accounts and certificates of deposit
         less than $100,000, respectively. The increase in rates paid on
         interest bearing liabilities was

20
<PAGE>   16

         reflected in all areas with the largest increase in certificates of
         deposit $100,000 or greater and Money Market Investment Accounts.

         The Company's net interest margin increased 31 basis points to 3.85% 
         in 1995, primarily as a result of a higher loan to deposit ratio
         and the impact of shifts in the mix of earning assets to higher
         yielding loans and investments.  During 1995, the interest rate spread
         remained relatively level compared with 1994.  Total interest income
         increased in 1995 compared to 1994.  The increased level of earning
         assets combined with an increase in yield on earning assets resulted in
         a higher level of total interest income.  Total interest expense also
         increased in 1995 compared to 1994.  Total interest bearing liabilities
         increased only 7.9% while earning assets increased 11.4%; however, the
         average rate paid on interest bearing liabilities increased 127 basis
         points in 1995 compared to 1994 while the average rate earned on
         earning assets increased 124 basis points.  The average rate paid on 
         all interest bearing liabilities in 1995 was 5.57% compared with 4.30%
         in 1994.

Provision For Possible Loan Losses

         In 1995, the Company reported a net negative provision for possible 
         loan losses of $520,000, compared with $960,000 in 1994.  In 1995 the 
         Company recorded recoveries of previously charged-off loans in excess 
         of current year charge-offs in the amount of $713,000, compared with
         net recoveries of $626,000 in 1994.  The allowance for possible loan 
         losses was 3.1% of loans at December 31, 1995, compared to 3.5% of 
         loans at the same date in 1994.

Non-Interest Income

         Total non-interest income of $685,000 in 1995 reflected a decrease of 
         18.5% when compared with $840,000 reported in 1994. Non-interest
         income, less nonrecurring income (gains/losses on sale of securities
         and other real estate), decreased 14.0%, or $105,000 from 1994.  Trust
         income declined $92,000, or 22.4%, in 1995 compared to 1994 as a result
         of a decrease in assets under management.  Service fee income increased
         4.5%, or $9,000 in 1995 from 1994 , reflecting the increase in average
         deposits during 1995, as well as the increased number of deposit
         accounts.  The Company entered into an agreement in the fourth quarter
         of 1994 with BFP Financial Partners, Inc. to offer certain investment
         services which resulted in $50,000 in income in 1995 compared to $8,000
         during 1994.  The Company recorded net losses on  sale of securities
         available for sale of $11,000 in 1995 compared with a net gain on sale
         of securities available for sale of $30,000 recorded in 1994.  Gains on
         sale of foreclosed assets of $53,000 were reported in 1995 compared to
         $62,000 in 1994.

Non-Interest Expense

         Total non-interest expense declined 3.4% to $4.3 million in 1995 from 
         $4.4 million in 1994.  During 1995, net foreclosed asset expense
         decreased $63,000 from $26,000 in 1994 to a net credit of $37,000 in
         1995.  This credit resulted from income received on previously
         foreclosed assets.  FDIC insurance expense decreased 51.2% in 1995
         while salaries and employee benefits declined $19,000 in 1995 from the
         1994 levels.  Occupancy expense declined $23,000 during 1995 compared
         to 1994.  Data processing expense increased $66,000 during 1995
         compared to 1994 as a result of the Company having implemented image
         processing and having outsourced its proof and statement rendering
         functions.  This increase in data processing expense was partially
         offset by reduced personnel expenses and decreases in stationery,
         supplies and postage related to these functions.  At both December 31,
         1995 and 1994, the Company had 42 employees.  Non-personnel related
         expenses for 1995 were $2.1 million compared to $2.2 million for 1994.

Income Taxes

         Reported earnings reflected the use of net operating loss 
         carryforwards and, as such, no significant income taxes were recorded 
         in either 1995 or 1994.
                                                                              21
<PAGE>   17

Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                             December 31
         --------------------------------------------------------------------------------------------------------
          (In Thousands)                                                             1996                   1995
         --------------------------------------------------------------------------------------------------------
         <S>                                                                  <C>                     <C>
         Assets
          Cash and due from banks - Note L                                    $      6,128            $     6,279
          Federal funds sold                                                         6,825                  1,000
          Securities - Notes C and H:
           Available for sale (amortized cost of $46,334
             and $47,645, respectively)                                             46,437                 47,924       
          Loans (net of unearned income of $256 and $203,                                                               
           respectively) - Notes D and K:                                                                               
            Commercial                                                              35,721                 40,657       
            Real estate - mortgage loans                                            58,763                 48,648       
            Real estate - construction loans                                         9,467                  5,952       
            Consumer                                                                 3,937                  3,083       
         --------------------------------------------------------------------------------------------------------
             Loans, net of unearned income                                         107,888                 98,340       
            Less allowance for possible loan losses                                 (2,878)                (3,034)      
         --------------------------------------------------------------------------------------------------------
             Total net loans                                                       105,010                 95,306       
         --------------------------------------------------------------------------------------------------------
          Premises and equipment, net - Note E                                         784                    692       
          Accrued interest and other assets                                          1,495                  1,599       
         --------------------------------------------------------------------------------------------------------

         Total Assets                                                         $    166,679            $   152,800
         ========================================================================================================

              Liabilities
          Non-interest bearing demand deposits                                $     12,721            $     9,198
          Interest-bearing deposits - Note C:
           NOW accounts                                                              4,865                  6,110      
           Money market accounts                                                    64,140                 50,651   
           Time certificates less than $100,000                                     26,423                 34,530   
           Time certificates of $100,000 and greater                                25,121                 30,045   
         --------------------------------------------------------------------------------------------------------
            Total Deposits                                                         133,270                130,534   
         -------------------------------------------------------------------------------------------------------- 

         Federal Home Loan Bank borrowings (Notes C and H)                           9,500                     --   
                                                                                                                    
          Accounts payable and accrued liabilities                                   1,824                  2,254   
         --------------------------------------------------------------------------------------------------------
            Total Liabilities                                                      144,594                132,788   
         -------------------------------------------------------------------------------------------------------- 

                                                                                                             
          Commitments and contingencies                                                                      
            - Notes I, J, and K                                                                              

                                                                                                             
         Shareholders' Equity: - Notes B, C, M and N                                                         
          Common stock, $6 par value; authorized                                                             
           50,000,000 shares; issued and outstanding                                                         
           2,202,473 in 1996 and 2,191,500 in 1995                                  13,215                 13,149     
          Additional paid-in capital                                                 6,676                  8,500      
          Retained earnings (deficit)                                                2,130                 (1,916)    
          Unrealized gain on securities available for sale, net of taxes                64                    279
         --------------------------------------------------------------------------------------------------------
            Total Shareholders' Equity                                              22,085                 20,012
         --------------------------------------------------------------------------------------------------------
           Total Liabilities and Shareholders' Equity                         $    166,679            $   152,800
         ========================================================================================================
</TABLE>

         See accompanying notes to consolidated financial statements.

22
<PAGE>   18

                      Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                 Year Ended December 31
         --------------------------------------------------------------------------------------------------------------       
               (In Thousands, Except Per Share Data)                              1996            1995            1994
         --------------------------------------------------------------------------------------------------------------       
         <S>                                                                <C>              <C>             <C>
         Interest Income:
          Interest and fees on loans                                        $     9,569      $    8,626      $    6,411
          Interest on federal funds sold                                            314             362             429         
          Interest on securities:                                                                                               
           U.S. Treasury securities                                                 365             653           1,000         
           Other U.S. government agency obligations                               2,583           2,567           1,496         
           States and political subdivisions                                          5              --              --         
           Other securities                                                          63              39              39         
         --------------------------------------------------------------------------------------------------------------
             Total interest income                                               12,899          12,247           9,375         
         --------------------------------------------------------------------------------------------------------------
         Interest Expense:                                                                                     
          Interest bearing demand deposits                                        2,953           2,683           1,742    
          Time deposits less than $100,000                                        1,782           2,109           1,750    
          Time deposits $100,000 and over                                         1,563           1,850           1,261    
          Federal funds purchased                                                     8              --              --    
          Federal Home Loan Bank borrowings                                         140              --              --    
         --------------------------------------------------------------------------------------------------------------
             Total interest expense                                               6,446           6,642           4,753   
         --------------------------------------------------------------------------------------------------------------
         Net Interest Income                                                      6,453           5,605           4,622   
         Provision for possible loan losses - Note D                                 --             520             960  
         --------------------------------------------------------------------------------------------------------------
         Net interest income after provision for possible loan losses             6,453           6,125           5,582  
         Non-interest Income:                                                                                       
          Service fee income                                                        193             209             200      
          Trust income                                                              399             319             411      
          Investment Center income                                                   72              50               8      
          Gain (loss) on sale of securities, net - Note C                            (2)            (11)             30
          Income (expense) from foreclosed assets                                   130              37             (26)
          Gain on sale of other real estate owned                                    11              53              62     
          Other                                                                     124              65             129     
         --------------------------------------------------------------------------------------------------------------
             Total non-interest income                                              927             722             814     
         --------------------------------------------------------------------------------------------------------------
         Non-interest Expense:                                                                                         
          Salaries and employee benefits                                          2,437           2,180           2,199     
          Occupancy expense                                                         562             489             512     
          Legal expense                                                              60              33              19     
          FDIC insurance                                                              6             163             334     
          Audit, tax and accounting                                                 205             184             189     
          Data processing expense                                                   209             179             113     
          Other operating expenses                                                1,186           1,073           1,020     
         --------------------------------------------------------------------------------------------------------------
             Total non-interest expense                                           4,665           4,301           4,386     
         --------------------------------------------------------------------------------------------------------------        

         Income before income taxes                                               2,715           2,546           2,010     
         Income tax expense - Note G                                                168              32              --     
         --------------------------------------------------------------------------------------------------------------

         Net Income                                                         $     2,547      $    2,514      $    2,010
         ==============================================================================================================

         Net income per share - Note B                                      $      1.15      $     1.14      $      .92
         ==============================================================================================================

         Weighted average common shares outstanding - Note B                  2,219,834       2,204,254       2,181,909
         ==============================================================================================================
</TABLE>





         See accompanying notes to consolidated financial statements.
                                                                              23
<PAGE>   19

                Consolidated Statements of Sharholders' Equity

<TABLE>
<CAPTION>                                                                                        
                                                                                              Unrealized
                                                                                              Gain (Loss)
                                                                 Additional     Retained     on Securities
                                                      Common       Paid-In      Earnings       Available
                                                      Stock        Capital      (Deficit)      For Sale       Total
         -----------------------------------------------------------------------------------------------------------
          (In Thousands)
         -----------------------------------------------------------------------------------------------------------
                                                    <C>           <C>          <C>             <C>          <C>
         Balance, January 1, 1994                   $ 13,082      $ 8,490      $ (6,440)       $   294      $ 15,426

         Issuance of Common Stock
          (3,437 shares)                                  21            1            --             --            22

         Net Income                                       --           --         2,010             --         2,010

         Change in unrealized gain (loss)
          on securities available for sale,
          net of taxes - Note C                           --           --            --         (1,187)       (1,187)
         -----------------------------------------------------------------------------------------------------------

         Balance, December 31, 1994                   13,103        8,491        (4,430)          (893)       16,271

         Issuance of Common Stock
          (7,712 shares)                                  46            9            --             --            55

         Net Income                                       --           --         2,514             --         2,514

         Change in unrealized gain (loss) on
          securities available for sale,
          net of taxes - Note C                           --           --            --          1,172         1,172
         -----------------------------------------------------------------------------------------------------------

         Balance, December 31, 1995                   13,149        8,500        (1,916)           279        20,012

         Issuance of Common Stock
          (10,973 shares)                                 66           27            --             --            93

         Net Income                                       --           --         2,547             --         2,547

         Transfers to comply with state statute,
          net - Note N                                    --       (1,851)        1,851             --            --

         Cash dividends - $.16 per share                  --           --          (352)            --          (352)

         Change in unrealized gain on
          securities available for sale,
          net of taxes - Note C                           --           --            --           (215)         (215)
         -----------------------------------------------------------------------------------------------------------

         Balance, December 31, 1996                 $ 13,215      $ 6,676      $  2,130        $    64      $ 22,085
         ===========================================================================================================
</TABLE>





         See accompanying notes to consolidated financial statements.
24

<PAGE>   20

                    Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31
         ---------------------------------------------------------------------------------------------------------------       
          (In Thousands)                                                     1996            1995            1994
         ---------------------------------------------------------------------------------------------------------------       
         <S>                                                                   <C>            <C>              <C>      
         Cash Flows from Operating Activities:                                                                               
          Interest received                                                    $  13,055      $  11,879        $   9,066     
          Fees received                                                              929            909              914     
          Interest paid                                                           (6,934)        (6,144)          (4,918)    
          Cash paid to suppliers and associates                                   (4,623)        (4,012)          (2,753)    
         ---------------------------------------------------------------------------------------------------------------        
           Net cash provided by operating activities                               2,427          2,632            2,309      
         ---------------------------------------------------------------------------------------------------------------        

              Cash Flows from Investing Activities:                                                                          
          Proceeds from sales of securities:                                                                                 
           Available for sale                                                      6,012          4,089           21,530     
          Maturities of securities:                                                                                          
           Held to maturity                                                           --          1,557            2,376     
           Available for sale                                                      9,632          4,266            3,889     
          Purchases of securities:                                                                                           
           Held to maturity                                                           --             --          (11,762)    
           Available for sale                                                    (14,360)        (9,065)         (25,547)    
          Loans (originated) repaid to customers, net                             (9,704)       (16,542)          (3,243)    
          Capital expenditures                                                      (310)          (390)            (105)    
         ---------------------------------------------------------------------------------------------------------------        
           Net cash provided (used) by investing activities                       (8,730)       (16,085)         (12,862)    
         ---------------------------------------------------------------------------------------------------------------        

              Cash Flows from Financing Activities:                                                                          
          Net increase (decrease) in demand,                                                                                 
           NOW, and money market savings                                          15,767         (2,038)          17,873     
          Net increase (decrease) in time certificates                           (13,031)         4,229           (6,479)    
          Advances from Federal Home Loan Bank                                     9,500             --               --     
          Proceeds from issuance of common stock                                      93             55               23     
          Dividends paid                                                            (352)            --               --     
         --------------------------------------------------------------------------------------------------------------- 
           Net cash provided (used) by financing activities:                      11,977          2,246           11,417     
         ---------------------------------------------------------------------------------------------------------------        

         Net increase (decrease) in cash and cash equivalents                      5,674        (11,207)             864     
                                                                                                                             
         Cash and cash equivalents at beginning of year                            7,279         18,486           17,622     
         --------------------------------------------------------------------------------------------------------------- 

         Cash and cash equivalents at end of year                              $  12,953      $   7,279        $  18,486
         ===============================================================================================================   

         Reconciliation of net income to net cash provided by operating activities:
         Net income                                                            $   2,547      $   2,514        $   2,010
         Adjustments to reconcile net income to net cash provided by operating
           activities:
          Depreciation and amortization                                              209            211              183   
          Provision for possible loan losses                                          --           (520)            (960)  
          Provision for deferred income taxes                                         82             --               --   
          (Gain) loss on sale of securities                                            2            (11)             (30)  
          Loss on disposal of equipment                                               14             --               --   
          Gain on sale of other real estate owned                                    (11)           (53)             (62)  
          Provision for loss on other real estate owned                               --             --               51   
          Changes in assets and liabilities:                                                                               
           Decrease in other real estate                                              --            128            1,224   
           (Increase) decrease in accrued interest and other assets                    6           (418)            (355)        
           Increase (decrease) in accounts payable and accrued liabilities          (422)           759              248  
         --------------------------------------------------------------------------------------------------------------- 

         --------------------------------------------------------------------------------------------------------------- 

         Net cash provided by operating activities                             $   2,427      $   2,632        $   2,309 
         ===============================================================================================================   

         Supplemental disclosures of noncash investing and financing activities:                                 
                                                                                                                 
         Change in unrealized gain (loss) on securities available for sale,
          net of taxes                                                         $    (215)     $   1,172        $  (1,187)
         Transfer of securities to available for sale                                 --         20,772               --
         Transfer of securities from available for sale to held to maturity           --             --            7,780  
         Loans made to finance sale of other real estate owned                        --             --            1,061
</TABLE>



         See accompanying notes to consolidated financial statements.
                                                                              25
<PAGE>   21
Notes to Consolidated Financial Statements

A. Summary of Significant Accounting Policies

         On April 16, 1996 the shareholders of The Bank of Nashville (The
         Bank) approved the formation of a holding company.  On April 30, 1996
         The Bank became a wholly-owned subsidiary of the holding company,
         Community Financial Group, Inc., (CFGI), a Tennessee Corporation.  Each
         outstanding share of The Bank's common stock was exchanged for an
         outstanding share of CFGI and each outstanding warrant and each option
         to purchase shares of The Bank became warrants and options to purchase
         shares of CFGI.

         The consolidated financial statements include the accounts of CFGI and 
         The Bank (collectively the Company) after elimination of material 
         intercompany accounts and transactions.

         The accounting and reporting policies of the Company conform to
         generally accepted accounting principles and to general practices
         within the banking industry.  Management has made a number of estimates
         and assumptions relating to the reporting of assets and liabilities and
         the disclosure of contingent assets and liabilities to prepare these
         consolidated financial statements in conformity with generally accepted
         accounting principles.  Actual results could differ from these
         estimates.  Following is a summary of the more  significant accounting
         policies of the Company.

         SECURITIES

         Securities are designated as held to maturity or available for
         sale at the time of acquisition.  The Company does not have securities
         designated as trading securities.  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.  As of December 31, 1996 and 1995, CFGI has classified its
         entire securities portfolio as available for sale.  Available for sale
         securities are reported at fair value.  If a decline in value is
         considered to be other than temporary, the securities are written down
         to fair value and the amount of the writedown is included in earnings.
         Unrealized gains and losses on securities available for sale are
         reflected in a separate shareholders' equity account net of applicable
         income taxes in accordance with SFAS No. 115 (See Note C).  The 
         adjusted cost of a specific security sold is used to compute the gain 
         or loss on the sale of that security.  Gains and losses on the sale of
         securities available for sale are included in non-interest income.

         LOANS

         Loans are carried at the principal amount outstanding net of unearned 
         income.  Interest income on loans and amortization of unearned income 
         is computed by methods which result in level rates of return on
         principal amounts outstanding.  Effective January 1, 1995, the Company 
         adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan,
         as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
         Loan-Income Recognition and Disclosures.  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 possible loan losses through a charge to provision
         for loan losses.  Prior periods have not been restated.

         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.  Cash receipts on nonaccrual
         loans are applied to reduce the principal amount of such loans until
         the principal has been recovered and are recognized as interest income,
         thereafter.

         Loan origination, commitment fees and certain direct origination
         costs are deferred and amortized over the contractual life of the
         related loans, adjusted for prepayments as a yield adjustment.

         ALLOWANCE FOR POSSIBLE LOAN LOSSES

         The allowance for possible loan losses reflects an amount which, in 
         management's judgment, is adequate to provide for estimated loan
         losses.  Management's evaluation of the loan portfolio consists of
         evaluating


26
<PAGE>   22

         current delinquencies, the adequacy of underlying collateral, 
         current economic conditions, risk characteristics, and management's
         internal credit review process.  Accounts are charged off as soon as
         the probability of loss is established.  Management believes that the
         allowance for possible loan losses is appropriate.  While management
         uses available information to recognize losses on loans, future
         adjustments in the allowance may be necessary based on changes in
         economic conditions.  In addition, various regulatory agencies, as part
         of their examinations, periodically review the Company's allowance for
         possible loan losses.  Such agencies may require the Company to adjust
         the allowance based on their judgment and information available to them
         at the time of their examinations.

         OTHER REAL ESTATE OWNED (OREO)

         Other real estate owned includes property acquired in situations in 
         which the Company has physical possession of a debtor's assets
         (collateral).  Such assets are carried at the lower of cost or fair 
         value less estimated cost to sell.  Cost includes loan principal,
         accrued interest, foreclosure expense and expenditures for subsequent
         improvements.  Losses arising from the acquisition of such property are
         charged against the allowance for possible loan losses.  Declines in
         value subsequent to foreclosure are recorded as a valuation allowance.
         Provisions for subsequent declines or losses from disposition of such
         property are recognized in non-interest expense.

         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

                   INCOME TAXES

         The Company accounts for income taxes in accordance with the asset 
         and liability method of accounting.  Under such method deferred tax as
         sets and liabilities are recognized for the estimated future tax 
         effects attributable to differences between the financial statement
         carrying amounts of existing assets and liabilities and their
         respective tax bases.  Deferred tax assets and liabilities are measured
         using enacted tax rates expected to apply to taxable income in the 
         years in which those temporary differences are expected to be recovered
         or settled.  The effect on deferred tax assets and liabilities of a
         change in tax rates is recognized in the period that includes the
         enactment date.

         TRUST ASSETS

         Assets of the trust department, other than cash on deposit at The 
         Bank, are not included in these consolidated financial statements
         because they are not assets of the Company.

         STATEMENT OF CASH FLOWS

         For purposes of reporting cash flow, the Company has defined cash and 
         cash equivalents as cash and due from banks and daily federal funds 
         sold.

         EARNINGS PER COMMON SHARE

         Net income per share has been computed using the weighted average 
         number of common shares and common share equivalents outstanding 
         during each year presented.  Common stock equivalents include stock 
         options.  See Note B.

         FINANCIAL INSTRUMENTS

         The Company enters into interest rate floor agreements for its
         asset/liability management program.  Fees paid upon inception of these
         agreements are deferred and amortized over the life of the agreements.
         Income or expense derived from these agreements is recognized in
         interest income during the period earned.

         RECLASSIFICATIONS

         Certain reclassifications have been made in the consolidated financial
         statements for prior years to conform with the 1996 presentation.


                                                                             27
<PAGE>   23

B. Shareholders' Equity

         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, 5,973, 7,712, and 3,437 shares
         were issued during 1996, 1995 and 1994, respectively.

         The Company had outstanding stock options totaling 75,000 and
         65,000 shares at December 31, 1996 and 1995, respectively.  Options
         totaling 15,000 shares were issued and options totaling 5,000 shares
         were exercised during 1996 (See Note M).

         At December 31, 1996 and 1995, warrants to purchase 4,744,927 shares 
         of CFGI's common stock were outstanding.  The exercise price of the 
         warrants is $12.50, and they expire on December 31, 1998.  These
         warrants are common stock equivalents.

         Management has used the treasury stock method to compute earnings per 
         share since the Company was incorporated.  The Company's options
         and warrants are common stock equivalents.  The above mentioned 
         warrants have not been included in the Company's computation of 
         earnings per share because the market price of the Company's common 
         stock has been less than the exercise price of the warrants since
         issuance.  If the market price of the common stock exceeds the 
         warrants' exercise price for substantially all of any three-month 
         reporting period, the Company will reflect the impact of the warrants 
         in all future earnings per share computations using the modified 
         treasury stock method.  The modified treasury stock method assumes the
         exercise of all outstanding warrants, the repurchase of up to 20% of 
         the Company's stock, the retirement of any long-term and short-term 
         borrowings and the investment of the remaining proceeds, with 
         appropriate recognition of any income tax effects.

         If the Company's stock price had been in excess of $12.50 per share 
         for substantially all of any three-month reporting period in the
         years ending December 31, 1996 and 1995, earnings per share using the
         modified treasury stock method for the years ended December 31, 1996
         and 1995 would have been $.62 and $.74, respectively.

C. Securities

         The Company has classified all securities as available for sale in
         accordance with SFAS No. 115, Accounting for Certain Investments in
         Debt and Equity Securities since December 31, 1995.  The Company
         recorded increases in shareholders' equity of $64,000 and $279,000 at
         December 31, 1996 and 1995, respectively, for the unrealized gain on
         securities available for sale.

         Proceeds from sales of debt securities during 1996, 1995, and 1994 
         were $6.0 million, $4.1 million and $21.5 million, respectively.
         Gross gains of $5 thousand and gross losses of $7 thousand were
         realized on those sales in 1996, gross gains of $10 thousand and gross
         losses of $21 thousand were realized on those sales in 1994 and gross
         gains of $131 thousand and gross losses of $101 thousand were realized
         on those sales in 1994.

         The amortized cost, gross unrealized gains and losses, and estimated 
         fair values of securities at December 31, 1996 and 1995 were as
         follows:

<TABLE>
<CAPTION>
                                                                               Available for Sale
                                                                               Gross       Gross     Estimated
                                                                 Amortized  Unrealized   Unrealized    Fair
                                                                   Cost        Gains       Losses      Value
         -----------------------------------------------------------------------------------------------------
          (In Thousands)                                                              1996
         -----------------------------------------------------------------------------------------------------
         <S>                                                   <C>          <C>         <C>        <C>          
         U.S. Treasury Securities and Obligations                                                               
          of U.S. Government Agencies                          $  22,420    $   324     $    32    $  22,714    
         Collateralized Mortgage Obligations                      21,893         57         254       21,694    
         Securities of states and political subdivisions             360          8          --          368    
         Other - Equity Securities                                 1,661         --          --        1,661    
         -----------------------------------------------------------------------------------------------------
                                                               $  46,334    $   389     $   286    $  46,437    
         =====================================================================================================
</TABLE>



28
<PAGE>   24

<TABLE>
<CAPTION>
                                                                               Available for Sale
                                                                               Gross       Gross     Estimated
                                                                 Amortized  Unrealized   Unrealized    Fair
                                                                   Cost        Gains       Losses      Value
         -----------------------------------------------------------------------------------------------------
          (In Thousands)                                                              1996
         -----------------------------------------------------------------------------------------------------
         <S>                                                   <C>           <C>          <C>       <C>          
         U.S. Treasury Securities and Obligations
          of U.S. Government Agencies                          $  28,102     $    319     $    40   $  28,381
         Collateralized Mortgage Obligations                      18,745          177         177      18,745
         Other - Equity Securities                                   798           --          --         798

                                                               $  47,645     $    496     $   217   $  47,924
         ====================================================================================================
</TABLE>


         At December 31, 1996 and 1995, The Company did not have any securities
         which it classified as held to maturity or trading.

         In November 1995, the Financial Accounting Standards Board (FASB) 
         issued a Special Report, "A Guide to Implementation of Statement
         115 on Accounting for Certain Investments in Debt and Equity
         Securities."  The FASB  permitted a one-time opportunity to reassess 
         the appropriateness of the designation of all securities held upon the
         initial application of the Special Report.  The Company reviewed its
         current designation of all securities in conjunction with liquidity
         needs and management of interest rate risk and transferred $20.7
         million of securities from held to maturity to available for sale.  At
         the time of transfer, such securities had an unrealized loss of
         $30,000.

         The amortized cost and fair value of debt securities by contractual 
         maturity at December 31, 1996, 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.

         Collateralized mortgage obligations are disclosed as a separate line 
         item due to staggered maturity dates.  Investments in Federal Reserve 
         Bank stock and Federal Home Loan Bank stock are excluded as they have 
         no stated maturity date.

<TABLE>
<CAPTION>
                                                                                         Available for Sale
                                                                                      ------------------------
                                                                                                     Estimated
                                                                                      Amortized        Fair
                                                                                        Cost           Value
         -----------------------------------------------------------------------------------------------------
          (In Thousands)                                                                       1996
         -----------------------------------------------------------------------------------------------------
         <S>                                                                         <C>             <C>
         Due in one year or less                                                     $  3,006        $  3,010
         Due after one year through five years                                          3,724           3,727
         Due after five years through ten years                                         1,016           1,047
         Due after ten years                                                           15,034          15,298
         -----------------------------------------------------------------------------------------------------
                                                                                       22,780          23,082

         Collateralized Mortgage Obligations                                           21,893          21,694
         -----------------------------------------------------------------------------------------------------
                                                                                     $ 44,673        $ 44,776
         =====================================================================================================
</TABLE>

         Securities with an aggregate amortized cost of approximately $25.6 
         million and $18.3 million were pledged to secure public deposits, 
         Federal Home Loan Bank borrowings and for other purposes as required 
         by law at December 31, 1996 and 1995, respectively.


                                                                             29
<PAGE>   25

D. Loans and Allowance for Possible Loan Losses

         An analysis of the changes in the allowance for possible loan losses 
         is as follows:

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31
         ----------------------------------------------------------------------------------------------------------
          (In Thousands)                                                  1996              1995              1994
         ----------------------------------------------------------------------------------------------------------
         <S>                                                           <C>               <C>               <C>
         Balance, January 1                                            $  3,034          $  2,841          $  3,175
         Provision charged (credited) to operations                          --              (520)             (960)
         Loans charged off, net of recoveries of $541, $1,058
           and $1,170 in 1996, 1995 and 1994, respectively                 (156)              713               626
         ----------------------------------------------------------------------------------------------------------
         Balance, December 31                                          $  2,878          $  3,034          $  2,841
         ==========================================================================================================
</TABLE>

         At December 31, 1996 and 1995, loans on nonaccrual status amounted to 
         $579,000 and $451,000, respectively.  The effect of nonaccrual loans 
         was to reduce interest income by approximately $74,000 in 1996,
         $78,000 in 1995, and $27,000 in 1994.  There were no material
         commitments to lend additional funds to customers whose loans were
         classified as nonaccrual at December 31, 1996 and 1995.

         Renegotiated loans, which are performing in accordance with their new
         terms and, therefore, not included in nonaccrual loans.  The Company 
         had no renegotiated loans at December 31, 1996 and 1995.

         The Company adopted SFAS No. 114, "Accounting by Creditors for
         Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for
         Impairment of a Loan - Income Recognition and Disclosures," as of
         January 1, 1995.  These statements require that certain impaired loans
         be measured based on the present value of expected future cash flows
         discounted at the loan's original effective interest rate.  As a
         practical expedient, impairment may be measured based on the loan's
         observable market price or the fair value of the collateral if the loan
         is collateral dependent.  When the measure of the impaired loan is less
         that the recorded investment in the loan, the impairment is recorded
         through a valuation allowance.  The adoption of these statements did 
         not have a material impact on the Company's financial statements.

         At December 31, 1996, the Company's recorded investment in impaired 
         loans and the related valuation allowance calculated under the
         statements are $359,000 and $184,000, respectively.  At December 31,
         1995 the Company's recorded investment in impaired loans and the
         related valuation allowance were $324,000 and $162,000, respectively.
         The valuation allowance is included in the allowance for loan losses on
         the consolidated balance sheets.  At December 31, 1996 and 1995 there
         were no impaired loans without an accompanying valuation reserve.

         The average recorded investment in impaired loans for the year ended
         December 31, 1996 and 1995 was $382,000 and $360,000, 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 1996 or 1995.

         In the ordinary course of business, the Company makes loans to
         directors, executive officers, and principal shareholders, including
         related interests.  In management's opinion, these loans are made on
         substantially the same terms, including interest and collateral, as
         those prevailing at the time for comparable transactions with other
         borrowers and they did not involve more than the normal risk of
         collectability or present other unfavorable features at the time such
         loans were made.  During 1996, $2.5 million of new loans were made and
         repayments and other reductions totaled $3.6 million.  Outstanding 
         loans to executive officers and directors, including their associates 
         and affiliated companies, were $2.9 million and $4.0 million at 
         December 31, 1996 and 1995, respectively.  Unfunded lines to executive 
         officers and directors were $4.2 million and $4.9 million at December 
         31, 1996 and 1995, respectively.


30
<PAGE>   26

E. Premises and Equipment

         Premises and equipment is summarized as follows:

<TABLE>
<CAPTION>
                                                                                                     December 31
         -------------------------------------------------------------------------------------------------------------
          (In Thousands)                                                                         1996           1995
         -------------------------------------------------------------------------------------------------------------
         <S>                                                                                  <C>            <C>
         Leasehold improvements                                                               $    232       $    155
         Furniture and equipment                                                                 1,823          1,618
         -------------------------------------------------------------------------------------------------------------
                                                                                                 2,055          1,773
         Less accumulated depreciation and amortization                                         (1,271)        (1,081)
         -------------------------------------------------------------------------------------------------------------
                                                                                              $    784       $    692
         =============================================================================================================
</TABLE>

F. Other Real Estate Owned

         An analysis of the changes in the valuation allowance for other real
         estate owned is as follows:

<TABLE>
<CAPTION>                                                       
                                                                                        Year Ended December 31  
         -------------------------------------------------------------------------------------------------------------
          (In Thousands)                                                            1996         1995           1994 
         -------------------------------------------------------------------------------------------------------------
         <S>                                                                      <C>         <C>            <C>    
         Balance, January 1                                                       $   --      $    25        $   947
         Provision Charged Against Income                                             --           --             51
         Recoveries                                                                   --          (25)          (973)
         -------------------------------------------------------------------------------------------------------------

         Balance, December 31                                                     $   --      $    --        $    25
         =============================================================================================================
</TABLE>

G. Income Taxes

         As discussed in Note A, the Company accounts for income taxes in 
         accordance with SFAS No. 109.

         Actual income tax expense for the years ended December 31, 1996,
         1995 and 1994 differed from an "expected" tax expense (computed by
         applying the U.S. Federal corporate tax rate of 34% to income before
         income taxes as follows:

<TABLE>
<CAPTION>                                                       
                                                                                              December 31  
         -------------------------------------------------------------------------------------------------------------
          (In Thousands)                                                            1996         1995           1994 
         -------------------------------------------------------------------------------------------------------------
         <S>                                                                   <C>          <C>             <C>
         Computed "expected" tax expense                                       $    923     $    866        $    683
         Benefit of net operating loss carryforward                                (755)        (834)           (683)
         -------------------------------------------------------------------------------------------------------------

         Total Income Tax Expense                                              $    168     $     32        $     --
         =============================================================================================================
</TABLE>

         The components of income tax expense (benefit) were as follows:

<TABLE>
<CAPTION>
                                                                                              December 31
         -------------------------------------------------------------------------------------------------------------
          (In Thousands)                                                            1996         1995           1994
         -------------------------------------------------------------------------------------------------------------
         <S>                                                                      <C>          <C>            <C>
         Current income tax expense:
          Federal                                                                 $    86      $    32        $    --
          State                                                                        --           --             -- 
         -------------------------------------------------------------------------------------------------------------
                                                                                       86           32             --
         -------------------------------------------------------------------------------------------------------------
         Deferred income tax expense:
          Federal                                                                      82           --             --
          State                                                                        --           --             --
         -------------------------------------------------------------------------------------------------------------
                                                                                       82           --             --
         -------------------------------------------------------------------------------------------------------------

         Total Income Tax Expense                                                 $   168      $    32        $    --
         =============================================================================================================
</TABLE>

                                                                              31
<PAGE>   27
         Significant temporary differences and carryforwards that give rise to 
         the deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                                                     December 31
         -------------------------------------------------------------------------------------------------------------
          (In Thousands)                                                                         1996           1995
         -------------------------------------------------------------------------------------------------------------
         <S>                                                                                   <C>            <C>
         Deferred tax assets:
         Deferred fees, principally due to timing differences
          in the recognition of income                                                         $   134        $   119     
         Net operating loss carryforwards                                                           73            960     
         Alternative minimum tax credit carryforwards                                               30             73     
         Other                                                                                      67             41     
         -------------------------------------------------------------------------------------------------------------
           Total gross deferred tax assets                                                         304          1,193     
         -------------------------------------------------------------------------------------------------------------
           Less valuation allowance                                                                 --           (760)    
         -------------------------------------------------------------------------------------------------------------
           Net deferred tax assets                                                                 304            433     
         -------------------------------------------------------------------------------------------------------------  

         Deferred tax liabilities:                                                                                  
         Unrealized gain securities available for sale                                             (39)          (106)    
         Discount on securities deferred for tax purposes                                          (97)           (53)     
         Loans, principally due to provision for possible loan losses                             (213)          (213)
         Premises and equipment, principally due to differences
          in depreciation methods                                                                  (66)           (61)
         Other                                                                                     (10)            --
         -------------------------------------------------------------------------------------------------------------
           Total gross deferred tax liabilities                                                   (425)          (433)
         -------------------------------------------------------------------------------------------------------------

         Net                                                                                   $   121        $    --
         =============================================================================================================
</TABLE>


         The net decrease during 1996 and 1995 in the valuation allowance for
         deferred tax assets was $760,000 and $1,466,000, respectively.

         At December 31, 1996, the Company had a net operating loss 
         carryforward of $1.9 million for state income tax purposes.  This 
         state net operating loss carryforward expires in the year 2007.

H. Long Term Debt and Lines of Credit

         The Bank maintains an arrangement with the Federal Home LoanBank
         of Cincinnati to provide for certain borrowing needs of The Bank.  The
         arrangement requires The Bank to hold stock in the Federal Home Loan
         Bank and requires The Bank to pledge investment securities, to be held
         by the Federal Home Loan Bank, as collateral.  During 1996, $9,500,000
         was advanced under this arrangement. At December 31, 1996 indebtedness
         under the arrangement totaled $9,500,000.  These advances mature in
         September, 2001 and are eligible for prepayment at The Bank's option
         beginning in September, 1998.  The interest rate on these advances is
         tied to the one-month LIBOR rate minus 5 basis points and adjusts
         monthly. Interest is payable monthly.  The maximum advance outstanding
         was $9,500,000, the average balance outstanding was $2,745,000 and the
         weighted average interest rate on the advances was 5.37% for the year
         ended 1996.  The Bank has pledged investment securities with an
         amortized cost of approximately $11.3 million at December 31, 1996 as
         collateral under terms of the loan agreement.

         On December 31, 1996 and 1995, the Company had available for its
         use $15.0 million and $13.5 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.
         No amounts were outstanding under these lines of credit at December 31,
         1996 and 1995.

I. Lease Commitments

         The Company occupies space under noncancelable operating leases.
         The leases provide annual escalating rents for periods through 2000
         with options for renewals.  Rent expense is recognized in equal monthly
         amounts over the lease term.  Rent expense was $284,000, $209,000 and
         $238,000 for 1996, 1995 and 1994, respectively.


32
<PAGE>   28
         Future lease payments under noncancelable operating leases are 
         payable as follows:

<TABLE>
<CAPTION>
                            --------------------------------------------------
                             (In Thousands)
                            --------------------------------------------------
                            <S>                                       <C>
                            1997                                      $   396
                            1998                                          378
                            1999                                          301
                            2000                                          142
                            2001                                          123
                            --------------------------------------------------
                                                                      $ 1,340
                            ==================================================
</TABLE>

J. 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, 1996 and 1995 unused lines of credit were approximately
         $30.5 million and $23.5 million, respectively, with the majority
         generally having terms at origination of one year.  Additionally, the
         Company had standby letters of credit of $1,612,000 and $1,902,000 at
         December 31, 1996 and 1995, 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.

         The Company has entered into interest rate floor agreements for its
         asset/liability management program to reduce interest rate risk.  These
         interest rate floors represent obligations by third parties whereby the
         Company receives payment when the underlying rate index falls below an
         agreed upon level.  The Company paid a fee, which is amortized as an
         adjustment of yield.  The unamortized portion of this fee was $31,000 
         and $51,000 at December 31, 1996 and 1995, respectively.  At December 
         31, 1996, the Company held interest rate floor contracts with notional
         amounts totaling $8.0 million which expire in 1997 and 1998, and were
         entered into to protect the Company from falling interest rates.

K. 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.

                                                                              33
<PAGE>   29

         At December 31, 1996 funded and unfunded loan commitments as classified
         by Standard Industry Classification codes include borrowers in the real
         estate industry approximating $21.3 million and $3.9 million,
         respectively, and loans to building contractors approximating $7.8
         million and $7.5 million, respectively.  At December 31, 1995, funded 
         and unfunded commitments to borrowers in the real estate industry were
         approximately $18 million and $2 million, respectively, and to building
         contractors approximately $6.7 million and $5.3 million, respectively.

L. Cash Restrictions

         The Company is required to maintain average balances with the Federal
         Reserve Bank.  The average amounts of these balances maintained during
         the years ended December 31, 1996 and 1995, were $652,000 and $780,000,
         respectively.  The required balance at December 31, 1996 was $704,000.

M. Employee Benefits

         Effective January 1, 1990, the Board of Directors approved the 
         creation of an Incentive Phantom Stock Appreciation Rights Plan, an 
         Associates Stock Purchase Plan, and a Retirement Savings Plan 401(K).

         Stock Appreciation Rights (SARs) were granted to selected officers.
         Payment of the SARs was made in cash based on the increase in the book
         value of the Company's common stock at the conclusion of the plan
         (December 31, 1994), compared to the book value at the grant date. 
         Under the Plan, the Board of Directors has authorized 400,000
         SARs of which 234,500 SARs were outstanding to various officers at
         December 31, 1994.  During 1994, $100,000 of compensation expense was
         recorded relating to SARs outstanding. Subsequent to the year ended
         December 31, 1994, the Company paid $122,000 of previously accrued
         expenses in order to terminate the SAR plan.

         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 1996, 1995 and 1994 was approximately
         $61,000, $63,000 and $55,000, respectively.

         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.
         Incidental expenses regarding the administration of the plan are
         absorbed by the Company.

         Prior to January 1, 1996, the Company accounted for its stock option 
         plan and ASPP in accordance with the provisions of Accounting
         Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
         Employees, and related interpretations.  As such, compensation expense
         related to stock options would be recorded on the date of grant only if
         the current market price of the underlying stock exceeded the exercise
         price.  On January 1, 1996 The Company adopted SFAS No. 123, Accounting
         for Stock-Based Compensation, which permits entities to recognize as
         expense over the vesting period the fair value of all stock-based
         awards on the date of grant.  Alternatively, SFAS No. 123 also allows
         entitles to continue to apply the provisions of APB No. 25 and provide
         proforma net income and proforma earnings per share disclosures for
         employee stock option grants and purchases under the ASPP made in 1995
         and future years as if the fair-value-based method detailed in SFAS No.
         123 had been applied.  The Company has elected to continue to apply the
         provisions of APB No. 25. The provisions of SFAS No. 123 need not be
         applied to immaterial items.  As such, proforma disclosures are not
         provided.

         As of December 31, 1996, the Company's Board of Directors had approved
         the issuance of stock options to purchase 75,000 shares of the
         Company's common stock.  Compensation expense was not recorded in
         connection with the issuance of these options as the option price was
         equal to or exceeded the market price of the Company's common stock at
         the date of grant.  The following table presents information on stock
         options:



34
<PAGE>   30

<TABLE>
<CAPTION>
                                                                     Total               Exercisable         Option
                                                                 Option Shares             Options         Price Range
         --------------------------------------------------------------------------------------------------------------- 
         <S>                                                         <C>                    <C>          <C>
         Options outstanding at January 1, 1994                      60,000                 25,000       $   6.00-7.125

         Granted                                                      5,000                     --       $   7.00-7.125
         Options that became exercisable                                 --                 18,000       $   6.00-7.125
         --------------------------------------------------------------------------------------------------------------- 
         Options outstanding at December 31, 1994                    65,000                 43,000       $   6.00-7.125

         Granted                                                         --                     --              --
         Options that became exercisable                                 --                  8,000       $   6.00-7.125
         --------------------------------------------------------------------------------------------------------------- 
         Options outstanding at December 31, 1995                    65,000                 51,000       $   6.00-7.125

         Granted                                                     15,000                  3,000       $       10.125
         Options that became exercisable                                 --                  8,000       $   6.00-7.125
         Options exercised                                           (5,000)                (5,000)      $        7.125
         --------------------------------------------------------------------------------------------------------------- 
         Options outstanding at December 31, 1996                    75,000                 57,000       $  6.00-10.125
         ===============================================================================================================
</TABLE>

         The stock options are exercisable ratably through 1997 and become
         exercisable in full in the event of a merger, sale or change in
         majority control of the Company.  The options expire in the years 2002,
         2003, 2004 and 2006.

N. Restrictions on Retained Earnings, Regulatory Matters and Litigation

         In order to fund dividends in 1996, and in accordance with state
         statute, The Bank transferred $1,925,000 from additional paid-in
         capital to retained earnings and $74,000 from retained earnings to
         additional paid-in capital, resulting in a net reduction of $1,851,000
         in additional paid-in capital at March 31, 1996.  Subsequent to its
         acquisition by CFGI, The Bank transferred $187,000 from retained
         earnings to additional paid-in capital.  In  order to declare dividends
         in the future The Bank must transfer a minimum of ten percent of
         current net income from retained earnings to additional paid-in capital
         until additional paid-in capital equals common stock.  At December  31,
         1996, approximately $1.9 million of The Bank's retained earnings were
         available for dividend declaration and payment to its shareholder CFGI 
         (parent company), without regulatory approval.

         Also, there are from time to time other legal proceedings pending 
         against the Company.  In the opinion of management, liabilities,
         if any, arising from such proceedings presently pending would not have
         a material adverse effect on the consolidated financial statements of
         the Company.

         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
         financial statements.  Under capital adequacy guidelines and the
         regulatory framework for prompt corrective action, the Company must
         meet specific capital guidelines that involve quantitative measures of
         the Company's assets, liabilities, and certain off-balance-sheet items
         as calculated under regulatory accounting practices.  The Company'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 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 meets all capital adequacy requirements
         to which it is subject as of December 31, 1996.

         As of December 31, 1996, the most recent notification from the Federal 
         Deposit Insurance Corporation categorized The Bank as adequately
         capitalized under the regulatory framework for prompt corrective
         action.  To be categorized as adequately capitalized the Company 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 Company's category.


                                                                             35
<PAGE>   31
         CFGI and The Bank's actual capital amounts and ratios are also
         presented in the table.

         CAPITAL RATIOS

<TABLE>
<CAPTION>
                                                                                   CFGI                    The Bank
                                                                                December 31               December 31
         -------------------------------------------------------------------------------------------------------------------
               (Dollars In Thousands)                                        1996         1995         1996         1995
         -------------------------------------------------------------------------------------------------------------------
         <S>                                                              <C>            <C>        <C>           <C>
         CAPITAL COMPONENTS     
          TIER 1 CAPITAL:
           Shareholders' equity                                           $ 22,085       $  --      $ 22,005      $ 20,012
            Disallowed portion of deffered tax assets                           --          --            --          (143)
            Unrealized (gain) on securities AFS                                (64)         --           (64)         (279)
         -------------------------------------------------------------------------------------------------------------------
               Total Tier 1 capital                                         22,021          --        21,941        19,590

          TIER 2 CAPITAL:
           Allowable allowance for possible loan losses                      1,443          --         1,453         1,270
         -------------------------------------------------------------------------------------------------------------------
               Total capital                                              $ 23,464          --      $ 23,394      $ 20,860
         ===================================================================================================================

         Risk-adjusted assets                                             $113,971          --      $114,854      $ 99,802
         Quarterly average assets                                         $167,111          --      $167,052      $152,907
</TABLE>

<TABLE>
<CAPTION>
                                                        FDICIA
                                                        Minimum                 December 31                 December 31
                                                        Ratios                1996      1995              1996       1995
                                                        ------                ----      ----              ----       ----
         <S>                                            <C>                  <C>          <C>            <C>        <C>
         CAPITAL RATIOS
            Total risk-based capital ratio              6-10%                20.6%        --             20.4%      20.9%
            Tier 1 risk-based capital ratio             3- 6%                19.3%        --             19.1%      19.6%
            Tier 1 leverage ratio                       2- 5%                13.2%        --             13.1%      12.8%
</TABLE>

O. Fair Value of Financial Instruments

         SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
         requires disclosure of fair value information about financial
         instruments for both on and off-balance sheet assets and liabilities
         for which it is practicable to estimate fair value.  The techniques
         used for this valuation are significantly affected by the assumptions
         used, including the amount and timing of future cash flows and the
         discount rate.  Such estimates involve uncertainties and matters of
         judgment and therefore cannot be determined with precision.  In that
         regard, the derived fair value estimates cannot be substantiated by
         comparison to independent markets.  Accordingly, the aggregate fair
         value amounts presented are not meant to represent the underlying value
         of the Company.

         The following table presents the carrying amounts and the estimated 
         fair value of the Company's financial instruments at December 31:

<TABLE>
<CAPTION>
                                                                 Carrying         Estimated       Carrying      Estimated
                                                                  Amount         Fair Value        Amount      Fair Value
         -------------------------------------------------------------------------------------------------------------------
          (In Thousands)                                           1996             1996            1995          1995
         -------------------------------------------------------------------------------------------------------------------
         <S>                                                    <C>               <C>             <C>            <C> 
         Financial assets:
           Cash, due from banks, and federal funds sold         $ 12,953          $ 12,953        $  7,279       $  7,279
           Investment securities                                  46,437            46,437          47,924         47,924
           Loans, net of unearned income                         107,888           107,974          98,340         98,255

         Financial liabilities:
           Deposits                                              133,270           133,633         130,534        131,210
           Federal Home Loan Bank borrowings                       9,500             9,500              --             --
         -------------------------------------------------------------------------------------------------------------------
</TABLE>



36
<PAGE>   32

<TABLE>
<CAPTION>
                                                                 Contractual                      Contractual
                                                                     or                               or
                                                                  Notional       Estimated         Notional     Estimated
                                                                  Amounts        Fair Value        Amounts     Fair Value
         -------------------------------------------------------------------------------------------------------------------
          (In Thousands)                                            1996            1996             1995         1995
         -------------------------------------------------------------------------------------------------------------------
         <S>                                                      <C>              <C>              <C>          <C>
         Off-balance items:
         Interest rate floors                                     $ 8,000          $  *             $ 8,000      $  *
         Commitments to extend credit                              30,521             *              23,510         *
         Standby letters of credit                                  1,612             *               1,902         *
         -------------------------------------------------------------------------------------------------------------------

         * The estimated fair value of these items was not significant at December 31, 1996 or 1995.
         ===================================================================================================================
</TABLE>


         The following summary presents the methodologies and assumptions used 
         to estimate the fair value of the Company's financial instruments
         presented above.

         CASH DUE FROM BANKS AND FEDERAL FUNDS SOLD

         For cash due from banks and federal funds sold, the carrying amount 
         is a reasonable estimate of fair value.  These instruments expose the
         Company to limited credit risk and carry interest rates which 
         approximate market.

         INVESTMENT SECURITIES

         In estimating fair values, management makes use of prices or dealer 
         quotes for U.S. Treasury securities, other U.S. government agency 
         securities, and mortgage-backed certificates.  As required by 
         SFAS 115, securities available for sale are recorded at fair value.

         LOANS

         The fair value of loans is estimated by discounting the future cash 
         flows using the current rates at which similar loans would be made to 
         borrowers with similar credit ratings for the same remaining 
         maturities adjusted for differences in loan characteristics.  The risk
         of default is measured as an adjustment to the discount rate, and no
         future interest income is assumed for nonaccrual loans.

         The fair value of loans does not include the value of the customer 
         relationship or the right to fees generated by the account.

         DEPOSIT LIABILITIES

         The fair value of deposits with no stated maturities (which includes 
         demand deposits, NOW accounts, and money market deposits) is the
         amount payable on demand at the reporting date.  The fair value of
         fixed-maturity certificates of deposit is estimated using a discounted
         cash flow model based on the rates currently offered for deposits of
         similar maturities.

         SFAS No. 107 requires deposit liabilities with no stated maturity to 
         be reported at the amount payable on demand without regard for
         the inherent funding value of these instruments.  The Company believes
         that significant value exists in this funding source.

         FEDERAL HOME LOAN BANK BORROWINGS

         The fair value of Federal Home Loan Bank borrowings is estimated
         using discounted cash flows, based on current incremental borrowing
         rates for similar types of borrowing arrangements.


         INTEREST RATE FLOORS

         The fair value of interest rate floors is established by the issuer 
         based on the market price to purchase a like instrument with 
         comparable terms.



                                                                             37
<PAGE>   33

P. Parent Company Financial Information

       Condensed financial information for Community Financial Group, Inc. 
       (Parent Company only), as of December 31, 1996 and the period from
       May 1, 1996 to December 31, 1996 was as follows:

  CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                                         December 31
       --------------------------------------------------------------------------------------------------------------
        (In Thousands)                                                                                       1996
       --------------------------------------------------------------------------------------------------------------
       <S>                                                                                                <C>
       Assets
         Cash                                                                                             $     37
         Investment in bank subsidiary, at cost adjusted for equity in earnings                             22,005
         Other assets                                                                                           61
       --------------------------------------------------------------------------------------------------------------
          Total Assets                                                                                    $ 22,103

       Liabilities and Shareholders' Equity
         Other liabilities                                                                                $     18
       --------------------------------------------------------------------------------------------------------------
           Total Liabilities                                                                                    18
           Total Shareholders' Equity                                                                       22,085
       --------------------------------------------------------------------------------------------------------------
           Total Liabilities and Shareholders' Equity                                                     $ 22,103
       =============================================================================================================
</TABLE>

  CONDENSED INCOME STATEMENT

<TABLE>
<CAPTION>
                                                                                                         Eight Month
                                                                                                        Period Ended
                                                                                                         December 31
       --------------------------------------------------------------------------------------------------------------
        (In Thousands)                                                                                       1996
       --------------------------------------------------------------------------------------------------------------
       <S>                                                                                                <C>
       Income
         Dividends from bank subsidiary                                                                   $    231
       --------------------------------------------------------------------------------------------------------------
           Total income                                                                                        231              

       Expenses
         Interest expense on short-term borrowings                                                               1
         Other expenses                                                                                         50
       --------------------------------------------------------------------------------------------------------------
           Total expenses                                                                                       51
       --------------------------------------------------------------------------------------------------------------

       Income before income taxes                                                                              180
       Reduction to consolidated income taxes arising
         from parent company taxable loss                                                                       19 
       Equity in undistributed earnings of subsidiary bank                                                   2,348
       --------------------------------------------------------------------------------------------------------------

       Net Income                                                                                         $  2,547
       ==============================================================================================================
</TABLE>


38
<PAGE>   34

  STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                         Eight Month
                                                                                                        Period Ended
                                                                                                         December 31
       --------------------------------------------------------------------------------------------------------------
        (In Thousands)                                                                                       1996
       --------------------------------------------------------------------------------------------------------------
       <S>                                                                                                <C>
       Operating activities
         Net income                                                                                       $  2,547
         Adjustments to reconcile net income to net cash provided by operating activities:
           Undistributed earnings of subsidiaries                                                           (2,348)
           (Increase) in other assets                                                                          (43)
           Increase in other liabilities                                                                        18 
       --------------------------------------------------------------------------------------------------------------
             Net cash provided by operating activities                                                         174
       --------------------------------------------------------------------------------------------------------------
       Cash provided by investing activities                                                                    --
       --------------------------------------------------------------------------------------------------------------

       Financing activities
         Repayment of short-term borrowing                                                                     (20)
         Proceeds from issuance of common stock                                                                 56
         Cash dividends paid                                                                                  (176)
       --------------------------------------------------------------------------------------------------------------
           Net cash provided by (used in) financing activities                                                (140)
       --------------------------------------------------------------------------------------------------------------

       Increase in cash and due from banks                                                                      34
       Cash and due from banks, beginning of period                                                              3
       --------------------------------------------------------------------------------------------------------------      
       Cash and due from banks, end of year                                                               $     37
       ==============================================================================================================
</TABLE>


                                                                              39
<PAGE>   35

REPORT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

         The management of Community Financial Group, Inc. and subsidiary
         (the Company) is responsible for preparing the accompanying
         consolidated financial statements in accordance with generally accepted
         accounting principles.  The amounts therein are based on management's
         best estimates and judgments.  Management has also prepared other
         information in the annual report and is responsible for its accuracy
         and consistency with the consolidated financial statements.

         The Company maintains a system of internal accounting control which 
         it believes, taken as a whole, is sufficient to provide reasonable 
         assurance that assets are properly safeguarded and that transactions 
         are executed in accordance with proper authorization and are
         recorded and reported properly.  In establishing and maintaining any
         system of internal accounting control, estimates and judgments are
         required to assess the relative costs and expected benefits.  The
         Company also maintains a program that independently assesses the
         effectiveness of their internal controls.

         The Company's consolidated financial statements have been audited by 
         independent certified public accountants.  Their Independent
         Auditors' Report, which follows, is based on an audit made in
         accordance with generally accepted auditing standards and expresses an
         opinion as to the fair presentation of the Company's consolidated
         financial statements.  In performing their audit, the Company's
         independent certified public accountants consider the Company's
         internal control structure 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/ Mark S. Linebaugh, Jr.
         --------------------------
         Mack S. Linebaugh, Jr.
         Chairman of the Board
         President and CEO


INDEPENDENT AUDITORS' REPORT


         THE BOARD OF DIRECTORS AND SHAREHOLDERS
         COMMUNITY FINANCIAL GROUP, INC.:

         We have audited the accompanying consolidated balance sheets of
         Community Financial Group, Inc. and subsidiary (the Company) as of
         December 31, 1996 and 1995, and the related consolidated statements of
         income, shareholders' equity, and cash flows for each of the years in
         the three-year period ended December 31, 1996.  These consolidated
         financial statements are the responsibility of the Company's
         management.  Our responsibility is to express an opinion on these
         consolidated financial statements based on our audits.

         We conducted our audits in accordance with generally accepted
         auditing standards.  Those standards require that we plan and perform
         the audit to obtain reasonable assurance about whether the financial
         statements are free of material misstatement.  An audit includes
         examining, on a test basis, evidence supporting the amounts and
         disclosures in the financial statements.  An audit also includes
         assessing the accounting principles used and significant estimates made
         by management, as well as evaluating the overall financial statement
         presentation.  We believe that our audits provide a reasonable basis 
         for our opinion.

         In our opinion, the consolidated financial statements referred to above
         present fairly, in all material respects, the consolidated financial
         position of Community Financial Group, Inc. and subsidiary as of
         December 31, 1996 and 1995, and the results of their operations and
         their cash flows for each of the years in the three-year period ended
         December 31, 1996 in conformity with generally accepted accounting
         principles.



         /s/
         Nashville, Tennessee
         January 22, 1997



40
<PAGE>   36

COMMUNITY FINANCIAL GROUP, INC. AND SUBSIDIARY (UNAUDITED)
CONSOLIDATED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                          1996
                                                                                   Three Months Ended
         ----------------------------------------------------------------------------------------------------------------
          (In Thousands, except per share data)               December 31     September 30    June 30         March 31
         ----------------------------------------------------------------------------------------------------------------
         <S>                                                  <C>              <C>          <C>             <C>
         Interest income                                      $    3,431       $    3,186   $    3,174      $    3,108
         Interest expense                                          1,691            1,598        1,558           1,599
         ----------------------------------------------------------------------------------------------------------------

         Net interest income                                       1,740            1,588        1,616           1,509

         Provision for possible loan losses                           --               --           --              --     
         Non-interest income                                         215              217          229             266
         Non-interest expense                                      1,282            1,173        1,180           1,030
         ----------------------------------------------------------------------------------------------------------------

         Income before income taxes                                  673              632          665             745
         Provision for income taxes                                   76               62           15              15
         ----------------------------------------------------------------------------------------------------------------

         Net income                                           $      597       $      570   $      650      $      730
         ================================================================================================================

         Income per share:
         Net income                                           $      .27       $      .26   $      .29      $      .33
         ================================================================================================================

         Weighted Average Common
          Shares Outstanding                                   2,225,525        2,219,082    2,215,507       2,213,284
         ================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                                          1995
                                                                                   Three Months Ended
         ----------------------------------------------------------------------------------------------------------------
          (In Thousands, except per share data)               December 31     September 30    June 30         March 31
         ----------------------------------------------------------------------------------------------------------------
         <S>                                                  <C>              <C>          <C>             <C>
         Interest income                                      $    3,256       $    3,075   $    3,075      $    2,841
         Interest expense                                          1,672            1,691        1,767           1,512
         ----------------------------------------------------------------------------------------------------------------

         Net interest income                                       1,584            1,384        1,308           1,329

         Provision for possible loan losses                           --               --           --            (520)
         Non-interest income                                         145              207          196             174
         Non-interest expense                                      1,173              993        1,045           1,090
         ----------------------------------------------------------------------------------------------------------------

         Income before income taxes                                  556              598          459             933
         Provision for income taxes                                   32               --           --              --
         ----------------------------------------------------------------------------------------------------------------

         Net income                                           $      524       $      598   $      459      $      933
         ================================================================================================================

         Income per share:
         Net income                                           $      .24       $      .27   $      .21      $      .42
         ================================================================================================================

         Weighted Average Common
          Shares Outstanding                                   2,209,855        2,206,085    2,199,802       2,195,748
         ================================================================================================================
</TABLE>


                                                                              41
<PAGE>   37

COMMON STOCK INFORMATION

         The common stock of Community Financial Group, Inc., is traded
         over-the-counter on the National Association of Securities Dealers,
         Inc. (NASDAQ) under the symbol CFGI. The trading symbol for the
         detachable warrants is CFGIW. The quotes appear weekly in the Wall
         Street Journal under the heading, "NASDAQ Weekly Bid & Asked
         Quotations" and daily in The New York Times under the heading "NASDAQ
         Supplemental List". As of December 31, 1996, there were 532
         shareholders of record of CFGI common stock. 


         The following table sets forth the Company's high and low prices
         during each quarter for the past two years.

<TABLE>
<CAPTION>
                                                         Market Price
                       ---------------------------------------------------   
                           1996                       High          Low
                       ---------------------------------------------------
                       <S>                        <C>          <C>
                       First quarter              $   11.00    $   10.00
                       Second quarter                 11.00         9.75
                       Third quarter                  10.75         9.75
                       Fourth quarter                 11.75        10.50
</TABLE>


<TABLE>
<CAPTION>
                                                         Market Price
                       ---------------------------------------------------   
                           1995                       High          Low
                       ---------------------------------------------------
                       <S>                         <C>          <C>            
                       First quarter               $   8.50     $   6.75
                       Second quarter                  8.75         7.75
                       Third quarter                  10.25         8.00
                       Fourth quarter                 10.75         9.75
</TABLE>


         Quarterly stock price quotations were provided by the National 
         Association of Securities Dealers, Inc., and reflect prices without 
         retail markup, markdown or commissions and may not reflect actual 
         transactions.


42