CORESTRENGTH
2016 ANNUAL REPORTCOMMUNITY FINANCIAL GROUP, INC.
EXCEPTIONALPERFORMANCE
Wheatland Bank's strong financial performance is proof that our vision and strategic plans for being the premier independent community bank in eastern and central Washington are generating significant value and returns for our shareholders, customers, employees and local communities. With another year of record earnings, driven by continued robust loan growth, 2016, much like 2015, was a year of enhanced favorable financial results and trends. CFG and its wholly owned subsidiary Wheatland Bank, reported consolidated net income of $2.4 million for the year ended December 31, 2016, up 38% over the 2015 net income. This substantial increase in earnings for 2016 follows 2015's improvement in net income of 37% over the prior year. Earnings per share for 2016 rose by 37% to $1.70 over the 2015 level of $1.24, and the consolidated CFG return on average equity was 8.4% for 2016, up 27% from 6.6% for 2015. These exceptional increases in earnings contributed to a 22% annualized market value appreciation of CFG stock, as determined by a December 31, 2016 independent stock valuation, and a 61% total appreciation in the market value over the last four year period. The CFG Board of Directors declared a 5% stock dividend payable March 24, 2017 and approved a related cash repurchase program at the new higher market value. Both 2016's and 2015's net income were largely fueled by new customer relationships and outstanding record loan growth from the Bank’s 2015 expansion into the Tri-Cities market, as well as continued growth from its other eastern and central Washington markets.
Wheatland Bank finished 2016 with $365 million in total assets, $240 million in total net loans and total deposits of $327 million. Following 2015's year of the highest percentage organic loan growth of any bank in Washington State, Wheatland had another year of solid loan growth of 10%. Wheatland's larger loan portfolio drove the consolidated net interest income up 14% for the year ended December 31, 2016 to $12.9 million from $11.3 million for 2015. Loan quality continues to be very good and compares favorably to industry standards with only .25% of Wheatland's loans delinquent, and only .04% of its loans in a nonaccrual status as of December 31, 2016. The allowance for loan losses is fully funded to an amount significantly in excess of anticipated future losses and the Bank and CFG are well capitalized by all regulatory standards.
Our mission is to help our customers truly succeed, manage risk and build wealth for long-term generational prosperity. With deep roots in agricultural and commercial banking, Wheatland uses its industry expertise, local market knowledge and decentralized lending structure to provide operating capital and finance new business opportunities for its customers, while also working closely with them as trusted advisors to help mitigate risks associated with various business and economic cycles. The loan portfolio has been funded with Wheatland's stable low cost core deposits, which we attribute to a very loyal and growing customer base and our needs based consultative customer service approach to delivering state of the art depository and treasury management services.
Now for the future. The Board of Directors updated its master strategic plan recently and we will continue to focus on remaining independent and enhancing shareholder value through a balanced approach to growth and earnings. During the fourth quarter of 2016, we launched a strategic initiative to significantly expand our residential lending division to better serve our growing regional branch footprint and local communities with a wider range of services to finance home purchases, refinances and construction loans. We project that this new division will not only directly enhance the net income of the Bank, but will also indirectly do so by facilitating cross referrals and therefore growth of new customer relationships, loans and core deposits.
Meanwhile, the external banking industry around us continues to consolidate. During the last decade alone, Washington State has seen a reduction in the number of FDIC insured banks from 86 to 45, and there are only 14 banks remaining which are headquartered in eastern and central Washington. We believe that Wheatland Bank is uniquely positioned with its relationship banking model and specialization in agricultural and small business banking, to seize opportunities and thrive as the premier independent community bank in our local markets. The Bank is fortunate to have a very dedicated Board of Directors and 123 of the most talented and hardworking employees, who together, are fully committed to our mission of ensuring our customers receive the highest value of financial services to assist them in achieving their long term goals. As always, thank you for investing in Wheatland Bank and CFG, for your banking business and your referrals. Please call me if you have any questions or feedback during the year.
Dear Fellow Shareholders
Sincerely,
Susan M. Horton, CPAChairman, CEO and President
$ in thousands
CFG CONSOLIDATED NET INCOME
$1,50 0
$2,50 0
$2,0 0 0
$0
$1,0 0 0
$50 0
2012 2013 2014 2015 2016
*As adjusted for subsequent stock dividends
EARNINGS PER SHARE*
$02012 2013 2014 2015
$1.50
$1.0 0
$.50
$2.0 0
2016
MARKET VALUE PER SHARE*
$15
$25
$20
$0
$10
$5
*As adjusted for subsequent stock dividends
$0
2.0 0%
RETURN ON AVERAGE EQUITY
6 .0 0%
10.0 0%
8.0 0%
4.0 0%3.2%
2012 2013 2014 2015 2016
4.9% 5.2%
6.6%
8.4%
2012 2013 2014 2015 2016
$18.27
$14.98$17.36
$19.69
$24.05
$731
$1,151$1,286
$1,763
$2,441
$0.52
$1.24
$0.81
$1.70
$0.91
C O N S O L I D AT E D S TAT E M E N T S O F
F INANCIAL CON DIT ION
December 31,
2016 2015
Assets
Cash and due from banks $ 12,155,462 $ 5,840,252
Federal funds sold and overnight deposits 10,302,179 20,393,618
Cash and cash equivalents 22,457,641 26,233,870
Interest-bearing deposits in banks 34,271,000 46,769,000
Securities available-for-sale, at fair value 41,154,971 35,969,983
Federal Home Loan Bank stock, at cost 424,900 409,000
Investment in statutory trust 124,000 124,000
Loans held for sale 506,325 530,800
Loans receivable, net of allowance for loan losses;
2016 $2,836,067; 2015 $3,094,183 240,440,639 219,180,049
Premises and equipment, net 15,314,853 15,385,573
Bank owned life insurance 7,497,958 7,175,636
Other real estate held-for-sale 136,874 139,500
Accrued interest receivable and other assets 2,665,782 2,548,937
Total assets $ 364,994,943 $ 354,466,348
Liabilities and stockholders’ equity
Liabilities
Deposits:
Noninterest-bearing $ 152,289,366 $ 137,654,607
Interest-bearing 175,113,520 181,576,968
Total deposits 327,402,886 319,231,575
Deferred tax liability, net 420,225 561,344
Subordinated debt 4,124,000 4,124,000
Employee Stock Ownership Plan debt 380,794 496,572
Accrued interest payable and other liabilities 2,625,042 2,010,450
Total liabilities 334,952,947 326,423,941
Stockholders’ equity
Preferred stock - no par value, 300,000 shares authorized; – –
none issued
Common stock - no par value, 2,000,000 shares authorized;
Shares issued and outstanding
December 31, 2016 - 1,375,262
December 31, 2015 - 1,336,679 26,425,706 25,632,945
Retained earnings 3,843,858 2,504,196
Employee Stock Ownership Plan debt guarantee (380,794) (496,572)
Accumulated other comprehensive income 153,226 401,838
Total stockholders’ equity 30,041,996 28,042,407
Total liabilities and stockholders’ equity $ 364,994,943 $ 354,466,348
C O N S O L I D AT E D S TAT E M E N T S O F
COM PREHEN S I VE INCOME
Year Ended December 31,
2016 2015
Interest income
Loans receivable, including fees $ 11,969,413 $ 10,335,642
Interest-bearing deposits and federal funds sold 556,163 630,821
Investment securities
Taxable 338,793 332,862
Non-taxable 358,805 337,731
Total interest income 13,223,174 11,637,056
Interest expense
Deposits 155,542 185,452
Borrowed funds 175,810 148,847
Total interest expense 331,352 334,299
Net interest income 12,891,822 11,302,757
Provision for loan losses – –
Net interest income after provision for loan losses 12,891,822 11,302,757
Noninterest income
Service charges on deposit accounts 754,330 713,990
Third party bankcard interchange income 658,377 645,142
Residential mortgage origination and sale income 246,510 257,741
Net gain on sale of available-for-sale securities – 94,590
Other noninterest income 665,802 382,998
Total noninterest income 2,325,019 2,094,461
Noninterest expense
Salaries and benefits, net of direct loan origination costs 7,052,985 6,297,255
Occupancy 1,170,312 1,077,192
Information technology 950,594 918,258
Furniture and equipment depreciation and maintenance 378,012 443,441
Legal, audit and regulatory examinations 268,682 232,791
Regulatory insurance and assessments 191,110 224,655
Supplies and postage 193,185 198,419
Excise tax 207,437 177,659
Other operating expenses 1,405,892 1,346,995
Total noninterest expense 11,818,209 10,916,665
Income before income taxes 3,398,632 2,480,553
Federal income tax expense 957,838 717,645
Net income $ 2,440,794 $ 1,762,908
Other comprehensive income (loss)
Unrealized gains (losses) in securities available-for-sale (376,685) 303,707
Reclassification adjustment for (gains) losses realized in net income – (94,590)
Tax effect 128,073 (71,100)
Total other comprehensive income (loss) (248,612) 138,017
Total comprehensive income $ 2,192,182 $ 1,900,925
Basic earnings per share $ 1.70 $ 1.24
Diluted earnings per share $ 1.69 $ 1.24
C O N S O L I D AT E D S TAT E M E N T S O F
F INANCIAL CON DIT ION
C O N S O L I D AT E D S TAT E M E N T S O F
CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated
ESOP Other
Common Stock Retained Debt Comprehensive
Shares Amount Earnings Guarantee Income (Loss) Total
Balance at December 31, 2014 1,261,668 $ 24,329,171 $ 1,744,094 $ (607,185) $ 263,821 $ 25,729,901
4% stock dividend on
April 6, 2015 50,266 1,002,806 (1,002,806) – – –
Redemption of fractional shares – (4,004) – – – (4,004)
Stock options exercised 24,745 304,972 – – – 304,972
Guarantee of ESOP debt – – – 110,613 – 110,613
Net income – – 1,762,908 – – 1,762,908
Change in unrealized holding gain
on securities available-for-sale,
net of $71,100 income tax effect – – – – 138,017 138,017
Balance at December 31, 2015 1,336,679 25,632,945 2,504,196 (496,572) 401,838 28,042,407
4% stock dividend on
April 4, 2016 53,272 1,101,132 (1,101,132) – – –
Redemption of fractional shares – (4,034) – – – (4,034)
Stock repurchased (14,834) (306,618) – – – (306,618)
Stock options exercised 145 2,281 – – – 2,281
Guarantee of ESOP debt – – – 115,778 – 115,778
Net income – – 2,440,794 – – 2,440,794
Change in unrealized holding gain
on securities available-for-sale,
net of $128,073 income tax effect – – – – (248,612) (248,612)
Balance at December 31, 2016 1,375,262 $ 26,425,706 $ 3,843,858 $ (380,794) $ 153,226 $ 30,041,996
C O N S O L I D AT E D S TAT E M E N T S O F
C A SH FLOW S
Year Ended December 31,
2016 2015
Cash flows from operating activities
Net income $ 2,440,794 $ 1,762,908
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 688,735 724,007
Net amortization of premiums and discounts on securities available-for-sale 536,427 672,947
Changes in loans held for sale 24,475 (185,800)
(Gain) loss on disposal of premises and equipment 1,764 (3,925)
Impairment of other real estate held-for-sale – 30,241
Realized (gain) loss on securities available-for-sale, net – (94,590)
Provision (benefit) for deferred income taxes (13,046) (123,729)
Increase in cash surrender value of bank owned life insurance (359,476) (169,895)
Change in assets and liabilities:
Accrued interest receivable and other assets (116,845) (610,631)
Accrued interest payable and other liabilities 614,592 (138,717)
Net cash provided by operating activities 3,817,420 1,862,816
Cash flows from investing activities
Net change in interest-bearing deposits 12,498,000 28,544,000
Securities available-for-sale:
Purchases (12,319,299) (3,366,165)
Proceeds from sales – 17,256,231
Proceeds from maturities, calls or principal reductions 6,221,199 6,619,471
Purchases of FHLB stock (4,091,000) (2,415,600)
Proceeds from redemption of FHLB stock 4,075,100 2,918,900
Net (increase) decrease in loans receivable (21,260,590) (57,841,837)
Purchase of life insurance policies – (4,500,000)
Proceeds from surrender of life insurance policies 37,154 –
Purchases of premises and equipment (619,959) (6,069,819)
Proceeds from sale of equipment 180 3,925
Proceeds from sale of other real estate held-for-sale 2,626 –
Net cash used by investing activities (15,456,589) (18,850,894)
Cash flows from financing activities
Net increase in deposits 8,171,311 11,115,049
Proceeds from stock options exercised 2,281 304,972
Cash paid for repurchase of common stock (306,618) –
Fractional shares paid in cash (4,034) (4,004)
Net cash provided by financing activities 7,862,940 11,416,017
Net change in cash and cash equivalents (3,776,229) (5,572,061)
Cash and cash equivalents at beginning of year 26,233,870 31,805,931
Cash and cash equivalents at end of year $ 22,457,641 $ 26,233,870
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 333,969 $ 350,719
Income taxes $ 894,086 $ 894,316
BOARD OF DIRECTORS
Susan M. Horton, CPAChairmanCommunity Financial Group, Inc.Wheatland Bank
Charles R. CooperDirectorCommunity Financial Group, Inc.Wheatland Bank
Dennis D. BlyVice ChairmanCommunity Financial Group, Inc.Wheatland Bank
Donna T. Herak BockDirectorCommunity Financial Group, Inc.Wheatland Bank
Howard E. LeffelSecretaryCommunity Financial Group, Inc.Wheatland Bank
Richard A. VandervertDirectorCommunity Financial Group, Inc.Wheatland Bank
Christopher D. BellDirectorWheatland Bank
Scott K. JonesDirectorWheatland Bank
Marlo D. MerrellDirectorWheatland Bank
C O R P O R A T E
Directors from left to right: Marlo Merrell, Dennis Bly, Scott Jones, Chuck Cooper, Susan Horton, Chris Bell,
Donna Herak Bock, Dick Vandervert and Mike Leffel
L E A D E R S H I P
SENIOR MANAGEMENT
Joseph W. DruffelExecutive Vice PresidentChief Credit OfficerChief Compliance Officer
Allison R. Yarnell, CPAExecutive Vice President Chief Financial Officer
Michael W. PalmerExecutive Vice PresidentChief Banking OfficerTeam Leader - Spokane / Lincoln / Adams / Grant Counties
Susan M. Horton, CPAPresident Chief Executive Officer
Erik W. HopkinsSenior Vice PresidentTeam Leader - Chelan / Douglas Counties
Stephen J. LancasterSenior Vice PresidentTeam Leader - Benton / Franklin Counties
David D. MurraySenior Vice PresidentTeam Leader - Yakima / Kittitas Counties
Mary K. SwansonSenior Vice PresidentBank OperationsSecurity and Bank Secrecy Act Officer
Kitt R. ZimmermanSenior Vice PresidentChief Information Officer
Troy W. SimsSenior Vice PresidentDirector of Residential Lending Services
QUINCY
1015 Central Ave S
Quincy, WA 98848
(509) 787-9808
MOSES LAKE
1442 S Pioneer Way
Moses Lake, WA 98837
(509) 764-4602
SPOKANE VALLEY
14732 E Indiana Ave
Spokane Valley, WA 99216
(509) 232-5705
SPOKANE DOWNTOWN
222 N Wall St, Ste 100
Spokane, WA 99201
(509) 458-2265
DAVENPORT
600 Morgan St
Davenport, WA 99122
(509) 725-0211
WILBUR
8 SE Main St
Wilbur, WA 99185
(509) 647-5518
ODESSA
22 E 1st Ave
Odessa, WA 99159
(509) 982-2641
RITZVILLE
101 E 1st Ave
Ritzville, WA 99169
(509) 659-0330
COMMUNITY FINANCIAL GROUP, INC. & WHEATLAND BANK ADMINISTRATIVE HEADQUARTERS
222 N Wall St, Ste 308Spokane, WA 99201
(509) 242-5626 (888) 896-2577
W H E A T L A N D
SPOKANE NORTHSIDE
10801 N Newport Highway
Spokane, WA 99218
(509) 232-4325
WENATCHEE
1115 N Miller St
Wenatchee, WA 98801
(509) 663-5100
YAKIMA
201 E Yakima Ave, Ste 100
Yakima, WA 98901
(509) 452-7728
ELLENSBURG
205 S Main St, Ste 1
Ellensburg, WA 98926
(509) 933-3200
CHELAN
134 E Woodin Ave
Chelan, WA 98816
(509) 682-1400
PASCO
9715 Sandifur Parkway
Pasco, WA 99301
(509) 545-5626
WHEATLAND WEALTH MANAGEMENT
222 N Wall Street, Ste 100
Spokane, WA 99201
(509) 458-5200
WHEATLAND BANK HOME LOAN CENTER
222 N Wall Street, Ste 101
Spokane, WA 99201
(509) 838-5626
L O C A T I O N S