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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2000
Commission File Number 0-27393
CUMBERLAND BANCORP, INCORPORATED
(Exact name of registrant as specified in its charter)
Tennessee 62 - 1297760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4205 Hillsboro Road, Suite 101, Nashville, Tennessee 37215
(Address of principal executive offices) (Zip Code)
(615) 377-9395
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, $.50 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ]
The aggregate market value of the issuer's voting stock held by
non-affiliates, computed by reference to the price at which the stock was sold
as of February 28, 2001, is $35,193,033 for 3,910,337 shares, at an estimated
$9.00 per share.
As of February 28, 2001, 6,946,878 shares of the issuer's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for its Annual
Meeting of Shareholders are incorporated by reference into Part III of this
annual report on Form 10-K.
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CROSS REFERENCE INDEX
TO
FORM 10-K
PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS 2
ITEM 2. DESCRIPTION OF PROPERTY 13
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK 29
ITEM 8. FINANCIAL STATEMENTS 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS 60
ITEM 11. EXECUTIVE COMPENSATION 60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 60
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K 60
---------------
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Cautionary Statement Concerning
Forward-Looking Information
This Annual Report on Form 10-K of Cumberland Bancorp, Incorporated, a
Tennessee corporation (the "Company") contains or incorporates by reference
certain "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the "safe harbors" created thereby. Those statements
include, but may not be limited to, the discussions of the Company's
expectations concerning its future profitability, operating performance, growth
strategy and its assumptions regarding other matters. Also, when any of the
words "believes", "expects", "anticipates", "intends", "estimates", "plans", or
similar terms or expressions, are used in this Annual Report on Form 10-K,
forward-looking statements are being made.
You should be aware that, while the Company believes the expectations
reflected in those forward-looking statements are reasonable, they are
inherently subject to risks and uncertainties which could cause the Company's
future results and stockholder values to differ materially from the Company's
expectations. These factors are disclosed in Management's Discussion and
Analysis of Financial Condition and Results of Operations set forth herein.
Because of these factors, there can be no assurance that the forward-looking
statements included or incorporated by reference herein will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included or incorporated by reference herein, you
should not regard the inclusion of such information as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved. In addition, the Company does not intend to, and is not obligated to,
update these forward-looking statements after the date of this Annual Report on
Form 10-K, even if new information, future events or other circumstances have
made them incorrect or misleading as of any future date.
PART I
ITEM 1. Description of Business
General
We are the largest Tennessee bank holding company headquartered in
Nashville, Tennessee. We conduct our banking business through five (5) bank
subsidiaries:
- Bank of Mason, a Tennessee state chartered bank with one (1)
office in Tipton County, Tennessee,
- Bank of Dyer, a Tennessee state chartered bank with four (4)
offices in Gibson and Madison County, Tennessee,
- Cumberland Bank, a Tennessee state chartered bank with nine
(9) offices in Macon, Smith, Sumner, Robertson and Warren
Counties, Tennessee,
- BankTennessee, a Tennessee state chartered bank with six (6)
offices in Shelby and Lauderdale Counties, Tennessee and
- The Community Bank, a Tennessee state chartered bank, with
three (3) offices in Davidson and Williamson Counties,
Tennessee.
Our Tennessee banks are collectively referred to as our bank
subsidiaries or our banks. We also own a fifty percent (50%) interest in The
Murray Bank, a federal savings bank, which opened for business June 15,
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1999 and has grown to total assets of more than $41.9 million at December 31,
2000. We also own a fifty percent (50%) interest in the Insurors Bank of
Tennessee, a state chartered, Federal Reserve Bank member bank which opened for
business November 20, 2000. The Insurors Bank had total assets of $7 million at
December 31, 2000.
Our operations principally involve commercial and residential real
estate lending, commercial business lending, consumer lending, construction
lending and other financial services, including credit card services and
brokerage services. We had total assets of more than $643 million as of December
31, 2000.
The following table represents our bank's growth in branch offices and
total assets from the years ended December 31, 1994 and December 31, 1997 to
December 31, 2000. Data for BankTennessee and The Community Bank for 1994 and
1997 are for their respective predecessor entities.
12/31/94 12/31/97 12/31/00
-------- -------- --------
($ in thousands)
BankTennessee
Branch Offices ............... 2 3 6
Total Assets ................. $ 72,200 $ 97,400 $209,926
Cumberland Bank
Branch Offices ............... 2 4 9
Total Assets ................. $ 63,500 $102,700 $246,849
The Community Bank
Branch Offices ............... 1 1 3
Total Assets ................. $ 11,500 $ 35,300 $123,908
Bank of Dyer
Branch Offices ............... 1 2 4
Total Assets ................. $ 18,000 $ 28,086 $ 48,172
Bank of Mason
Branch Offices ............... -- -- 1
Total Assets ................. -- -- $ 8,724
Total
Bank Branch Offices .......... 6 10 23
Bank Subsidiaries Total Assets $165,200 $263,486 $637,579
We have eight (8) bank branch offices that are less than three years
old as of December 31, 2000. We also have broadened our mix of products and
expanded our customer base through a combination of internal growth and
acquisitions. Our growth has been directed by a senior management team composed
of individuals with an average of more than twenty-one (21) years of banking
experience in Tennessee.
Cumberland Bank. Cumberland Bank has been in business in Smith County
for more than twenty-five (25) years. It was originally organized as a state
savings and loan association in 1975 in Carthage and converted to a Tennessee
state bank in 1991. Its first office was in Carthage with later expansion to
Gallatin. We believe that Cumberland Bank also has a well established base in
Sumner County with offices in Gallatin,
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White House, and Portland, Tennessee. Another office operates in Gordonsville in
Smith County. Cumberland Bank opened a new office in Lafayette, Macon County,
Tennessee during the fourth quarter of 1999. It acquired two branch offices in
the third quarter of 1999, both of which are located in Warren County,
Tennessee. Cumberland Bank provides lending and other financial services through
its subsidiary, Cumberland Finance Company, which has offices in Gallatin and
Murfreesboro, Tennessee. Cumberland Bank offers investment services and other
financial services through its subsidiary CBC Financial Services, Inc., which
has offices in Carthage and Gallatin, Tennessee. Cumberland Bank also manages
and owns a fifty percent (50%) interest in a full service, independent insurance
agency, InsureTennessee, Inc. InsureTennessee represents more than twenty (20)
different companies offering automobile, home, life, health, disability and
other types of insurance. InsureTennessee shares an office location in Carthage
with CBC Financial Services and an office in Collierville, Tennessee in
BankTennessee's building on New Byhalia Road. InsureTennessee opened a new
office in Cross Plains, Tennessee during the third quarter 2000. A new branch
building also was constructed in the fourth quarter of 2000 in Lafayette,
Tennessee.
We have entered into a joint venture with InsCorp, Inc., a Tennessee
bank holding company, under which we acquired a fifty percent (50%) interest in
Insurors Bank of Tennessee, a de novo state chartered bank located in Nashville,
Davidson County, Tennessee. InsCorp owns the remaining interest in the bank,
which opened for business on November 20, 2000.
BankTennessee. BankTennessee was originally organized as a federal
savings association, First Federal Savings and Loan Association in 1934 and
later changed its name to First Federal Bank of Memphis. It converted to a
Tennessee state bank in 1997. BankTennessee's senior management team has over
seventy-five (75) years of banking experience, with three former bank presidents
on staff. BankTennessee is Tennessee's largest Small Business Administration
lender according to "SBA Lenders". Also, residential construction loans account
for a substantial percentage of BankTennessee's loan portfolio compared to other
Tennessee banks. BankTennessee's recent growth includes completion of a new $3.0
million main office in Collierville and a recently completed branch office in
Ripley, Tennessee.
The Community Bank. The Community Bank was originally organized as a
federal savings association, First Southern Federal Savings Bank, and later
First Federal Bank of Nashville, in 1976. It converted to a Tennessee state bank
in 1997. It has three (3) offices, one in Nashville, Tennessee, opened in 1976,
one in Brentwood, Williamson County, opened in 1996, and a new facility in
Franklin, Williamson County, constructed in 2000.
Except for Macon, Gibson, Smith, Lauderdale, Warren, Robertson, Tipton
and northern Sumner Counties which are predominantly rural, our banks are
located in growing metropolitan areas including Collierville and eastern Shelby
County in Metropolitan Memphis, and Green Hills, Brentwood, Franklin and
Gallatin in Metropolitan Nashville. Management believes that the markets in
which our banks operate offer an environment for continued growth with respect
to our target market, which includes local consumers, professionals and small
businesses. Our banks do not have a concentration of deposits obtained from a
single person or entity, or a small group of persons or entities, the loss of
which would have a material adverse effect on our business or the business of
our banks. Construction and development loans of approximately $73.7 million
made up 14.5% of our loan portfolio as of December 31, 2000.
Our banks provide a range of customary services which include checking,
NOW accounts, money market and savings accounts, certificates of deposit,
individual retirement accounts, money transfers, and safe deposit facilities.
Lending services include construction lending, commercial, consumer, commercial
and residential real estate, home equity and home improvements. In addition, the
banks offer various uninsured, non-deposit products including annuities and
mutual funds, brokerage services, and secondary market mortgage processing
services. The banks are not authorized to provide trust services.
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Our banks are subject to the regulatory authority of the Department of
Financial Institutions of the State of Tennessee and the Federal Reserve Board
of Governors and the Federal Deposit Insurance Corporation (the "FDIC") which
currently insures the depositors of each member bank to a maximum of $100,000
per depositor. For this protection, each bank pays a quarterly statutory
assessment and is subject to the rules and regulations of the FDIC.
Market Areas
We operate principally in twelve (12) market areas in Tennessee: Macon
County, Shelby County, Madison County, Robertson County, Gibson County, Tipton
County, Smith County, Sumner County, Warren County and Southern
Davidson/Williamson County. We also have a bank branch in Lauderdale County and
a finance company office in Rutherford County.
Employees
We had approximately 321 full-time equivalent employees as of December
31, 2000. None of our employee's or our banks' employees are represented by a
collective bargaining group. We consider relations with our employees to be
excellent. We and our banks provide several employee benefit programs, including
a 401(k) plan, group life and health insurance, an annual merit program, paid
vacations, and sick leave.
Competition
Our banks have substantial competition in attracting and retaining
deposits and in lending funds. The primary factors in competing for deposits are
the range and quality of financial services offered, the ability to offer
attractive rates and the availability of convenient office locations. Such
competition is heightened by the fact that Tennessee law permits any bank or
savings association located in Tennessee to branch in any county in Tennessee.
Additional significant competition for savings deposits comes from other
investment alternatives, such as money market funds and corporate and government
securities. Primary factors in competing for loans are the range and quality of
lending services offered, interest rates and loan origination fees. Competition
for the origination of loans normally comes from other savings and financial
institutions, commercial banks, credit unions, insurance companies and other
financial service companies.
Except in our Smith County market, our banks have relatively small
market shares in their respective markets. Competitors of each of our banks
generally possess substantially greater financial resources that those available
to our banks. In addition, these institutions generally have higher lending
limits than our banks and may provide various services for their customers which
our banks do not offer.
We believe our strategy of relationship banking and local autonomy in
the communities we serve allows flexibility in rates and products offered in
response to local needs in a way that can enhance profitability for our banks,
particular as consolidation of the banking industry occurs and larger
institutions exit markets that are only marginally profitable for them. We
believe our emphasis on community banking, customer service and relationships is
the most effective method we have of competing with these larger regional bank
holding companies as well as smaller community banks.
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Lending Procedures and Loan Approval Process
Lending Procedures. Lending procedures of our banks reflect our
philosophy of granting local control to decision making. Although the overall
lending policy of the banks is set by our board of directors and is subject to
the oversight and control of our board of directors, we depend, to a great
degree, upon the judgment of our loan officers and senior management at each
bank to assess and control lending risks.
Individual loan officers have discretionary authority to approve
certain loans at each of our banks without prior approval. The discretionary
limit at BankTennessee varies by loan officer based upon seniority. For example,
the bank's president has discretionary approval authority up to $750,000 for
certain secured loans, while executive vice presidents have discretionary
approval authority up to $250,000 for certain secured loans. At Cumberland Bank,
certain individual loan officers have discretionary approval authority up to
$100,000 on certain secured loans while the bank's president has discretionary
approval authority up to $500,000 on secured loans. At The Community Bank,
certain individual loan officers have discretionary approval authority of up to
$250,000 on certain secured loans. At Bank of Dyer, certain loan offices have
discretionary approval authority up to $100,000 on certain secured loans. At
Bank of Mason, the president has discretionary approval authority up to $25,000
on certain secured loans.
Each of our banks utilize a loan committee to review loan requests
exceeding the discretionary limit of the loan officer or branch manager, or for
which the loan officer or branch manager chooses not to exercise his or her
discretionary authority. Each of the banks, except Bank of Mason, has its own
officer loan committee, reflecting our emphasis on local control and decision
making.
Loans are reviewed periodically by our banks' senior lending officers.
We utilize this process to grade each of our banks' loans and determine the
adequacy of our banks' loan loss reserve. Past due loans are reviewed by an
internal loan officer committee, and a summary report of such loans is reviewed
monthly by the board of directors of the Company. A report of loan review
findings is presented quarterly to the bank's board of directors.
Asset/Liability Management
Each of our banks has a committee comprised of its senior officers and
outside directors charged with managing assets and liabilities pursuant to our
asset-liability management policy. Each committee's task is to maximize and
stabilize the net interest margin, and to provide reasonable growth of assets,
earnings and return on equity capital while maintaining credit quality,
reasonable interest rate risk, adequate capital and liquidity. To meet these
objectives, each committee monitors its bank's progress and assists in directing
overall acquisition and allocation of funds. Each committee meets monthly to
review liquidity and funds position, and to review the general economic
condition and other factors affecting the availability and use of funds of its
bank. Each committee reports monthly to our and the individual banks' boards of
directors explaining variances between budget and actual results, providing the
likely reasons for such variances and reporting management's course of action in
light of any budget variances. Our asset liability management policy is reviewed
annually by each bank's board of directors.
Investment Activities
Our banks maintain separate investment portfolios consisting primarily
of investment grade securities, including federal agency obligations, corporate
bonds and asset-backed securities. Federal regulations limit the types and
quality of instruments in which the banks may invest.
A key objective of each of our banks' investment portfolios is to
provide a balance with the banks' loans consistent with each bank's liability
structures, and to assist in management of interest rate risk. The
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investment portfolio generally receives more weight than loans in the risk-based
capital formula, and provides the necessary liquidity to meet fluctuations in
credit demands and fluctuations in deposit levels of the local communities
served. The portfolios also provide collateral for pledging against public
deposits and income for our banks.
Each of the banks manages its own investment portfolios. They utilize
investment advice provided primarily by reputable, independent brokerage firms.
Non-Depository Business
Cumberland Finance Company. Cumberland Finance, a wholly-owned
subsidiary of Cumberland Bank, was formed in 1994 for the purpose of offering
high risk, higher yield credit to people located in Smith County, Tennessee. In
1995, Cumberland Finance expanded its operations to Murfreesboro in Rutherford
County, Tennessee. Cumberland Finance was profitable in its first year of
operations but has struggled financially since then due to problems associated
with growth and underwriting functions. Cumberland Finance was profitable in
2000.
CBC Financial Services, Inc. CBC Financial Services, a wholly-owned
subsidiary of Cumberland Bank, opened its first office in Carthage, Tennessee in
1993 and thereafter expanded its operations to Gallatin, Tennessee in 1997. It
provides both full-service brokerage services and financial estate planning
services to customers within Smith and Sumner Counties, Tennessee. CBC Financial
Services has experienced operating losses in recent years as a result of costs
attributable to its growth, but we expect that its will be profitable in the
year 2001, based upon current trends of increased gross revenue and decreased
monthly losses. Under its current management, CBC Financial Services has grown
to a business with over $50 million in assets under administration as of
December 31, 2000.
InsureTennessee, Inc. InsureTennessee is a fully-licensed insurance
agency, owned fifty percent (50%) by Cumberland Bank and fifty percent (50%) by
a long-time West Tennessee insurance agent. It provides insurance products to
customers in Shelby, Sumner and Smith Counties, Tennessee through its offices in
Carthage, Gallatin and most recently Collierville, Tennessee. InsureTennessee
continued to experience operating losses the past year as a result of costs
attributable to its growth, but we expect that it will be profitable in the year
2001, based upon current trends of increased gross revenue and decreased monthly
losses.
Joint Ventures
The Murray Bank. On October 1, 1998, we entered into a joint venture
with BancKentucky for the purposes of forming and operating a federal savings
bank pursuant to Section 5(c) of the Home Owners Loan Act, as amended. By virtue
of the joint venture, we own a fifty percent (50%) interest in the voting common
stock of The Murray Bank a federal savings bank located at 405 South 12th
Street, Murray, Kentucky. BancKentucky owns the additional fifty percent (50%)
of The Murray Bank. The Murray Bank opened for business to the public on June
15, 1999.
Of the 20,000 shares of common stock, $10.00 par value issued by the
Murray Bank, we acquired 10,000 of these shares at $215 per share for a total
consideration of $2.15 million. The board of directors of The Murray Bank
consists of thirteen (13) directors, of which four (4) have been designated by
us. Under the terms of our agreement with BancKentucky, we also provide
investment, accounting, auditing, human resource management, and loan review
services to The Murray Bank on a fee for services basis, and will continue to do
so as long as we have beneficial ownership of at least fifty percent (50%) of
the voting stock of The Murray Bank.
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The Insurors Bank. On August 26, 1999, we entered into a joint venture
with InsCorp, Inc. for the purposes of forming and operating a state-chartered
bank. By virtue of the joint venture, we own a fifty percent (50%) interest in
the voting common stock of Insurors Bank of Tennessee located at 2500 Hillsboro
Road, Nashville, Tennessee. InsCorp owns the additional fifty percent (50%) of
Insurors Bank of Tennessee. InsCorp is a company primarily owned by independent
insurance agents in Tennessee. Insurors Bank opened for business to the public
on November 20, 2000.
Of the 590,000 shares of common stock issued by Insurors Bank of
Tennessee, we acquired 295,000 of these shares at $10 per share for a total
consideration of $2,950,000. The board of directors of Insurors Bank of
Tennessee consists of thirteen (13) directors, of which three (3) have been
designated by us. Under the terms of our agreement with InsCorp, we also provide
accounting, auditing, investment, human resource management, back-office
operations, to Insurors Bank of Tennessee on a fee for service basis.
Monetary Policies
The result of operations of the Bank and the Company are affected by
credit policies of monetary authorities, particularly the Federal Reserve Board.
The instruments of monetary policy employed by the Federal Reserve Board include
open market operations in U.S. government securities, changes in the discount
rate on bank borrowings and changes in reserve requirements against bank
deposits. In view of changing conditions in the national economy and in the
money markets, as well as the effects of actions by monetary and fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or the
effect of such matters on the business and earnings of the Company.
Supervision and Regulation
We, along with our banks, are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions and provide
for general regulatory oversight with respect to virtually all aspects of our
and our banks' operations. These laws and regulations are generally intended to
protect depositors, not shareholders. The following summaries of statutes and
regulations affecting banks and bank holding companies do not purport to be
complete. These summaries are qualified in their entirety by reference to the
statutes and regulations described.
General. As a bank holding company, we are regulated under the Bank
Holding Company Act of 1956, as amended, and are inspected, examined and
supervised by the Board of Governors of the Federal Reserve System. Under the
BHCA, bank holding companies generally may not acquire the ownership or control
of more than 5% of the voting shares, or substantially all the assets, of any
company, including a bank, without the Federal Reserve's prior approval. In
addition, bank holding companies generally may engage, directly or indirectly,
only in banking and such other activities as are determined by the Federal
Reserve to be closely related to banking. Under the recently enacted
Gramm-Leach-Bliley Act, bank holding companies may elect to become financial
holding companies, which are permitted to engage in activities that are
financial in nature or incidental to a financial activity. We have not elected
to become a financial holding company.
Various governmental requirements, including Sections 23A and 23B of
the Federal Reserve Act, as amended, limit borrowings by us and our nonbank
subsidiaries from our affiliate banks. These requirements also limit various
other transactions between us and our nonbank subsidiaries, on the one hand, and
our banks, on the other. For example, Section 23A limits to no more than 10% of
its total capital the aggregate outstanding amount of any bank's loans and other
"covered transactions" with any particular nonbank affiliate, and limits to no
more than 20% of its total capital the aggregate outstanding amount of any
bank's "covered transactions" with all of its nonbank affiliates. Section 23A
also generally requires that a bank's loans to its
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nonbank affiliates be secured, and Section 23B generally requires that a bank's
transactions with its nonbank affiliates be on arm's length terms.
All of our banks are incorporated under the banking laws of the State
of Tennessee and, as such, are governed by the applicable provisions of those
laws. Consequently, the Tennessee Department of Financial Institutions
supervises and regularly examines our banks. Our banks' deposits are insured by
the FDIC through the Bank Insurance Fund, and therefore are governed by the
provisions of the Federal Deposit Insurance Act and examined by the FDIC. The
TDFI and the FDIC regulate or monitor virtually all areas of our banks'
operations. The Murray Bank is a federal savings bank organized under the laws
of the United States of America. The Murray Bank is primarily regulated and
examined by the Office of Thrift Supervision. The FDIC also regulates various
operations of The Murray Bank.
Branching. Tennessee law imposes limitations on the ability of a state
bank to establish branches in Tennessee. Under current Tennessee law, any
Tennessee bank domiciled in Tennessee may establish branch offices at any
location in any county in the state. Furthermore, Tennessee and federal law
permits out-of-state acquisitions by bank holding companies, interstate merging
by banks, and de novo branching of interstate banks, subject to certain
conditions. These powers may result in an increase in the number of competitors
in our banks' markets. We believe our banks can compete effectively in their
markets despite any impact of these branching powers, but there can be no
assurance that future developments will not affect our banks' ability to compete
effectively.
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, the federal bank regulatory agencies responsible for
evaluating us and our banks, evaluate the record of the financial institutions
in meeting the credit needs of their local communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation of
those institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
Capital Requirements Generally. The federal regulatory agencies that
evaluate us and our banks use capital adequacy guidelines in their examination
and regulation of banks. If the capital falls below the minimum levels
established by these guidelines, the banks may be denied approval to acquire or
establish additional banks or non-bank businesses, or to open facilities, or the
banks may be regulated by additional regulatory restrictions or actions.
Risk-Based Capital Requirements. All of the federal regulatory agencies
have adopted risk-based capital guidelines for banks and bank holding companies.
These risk-based capital guidelines are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks to
account for off-balance sheet exposure and to minimize disincentives for holding
liquid assets. Assets and off-balance sheet items are assigned to broad risk
categories each with appropriate weights. The resulting capital ratios represent
capital as a percentage of total risk-weighted assets and off-balance sheet
items. The ratios are minimums. The guidelines require all federally-regulated
banks to maintain a minimum risk-based total capital ratio of 8%, of which at
least 4% must be Tier I capital, as described below.
A banking organization's qualifying total capital consists of two
components: Tier I, or "core," capital and Tier 2, or "supplementary," capital.
Tier I capital is an amount equal to the sum of: (1) common shareholders'
equity, including adjustments for any surplus or deficit; (2) non-cumulative
perpetual preferred stock; and (3) the company's minority interests in the
equity accounts of consolidated subsidiaries. With limited exceptions for
goodwill arising from certain supervisory acquisitions, intangible assets
generally must be deducted from Tier I capital. Other intangible assets may be
included in an amount up to 25% of Tier I capital, so long as the asset is
capable of being separated and sold apart from the banking organization or the
bulk of its assets. Additionally, the market value of the asset must be
established on an annual basis through an
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identifiable stream of cash flows and there must be a high degree of certainty
that the asset will hold this market value notwithstanding the future prospects
of the banking organization. Finally, the banking organization must demonstrate
that a liquid market exists for the asset. Intangible assets in excess of 25% of
Tier I capital generally are deducted from a banking organization's regulatory
capital. At least 50% of the banking organization's total regulatory capital
must consist of Tier I capital.
Tier 2 capital is generally considered to be an amount equal to the sum
of the following:
- the allowance for possible credit losses in an amount up to
1.25 % of risk-weighted assets;
- cumulative perpetual preferred stock with an original maturity
of 20 years or more and related surplus;
- hybrid capital instruments defined as instruments with
characteristics of both debt and equity, perpetual debt and
mandatory convertible debt securities; and
- in an amount up to 50% of Tier I capital, eligible term
subordinated debt and intermediate-term preferred stock with
an original maturity of five years or more, including related
surplus.
Investments in unconsolidated banking and finance subsidiaries,
investments in securities subsidiaries and reciprocal holdings of capital
instruments must be deducted from capital. The federal regulatory agencies may
require other deductions on a case-by-case basis.
Under the risk-weighted capital guidelines, balance sheet assets and
certain off-balance sheet items like standby letters of credit, are assigned to
one of four risk-weight categories according to the nature of the asset and its
collateral or the identity of any obligor or guarantor. These four categories
are 0%, 20%, 50% or 100%. For example, cash is assigned to the 0% risk category,
while loans secured by one-to-four family residences are assigned to the 50%
risk category. The aggregate amount of assets and off-balance sheet items in
each risk category is adjusted by the risk-weight assigned to that category to
determine weighted values, which are added together to determine the total
risk-weighted assets for the banking organization. Accordingly, an asset, like a
commercial loan, which is assigned to a 100% risk category is included in
risk-weighted assets at its nominal face value, whereas a loan secured by a
single-family home mortgage is included at only 50% of its nominal face value.
The application ratios are equal to capital, as determined, divided by
risk-weighted assets, as determined.
Leverage Capital Requirements. The federal regulatory agencies have
issued a final regulation requiring certain banking organizations to maintain
additional capital of 1% to 2% above a 3% minimum Tier I leverage capital ratio
equal to Tier I capital, less intangible assets, to total assets. In order for
an institution to operate at or near the minimum Tier I leverage capital ratio
of 3%, the banking regulators expect that the institution would have
well-diversified risk, no undue rate risk exposure, excellent asset quality,
high liquidity and good earnings. In general, the bank would have to be
considered a strong banking organization, rated in the highest category under
the bank rating system and have no significant plans for expansion. Higher Tier
I leverage capital ratios of up to 5% will generally be required if all of the
above characteristics are not exhibited, or if the institution is undertaking
expansion, seeking to engage in new activities, or otherwise faces unusual or
abnormal risks.
Institutions not in compliance with these regulations are expected to
be operating in compliance with a capital plan or agreement with that
institution's regulator. If they do not do so, they are deemed to be engaging in
an unsafe and unsound practice and may be subject to enforcement action. Failure
to maintain a Tier I leverage capital ratio of at least 2% of assets constitutes
an unsafe and unsound practice and may result in enforcement action against an
institution justifying termination of that institution's FDIC insurance.
10
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At December 31, 2000, the Company's subsidiary bank's risk-based Tier 1
Capital and risk-based Total Capital ratios were 7.42% and 10.79%, respectively.
Liability for Bank Subsidiaries. Under the Federal Reserve policy, we,
as a bank holding company, are expected to act as a source of financial and
managerial strength to each of our banks and to maintain resources adequate to
support each of our banks. This support may be required at times when we may not
have the resources to provide it. Any depository institution insured by the FDIC
can be held liable for any loss incurred, or reasonably expected to be incurred,
by the FDIC in connection with the default of a commonly-controlled,
FDIC-insured depository institution like a bank subsidiary. Additionally,
depository institutions insured by the FDIC may be held liable to the FDIC for
any loss incurred or reasonably expected to be incurred in connection with any
assistance provided by the FDIC to a commonly-controlled, FDIC-insured
depository institution in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
"default" is likely to occur in the absence of regulatory assistance. All of our
banks are FDIC-insured depository institutions. Also, in the event that such a
default occurred with respect to one of our banks, any capital loans from us to
that bank would be subordinate in right of payment to payment of the bank's
depositors and other of the bank's obligations.
Dividend Restrictions. Federal and Tennessee law limits the payment of
dividends by banks. Under Tennessee law, the directors of a state bank, after
making proper deduction for all expenditures, expenses, taxes, losses, bad
debts, and any write-offs or other deductions required by the TDFI, may credit
net profits to the bank's undivided profits account. Thereafter, the bank may
quarterly, semi-annually, or annually declare a dividend from that account in an
amount judged expedient by the bank's board of directors. Before declaring the
dividend, the board of directors must deduct any net loss from the undivided
profits account and transfer to the bank's surplus account (1) the amount, if
any, required to raise the surplus to 50% of the capital stock and (2) the
amount required, if any, but not less than 10% of net profits, to make the
paid-in-surplus account equal the capital stock account. Thereafter, the bank
may declare a dividend if the bank is adequately reserved against deposits and
those reserves will not be impaired by the declaration of the dividend.
A state bank, with the approval of the TDFI, may transfer funds from
its surplus account to the undivided profits or retained earnings account or any
part of its paid-in-capital account. The payment of dividends by any bank is
dependent upon its earnings and financial condition and, also may be limited by
federal and state regulatory agency protections against unsafe or unsound
banking practices. The payment of dividends could, depending upon the financial
condition of a bank, constitute an unsafe or unsound banking practice. When a
bank's surplus account is less than its capital stock account, Tennessee law
imposes other restrictions on dividends. Finally, the FDIC prohibits a state
bank, the deposits of which are insured by the FDIC, from paying dividends if it
is in default in the payment of any assessments due the FDIC.
The Federal Reserve also imposes dividend restrictions on our banks as
state member banks of the Federal Reserve. Our banks may not declare or pay a
dividend if that dividend would exceed the bank's undivided profits, unless the
bank has received the prior approval of the Board of Governors of the Federal
Reserve. Additionally, our banks may not permit any portion of their "permanent
capital" to be withdrawn unless the withdrawal has been approved by the Board of
Governors of the Federal Reserve. Permanent capital is defined as the total of a
bank's perpetual preferred stock and related surplus, common stock and surplus,
and minority interest in consolidated subsidiaries. Finally, if one of our banks
has a capital surplus in excess of that required by law, that excess may be
transferred to the bank's undivided profits account and be available for the
payment of dividends so long as (1) the amount came from the earnings of prior
periods, excluding earnings transferred as a result of stock dividends and (2)
the bank's board and the Board of Governors of the Federal Reserve approved the
transfer.
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In 2000, cash dividends totaling $0.10 per share were declared and
$0.075 cents per share were paid in the calendar year. In the first quarter of
2001, a cash dividend was declared in the amount of $0.03 cents per share
payable on April 14, 2001 to shareholders of record on March 1, 2001.
Deposit Insurance Assessments. The deposits of each of our banks are
insured up to regulatory limits by the FDIC and we are required under the FDIC's
deposit insurance assessments to maintain the Bank Insurance Fund (BIF) and
Savings Association Insurance Fund (SAIF). The FDIC has adopted regulations
establishing a permanent risk-related deposit insurance assessment system. Each
financial institution is assigned to one of three capital groups -- well
capitalized, adequately capitalized or undercapitalized -- and further assigned
to one of three subgroups within a capital group. A bank's assignment is based
on supervisory evaluations by the institution's primary federal regulator and,
if applicable, other information relevant to the institution's financial
condition and the risk posed to the applicable insurance fund. The assessment
rate applicable to our banks in the future will depend in part upon the risk
assessment classification assigned to each bank by the FDIC and in part on the
BIF assessment schedule adopted by the FDIC. Institutions are prohibited from
disclosing the risk classification to which they have been assigned. The Deposit
Insurance Funds Act of 1996 provides for assessments to be imposed on insured
depository institutions with respect to deposits insured by the BIF and the
SAIF. Currently, the annual insurance premiums on bank deposits insured by the
BIF and SAIF vary between $0.00 to $0.27 per $100 of deposits.
Effects of Governmental Policies. The difference between interest
earned by our banks on their loans and investments and the interest paid by them
on their deposits or other borrowings affects our banks' earnings. The yields on
their assets and the rates paid on their liabilities are sensitive to changes in
prevailing market rates of interest. Thus, the general economic conditions,
fiscal policies of the federal government, and the policies of regulatory
agencies, particularly the Federal Reserve, which establishes national monetary
policy, will influence our banks' earnings and growth. The nature and impact of
any future changes in fiscal or monetary policies cannot be predicted.
Commercial banks are affected by the credit policy of various
regulatory authorities, including the Federal Reserve. An important function of
the Federal Reserve is to regulate the national supply of bank credit. Among the
instruments of monetary policy used by the Federal Reserve to implement these
objectives are open market operations in U.S. Government securities, changes in
reserve requirements on bank deposits, changes in the discount rate on bank
borrowings, and limitations on interest rates that banks may pay on time and
savings deposits. The Federal Reserve uses these means in varying combinations
to influence overall growth of bank loans, investments and deposits, and also to
affect interest rates charged on loans, received on investments or paid for
deposits.
The monetary and fiscal policies of regulatory authorities, including
the Federal Reserve, also affect the banking industry. Through changes in the
reserve requirements against bank deposits, open market operations in U.S.
Government securities and changes in the discount rate on bank borrowings, the
Federal Reserve influences the cost and availability of funds obtained for
lending and investing. No prediction can be made with respect to possible future
changes in interest rates, deposit levels or loan demand or with respect to the
impact of these changes on the business and earnings of our banks.
From time to time, various federal and state laws, rules and
regulations, and amendments to existing laws, rules and regulations, are enacted
that affect banks and bank holding companies. Future legislation and regulation
could significantly change the competitive environment for banks and bank
holding companies. We cannot predict the likelihood or effect of any such
legislation or regulation.
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ITEM 2. Description of Property
Our principal and executive offices are located at 4205 Hillsboro Road,
Suite 101, Nashville, Tennessee 37215 in a leased facility with over 5,000
square feet of office space used by The Community Bank as its Green Hills
branch. The Community Bank also operates two other branch offices located in
Brentwood and Franklin, Williamson County, Tennessee. BankTennessee currently
conducts business in six (6) offices located in Shelby and Lauderdale Counties,
Tennessee. Bank of Dyer has four offices located in Madison and Gibson Counties.
Bank of Mason has one office in Fayette County. Cumberland Bank currently
conducts business at nine (9) offices located in Macon, Smith, Sumner, Robertson
and Warren Counties, Tennessee. CBC Financial Services conducts business at two
offices, one in Smith County and one in Sumner County. Cumberland Finance
conducts business at two offices, one located in Sumner County and one in
Rutherford County, Tennessee. InsureTennessee conducts business at two offices,
one in Smith County and one in Shelby County that it shares with BankTennessee.
We own all of our branch office locations except for seven leased
operations which include Cumberland Bank's office in Gallatin, and McMinnville,
The Community Bank's offices in Green Hills, BankTennessee's Collierville Square
office, Cumberland Finance's Murfreesboro office and CBC Financial Services'
office in Carthage.
Cumberland Bank also operates off-site ATM's at leased locations in
Smith and Sumner Counties.
ITEM 3. Legal Proceedings
The nature of the banking business generates a certain amount of
litigation against us and our banks involving matters in the ordinary course of
business. None of the legal proceedings currently pending or threatened to which
we or our subsidiaries are a party or to which any of our properties are subject
will have, or have, in the opinion of management, a material effect on our
business or financial condition.
ITEM 4. Submission of Matters to a Vote of Shareholders
No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ending December 31, 2000.
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ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters
We have no established public trading market for our shares.
Accordingly, there is no comprehensive record of trades or the prices of any
trades. The following table reflects stock prices for our shares to the extent
any information is available. We did not declare any cash dividends for fiscal
years ended December 31, 1998 or 1999. In 2000, cash dividends totaling $.10 per
share were declared.
Cumberland Bancorp Incorporated Common Stock(1)
HIGH LOW
------ ------
1999:
First Quarter .............. $12.27 $ 9.09
Second Quarter ............. $12.50 $12.00
Third Quarter .............. $12.50 $12.50
Fourth Quarter.............. $12.50 $12.50
2000:
First Quarter .............. $12.50 $12.50
Second Quarter ............. $12.50 $11.00
Third Quarter .............. $11.00 $10.50
Fourth Quarter.............. $10.50 $ 9.50
(1) The amounts per share have been adjusted for a stock split and stock
dividend prior to December 31, 2000. This data does not reflect subsequent
stock splits.
As of February 28, 2001, we had approximately 1,139 record
shareholders. At that date, 6,946,878 shares were outstanding.
In the first quarter of 2001, a cash dividend was declared in the
amount of $0.03 per share payable on April 14, 2001 to shareholders of record on
March 1, 2001.
We review our dividend policy at least annually. The amount of the
dividend, while in our sole discretion, depends in part upon the performance of
our banks. Our ability to pay dividends is restricted by federal laws and
regulations applicable to bank holding companies, by commitments we have made to
federal banking regulators and by Tennessee laws relating to the payment of
dividends by Tennessee corporations. Because substantially all of our operations
are conducted through our subsidiaries, our ability to pay dividends also
depends on the ability of our banks to pay a dividend to us. The ability of the
banks to pay cash dividends is restricted by applicable regulations of the TDFI,
the Federal Reserve, the OTS and the FDIC. As a result, we may not be able to
declare a dividend to holders of the shares even if the present dividend policy
were to change. See "Supervision and Regulation - Dividend Restrictions."
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ITEM 6. Selected Consolidated Financial Data (unaudited)
The table below provides selected consolidated financial data for our
company as of and for the five years ended December 31, 2000, 1999, 1998, 1997
and 1996. This information does not include financial data of BankTennessee or
The Community Bank before the July 1997 merger of First Federal Bancshares, Inc.
into us. The merger was accounted using the purchase method of accounting. In
accordance with purchase accounting, the results of operations for BankTennessee
and The Community Bank are included in the selected consolidated financial data
since the date of the merger. You should read the following selected
consolidated financial information in conjunction with our financial statements
and the notes to those statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" located elsewhere in this
document.
For years ending December 31,
-----------------------------------------------------
(In thousands, except per share amount)
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
Summary of Operations
Interest income $ 51,651 39,193 33,290 20,479 11,475
Interest expense 27,057 19,127 17,381 10,429 5,514
Net interest income 21,958 20,066 15,909 10,050 5,961
Provision for loan losses (2,636) (1,623) (1,188) (1,390) (430)
Noninterest income 5,771 4,290 4,237 3,390 1,697
Noninterest expense (21,132) (17,109) (13,613) (8,696) (5,497)
Income before income taxes 6,597 5,624 5,345 3,354 1,731
Income tax expense 2,436 2,113 2,003 1,220 611
Net earnings 4,161 3,511 3,342 2,134 1,120
Basic earnings per share 0.60 0.56 0.56 0.49 0.39
Diluted earnings per share 0.59 0.55 0.55 0.48 0.37
Dividends per common share 0.10 0 0 0 0
Book value per common share 5.73 5.14 4.02 3.41 2.82
Selected Period-End Balances
Total assets 643,457 525,559 408,706 330,335 130,774
Loans net of unearned income 507,217 440,316 321,547 269,378 105,141
Allowance for loan losses 6,137 5,146 4,012 3,214 1,386
Total deposits 524,142 435,252 357,404 285,049 116,078
Other borrowings 64,535 49,284 25,206 23,189 5,426
Stockholders' equity 39,476 35,275 22,059 18,650 8,352
Selected Average Balances
Total assets 576,622 453,378 372,967 226,220 125,380
Securities 23,468 25,886 26,612 14,631 9,524
Loans net of unearned income 476,339 374,716 293,665 184,792 98,036
Allowance for loan losses 5,635 4,196 3,504 2,603 1,183
Total deposits 485,708 387,941 319,796 196,219 111,107
Other borrowings 47,437 34,477 27,776 12,942 5,101
Stockholders' equity 37,366 27,200 20,607 13,543 7,905
Selected Operating Ratios
Annual % change in average loans 27.12% 27.60% 58.92% 88.49% 26.46%
Annual % change in average assets 27.18% 21.56% 64.87% 80.43% 21.05%
Return on average equity 11.14% 12.91% 16.22% 15.76% 14.07%
Return on average assets 0.72% 0.77% 0.89% 0.94% 0.89%
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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain of the statements contained in this discussion may contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the "safe harbors" created thereby. Those statements
include, but may not be limited to, the discussions of the Company's
expectations concerning its future profitability, operating performance, growth
strategy and its assumptions regarding other matters. Also, when any of the
words "believes", "expects", "anticipates", "intends", "estimates", "plans", or
similar terms or expressions, are used in this discussion, forward-looking
statements are being made.
You should be aware that, while the Company believes the expectations
reflected in those forward-looking statements are reasonable, they are
inherently subject to risks and uncertainties which could cause the Company's
future results and stockholder values to differ materially from the Company's
expectations. Because of these factors, there can be no assurance that the
forward-looking statements included or incorporated by reference herein will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included or incorporated by reference herein, you
should not regard the inclusion of such information as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved. In addition, the Company does not intend to, and is not obligated to,
update these forward-looking statements after the date of this Annual Report on
Form 10-K, even if new information, future events or other circumstances have
made them incorrect or misleading as of any future date.
You should read the following discussion in conjunction with our
financial statements and the notes to those statements appearing elsewhere in
this document.
Cumberland Bancorp, Incorporated had several significant events that
occurred during 2000 which affected its financial condition and results of
operations. A Trust Preferred issuance was completed in the last month of the
year which raised approximately $8.0 million in net additional capital. Bank of
Mason (a $9 million bank) was consolidated as of September 2000. This
transaction was accounted for as a purchase. No prior period amounts have been
restated.
Our total assets grew from $525.6 million at year-end 1999 to $643.5
million at December 31, 2000, a $118 million increase or 22%. The primary
changes in assets was the $66 million increase in net loans and the $36 million
increase in liquid assets: cash, interest bearing deposits, and federal funds
sold. In addition, fixed assets increased $8.9 million during the year. This
increase is primarily due to the construction of new branch buildings. Federal
funds sold increased $22 million in 2000. We funded these increases primarily by
an increase in deposits of $89 million and the $8 million issuance of Trust
Preferred securities, discussed in more detail in note 15 to the consolidated
financial statements.
Our total liabilities grew from $490 million at year end 1999 to $596
million at December 31, 2000, a $106 million increase or 22%. In addition to the
deposit growth mentioned above, federal funds purchased increased $7.3 million
and advances from the Federal Home Loan Bank increased $6.7 million.
Shareholders' equity increased $4.2 million to $39.5 million at
December 31, 2000. The increase is primarily related to 2000 earnings. Our
leverage capital ratio increased from 6.84% at December 31, 1999 to 7.42% at
December 31, 2000. See note 17 to our consolidated financial statements for more
information relating to capital.
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Results of Operations Year ended December 31, 2000 Compared to the Year ended
December 31, 1999
Net earnings were $4.2 million in 2000 compared to $3.5 million in
1999. Total revenues increased 32% while total expenses increased 33% during
2000 as compared to the prior year.
Net interest income increased $4.5 million, or 23%, to $24.6 million in
2000 from $20.1 million in 1999. The increase is a result of growth in average
earning assets of our bank subsidiaries throughout the year, and the results of
our branch expansion efforts.
The Company's net interest spread and net yield on earning assets were
4.69% and 4.65% respectively, in 2000 as compared to 4.66% and 4.71% in 1999.
The increase in net interest spread was the result of yields on earning assets
increasing faster than rates paid on interest bearing liabilities. The decrease
in net yield on earning assets was the result of average interest bearing
liabilities increasing more than average interest earning assets. Net interest
spread represents the difference in the yield on earning assets and the rate
paid on interest bearing liabilities. Net yield on earning assets is net
interest income divided by average earning assets.
The provision for loan losses was $2.6 million in 2000 compared to $1.6
million in 1999, a 62.4% increase. The increase in the provision was
attributable to the 15% increase in loans and an increase in net loan
charge-offs. Net loan charge-offs were $1.7 million in 2000 compared to $0.6
million in 1999. Charge-offs increased due to increased losses in consumer, real
estate and commercial loans.
Noninterest income increased $1.5 million, or 35%, to $5.7 million in
2000 from $4.3 million in 1999. Mortgage banking income declined $126,000 or 13%
from 1999 levels, primarily due to reduction in mortgage activity related to
rising interest rates.
Noninterest expense increased $4.0 million, or 24%, to $21.1 million in
2000 from $17.1 million in 1999. Included in noninterest expense are increases
in data processing expenses of $474,000 and postage, freight and courier expense
of $90,000. Other increases in other expenses are primarily a result of overall
growth. Salaries and benefits increased from $9.2 million in 1999 to $11.2
million in 2000 or an increase of 21%.
Results of Operations Year ended December 31, 1999 Compared to the Year ended
December 31, 1998
Net earnings were $3.5 million in 1999 compared to $3.3 million in
1998. Total revenues increased 16% while total expenses increased 18% during
1999 as compared to the prior year. As discussed in more detail later, our
portion of the operating loss in The Murray Bank, expenses relating to the
acquisition of Bancshares of Dyer, Inc. and start up costs associated with other
market expansions negatively affected earnings in 1999.
Net interest income increased $4.2 million, or 26%, to $20.1 million in
1999 from $17.4 million in 1998. The increase is a result of growth in average
earning assets of our Cumberland Bank subsidiary throughout the year, and our
BankTennessee and Community Bank subsidiaries for the last six months.
The Company's net interest spread and net yield on earning assets were
4.66% and 4.71% respectively, in 1999 as compared to 4.41% and 4.50% in 1998.
The increase in net interest spread and net yield on earning assets was the
result of yields on earning assets increasing faster than rates paid on interest
bearing liabilities. Net interest spread represents the difference in the yield
on earning assets and the rate paid on interest bearing liabilities. Net yield
on earning assets is net interest income divided by average earning assets.
The provision for loan losses was $1.6 million in 1999 compared to $1.2
million in 1998, a 37% increase. The increase in the provision was primarily
attributable to the 36.3% increase in loans.
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Noninterest income increased $120,000, or 3%, to $4.4 million in 1999
from $4.3 million in 1998. Mortgage banking income declined $443,000 or 32% from
1998 levels, primarily due to reduction in mortgage activity related to rising
interest rates.
Noninterest expense increased $3.6 million, or 26%, to $17.2 million in
1999 from $13.6 million in 1998. Included in noninterest expense is
approximately $116,000 in 1999 related to losses of unconsolidated affiliates,
compared to $92,000 in the prior year. Also included in 1999 are expenses of
approximately $102,000 related to organization of new entities and to mergers
and acquisitions. Other increases in other expenses are primarily a result of
overall growth. Salaries and benefits increased from $7.1 million in 1998 to
$9.2 million in 1999 or an increase of 29%.
Loans
The following table presents various categories of loans contained in
our banks' loan portfolio for the periods indicated and the total amount of all
loans for such period:
December 31,
2000 1999 1998 1997 1996
--------- --------- -------- -------- --------
(In thousands)
Type of Loan
Real estate-construction and
development $ 73,706 80,789 55,220 42,819 7,573
Real estate-1 to 4 family
residential 181,723 157,820 140,138 121,928 43,143
Real estate other 63,450 49,708 12,555 26,956 5,923
Commercial, financial and
agricultural 131,548 102,385 71,070 38,977 18,762
Consumer 58,156 50,643 45,431 41,941 32,083
Other 1,396 1,744 746 208 193
--------- --------- -------- -------- --------
Total loans 509,979 443,089 325,160 272,829 107,677
Unearned income and deferred fees (2,762) (2,773) (3,613) (3,451) (2,536)
--------- --------- -------- -------- --------
Net loans $ 507,217 $ 440,316 321,547 269,378 105,141
========= ========= ======== ======== ========
Loan growth was $66.9 million, or 15.2%, during 2000, and $118 million,
or 36.3%, during 1999. Of this increase, $3.5 million, or 5.2% was as a result
of our acquisition of the Bank of Mason. We believe that the remaining loan
growth reported in 2000 approximates normal growth for our other four operating
bank subsidiaries. Loans continued to grow during 2000 as a result of strong
economic conditions in our banks' primary markets, with commercial loans
experiencing the largest growth. We believe that commercial loans and loans to
the residential real estate industry will continue to be our two primary loan
categories.
At December 31, 2000, 1-4 family residential real estate loans
constituted 36% of total loans and construction and development loans
constituted 14% of total loans. Construction and development loans typically
involve 1-4 family residential properties or loans to develop subdivisions of
such properties. More than half of our construction and development loans are
made to finance speculative construction by builders. The remaining builder
loans are for custom-built homes with sales contracts in place. Most of our real
estate loans are secured by properties located in the primary service areas of
our banks.
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The following is a presentation of an analysis of maturities of loans
as of December 31, 2000:
Type of Loan Due in 1 Due in Due
year 1 to 5 After 5
or less Years Years Total
-----------------------------------------
(In thousands)
Real estate-construction & development $ 66,923 4,005 2,778 73,706
Real estate-1-4 family residential 100,067 74,133 7,523 181,723
Real estate-other 47,875 12,869 2,706 63,450
Commercial, financial and agricultural 68,868 53,546 9,134 131,548
Consumer 30,274 27,631 251 58,156
Other 315 1,081 -- 1,396
-----------------------------------------
Total $314,322 173,265 22,392 509,979
=========================================
At December 31, 2000, $144 million in loans due after one year had
predetermined interest rates and $172 million in loans due after one year had
floating interest rates.
It is our philosophy to pursue real estate lending as our core type of
lending relationship. Of our combined loan portfolio, 62.5% is secured by
residential and other real estate. Management believes this type of lending has
allowed us to maintain low levels of charge-offs and non-performing loans.
However, the real estate lending market has traditionally been sensitive to
increases in interest rates, and the volume of such loans may decline if
interest rates increase.
Provision for Loan Losses and Asset Quality
The provision for loan losses represents charges made to earnings to
maintain an adequate allowance for loan losses. The allowance is maintained at
an amount believed by management to be sufficient to absorb losses in the loan
portfolio. Factors considered in establishing an appropriate allowance include
an assessment of the financial condition of the borrower; a determination of the
value and adequacy of underlying collateral; the condition of the local economy
and the condition of the specific industry of the borrower; an analysis of the
levels and trends of loan categories; and a review of delinquent and classified
loans. We apply a systematic process for determining the adequacy of the
allowance for loan losses, including an internal loan review function and a
monthly analysis of the adequacy of the allowance. Our monthly analysis includes
determination of specific potential loss factors on individual classified loans,
historical potential loss factors derived from actual net charge-off experience
and trends in nonperforming loans, and potential loss factors for other loan
portfolio risks such as loan concentrations, local economy, and the nature and
volume of loans.
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An analysis of our loss experience, as well as a breakdown of the
allowance for possible loan losses, is furnished in the following table for the
periods indicated:
Years Ended December 31,
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of year $ 5,146 4,012 3,214 1,386 1,255
Increase due to acquisitions 58 152 -- 1,229 --
--------- -------- -------- -------- --------
Loans charged-off:
Real estate-construction & development (73) -- (65) -- --
Real estate-1 to 4 single family (414) (117) (45) (23) (5)
Real estate-other (62) -- -- (90) --
Commercial, financial & agricultural (614) (123) (54) (35) (1)
Consumer (704) (518) (324) (721) (336)
Other -- -- (24) -- --
--------- -------- -------- -------- --------
Total charge-offs $ (1,867) (758) (512) (869) (342)
--------- -------- -------- -------- --------
Charge-offs recovered:
Real estate - construction & development -- -- 21 -- --
Real estate - 1-4 single family 5 9 2 11 --
Real estate - other 32 -- -- -- --
Commercial 10 19 5 1 4
Consumer 117 89 76 66 39
Other -- -- 18 -- --
--------- -------- -------- -------- --------
Total recoveries $ 164 117 122 78 43
--------- -------- -------- -------- --------
Net loans charged-off (1,703) (641) (390) (791) (299)
Current year provision 2,636 1,623 1,188 1,390 430
--------- -------- -------- -------- --------
Balance at end of year $ 6,137 5,146 4,012 3,214 1,386
========= ======== ======== ======== ========
Loans at year end $ 507,217 440,316 321,547 269,378 105,141
Ratio of allowance to loans at year end 1.20% 1.17% 1.25% 1.19% 1.32%
Average loans $ 479,888 374,716 293,665 184,792 98,036
Ratio of net loans charged off to average loans 0.35% 0.17% 0.13% 0.43% 0.31%
The recorded values of loans actually removed from the consolidated
balance sheets are referred to as charge-offs and, after netting out recoveries
on previously charged-off assets, become net charge-offs. Our policy is to
charge off loans, when, in management's opinion, the loan is deemed
uncollectible, although concerted efforts are made to maximize recovery. Our
level of net charge-offs to average loans was 0.35% in 2000 and 0.17% in 1999.
Charge-offs were higher due to real estate foreclosures and consumer
bankruptcies in 2000. During 2000, the provision for loan losses of $2.6 million
was $1,013,000 more than the preceding year. Factors which gave rise to the
increased provision in 2000 were the loan growth our institutions sustained, a
substantial increase in commercial loan losses in BankTennessee's portfolio and
real estate losses at all of our banks.
The level of non-performing loans is an important element in assessing
asset quality and the relevant risk in the credit portfolio. Non-performing
loans include non-accrual loans, restructured loans and loans delinquent 90 days
or more. Loans are classified as non-accrual when management believes that
collection of interest is doubtful. When loans are placed on nonaccrual status,
all unpaid accrued interest is reversed. Another element associated with asset
quality is foreclosed properties, which represent real estate or personal
property acquired through loan defaults by customers.
20
22
The following table presents information regarding nonaccrual, past due
and restructured loans, and foreclosed properties at the dates indicated:
December 31,
2000 1999 1998 1997 1996
------ ----- ----- ----- ----
(Dollars in Thousands)
Loans accounted for on a non-accrual basis $5,608 2,446 1,745 1,561 565
Accruing loans which are contractually
past due 90 days or more as to principal
and interest payments 345 241 467 86 428
Restructured loans -- 693 652 443 --
----- ----- ----- ----- ----
Total nonperforming loans (1) 5,953 3,380 2,864 2,090 993
Foreclosed properties 3,142 2,400 610 630 502
- ---------
(1) As of December 31, 2000, all restructured loans were in compliance with
their modified terms.
Non-performing loans were 1.2% and 0.8% of loans at December 31, 2000
and 1999, respectively. The dollar increase in non-performing loans during 2000
is due to a growing and maturing portfolio, along with conditions in the
marketplace. Additional interest income of approximately $499,000 in 2000,
$125,000 in 1999, $121,000 in 1998, $79,000 in 1997, and $33,000 in 1996 would
have been recorded if all loans accounted for on a non-accrual basis had been
current in accordance with their original terms. No interest income has been
recognized during the five year period ended December 31, 2000 on loans that
have been accounted for on a non-accrual basis.
Management has internally classified approximately $6.3 million in
loans as substandard based upon other possible credit problems. These loans are
not included in the above amounts. These loans are performing loans but are
classified as substandard due to payment history, decline in the borrowers'
financial position or decline in collateral value. Loans classified as
substandard are inadequately protected by the current sound worth and paying
capacity of the obligor or the collateral pledged, if any. Loans so classified
must have a well-defined weakness or weakness that jeopardize the liquidation of
the debt. Loans classified as doubtful have all the weaknesses inherent in one
classified substandard, with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable. Loans classified as
loss are considered uncollectible and of such little value that their
continuance as bankable assets is not warranted.
As of December 31, 2000, there are no loans classified by our
regulators or management as loss, doubtful or substandard that have not been
disclosed above or which represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.
21
23
The allocation of the allowance for loan losses by loan category at
December 31, for the years indicated is presented below:
As of December 31,
---------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- ------------------------------
Percent Percent Percent
Percent of Loans of Loans of Loans
of in Each Percent of in Each Percent of in Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loan
------ --------- ----- ------ --------- ----- ------ --------- ----
Real estate -
construction &
Development $1,227 20% 14% 1,029 20% 18% 802 20% 18%
Real estate - 1-4
single
family 430 7% 36% 257 5% 36% 201 5% 42%
Real estate -
other 368 6% 12% 309 6% 11% 160 4% 4%
Commercial,
financial and
agriculture 1,289 21% 26% 1,132 22% 23% 883 22% 23%
Consumer 1,964 32% 11% 1,647 32% 11% 1,204 30% 12%
Other 123 2% 1% 103 2% 1% 80 2% 1%
Unallocated 736 12% -- 669 13% -- 682 17% --
------ --- --- ----- --- --- ----- --- ---
Total $6,137 100% 100% 5,146 100% 100% 4,012 100% 100%
====== === === ===== === === ===== === ===
As of December 31, 2000, real estate mortgage loans constituted
62.5% of outstanding loans. Approximately $143 million, or 45%, of this category
represents first mortgage residential real estate mortgages where the amount of
the original loan generally does not exceed 80% of the appraised value of the
collateral. We have $73.7 million in construction and development loans, which
are primarily related to the home building industry in Shelby, Williamson,
Davidson and Sumner Counties, Tennessee. The remaining portion of this category
consists primarily of commercial real estate loans. Risk of loss for these loans
is generally higher than residential loans. Therefore, management has allocated
a significant portion of the allowance for loan losses to this category.
Securities
Our banks' securities portfolios are primarily used as a source of
liquidity. Total securities were $24.0 million at year-end 2000, which is up
$1.2 million from year-end 1999. The securities portfolios comprised 3.7% of
total assets at year-end 2000. Our banks' policy guidelines are designed to
minimize credit, market and liquidity risk. Securities generally must be
investment grade or higher to be purchased. Over the last year, a majority of
newly-purchased securities have been designated as Available for Sale to
increase flexibility for asset liability management. Approximately 64% of
securities held at year-end 2000 were pledged for public deposits. Other than
commitments to originate or sell mortgage loans, our banks do not invest in
off-balance sheet or derivative financial instruments.
We invest primarily in obligations of the United States or
obligations guaranteed as to principal and interest by the United States, other
taxable securities and in certain obligations of states, counties and
municipalities ("SCM"). The majority of the mortgage-backed securities are
instruments of U.S. Government agencies. In addition, we enter into federal
funds transactions with our principal correspondent banks, and act as a net
seller of such funds. We did not hold securities of any single issuer that
exceeded ten percent of shareholders' equity.
22
24
The following tables present, for the periods indicated, the
carrying amount of our securities portfolio, including mortgage-backed
securities, segregated into available for sale and those held to maturity
categories.
At December 31,
---------------------------------
2000 1999 1998
------- ------ ------
(Dollars in thousands)
Available for sale:
U.S. Government and agencies $ 9,888 10,378 10,471
Obligations of SCM 2,866 2,727 1,844
Mortgage-backed 1,246 1,464 3,384
Other debt securities 217 262 --
Marketable equity securities 1,333 1,268 1,571
Other securities 16 -- --
------- ------ ------
Total available for sale 15,566 16,099 17,270
------- ------ ------
Held to maturity:
U.S. Government and agencies 4,600 2,560 4,624
Obligations of SCM 654 230 4,782
Mortgage-backed 3,171 3,844 --
Other debt securities -- 43 --
------- ------ ------
Total held to maturity 8,425 6,677 9,406
------- ------ ------
Total securities $23,991 22,776 26,676
------- ------ ------
The following table indicates, for the year ended December 31, 2000,
the amount of investments due in (1) one year or less, (2) one to five years,
(3) five to ten years, and (4) over ten years:
1 yr or Over
less 1 to 5 yrs 5 to 10 yrs 10 yrs Total
Balance Yield Balance Yield Balance Yield Balance Yield Balance
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Available for sale:
U.S. Government
and agencies $ 3,747 5.44% 4,660 5.73% 1,132 6.17% 349 6.00% 9,888
Obligations of SCM 173 4.85% 1,423 5.92% 1,270 5.37% 2,866
Mortgage-backed 1,246 7.24% 1,246
Marketable equity
securities(2) 1,333 4.62% 1,333
Other 233 9.8% 233
Held to maturity:
U.S. Government
and agencies 100 6.16% 3,900 5.82% 600 6.25% 4,600
Obligations of SCM 95 4.51% 249 5.79% 310 5.87% 654
Mortgage-backed 3,171 7.04% 3,171
- -------------------------------------------------------------------------------------------------------------------------------
Totals $ 3,942 8,982 3,465 7,602 23,991
- -------------------------------------------------------------------------------------------------------------------------------
(1) Yields are presented based on adjusted cost basis of securities available
for sale. Yields based on carrying value would be higher since fair value is
less than adjusted cost.
(2) Marketable equity securities are included in the over 10 year category as
there is no maturity.
23
25
Deposits and Borrowings
Deposits are our primary source of funding loans. Depending upon
current market rates, we may from time to time use FHLB borrowings to complement
our funding needs. See Liquidity and Interest Rate Sensitivity. We believe we
have the ability to generate deposit growth within our local markets as loan
demand dictates. Our long-term strategy has been to match the competition on
popular deposit products such as money market demand accounts and certificates
of deposit. FHLB advances, while typically more costly than deposit funding, are
typically the lowest cost borrowed funds available to institutions such as our
banks. Our banks utilize short-term borrowing from the FHLB to sustain the
available for sale loans until they are sold. The marketable time table has
increased slightly, therefore, short-term borrowings have increased. Of a total
$46.2 million in FHLB borrowings at year-end 2000, $17.1 million matures before
December 31, 2001.
Total deposits grew at a rate of 20.4% during 2000, resulting from the
opening of new branch locations, and more attractive pricing for deposits.
Deposit growth was greater than loan growth in 2000, resulting in a decrease in
loan to deposit ratio from 101% at year end 1999 to 96.8% at year end 2000. The
increase in deposit growth over loan growth resulted in an increase of federal
funds sold of $22 million at the end of 2000.
We operate retail bank branches in twelve (12) different Tennessee
counties, have fifty percent (50%) ownership of a stand-alone federal savings
bank in one Kentucky county through a joint venture, and have fifty percent
(50%) ownership of a de novo bank in Nashville, Tennessee through a joint
venture. Each local market has its own unique deposit customer base. Deposit
growth has been strong in the communities where new additional branches have
been established. In general, large certificate of deposit customers tend to be
more sensitive to interest rate levels, making these deposits less reliable
sources of funding from liquidity planning purposes than core deposits. We have
normally had to pay a small premium for these types of deposits above current
rates. However, we believe that we have long-term customers who maintain
substantial deposits with our banks based upon personal relationships with each
bank's officers and employees.
Average amount of and average rate paid for our deposits for year-end
1998, 1999, and 2000 are represented by deposit category on the table on pages
25 through 26 of this section of the documents.
The following table indicates amounts outstanding of time
certificates of deposit of $100,000 or more and respective maturities for the
year ended December 31, 2000:
Time Certificates
of Deposit and Other
Time Deposits
-------------
(In thousands)
3 months or less $ 23,911
3-12 months 69,833
Over 12 months 20,393
--------
Total $114,137
========
24
26
CUMBERLAND BANCORP, INC. AND SUBSIDIARIES
Consolidated Average Balance Sheets, Net Interest Revenue and
Changes in Interest Income and Interest Expense
The following table shows the consolidated average monthly balances of
each principal category of assets, liabilities and stockholders' equity of the
Company, and an analysis of net interest revenue, and the change in interest
income and interest expense segregated into amounts attributable to changes in
volume and changes in rates.
(Dollars in Thousands)
2000 1999 2000/1999 Change
---------------------------------------------------------------------------------------------
Average Interest Revenue/ Average Interest Revenue/ Due to Due to
Balance Rate Expense Balance Rate Expense Volume Rate (1) Total
---------------------------------------------------------------------------------------------
Net loans (2 and 3) $ 476,339 10.17% $48,465 374,714 9.75% 36,528 9,907 2,030 11,937
Securities 23,468 6.55% 1,537 25,886 5.80% 1,502 (140) 175 35
Federal funds sold 18,419 6.00% 1,106 15,046 4.72% 710 159 237 396
FHLB and FRB stock 3,711 6.63% 246 2,921 6.85% 200 54 (8) 46
Interest-bearing deposits in banks 7,442 3.99% 297 7,824 3.23% 253 (12) 56 44
--------------------------------------------------------------------------------------------
Total earning assets 529,379 9.76% $51,651 426,391 9.19% 39,193 9,968 2,490 12,458
================ ============================================
Cash and due from banks 17,330 8,903
Allowance for loan losses (5,635) (4,196)
Other assets 35,548 22,278
--------- -------
Total assets $ 576,622 453,376
========= =======
Deposits:
NOW investments $ 41,568 2.31% $ 960 35,889 2.38% 854 135 (29) 106
Money market investments 93,008 4.97% 4,623 90,045 4.53% 4,082 134 407 541
Savings 16,288 2.79% 454 15,090 3.06% 462 37 (45) (8)
Time deposits $100,000 and over 97,140 6.15% 5,975 65,587 5.20% 3,411 1,641 923 2,564
Other time deposits 196,611 6.10% 12,002 149,464 5.51% 8,241 2,600 1,161 3,761
--------------------------------------------------------------------------------------------
Total interest-bearing
deposits 444,615 5.40% 24,014 356,075 4.79% 17,050 4,547 2,417 6,964
Non interest-bearing demand deposits 41,093 -- 31,866 -- -- --
--------------------------------------------------------------------------------------------
Total deposits 485,708 4.94% 24,014 387,941 4.39% 17,050 4,547 2,417 6,964
Fed Funds purchased 5,345 5.82% 311 2,334 5.06% 118 152 41 193
Notes payable 7,950 7.50% 596 7,293 7.93% 578 52 (34) 18
FHLB advances and other borrowings 34,142 6.26% 2,136 24,850 5.56% 1,381 5 750 755
--------- ------------------- -------------------------------------
Total deposits and borrowed
funds 533,145 5.07% 27,057 422,418 4.53% 19,127 4,756 3,174 7,930
---------------- --------------
Other liabilities 6,111 3,760
Stockholders' equity 37,366 27,200
------ ------
Total liabilities and
stockholders' equity $ 576,622 453,378
========= =======
Net interest income $24,594 $20,066 5,212 (684) 4,528
======= =====================================
Net yield on earning assets 4.65% 4.71%
==== ====
1 Changes in interest income and expense not due solely to balance or
rate changes are included in the rate category.
2 Interest income includes fees on loans of $3,164 in 2000 and $2,551 in
1999.
3 Nonaccrual loans are included in average loan balances and the
associated income (recognized on a cash basis) is included in interest.
4 No taxable equivalent adjustments have been made since the effect of
tax exempt income is insignificant.
25
27
CUMBERLAND BANCORP, INC. AND SUBSIDIARIES
Consolidated Average Balance Sheets, Net Interest Revenue and
Changes in Interest Income and Interest Expense
The following table shows the consolidated average monthly balances of
each principal category of assets, liabilities and stockholders' equity of the
Company, and an analysis of net interest revenue, and the change in interest
income and interest expense segregated into amounts attributable to changes in
volume and changes in rates.
(Dollars in Thousands)
1999 1998 1999/1998 Change
---------------------------------------------------------------------------------------------
Average Interest Revenue/ Average Interest Revenue/ Due to Due to
Balance Rate Expense Balance Rate Expense Volume Rate (1) Total
---------------------------------------------------------------------------------------------
Net loans (2 and 3) $ 374,716 9.75% $36,528 293,665 10.22% 29,999 8,280 (1,751) 6,529
Securities 25,886 5.80% 1,502 26,612 6.04% 1,607 (44) (61) (105)
Federal funds sold 15,046 4.72% 710 16,344 5.14% 840 (67) (63) (130)
FHLB and FRB stock 2,921 6.85% 200 2,541 7.20% 183 27 (10) 17
Interest-bearing deposits in banks 7,824 3.23% 253 14,575 4.54% 661 (306) (102) (408)
--------------------------------------------------------------------------------------------
Total earning assets 426,393 9.19% $39,193 353,737 9.41% 33,290 7,890 (1,987) 5,903
================ ============================================
Cash and due from banks 8,903 7,262
Allowance for loan losses (4,196) (3,504)
Other assets 22,278 15,472
--------- -------
Total assets $ 453,378 372,967
========= =======
Deposits:
NOW investments $ 35,889 2.38% $ 854 24,919 2.75% 686 302 (134) 168
Money market investments 90,045 4.53% 4,082 59,580 4.90% 2,919 1,493 (330) 1,163
Savings 15,090 3.06% 462 13,023 3.34% 435 69 (42) 27
Time deposits $100,000 and over 65,587 5.20% 3,411 58,765 5.74% 3,373 392 (354) 38
Other time deposits 149,464 5.51% 8,241 140,266 5.88% 8,249 541 (549) (8)
--------------------------------------------------------------------------------------------
Total interest-bearing
deposits 356,075 4.79% 17,050 296,553 5.28% 15,662 2,797 (1,409) 1,388
Non interest-bearing demand deposits 31,866 -- -- 23,243 -- -- -- -- --
--------------------------------------------------------------------------------------------
Total deposits 387,941 4.39% 17,050 319,796 4.90% 15,662 2,797 (1,409) 1,388
Fed Funds purchased 2,334 5.06% 118 164 3.05% 5 66 47 113
Note payable 7,293 7.93% 578 6,590 8.00% 527 56 (5) 51
FHLB advances and other borrowings 24,850 5.56% 1,381 21,022 5.65% 1,187 2 192 194
--------- ------------------- -------------------------------------
Total deposits and borrowed
funds 422,418 4.53% 19,127 347,572 5.00% 17,381 2,921 (1,175) 1,746
---------------- --------------
Other liabilities 3,760 4,788
Stockholders' equity 27,200 20,607
--------- -------
Total liabilities and
stockholders' equity $ 453,378 372,967
========= =======
Net interest income $20,066 $ 15,909 4,969 (812) 4,157
======= =====================================
Net yield on earning assets 4.71% 4.50%
==== ====
1 Changes in interest income and expense not due solely to balance or
rate changes are included in the rate category.
2 Interest income includes fees on loans of $2,551 in 1999 and $1,748 in
1998.
3 Nonaccrual loans are included in average loan balances and the
associated income (recognized on a cash basis) is included in interest.
26
28
Equity and Capital Resources
Our capital ratio's were in the "well capitalized" category for all
three regulatory capital calculations at December 31, 2000. Our leverage capital
ratio was 7.42% in 2000 and 6.84% in 1999, with shareholders' equity of $39.5
million at year-end 2000. For a discussion of capital requirements see
Supervision and Regulation - Capital Requirements.
In September 1999, we completed an Initial Public Offering (IPO) of
700,000 shares of our common stock at a price of $12.50 per share for a total
consideration of $8,500,000, before fees and expenses. In connection with the
purchase of the two branches from a financial institution, we issued 47,000
shares valued at $588,000. To purchase the minority interest shares of Bank of
Dyer in 1999 we issued 7,704 shares of stock valued at approximately $99,000.
Items that represent common stock equivalents include 460,035 common
stock options outstanding at December 31, 2000. At December 31, 2000, there were
69,790 additional common shares available for grant under the stock option plan.
We plan to continue granting stock options to selected officers, directors, and
other key employees.
Return on Equity and Assets
Returns on average consolidated assets and average consolidated equity
for the periods indicated are as follows:
Years Ended December 31,
---------------------------------
2000 1999 1998
------- ------- -------
Return on average assets 0.72% 0.77% 0.89%
Return on average equity 11.14% 12.91% 16.22%
Average equity to average assets ratio 6.48% 6.00% 5.53%
Dividend payout ratio 16.56% -- --
Liquidity
It is a primary concern to depositors, creditors, and regulators that
banks demonstrate the ability to have readily available funds sufficient to
repay fully-maturing liabilities. Our liquidity, represented by cash and cash
due from banks, is a result of our operating, investing and financing
activities. In order to insure funds are available at all times, we devote
resources to projecting on a monthly basis the amount of funds that will be
required and maintain relationships with a diversified customer base so funds
are accessible. Liquidity requirements can also be met through short-term
borrowings or the disposition of short-term assets, which are generally matched
to correspond to the maturity of liabilities.
Our banks have liquidity policies and, in the opinion of management,
the overall liquidity level is considered adequate. Neither we, nor our banks,
are subject to any specific liquidity requirements imposed by regulatory
authorities. Our banks are subject to general Federal Reserve guidelines, which
do not require a minimum level of liquidity. The ratio for average loans to
average deposits for 1999 was 96.6% and for 2000 was 98.1%. We do not know of
any trends or demands that are reasonably likely to result in liquidity
increasing or decreasing.
27
29
Interest Rate Sensitivity
A key element in the financial performance of financial institutions is
the level and type of interest rate risk assumed. The single most significant
measure of interest rate risk is the relationship of the repricing periods of
earning assets and interest-bearing liabilities. The more closely the repricing
periods are correlated, the less interest rate risk we assume. In general,
community bank customer preferences tend to push the average repricing period
for costing liabilities to a shorter time frame than the average repricing
period of earning assets, resulting in a net liability sensitive position in
time frames less than one year. A summary of the repricing schedule of our
interest earning assets and interest-bearing liabilities (GAP) at year-end 2000
follows:
Over 5
1-90 Days 91-365 Days 1-5 years years Total
------------------------------------------------------------------
Interest earning assets:
Loans, net $198,979 124,594 158,228 25,416 507,217
Securities available for sale 665 4,468 5,059 5,374 15,566
Securities held to maturity 265 494 5,353 2,313 8,425
Federal funds sold 33,025 -- -- -- 33,025
Interest-earning deposits 14,468 195 325 -- 14,988
- ------------------------------------------------------------------------------------------------------------
Total interest earning assets 247,402 129,751 168,965 33,103 579,221
- ------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Interest bearing demand deposits 140,781 -- -- -- 140,781
Savings deposits 15,662 -- -- -- 15,662
Time deposits 65,651 200,144 55,261 14 321,070
FHLB borrowings 7,180 4,994 529 33,508 46,211
Notes payable 78 976 3,788 3,907 8,749
Federal funds purchased 9,575 -- -- -- 9,575
- ------------------------------------------------------------------------------------------------------------
Trust preferred securities -- -- -- 8,000 8,000
- ------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 238,927 206,114 59,578 45,429 550,048
- ------------------------------------------------------------------------------------------------------------
Rate sensitive gap 8,475 (76,363) 109,387 (12,326) 29,173
- ------------------------------------------------------------------------------------------------------------
Rate sensitive cumulative gap $ 8,475 (67,888) 41,499 29,173 29,173
- ------------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage
of earnings assets 1.46% (11.72)% 7.16% 5.04%
- ------------------------------------------------------------------------------------------------------------
As shown in the table, we have a cumulative GAP of approximately 1.46%
and (11.72)% at the end of 90 days and one year, respectively. Management
believes that this level of GAP is appropriate since many of the liabilities
which are immediately repriceable can be effectively repriced more slowly than
the assets which are contractually immediately repriceable in a rising rate
environment. Conversely, those liabilities can often be repriced downward more
rapidly than contractually required assets repricing in a downward rate
28
30
environment. The degree to which management can control the rate of change in
deposit liabilities, which are immediately repriceable, is affected to a large
extent by the speed and amount of interest rate movements.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Our primary component of market risk is interest rate volatility.
Fluctuations in interest rates will ultimately impact both the level of income
and expense recorded on a large portion of our assets and liabilities, and the
market value of all interest-earning assets and interest-bearing liabilities,
other than those which possess a short term to maturity. Based upon the nature
of our operations, we do not maintain any foreign currency exchange or commodity
price risk.
The following table provides information about our financial
instruments that are sensitive to changes in interest rates as of December 31,
2000. These market risk sensitive instruments have been entered into by us for
purposes other than trading. We do not hold market risk sensitive instruments
for trading purposes. Amounts described below do not take into account possible
loan, security, or interest bearing deposit renewals or repricing for such
renewals. The information provided by this table should be read in connection
with our audited consolidated financial statements and Management's Discussion
and Analysis of Financial Condition and Results of Operation.
EXPECTED MATURITY DATE -
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
2002 to 2004 to 2006 FAIR
(Dollars in Thousands) 2001 2003 2005 THEREAFTER TOTAL VALUE
- ---------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Loans, net of unearned interest:(1)
Variable rate $ 168,882 6,964 4,112 182 180,140 180,140
Average interest rate 10.44% 8.67 7.84 9.98% 10.31% --
Fixed rate $ 144,382 78,097 78,340 26,258 327,077 325,882
Average interest rate 9.90% 9.58 9.26 8.25% 9.49% --
Securities(2) $ 3,942 4,449 4,532 11,067 23,991 23,971
Average interest rate 5.43% 5.71 6.11 6.50% 6.10% --
Federal funds sold $ 33,025 33,025 33,025
Average interest rate 5.89% 5.89%
Interest-earning $ 14,988 14,988 14,988
deposits in financial institutions 6.22% 6.22%
Interest-bearing deposits $ 418,444 40,970 18,077 22 477,513 478,960
Average interest rate 5.31% 6.49 6.51 4.52% 5.47% --
Federal funds purchased $ 9,575 9,575 9,575
Average interest rate 6.02% 6.02%
Other borrowings $ 13,228 1,409 943 47,380 62,960 62,862
Average interest rate 6.77% 6.92 7.61 6.30% 6.43% --
- ------------------
(1) Loan amounts and weighted average interest rates for loans net out any
undisbursed loan proceeds, make no assumptions about loan prepayments, and do
not include the allowance for loan losses.
(2) Securities include our investment in obligations of certain political
subdivisions within the State of Tennessee. Average interest rates have not been
adjusted for any federal, state, or municipal tax liability that we may incur.
29
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cumberland Bancorp, Incorporated
We have audited the consolidated balance sheets of Cumberland Bancorp,
Incorporated and Subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of earnings, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cumberland
Bancorp, Incorporated and Subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with generally
accepted accounting principles.
/s/ Heathcott & Mullaly, P.C.
Brentwood, Tennessee
February 26, 2001, except for Note 24, as to which the date is March 15, 2000
30
32
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
(Dollars in thousands, except share amounts) 2000 1999
- ----------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 22,280 18,255
Interest-bearing deposits in financial institutions 14,988 5,396
Federal funds sold 33,025 11,250
Securities available for sale, at fair value 15,566 16,099
Securities held to maturity, fair value $8,405 and
$6,594 at December 31, 2000 and 1999, respectively 8,425 6,677
Loans 507,217 440,316
Allowance for loan losses (6,137) (5,146)
- ----------------------------------------------------------------------------------
Loans, net 501,080 435,170
- ----------------------------------------------------------------------------------
Premises and equipment 23,467 14,578
Accrued interest receivable 5,644 4,073
Restricted equity securities 4,226 3,529
Investment in unconsolidated affiliates 4,983 2,441
Other real estate 3,142 2,400
Loan servicing rights 985 1,021
Other intangible assets 1,577 1,523
Other assets 4,069 3,147
- ----------------------------------------------------------------------------------
Total assets $ 643,457 525,559
- ----------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Deposits
Noninterest-bearing $ 46,629 34,099
Interest-bearing 477,513 401,153
- ----------------------------------------------------------------------------------
Total deposits 524,142 435,252
- ----------------------------------------------------------------------------------
Notes payable 8,749 7,455
Federal funds purchased 9,575 2,275
Advances from Federal Home Loan Bank 46,211 39,554
Accrued interest payable 4,694 3,072
Other liabilities 2,610 2,676
- ----------------------------------------------------------------------------------
Total liabilities 595,981 490,284
- ----------------------------------------------------------------------------------
Trust preferred securities 8,000 --
- ----------------------------------------------------------------------------------
Shareholders' equity:
Common stock, $0.50 par value, authorized 20,000,000 shares;
Shares issued - 6,893,628 in 2000 and 6,857,620 in 1999 3,447 3,429
Additional paid-in capital 25,526 25,110
Retained earnings 10,682 7,194
Accumulated other comprehensive income (loss) (179) (458)
- ----------------------------------------------------------------------------------
Total shareholders' equity 39,476 35,275
- ----------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 643,457 525,559
- ----------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
31
33
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 2000, 1999 and 1998
(Dollars in thousands, except per share data) 2000 1999 1998
- -------------------------------------------------------------------------------------------
Interest income:
Loans, including fees $ 48,465 36,528 29,999
Securities 1,537 1,502 1,607
Deposits in financial institutions 297 253 661
Federal funds sold 1,106 710 840
Federal Home Loan Bank dividends 246 200 183
- -------------------------------------------------------------------------------------------
Total interest income 51,651 39,193 33,290
- -------------------------------------------------------------------------------------------
Interest expense:
Time deposits of $100,000 or more 5,975 3,411 3,373
Other time deposits 18,039 13,639 12,288
Federal funds purchased 311 118 5
Notes payable and advances from Federal Home Loan Bank 2,732 1,959 1,715
- -------------------------------------------------------------------------------------------
Total interest expense 27,057 19,127 17,381
- -------------------------------------------------------------------------------------------
Net interest income 24,594 20,066 15,909
Provision for loan losses 2,636 1,623 1,188
- -------------------------------------------------------------------------------------------
Net interest income after
Provision for loan losses 21,958 18,443 14,721
- -------------------------------------------------------------------------------------------
Other income:
Service charges on deposit accounts 2,671 1,683 1,305
Other service charges, commissions and fees 1,787 1,206 1,039
Mortgage banking activities 811 937 1,378
Gain on sale of SBA loans 502 464 515
- -------------------------------------------------------------------------------------------
Total other income 5,771 4,290 4,237
- -------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 11,169 9,206 7,109
Occupancy 2,725 2,327 1,525
Deposit insurance premiums 211 209 205
Other operating 6,997 5,367 4,774
Minority interest in earnings of subsidiaries 30 -- --
- -------------------------------------------------------------------------------------------
Total other expenses 21,132 17,109 13,613
- -------------------------------------------------------------------------------------------
Income before income taxes 6,597 5,624 5,345
Income tax expense 2,436 2,113 2,003
- -------------------------------------------------------------------------------------------
Net earnings $ 4,161 3,511 3,342
- -------------------------------------------------------------------------------------------
Net earnings per share - basic $ 0.60 0.56 0.56
Net earnings per share - diluted 0.59 0.55 0.55
- -------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 6,883,656 6,248,130 5,971,306
Weighted average shares outstanding - diluted 7,010,963 6,387,636 6,098,173
- -------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
32
34
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 2000, 1999 and 1998
Accumulated
Common Stock Additional Other Total
-------------------- Paid-in Retained Comprehensive Shareholders'
(Dollars in thousand, except per share data) Shares Amount Capital Earnings Income (Loss) Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 5,466,571 $2,734 9,273 6,699 (50) 18,656
Sale of common stock to employees 19,464 9 107 -- -- 116
Cash dividends - Dyer -- -- -- (15) -- (15)
Comprehensive Income:
Net earnings -- -- -- 3,342 -- --
Other Comprehensive Income:
Change in unrealized loss on
Securities available for sale
net of $24 in income tax benefits -- -- -- -- (40) --
Total Comprehensive Income -- -- -- -- -- 3,302
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 5,486,035 2,743 9,380 10,026 (90) 22,059
Proceeds from sale of
common stock (private placement) 100,000 50 950 -- -- 1,000
10% stock dividend 507,305 254 6,087 (6,341) -- --
Cash dividend on fractional shares -- -- -- (2) -- (2)
Proceeds from sale of
common stock, net of offering costs 666,711 333 7,800 -- -- 8,133
Exercise of stock options 42,865 21 236 -- -- 257
Issuance of common stock
in connection with the acquisition
of McMinnville branch 47,000 24 564 -- -- 588
Issuance of common stock
in connection with the acquisition of minority
interest of Bank of Dyer 7,704 4 93 -- -- 97
Comprehensive Income:
Net earnings -- -- -- 3,511 -- --
Other Comprehensive Income:
Change in unrealized loss on
Securities available for sale,
net of $281 in income tax benefits -- -- -- -- (368) --
Total Comprehensive Income -- -- -- -- -- 3,143
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 6,857,620 3,429 25,110 7,194 (458) 35,275
Additional shares issued for
Bank of Dyer -- -- -- 15 -- 15
Proceeds from sale of common stock 34,678 17 410 -- -- 427
Exercise of stock options 1,330 1 6 -- -- 7
Dividends $0.10 per share -- -- -- (688) (688)
Comprehensive Income:
Net earnings -- -- -- 4,161 -- --
Other Comprehensive Income:
Change in unrealized loss on
Securities available for sale,
net of $171 in income taxes -- -- -- -- 279 --
Total Comprehensive Income -- -- -- -- -- 4,440
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 6,893,628 $3,447 25,526 10,682 (179) 39,476
- ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
33
35
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
(Dollars in thousands) 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
Net earnings $ 4,161 3,511 3,342
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Provision for loan losses 2,636 1,623 1,188
Depreciation and amortization 1,543 1,367 1,079
Operations of unconsolidated affiliates 308 104 86
Mortgage loans originated for sale (65,311) (51,740) (74,813)
Proceeds from sale of mortgage loans 66,196 52,494 76,155
Deferred income tax benefits (423) (467) (87)
Increase in accrued interest receivable (1,571) (877) (276)
Increase in accrued interest payable and other liabilities 1,556 1,635 526
Other, net (3,050) (3,169) (176)
--------------------------------------------------------------------------------------------------------------------
Total adjustments 1,884 970 3,682
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,045 4,481 7,024
--------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in financial institutions (9,592) 16,600 (12,568)
(Increase) decrease in federal funds sold (21,775) 3,000 (4,175)
Purchases of securities available for sale (639) (3,635) (23,863)
Proceeds from maturities and redemptions of securities available for sale 1,171 4,560 14,483
Purchases of securities held to maturity (3,902) (1,350) (4,489)
Proceeds from maturities and redemptions of securities held to maturity 2,147 4,079 6,449
Net increase in loans (69,431) (109,825) (53,886)
Cash received in purchase of branch -- 3,746 --
Investment in unconsolidated affiliates (2,904) (1,935) (613)
Purchases of premises and equipment (10,329) (3,627) (2,766)
Proceeds from sale of other real estate 1,175 1,346 46
--------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (114,079) (87,041) (81,382)
--------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 88,890 58,375 72,368
Increase (decrease) in federal funds purchased 7,300 2,275 (1,200)
Increase in advances from Federal Home Loan Bank 6,657 21,581 516
Proceeds from notes payable 4,325 675 3,000
Repayments of notes payable (3,031) (453) (298)
Proceeds from issuance of trust preferred securities 8,000 -- --
Dividends paid (516) -- (15)
Proceeds from issuance of common stock, net 434 9,390 117
--------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 112,059 91,843 74,488
--------------------------------------------------------------------------------------------------------------------
Net increase in cash 4,025 9,283 130
Cash and cash equivalents at beginning of year 18,255 8,972 8,842
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 22,280 18,255 8,972
--------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
--------------------------------------------------------------------------------------------------------------------
Interest paid $ 25,435 18,626 16,880
Income taxes paid 3,097 2,660 1,988
--------------------------------------------------------------------------------------------------------------------
Non-Cash Activities:
Issuance of common stock - due to acquisitions $ -- 685 --
10% stock dividend -- 6,341 --
Assets acquired through foreclosure 1,888 3,052 53
--------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
34
36
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) Summary of Significant Accounting Policies
The accounting policies of Cumberland Bancorp, Incorporated and
Subsidiaries conform to generally accepted accounting principles and to
general practices within the banking and financial services industry.
The significant policies are summarized as follows:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Cumberland Bancorp, Incorporated (the Company) and its subsidiaries.
Material intercompany accounts and transactions have been eliminated in
consolidation.
Nature of Operations
Substantially all of the assets, liabilities, and operations presented
in the consolidated financial statements are attributable to the five
subsidiary banks: Cumberland Bank, BankTennessee, The Community Bank,
Bank of Dyer and Bank of Mason. The Banks provide a variety of banking
services to individuals and businesses through their eighteen branches
located across ten counties in Middle and West Tennessee. Their primary
deposit products are demand deposits, savings deposits, and
certificates of deposit, and their primary lending products are
commercial business, real estate mortgage, and installment loans. Other
financial services such as credit insurance, investment products,
consumer loan services, and property and casualty insurance are also
provided by subsidiaries or divisions of the Banks.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Due From Banks
Included in cash and due from banks are legal reserve requirements
which must be maintained on an average basis in the form of cash and
balances due from the Federal Reserve and other banks.
Securities
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Debt and Equity Securities" (SFAS 115)
securities are classified into three categories: held to maturity
(HTM), available for sale (AFS), and trading.
Securities classified as held to maturity, which are those the Company
has the positive intent and ability to hold to maturity, are reported
at amortized cost. Securities classified as available for sale may be
sold in response to changes in interest rates, liquidity needs, and for
other purposes. Available for sale securities are reported at fair
value and include securities not classified as held to maturity or
trading. Trading securities are those held principally for the purpose
of selling in the near future and are carried at fair value. The
Company currently has no trading securities.
35
37
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) Summary of Significant Accounting Policies, continued
Unrealized holding gains and losses for available for sale securities
are excluded from earnings and reported, net of any income tax effect,
as other comprehensive income in shareholders' equity. Realized gains
and losses are reported in earnings based on the adjusted cost of the
specific security sold.
Loans
Loans which the Company has the positive intent and ability to hold to
maturity are stated at the principal amount outstanding. Unearned
discounts, deferred loan fees and the allowance for loan losses are
shown as reductions of loans. Loan origination fees are deferred, to
the extent they exceed direct origination costs, and recognized over
the life of the related loans as yield adjustments. Interest income on
loans is computed based on the outstanding loan balance.
Loans are generally placed on nonaccrual when a loan is specifically
determined to be impaired or when the collection of interest is less
than probable or collection of any amount of the principal is doubtful,
after considering economic and business conditions and collection
efforts. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on
specific impaired loans unless the likelihood of further loss is
remote. Interest payments received on such loans are applied as a
reduction of the loan principal balance. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments
received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgement, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash
flows. Because of uncertainties associated with the regional economic
conditions, collateral values, and future cash flows on impaired loans,
it is reasonably possible that management's estimate of credit losses
inherent in the loan portfolio and the related allowance may change
materially in the near term. The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries.
Mortgage Banking Activities
The Banks originate mortgage loans for sale and these loans are
generally sold at origination. Loans held for sale are carried at the
lower of cost or fair value. Origination fees are recorded as income
when the loans are sold to third party investors.
Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", was issued in September
2000 and revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures. The statement supersedes SFAS No. 125, although it retains
most of SFAS No. 125's provisions without modification. SFAS No. 140 is
effective for transactions occurring after March 31, 2001 and is not
expected to have a material effect on the Corporation's results of
operations, financial position or liquidity. Disclosure regarding
securitizations are effective for all fiscal years ending after
December 15, 2000.
36
38
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) Summary of Significant Accounting Policies, continued
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation has been computed on
straight-line and accelerated methods, based on the estimated useful
lives of the respective asset.
Other Intangible Assets
Other intangible assets consist of goodwill and a core deposit
intangible. Goodwill consists of the excess of cost over the fair value
of the assets acquired from Bancshares of Dyer, Inc. and the excess
cost over the fair value of net assets purchased in the acquisition of
Bank of Mason. Goodwill is being amortized over 15 years. The core
deposit intangible represents the value assigned to a deposit base
acquired in the acquisition of another financial institution's branch
banking operations in Warren County, Tennessee and is being amortized
on the straight line basis over 15 years.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return. The subsidiaries provide for income taxes on a separate-return
basis and remit to or receive from the Company amounts currently
payable or receivable. Income taxes have been provided using the
liability method in accordance with SFAS No. 109, "Accounting for
Income Taxes".
A valuation allowance is required by SFAS 109 if, based on the weight
of available evidence, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. This allowance is
evaluated periodically by management and adjusted based on current
circumstances.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires entities to disclose the estimated fair value of its financial
instrument assets and liabilities. Management is concerned that the
required disclosures under SFAS No. 107 may lack reasonable
comparability between financial institutions due to the wide range of
permitted valuation techniques and numerous estimates which must be
made given the absence of active secondary markets for many of the
financial instruments. This lack of uniform valuation methodologies
also introduces a greater degree of subjectivity to these estimated
fair values.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value. These fair values are provided for
disclosure purposes only and do not impact carrying values of financial
statement amounts.
Cash, interest bearing deposits in financial institutions and federal
funds sold -- The carrying amounts reported in the balance sheet for
cash, interest bearing deposits in financial institutions and federal
funds sold approximate those assets' fair values.
Securities (including mortgage-backed securities) -- Fair values for
securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
37
39
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) Summary of Significant Accounting Policies, continued
Loans receivable -- For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently offered
for loans with similar terms to borrowers of similar credit quality.
Restricted equity securities -- The carrying amounts reported in the
balance sheet for restricted equity securities approximate their fair
value.
Investments in unconsolidated affiliates -- The carrying amounts
reported in the balance sheet for investments in unconsolidated
affiliates approximate their fair values.
Loan servicing rights -- The carrying amounts reported in the balance
sheet for servicing rights approximate their fair value.
Deposits with defined maturities -- The fair value for deposits with
defined maturities is calculated by discounting future cash flows to
their present value. Future cash flows, consisting of both principal
and interest payments, are discounted with the Bank's current rates for
similar instruments applicable to the remaining maturity. For purposes
of this disclosure, deposits with defined maturities include all
certificates of deposits and other time deposits.
Deposits with undefined maturities -- The fair value of deposits with
undefined maturities is equal to the carrying value. For purposes of
this disclosure, deposits with undefined maturities include
noninterest-bearing demand, interest-bearing demand and savings
accounts.
Federal funds purchased -- The carrying amounts reported in the balance
sheet for federal funds purchased approximate their fair value.
Notes payable, and Federal Home Loan Bank advances -- The fair values
of notes payable and advances from the Federal Home Loan Bank are
estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
Accrued Interest -- The carrying amounts of accrued interest
approximate their fair values.
Trust Preferred Securities -- Fair values of Trust Preferred Securities
are based on quoted market prices of comparable instruments.
Off-Balance Sheet Financial Instruments -- Fair values for off-balance
sheet lending commitments are based on fees currently charged to enter
into similar agreements taking into account the remaining terms of the
agreements and the counter parties' creditworthiness.
Cash and Cash Equivalents
Cash and cash equivalents includes amounts in the balance sheet
caption, cash and due from banks.
38
40
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) Summary of Significant Accounting Policies, continued
Earnings per Share
Earnings per share (EPS) is calculated in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, issued in February 1997.
The statement requires the dual presentation of basic and diluted EPS
on the income statement. Basic EPS excludes dilution, and is computed
by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if options
to issue common stock were exercised or converted into common stock
that then shared in the earnings of the entity. EPS has been adjusted
for stock splits, but does not include the 2 for 1 split announced
subsequent to December 31, 2000, discussed in note 24. In addition,
average shares outstanding was increased by 511,783 shares to reflect
the pooling of interests with Bancshares of Dyer, Inc. in all periods
presented.
Effect of New Accounting Pronouncements
In July 1997, the FASB issued SFAS No. 130, "Comprehensive Income". The
statement establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. It
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is presented with the same prominence as
other financial statements. This statement requires that companies (i)
classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial
condition.
This statement is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods
provided for comprehensive purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". The statement establishes
standards for disclosure about operating segments in annual financial
statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise". This statement becomes effective for the Company's fiscal
year ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to its
requirements. The adoption of the provisions of this statement did not
have a material impact on the Company.
In October 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This Statement amends SFAS No. 65, which required that
retained securities be classified as trading securities. SFAS No. 134
allows these securities to be classified as trading, held to maturity
or available for sale based on the intent and ability of the
enterprise. This Statement is effective January 1, 1999, did not
materially impact the Company's financial position or results of
operations.
39
41
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) Summary of Significant Accounting Policies, continued
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 established a new model
for accounting for derivatives and hedging activities and supersedes
and amends a number of existing standards. SFAS 133 is effective for
fiscal years beginning after June 15, 2000, but earlier application is
permitted as of the beginning of any fiscal quarters subsequent to June
15, 1998. Upon the statement's initial application, all derivatives are
required to be recognized in the statement of financial position as
either assets or liabilities and measured at fair value. In addition,
all hedging relationships must be designated, reassessed, and
documented pursuant to the provisions of SFAS 133. Upon adoption of
SFAS 133 on January 1, 2001, the statement did not have a material
financial statement impact on the Corporation's financial position or
operating results.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-up Activities." This
Statement requires that the costs of start-up activities, including
organization costs, be expensed as incurred. When adopted, previously
capitalized start-up and organization costs should be written off and
reported as the cumulative effect of a change in accounting principle.
The Statement is effective for fiscal years beginning after December
15, 1998 and did not materially impact the Company's financial position
or results of operations.
Reclassifications
Certain reclassifications have been made to prior year amounts to
conform to the 2000 presentation.
(2) Interest Bearing Deposits
At December 31, 1999, the Company had certificates of deposit with the
Federal Home Loan Bank totaling $4,696,000 and certificates of deposit
with a related party institution totaling $700,000.
At December 31, 2000, the Company had demand deposits totaling
$4,448,000 and certificates of deposits totaling $10,000,000 at the
Federal Home Loan Bank. In addition, $520,000 in certificates of
deposit were with non-affiliated banks. The Company also had demand
deposits of $20,000 with non-financial institutions.
(3) Securities
The following table reflects the amortized cost and estimated fair
values of securities, as well as gross unrealized gains and gross
unrealized losses as of December 31, 2000 and 1999.
-------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------
Available for sale
U.S. Treasury and U.S.
government agencies $ 9,982 -- (94) 9,888
Obligations of state and
political subdivisions 2,842 39 (15) 2,866
Mortgage-backed securities 1,249 6 (9) 1,246
Marketable equity securities 1,495 -- (162) 1,333
Other debt securities 217 -- -- 217
Other securities 16 -- -- 16
-------------------------------------------------------------------------------
December 31, 2000 $15,801 45 (280) 15,566
-------------------------------------------------------------------------------
40
42
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(3) Securities, continued
-------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------
Held to maturity
U.S. Treasury and U.S.
government agencies $ 4,600 -- (13) 4,587
Obligations of state and
political subdivisions 654 9 -- 663
Mortgage-backed securities 3,171 23 (39) 3,155
-------------------------------------------------------------------------------
December 31, 2000 $ 8,425 32 (52) 8,405
-------------------------------------------------------------------------------
Available for sale
U.S. Treasury and U.S.
government agencies $10,696 -- (318) 10,378
Obligations of state and
political subdivisions 2,869 -- (142) 2,727
Mortgage-backed securities 1,490 3 (29) 1,464
Marketable equity securities 1,477 -- (209) 1,268
Other securities 261 1 -- 262
-------------------------------------------------------------------------------
December 31, 1999 $16,793 4 (698) 16,099
-------------------------------------------------------------------------------
Held to maturity
U.S. Treasury and U.S.
government agencies $ 2,560 -- (54) 2,506
Obligations of state and
political subdivisions 230 6 -- 236
Mortgage-backed securities 3,844 20 (55) 3,809
Other securities 43 -- -- 43
-------------------------------------------------------------------------------
December 31, 1999 $ 6,677 26 (109) 6,594
-------------------------------------------------------------------------------
The carrying amounts and estimated fair value of securities at December
31, 2000 by contractual maturity are shown below. 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.
Available for sale Held to maturity
-------------------------------------------------
(Dollars in thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
----------------------------------------------------------------------------------------------
Due in one year or less $ 3,764 3,747 195 194
Due after one through five years 4,873 4,832 4,149 4,139
Due after five through ten years 2,556 2,555 910 917
Due after ten years 1,631 1,620 -- --
Marketable equity securities 1,495 1,333 -- --
Mortgage-backed securities 1,249 1,246 3,171 3,155
SBA loan pool participation 217 217 -- --
Other securities 16 16 -- --
----------------------------------------------------------------------------------------------
$15,801 15,566 8,425 8,405
----------------------------------------------------------------------------------------------
41
43
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(3) Securities, continued
Securities carried at approximately $15,283,000 at December 31, 2000
and $9,572,000 at December 31, 1999 were pledged to secure deposits and
for other purposes as required or permitted by law. The fair value of
the securities portfolio is established by an independent pricing
service as of the approximate dates indicated.
At December 31, 1999, the Company did not hold securities of any single
issuer, other than obligations of the U.S. Treasury and other U.S.
Government agencies, whose aggregate book value exceeded ten percent of
shareholders' equity.
(4) Loans
A summary of loans outstanding by category follows:
(Dollars in thousands) 2000 1999
------------------------------------------------------------------------------
Real estate - construction and development $ 73,706 $ 80,789
Real estate - 1 to 4 family residential properties 181,723 157,820
Real estate - other 63,450 49,708
Commercial, financial and agricultural 131,548 102,385
Consumer 58,156 50,643
Other 1,396 1,744
------------------------------------------------------------------------------
509,979 443,089
Net deferred loan fees and discounts (608) (639)
Unearned income (2,154) (2,134)
------------------------------------------------------------------------------
$ 507,217 $ 440,316
------------------------------------------------------------------------------
In addition to the loans shown above, loans serviced for others totaled
$102,622,000 and $92,208,000 at December 31, 2000 and 1999,
respectively.
Certain parties (principally directors and officers of the Company or
the Banks, including their affiliates, families, and companies in which
they hold ten percent or more ownership) were customers of, and had
loans and other transactions with the Banks in the ordinary course of
business. The outstanding balances of such loans totaled $6,160,000 and
$4,147,000 as of December 31, 2000 and 1999, respectively. These loan
transactions were made on substantially the same terms as those
prevailing at the time for comparable loans to other persons. They did
not involve more than the normal risk of collectibility or present
other unfavorable features. During 2000, the Company advanced
$5,109,000 and received payments of $3,096,000 on such loans.
(5) Financial Instruments With Off-Balance Sheet Risk
The Banks are parties to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
their customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of
those instruments reflect the extent of involvement the Banks have in
those particular financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and letters of credit is represented by the contractual or
notional amount of those instruments. The Banks use the same credit
policies in making commitments and conditional obligations as it does
for on-balance sheet instruments.
42
44
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(5) Financial Instruments With Off-Balance Sheet Risk, continued
Financial Instruments with Off-Balance Sheet Risk (Dollars in Thousands)
----------------------------------------------------------------------------
Contractual commitments to extend credit $71,045
Standby letters of credit $ 3,060
----------------------------------------------------------------------------
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 to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Banks evaluate each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed
necessary by the Banks upon extension of credit is based on
management's credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Letters of credit are conditional commitments issued by the Banks 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. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
The Banks have a recourse obligation for 90 days from the purchase date
for loans sold to investors. At December 31, 2000, loans sold to the
investors with existing recourse approximated $12,366,000. The
obligation on these loans relates to performance by the borrower.
(6) Concentrations of Credit
The Banks grant agribusiness, commercial, construction, and individual
loans to customers located primarily within the middle and western
portion of Tennessee. Concentration by type of loans are presented in
note 3.
(7) Allowance for Loan Losses
Transactions in the allowance for loan losses were as follows:
(Dollars in thousands) 2000 1999 1998
----------------------------------------------------------------------------------
Balance at beginning of year $ 5,146 4,012 3,214
Allowance for loan losses of Bank of Mason
due to acquisition 57 -- --
Increase in allowance due to acquisition of branch -- 152 --
Provisions charged to operating expense 2,636 1,623 1,188
Loans charged-off (1,861) (758) (512)
Recoveries of previously charged-off loans 159 117 122
----------------------------------------------------------------------------------
Balance at end of year $ 6,137 5,146 4,012
----------------------------------------------------------------------------------
The Company had approximately $5,953,000 and $2,687,000 at December 31,
2000 and 1999, respectively, in loans which were considered impaired
under SFAS 114. Accrual of interest had been discontinued on these
loans as of those dates. The allowance for loan losses related to these
loans was approximately $893,000 and $537,000 at December 31, 2000 and
1999, respectively. If such loans had been on an accrual basis,
interest income would have been approximately $499,000, $125,000 and
$121,000 higher in 2000, 1999 and 1998, respectively.
43
45
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(8) Premises and Equipment
Premises and equipment are summarized as follows:
(Dollars in thousands) 2000 1999
-------------------------------------------------------------------
Land $ 4,786 3,816
Buildings and improvements 13,806 6,938
Leasehold improvements 903 1,354
Furniture, fixtures and equipment 7,397 5,475
Automobiles 155 155
Construction-in-progress 1,931 956
-------------------------------------------------------------------
28,978 18,694
Less accumulated depreciation 5,511 4,116
-------------------------------------------------------------------
Net premises and equipment $23,467 14,578
-------------------------------------------------------------------
Depreciation expense related to premises and equipment amounted to
$1,440,000 in 2000, $1,114,000 in 1999 and $928,000 in 1998.
A director's construction company was paid $2,784,000 as the general
contractor for building a branch of one of the subsidiaries. In another
transaction, $250,000 was paid to a director of the Company and his
associate by one subsidiary to purchase a building site for a new
branch. Also, a partnership, in which a director of one subsidiary was
a partner, was paid $680,000 for a branch office. These transactions
were made on substantially the same terms as those prevailing at the
time for comparable transactions with other persons.
(9) Investment in Unconsolidated Affiliates
Investments in unconsolidated affiliates consist of the following:
(Dollars in thousands) 2000 1999
----------------------------------------------------------------------------
Investment in Murray Bank (50% ownership) $2,095 2,013
Investment in Insurors Bank of Tennessee (50% ownership) 2,681 156
Other investments in other unconsolidated affiliates 207 272
----------------------------------------------------------------------------
$4,983 2,441
----------------------------------------------------------------------------
The Company uses the equity method of accounting in recording
investments in unconsolidated subsidiaries. The initial investment is
recorded at cost and the carrying amount of the investment is increased
or decreased by the proportionate share of earnings or losses. Any
dividends received are recorded as a reduction in the investment.
44
46
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(10 Restricted Equity Securities
Restricted equity securities consist of securities which are restricted
as to transferability. These securities are recorded at cost.
(Dollars in thousands) 2000 1999
-----------------------------------------------------------------------
Federal Home Loan Bank $3,551 2,981
Federal Reserve Bank 562 435
Bankers Bank 100 100
FNMA 13 13
-----------------------------------------------------------------------
$4,226 3,529
-----------------------------------------------------------------------
(11) Other Intangible Assets
A summary of other intangible assets at December 31, 2000 and 1999
follows:
(Dollars in thousands) 2000 1999 1998
-----------------------------------------------------------------------
Deposit premium $1,475 1,475 --
Goodwill 230 73 --
-----------------------------------------------------------------------
1,705 1,548 --
Accumulated amortization 128 25 --
-----------------------------------------------------------------------
Net intangible assets $1,577 1,523 --
-----------------------------------------------------------------------
Amortization expense related to intangible assets amounted to $103,000
and $25,000 in 2000 and 1999.
(12) Deposits
A summary of deposits at December 31, 2000 and 1999 follows:
(Dollars in thousands) 2000 1999
----------------------------------------------------------------------
Noninterest-bearing demand $ 46,629 34,099
Interest-bearing demand 140,781 130,777
Savings 15,662 16,383
Certificates of deposit of $100,000 or more 114,137 83,089
Other time 206,933 170,904
----------------------------------------------------------------------
Total deposits $524,142 435,252
----------------------------------------------------------------------
At December 31, 2000 scheduled maturities of time deposits are as
follows:
(Dollars in thousands)
-------------------------------------------------------------------
One year or less $265,796
Due after one year through three years 45,242
Due after three years 10,032
-------------------------------------------------------------------
$321,070
-------------------------------------------------------------------
45
47
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(13) Advances From Federal Home Loan Bank
The Company is participating in a program with the Federal Home Loan
Bank (FHLB) of Cincinnati to provide funds to the public for affordable
housing. The FHLB advances funds to the Company with the requirement
that the advances are secured by qualifying loans, essentially home
mortgages (1-4 family residential). To participate in this program, the
Company is required to be a member of the Federal Home Loan Bank and
own stock in the FHLB. The Company has $3,551,000 of such stock at
December 31, 2000 to satisfy this requirement.
At December 31, 2000 and 1999, advances from the FHLB totaled
$46,211,000 and $39,554,000, respectively. The interest rates on these
advances ranged from 4.79% to 9.125%. Qualifying loans totaling
$75,128,000 were pledged as security under a blanket pledge agreement
with the FHLB at December 31, 2000.
Maturities of the advances from FHLB at December 31, 2000 are as
follows:
(Dollars in thousands)
2001 $ 17,060
2002 2,113
2003 529
2004 -
Later years 26,509
---------
$ 46,211
---------
(14) Notes Payable
Notes payable consist of the following:
(Dollars in thousands) 2000 1999
-----------------------------------------------------------------------
Note payable to a lending institution which bears
interest at a rate of 8.25% until June 14, 2003 at
which time the rate will be at prime. Interest is
payable quarterly and principal is payable quarterly
or on an annual basis of at least 10% of the
outstanding balance commencing on June 15, 1998. The
note is secured by 100% of the common stock of
Cumberland Bank. $ 1,002 1,145
Note payable to a lending institution which bears
interest at a rate of 8.25%. Interest is payable
quarterly and principal is payable in fifteen
quarterly installments of $77,500 commencing on June
30, 1998, and one final payment of $37,500 due on
March 31, 2002. The note is secured by 100% of the
common stock of BankTennessee and The Community Bank.
347 735
46
48
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(14) Notes Payable, continued
Note payable to a lending institution which bears
interest at prime rate. Interest is payable quarterly
and principal is payable in one installment of
$40,000 on March 31, 2002, and 24 quarterly
installments commencing on June 30, 2002 of $77,500.
The note is secured by 100% of the common stock of
BankTennessee and The Community Bank. -- 1,900
$5,000,000 line of credit from a lending institution
with an optional variable or fixed interest rate to
be selected for each advance. Variable rate equal to
90 day LIBOR Rate plus 225 basis points. Advances can
be made on the line from inception to June 30, 2003.
Interest is payable quarterly. Principal is payable
in forty equal quarterly payments commencing
September 30, 2002 of 2.78% of the respective
advances. Advances made on or after July 1, 2002
through June 30, 2003 shall convert to thirty-six
quarterly interest plus principal payments beginning
September 30, 2003. Quarterly principal payments
shall be 2.78% of the respective balance for each
advance. The note is secured by all of the
outstanding shares of the capital stock of Cumberland
Bank, BankTennessee, The Community Bank, The Bank of
Dyer and any shares of capital stock of the Company
in any other banks. 2,000 --
$6,000,000 line of credit from a lending institution
which bears interest at a rate of 7.50%. Advances can
be made on the line from inception to March 31, 2000.
Interest is payable quarterly and principal is
payable in ten annual installments of $600,000
commencing April 1, 2000. The note is secured by 100%
of the common stock of Cumberland Bank,
BankTennessee, and The Community Bank. 5,400 3,675
-----------------------------------------------------------------------
$ 8,749 7,455
-----------------------------------------------------------------------
Minimum annual principal payments for future years are as follows:
(Dollars in thousands)
2001 $1,053
2002 881
2003 943
2004 943
2005 943
Later years 3,986
---------
$8,749
---------
The Company has agreed to certain covenants in connection with the
notes payable to the lending institution. These covenants include,
among other things, minimum financial ratios for the subsidiary Banks.
The Banks were in compliance with all of the provisions of the loan
covenants as of December 31, 2000.
The Company entered into a new loan agreement for a $6,000,000 line of
credit during 1998. In the loan agreement, the lending institution
placed a covenant restricting capital. The covenant states if the
Company is current on principal and interest payments, it will be
permitted to pay dividends to shareholders not exceeding twenty-five
percent of net earnings.
47
49
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(15) Trust Preferred Securities
On December 29, 2000, Cumberland Bancorp, Incorporated, through
Cumberland Capital Trust I and with the assistance of its Placement
Agent, sold to institutional investors $8,000,000 of capital
securities. Cumberland Capital Trust I, a Delaware business trust
wholly owned by Cumberland Bancorp, Incorporated, issued $8,000,000 of
Floating Rate Capital Securities. Holders of the Capital Securities are
entitled to receive preferential cumulative cash distributions from the
Trust, at a rate per annum reset quarterly equal to the sum of three
month LIBOR plus 350 basis points applied to the liquidation amount of
$1,000 per Capital Security, accruing from the date of original
issuance and payable quarterly in arrears on January 1, April 1, July 1
and October 1 each year commencing April 1, 2001. The rate was 9.93% at
December 31, 2000. The Company can defer payment of interest on the
subordinated debt securities at any time or from time to time for a
period not to exceed twenty consecutive quarters.
The proceeds were upstreamed to Cumberland Bancorp, Incorporated as
junior subordinated debt under the same terms and conditions.
Cumberland Bancorp, Incorporated has, through various contractual
arrangements, fully and unconditionally guaranteed all of Cumberland
Capital Trust I's obligations with respect to the capital securities.
These Capital Securities qualify as a Tier I Capital and are presented
in the Consolidated Balance Sheets as Trust Preferred Securities. The
sole asset of Cumberland Capital Trust I is $8,000,000 of junior
subordinated debentures issued by Cumberland Bancorp, Incorporated.
These junior subordinated debentures also carry the same floating rate
and both mature on December 25, 2025; however, the maturity of both may
be shortened to a date not earlier than December 25, 2005.
(16) Income Taxes
Income tax expense (benefits) consist of the following:
(Dollars in thousands) 2000 1999 1998
---------------------------------------------------------------------------------------
Current:
Federal $ 2,398 2,165 1,755
State 456 412 335
---------------------------------------------------------------------------------------
Total current tax 2,854 2,577 2,090
---------------------------------------------------------------------------------------
Deferred:
Federal (357) (393) (77)
State (66) (74) (10)
---------------------------------------------------------------------------------------
Total deferred tax benefits (423) (467) (87)
---------------------------------------------------------------------------------------
Tax benefits credited to shareholders' equity related
to exercise of stock options 5 3 --
---------------------------------------------------------------------------------------
Total income tax expense $ 2,436 $ 2,113 2,003
---------------------------------------------------------------------------------------
Significant temporary differences between tax and financial reporting
that give rise to deferred tax assets (liabilities) included in other
assets on the consolidated balance sheet are as follows at December 31,
2000 and 1999:
48
50
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(16) Income Taxes, continued
(Dollars in thousands) 2000 1999
-------------------------------------------------------------------
Allowance for loan losses $ 2,164 1,752
Unrealized loss on securities 59 252
Deferred loan fees 100 139
Other 398 192
-------------------------------------------------------------------
Total deferred tax assets 2,721 2,335
-------------------------------------------------------------------
FHLB stock dividends (562) (475)
Premises and equipment (480) (442)
Loan servicing rights (356) (388)
Other (143) -
-------------------------------------------------------------------
Total deferred tax liabilities (1,541) (1,305)
-------------------------------------------------------------------
Net deferred tax asset $ 1,180 1,030
-------------------------------------------------------------------
A reconciliation of the provision for income taxes with the amount of
income taxes computed by applying the federal statutory rate (34%) to
earnings before income taxes follows:
(Dollars in thousands) 2000 1999 1998
----------------------------------------------------------------------------------
Computed expected provision for income taxes $ 2,243 1,912 1,817
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit 261 223 215
Tax exempt interest (69) (48) --
Other, net 1 26 (29)
----------------------------------------------------------------------------------
Total income tax expense $ 2,436 2,113 2,003
----------------------------------------------------------------------------------
During 1996, the subsidiary Banks began computing their tax bad debt
reserves under the rules which apply to commercial banks. In years
prior to 1996, the Banks obtained tax bad debt deductions of
approximately $1.8 million in excess of their financial statement
allowance for loan losses for which no provision for federal income tax
was made. These amounts are subject to federal income tax in future
years if used for purposes other than to absorb bad debt losses. This
excess reserve is subject to recapture only if a bank ceases to qualify
as a bank as defined in the Internal Revenue Code.
(17) Minimum Capital Standards
The Company and its Bank subsidiaries 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 and
its Bank subsidiaries must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. 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 maintenance of minimum amounts and ratios (set
forth in the table below) 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, as of December 31, 2000 and 1999, that all capital adequacy
requirements to which they are subject are met.
49
51
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(17) Minimum Capital Standards, continued
As of December 31, 2000, the most recent notification from the Federal
Reserve Bank categorized the Company and all Bank subsidiaries as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Company and the Banks
must maintain total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the
category.
The Company has reached an agreement with the Federal Reserve Bank to
maintain the Bank subsidiaries as well capitalized for a period of two
years beginning October 2000 and for the Company to maintain a total
capital to risk-weighted assets ratio of at least 10%.
The Company and the Banks' actual capital amounts and ratios at
December 31, 2000 and 1999, are as follows:
To be well
capitalized
under
prompt
corrective
Required action
(Dollars in thousands) Minimum provisions Actual
------------------------------------------------------------------------------------
December 31, 2000
Cumberland Bancorp, Incorporated
Amount:
Tier I to average assets - leverage $ 24,820 31,025 46,070
Tier I to risk-weighted assets 19,359 29,038 46,070
Total capital to risk-weighted assets 38,718 48,397 52,207
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 7.42%
Tier I to risk-weighted assets 4.00% 6.00% 9.52%
Total capital to risk-weighted assets 8.00% 10.00% 10.79%
Cumberland Bank
Amount:
Tier I to average assets - leverage $ 9,151 11,438 16,490
Tier I to risk-weighted assets 7,475 11,212 16,490
Total capital to risk-weighted assets 14,949 18,686 18,823
Ratios:
Tier I to average assets - leverage 4.00% 5.00 7.21%
Tier I to risk-weighted assets 4.00% 6.00 8.82%
Total capital to risk-weighted assets 8.00% 10.00 10.07%
BankTennessee
Amount:
Tier I to average assets - leverage $ 8,189 10,236 15,047
Tier I to risk-weighted assets 6,650 9,975 15,047
Total capital to risk-weighted assets 13,300 16,625 17,125
Ratios:
Tier I to average assets - leverage 4.00% 5.00 7.35%
Tier I to risk-weighted assets 4.00% 6.00 9.05%
Total capital to risk-weighted assets 8.00% 10.00 10.30%
50
52
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(17) Minimum Capital Standards, continued
To be well
capitalized
under
prompt
corrective
Required action
(Dollars in thousands) Minimum provisions Actual
------------------------------------------------------------------------------------
December 31, 2000
The Community Bank
Amount:
Tier I to average assets - leverage $ 4,542 5,677 8,392
Tier I to risk-weighted assets 3,667 5,500 8,392
Total capital to risk-weighted assets 7,334 9,167 9,399
Ratios:
Tier I to average assets - leverage 4.00% 5.00 7.39%
Tier I to risk-weighted assets 4.00% 6.00 9.15%
Total capital to risk-weighted assets 8.00% 10.00 10.25%
Bank of Dyer
Amount:
Tier I to average assets - leverage $ 1,822 2,352 3,475
Tier I to risk-weighted assets 1,341 2,012 3,475
Total capital to risk-weighted assets 2,682 3,353 3,830
Ratios:
Tier I to average assets - leverage 4.00% 5.00 7.39%
Tier I to risk-weighted assets 4.00% 6.00 10.36%
Total capital to risk-weighted assets 8.00% 10.00 11.42%
Bank of Mason
Amount:
Tier I to average assets - leverage $ 359 449 934
Tier I to risk-weighted assets 189 284 934
Total capital to risk-weighted assets 379 474 1,002
Ratios:
Tier I to average assets - leverage 4.00% 5.00 10.41%
Tier I to risk-weighted assets 4.00% 6.00 19.72%
Total capital to risk-weighted assets 8.00% 10.00 21.15%
----------------------------------------------------------------------------------------------
December 31, 1999
Cumberland Bancorp, Incorporated
Amount:
Tier I to average assets - leverage $ 20,011 25,014 34,210
Tier I to risk-weighted assets 16,656 24,983 34,210
Total capital to risk-weighted assets 33,311 41,639 39,367
Ratios:
Tier I to average assets - leverage 4.00% 5.00 6.84%
Tier I to risk-weighted assets 4.00% 6.00 8.22%
Total capital to risk-weighted assets 8.00% 10.00 9.45%
51
53
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(17) Minimum Capital Standards, continued
To be well
capitalized
under
prompt
corrective
Required action
(Dollars in thousands) Minimum provisions Actual
------------------------------------------------------------------------------------
December 31, 1999
Cumberland Bank
Amount:
Tier I to average assets - leverage $ 7,572 9,465 12,539
Tier I to risk-weighted assets 6,017 9,026 12,539
Total capital to risk-weighted assets 12,034 15,043 14,427
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 6.62%
Tier I to risk-weighted assets 4.00% 6.00% 8.34%
Total capital to risk-weighted assets 8.00% 10.00% 9.59%
BankTennessee
Amount:
Tier I to average assets - leverage $ 3,131 3,914 11,138
Tier I to risk-weighted assets 5,862 8,793 11,138
Total capital to risk-weighted assets 11,724 14,656 12,970
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 6.25%
Tier I to risk-weighted assets 4.00% 6.00% 7.60%
Total capital to risk-weighted assets 8.00% 10.00% 8.85%
The Community Bank
Amount:
Tier I to average assets - leverage $ 3,751 4,689 6,417
Tier I to risk-weighted assets 3,275 4,912 6,417
Total capital to risk-weighted assets 6,549 8,187 7,267
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 6.84%
Tier I to risk-weighted assets 4.00% 6.00% 7.84%
Total capital to risk-weighted assets 8.00% 10.00% 8.88%
Bank of Dyer
Amount:
Tier I to average assets - leverage $ 1,614 2,018 2,598
Tier I to risk-weighted assets 1,086 1,629 2,598
Total capital to risk-weighted assets 2,173 2,716 2,896
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 6.44%
Tier I to risk-weighted assets 4.00% 6.00% 9.57%
Total capital to risk-weighted assets 8.00% 10.00% 10.66%
-------------------------------------------------------------------------------------
52
54
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(18) Employee Benefits
The Company maintains a 401(k) savings plan for all employees who have
completed six months of service and are 21 or more years of age.
Employer contributions to the plan are determined annually by the board
of directors. The Company's expenses related to the plan were $414,139
in 2000, $273,848 in 1999 and $138,839 in 1998.
(19) Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as
follows at December 31, 2000 and 1999:
2000 1999
---------------------------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Value Value Value Value
----------------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 22,280 22,280 18,255 18,255
Interest-bearing deposits in
financial institutions 14,988 14,988 5,396 5,396
Federal funds sold 33,025 33,025 11,250 11,250
Securities available for sale 15,566 15,566 16,099 16,099
Securities held to maturity 8,425 8,405 6,677 6,594
Loans, net of allowance 501,080 499,885 435,170 434,215
Accrued interest receivable 5,644 5,644 4,073 4,073
Restricted equity securities 4,226 4,226 3,529 3,529
Investment in unconsolidated
affiliates 4,983 4,983 2,441 2,441
Loan servicing rights 985 985 1,021 1,021
Financial liabilities:
Deposits with defined maturities 321,070 322,517 253,993 253,706
Deposits with undefined
maturities 203,072 203,072 181,259 181,259
Notes payable 8,749 8,730 7,455 7,250
Federal funds purchased 9,575 9,575 2,275 2,275
Advances from FHLB 46,211 45,105 39,554 38,484
Accrued interest payable 4,694 4,694 3,072 3,072
Trust Preferred Securities 8,000 8,000 -- --
Notional Fair Notional Fair
Amounts Value Amount Value
-----------------------------------------------------------------------------------
Off-balance sheet financial instruments:
Commitments to extend credit $69,285 - 76,436 --
Standby letters of credit 3,070 - 3,467 --
Mortgage loans sold subject to
repurchase provisions 12,366 - 13,157 --
The carrying values in the preceding table are included in the
consolidated balance sheets under the applicable captions.
53
55
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(20) Business Combinations and Acquisitions
On December 31, 1999, Cumberland Bancorp, Incorporated (CBI) acquired
for approximately 511,783 shares of its common stock, all of the
outstanding capital stock of Bancshares of Dyer, Inc. (BDI), a bank
holding company in Dyer, Tennessee, which owned approximately 98% of
Bank of Dyer. The merger has been accounted for as a pooling of
interests and accordingly, financial information for periods prior to
the merger reflect retroactive restatement of the companies' combined
financial position and operating results. No adjustments were necessary
to conform the accounting practices of the companies.
The following presents certain financial data for the separate entities
prior to the combination of CBI with BDI for the years ended December
31, 1999 and 1998.
(Dollars in thousands, except per share data)
1999 1998
---------------------------------------------------------------------
Total revenue:*
CBI, as originally reported $22,696 18,583
BDI 1,660 1,563
---------------------------------------------------------------------
CBI $24,356 20,146
---------------------------------------------------------------------
Net income:
CBI, as originally reported $ 3,270 3,018
BDI 241 324
---------------------------------------------------------------------
CBI $ 3,511 3,342
---------------------------------------------------------------------
*Total revenue is net interest income and noninterest income
The minority interest in Bank of Dyer was acquired in a purchase
transaction for cash of approximately $10,000 and 7,704 shares of CBI
common stock valued at $12.50 per share.
Effective September 24, 1999, the Company's Cumberland Bank subsidiary
purchased certain assets and assumed certain liabilities of American
City Bank's McMinnville, Tennessee branch. As part of the transaction,
the Company issued 47,000 shares of its common stock. The liabilities
assumed exceeded the assets received in the transaction (deposit
premium) by $1,475,000. Assets purchased and liabilities assumed at the
acquisition date are summarized as follows:
Assets (Dollars in thousands)
----------------------------------------------------------------------
Cash received in transaction $ 3,746
Loans, net 13,276
Premises and equipment 1,456
Other assets 222
Deposit premium 1,475
----------------------------------------------------------------------
$ 20,175
----------------------------------------------------------------------
Liabilities
----------------------------------------------------------------------
Deposits assumed $ 19,473
Other liabilities 114
Common shares issued to complete transaction 588
----------------------------------------------------------------------
$ 20,175
----------------------------------------------------------------------
54
56
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(20) Business Combinations and Acquisitions, continued
During 2000, the Company purchased additional shares of stock in the
Bank of Mason for $365,000 giving the Company 53% of the outstanding
stock at December 31, 2000. The excess cash paid over the fair value of
net assets acquired is recorded as goodwill in the consolidated
financial statements. The Bank of Mason has been appropriately included
in the consolidated financial statements of the Company for the period
in which Cumberland Bancorp, Incorporated had controlling interest.
Bank of Mason has approximately $9 million in total assets. Its
operations are not material to the consolidated financial statements.
Subsequent to December 31, 2000, the Company issued 53,250 shares for
the remaining interest in Bank of Mason.
(21) Commitments and Contingencies
The Company has entered into various noncancellable operating lease
arrangements in connection with its operating locations. Based upon
these agreements at December 31, 2000, future minimum lease commitments
are as follows:
(Dollars in thousands)
--------------------------------------------------------------------
2001 $ 236
2002 222
2003 216
2004 98
2005 11
Thereafter 22
--------------------------------------------------------------------
$ 805
--------------------------------------------------------------------
Rentals relating to these agreements which are included in occupancy
expense amounted to $265,000 in 2000, $196,000 in 1999 and $212,000 in
1998.
During 2000, the subsidiaries of the Company leased certain premises
from related parties. The related expense from the leases totaled
approximately $49,000 in 2000.
During 1997, the Company entered into an agreement with a group of
investors to open a BankTennessee branch in Ripley, Tennessee. In
return, these investors purchased 222,500 shares (as adjusted for the
March 1998 stock split) of the Company's common stock for $4.49 per
share (as adjusted for the March 1998 stock split). The agreement with
the Ripley group addresses a spin-off of the Ripley branch into a
separate entity after the branch reaches $30 million in assets and
becomes profitable. It is anticipated that the Ripley group will own
50% of the new entity and Cumberland Bancorp, Incorporated will own 50%
of the new entity. However, there are several provisions in the
agreement that could alter the anticipated structure.
During 1999 and 1998, the Company invested approximately $2,300,000
representing a 50% interest in a de novo bank in Murray, Kentucky. The
Company's pro rata portion of the organization and start-up costs of
approximately $92,500 in 1998 and $60,000 in 1999, in the respective
periods have been expensed.
The Murray Bank opened in June, 1999 and it incurred an operating loss
of approximately $275,000 in 1999. Earnings of approximately $26,000
were reported in 2000. This investment is being accounted for by the
equity method of accounting, whereby the Company's pro rata share of
its operations are shown as an adjustment of the original investment
and included in other operating expenses on the consolidated statements
of earnings.
55
57
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(21) Comments and Contingencies, continued
The investors that bought the remaining 50% of the Murray Bank
exercised their rights to purchase $250,000 worth of stock based upon a
price of 1.5 multiplied by the Company's book value when the charter
was granted to the Murray Bank by the OTS. An additional $250,000 in
stock options become exercisable at 1.5 multiplied by the Company's
book value if the Murray Bank attains certain financial objectives.
During 1999, the Company became involved in organizing a de novo bank
called Insurors Bank of Tennessee. The Company owns 50% and the
remaining 50% is owned by InsCorp, Inc., which is primarily owned by
Independent Insurance Agents in the State of Tennessee. The Company
invested approximately $2,830,000 during 2000 and 1999. Organization
and start-up costs were approximately $191,859 for 2000 and $24,000 in
1999. In November 2000, the Insurors Bank of Tennessee opened and
incurred an operating loss of approximately $492,000 for the year ended
December 31, 2000.
In the normal course of business there are commitments outstanding and
contingent liabilities such as legal proceedings pending against the
Bank. In the opinion of management, no material adverse effect on the
financial position is anticipated as a result of these items.
(22) Stock Options
The Company issues non-qualified stock options to employees,
non-employee directors, and bank advisory board members. The option
plan provides for the issuance of the Company's common stock at a price
determined by the plan's committee, which is the Board of Directors of
the Company. As a matter of policy, the Board of Directors has issued
options at an exercise price equal to the fair market value of the
Company's common stock at the date of grant. Share and per share
amounts in the accompanying text and tables have been adjusted for
stock splits and stock dividends (excluding the split announced
subsequent to December 31, 2000 described in note 24).
In 1995, SFAS No. 123 "Accounting for Stock Based Compensation" changed
the method for recognition of cost of plans similar to those of the
Company. As is permitted, management has elected to continue accounting
for the plan under APB Opinion 25 and related Interpretations.
Accordingly, no compensation cost has been recognized for the stock
option plan. However, under SFAS No. 123, the Company is required to
make proforma disclosures as if cost had been recognized in accordance
with the pronouncement. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant dates
for awards under the plan consistent with the method of SFAS No. 123,
the Company's net earnings and net earnings per common share would have
been as follows:
(Dollars in thousands, except per share data)
2000 1999 1998
As Reported Proforma As Reported Proforma As Reported Proforma
----------------------------------------------------------------------------------
Net income $ 4,161 3,960 3,511 3,344 3,342 3,206
Basic earnings
per share $ 0.60 0.58 0.56 0.54 0.56 0.54
Diluted earnings
per share $ 0.59 0.56 0.55 0.52 0.55 0.53
The fair value of the options granted is estimated as of the date
granted using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants: dividend yield of 0.8% in
2000 and 0% in prior years, risk-free interest rate of 6.0 percent in
all years, expected lives of five years, and expected volatility of 40
percent in 2000, 47 percent in 1999 and 53 percent in 1998.
The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 2000, 1999 and 1998
was $5.19, $6.09 and $3.16, respectively.
56
58
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(22) Stock Options, continued
Effective March 1, 1998, the Company approved 550,000 shares available
for a stock option plan. These options become exercisable at a rate of
20% per year or at the end of five years. These options generally
expire within six to ten years or earlier if an employee leaves.
A summary of the stock option activity for 2000, 1999 and 1998 is as
follows:
Weighted
Shares Shares Option Average
(Dollars in thousands, except per share Available Under Shares Exercise
data) for Option Option Exercisable Price
---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 -- -- -- --
New plan - 1998 550,000 -- --
Granted (393,710) 393,710 -- $ 5.45
---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 156,290 393,710 -- $ 5.45
Granted (42,750) 42,750 -- 12.50
Exercisable -- -- 83,642 5.45
Forfeited -- (9,625) -- 5.45
Exercised -- (1,200) -- 5.45
---------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 113,540 425,635 83,642 $ 6.16
Granted (43,750) 43,750 -- 12.50
Exercisable -- -- 82,302 5.45
Forfeited -- (6,820) -- 5.45
Exercised -- (1,330) -- 5.45
---------------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 69,790 461,235 165,944 $ 6.77
---------------------------------------------------------------------------------------------------
The following table sets forth the computation of basic net earnings
per share and diluted net earnings per share adjusted for stock splits
and stock dividends.
(Dollars in thousands, except per share data) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------
For basic net earnings per share and diluted net earnings
per share, net earnings $ 4,161 3,511 3,342
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 6,883,656 6,248,130 5,971,306
Effect of dilutive securities - stock options 127,307 139,506 126,867
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - diluted 7,010,963 6,387,636 6,098,173
Net earnings per share - basic $ 0.60 0.56 0.56
Net earnings per share - diluted 0.59 0.55 0.55
-----------------------------------------------------------------------------------------------------------
(23) Other Operating Expenses
Other operating expenses consists of the following:
Years ended December 31,
(Dollars in thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------
Data processing $ 1,381 907 783
Advertising 414 441 375
Stationery, printing and supplies 506 494 371
Postage, freight and courier 311 221 162
Directors' fees 443 418 357
Other 3,942 2,886 2,726
-----------------------------------------------------------------------------------------------------------
$ 6,997 5,367 4,774
-----------------------------------------------------------------------------------------------------------
57
59
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(24) Subsequent Event
Subsequent to December 31, 2000, the Company's board of directors
approved a 2 for 1 stock split for shareholders of record as of March
22, 2001, payable April 22, 2001. Per share amounts have not been
adjusted since shares related to the stock split will not be issued
until April 22, 2001.
(25) Parent Company Only Financial Information
Condensed Balance Sheets (Dollars in thousands)
-----------------------------------------------------------------
December 31,
------------------
Assets 2000 1999
-----------------------------------------------------------------
Cash $ 6,411 6,239
Investment in subsidiaries 44,514 33,946
Investment in unconsolidated affiliates 5,429 2,441
Premises and equipment 54 45
Goodwill 68 73
Other assets 949 713
-----------------------------------------------------------------
$57,425 43,457
-----------------------------------------------------------------
Liabilities and Shareholders' Equity
-----------------------------------------------------------------
Liabilities:
Notes payable $ 8,749 7,455
Accrued interest 713 257
Other liabilities 239 470
Subordinate debt securities 8,248 --
-----------------------------------------------------------------
Total liabilities 17,949 8,182
-----------------------------------------------------------------
Total shareholders' equity 39,476 35,275
-----------------------------------------------------------------
$57,425 43,457
-----------------------------------------------------------------
Condensed Statements of Earnings
--------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
--------------------------------------------------------------------------------------
Income:
Dividends from subsidiaries $ -- 800 620
Dividends from securities -- 4 2
Other income 41 13 13
--------------------------------------------------------------------------------------
41 817 635
--------------------------------------------------------------------------------------
Expenses:
Interest expense 603 578 527
Other expense 1,323 929 428
--------------------------------------------------------------------------------------
1,926 1,507 955
--------------------------------------------------------------------------------------
Loss before income taxes and equity in undistributed
earnings of subsidiaries (1,885) (690) (320)
Income tax benefit 732 558 359
--------------------------------------------------------------------------------------
Income (loss) before equity in undistributed earnings of
subsidiaries (1,153) (132) 39
Equity in undistributed earnings of subsidiaries 5,314 3,643 3,303
--------------------------------------------------------------------------------------
Net earnings $ 4,161 3,511 3,342
--------------------------------------------------------------------------------------
58
60
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(25) Parent Company Only Financial Information, continued
Condensed Statements of Cash Flows (Dollars in thousands)
----------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 4,161 3,511 3,342
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities:
Equity in undistributed earnings of subsidiaries (5,314) (3,643) (3,303)
Operations of unconsolidated affiliates 308 104 86
Depreciation and amortization 32 15 4
Increase in accrued interest payable 456 149 103
Other, net (384) 55 44
----------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (741) 191 276
----------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in commercial bank subsidiaries (5,366) (3,000) (1,725)
Investment in unconsolidated affiliates (2,904) (1,935) (613)
Purchases of premises and equipment (29) (20) (24)
----------------------------------------------------------------------------------------
Net cash used by investing activities (8,299) (4,955) (2,362)
----------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable 4,325 675 3,000
Repayment of notes payable (3,031) (453) (298)
Proceeds from trust preferred securities 8,000 -- --
Proceeds from issuance of common stock 434 9,390 117
Dividends paid on common stock (516) -- --
Dividends paid on common stock of previously
Acquired subsidiary -- -- (15)
----------------------------------------------------------------------------------------
Net cash provided by financing activities 9,212 9,612 2,804
----------------------------------------------------------------------------------------
Net increase in cash 172 4,848 718
Cash at beginning of year 6,239 1,391 673
----------------------------------------------------------------------------------------
Cash at end of year $ 6,411 6,239 1,391
----------------------------------------------------------------------------------------
59
61
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no disagreements with the Company's independent
auditors on any matters of accounting principles or practices or financial
statement disclosure during the fiscal year ended December 31, 2000.
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to the directors and
named executive officers is incorporated herein by reference to the Proxy
Statement relating to the Annual Meeting of Shareholders to be held April 26,
2001. The information required by this item for other executive officers is set
forth below:
Mark C. McDowell (43) - Mr. McDowell has served as our chief
administrative officer since July 1997. Mr. McDowell is responsible for
overseeing our administrative functions, including regulatory and financial
matters as well as shareholder issues. Mr. McDowell served as president of
Community Bancserve, a bank consulting business, from January 1996 to July 1997.
From 1980 to 1996, Mr. McDowell served as a bank examiner for the Tennessee
Department of Financial Institutions, serving as director of its Applications
Section beginning in 1989.
ITEM 11. Executive Compensation
The information required by this item with respect to executive
compensation is incorporated herein by reference to the Proxy Statement relating
to the Annual Meeting of Shareholders to be held April 26, 2001.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to the security ownership of certain
beneficial owners and management is incorporated herein by reference to the
Proxy Statement relating to the Annual Meeting of Shareholders to be held April
26, 2001.
ITEM 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related
transactions is incorporated herein by reference to the Proxy Statement relating
to the Annual Meeting of Shareholders to be held April 26, 2001.
ITEM 14. Exhibits and Reports on Form 8-K
(a)(1) Financial Statements. See Item 8.
(a)(2) Financial Statements Schedules. Inapplicable.
(a)(3) Exhibits. See Index to Exhibits.
Registrant is a party to certain notes which are more fully described
in the notes to Registrant's financial statements pursuant to which
Registrant has borrowed money from other financial institutions in
principal amounts which combined do not exceed ten percent (10%) of
Registrants total consolidated assets. Copies of these notes will be
filed with the Commission upon request. Registrant is also a party to
certain agreements entered into in connection with the Company's
offering of $8,248,000 in subordinated debentures in connection with
the offering of trust preferred securities to institutional investors
by Cumberland Capital Trust I on December 29, 2000. Copies of the
various transaction documents associated with the trust preferred
offering will be filed with the Commission upon request.
(b) Reports on Form 8-K
None.
60
62
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CUMBERLAND BANCORP, INCORPORATED
(REGISTRANT)
BY: /s/ Joel Porter
----------------------------------
Joel Porter, President
(Principal Executive Officer)
DATE: March 30, 2001
-------------------------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Joel Porter President (Principal Executive March 30, 2001
- ------------------------------ Officer) and Director
Joel Porter
/s/ Mark McDowell Chief Administrative Officer March 30, 2001
- ------------------------------ (Principal Financial and
Mark McDowell Accounting Officer)
/s/ John Wilder Chairman March 30, 2001
- ------------------------------
John Wilder
/s/ John S. Everett Director March 30, 2001
- ------------------------------
John S. Everett
/s/ Danny Herron Director March 30, 2001
- ------------------------------
Danny Herron
/s/ Tom E. Paschal Director March 30, 2001
- ------------------------------
Tom E. Paschal
/s/ Tom Brooks Director March 30, 2001
- ------------------------------
Tom Brooks
63
/s/ Jerry Cole Director March 30, 2001
- ------------------------------
Jerry Cole
/s/ Ronald Gibson Director March 30, 2001
- ------------------------------
Ronald Gibson
/s/ Frank Inman, Jr. Director March 30, 2001
- ------------------------------
Frank Inman, Jr.
/s/ Alex Richmond Director March 30, 2001
- ------------------------------
Alex Richmond
/s/ Wayne Rodgers Director March 30, 2001
- ------------------------------
Wayne Rodgers
/s/ John S. Shepherd Director March 30, 2001
- ------------------------------
John S. Shepherd
/s/ William D. Smallwood Director March 30, 2001
- ------------------------------
William D. Smallwood
64
INDEX TO EXHIBITS
3.1 Amended and Restated Charter of the Company (previously filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-1 dated
September 8, 1999 (Registration No. 333-84173) and incorporated herein
by reference).
3.2 Amended and Restated Bylaws of the Company (previously filed as Exhibit
3.2 to the Company's Registration Statement on Form S-1 dated September
8, 1999 (Registration No. 333-84173) and incorporated herein by
reference).
10.1 Cumberland Bancorp, Incorporated 1998 Stock Option Plan (incorporated
herein by reference to the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders held April 27, 2000).
10.2 Joint Venture Agreement dated as of October 1, 1998 by and between
Cumberland Bancorp, Inc. and BancKentucky and Addendum to Joint
Venture Agreement dated as of October 31, 1998 (previously filed as
Exhibit 10.2 to the Company's Registration Statement on Form S-1 dated
September 8, 1999 (Registration No. 333-84173) and incorporated herein
by reference).
10.3 Joint Venture Agreement dated as of August 26, 1999 by and between
Cumberland Bancorp, Inc. and InsCorp, Inc. (previously filed as Exhibit
10.3 to the Company's Registration Statement on Form S-1 dated
September 8, 1999 (Registration No. 333-84173) and incorporated herein
by reference).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors.