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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, 2001
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 Pike, Suite 204, Nashville, Tennessee 37215
(Address of principal executive offices) (Zip Code)
(615) 383-4758
(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 Registrant's voting stock held by
non-affiliates of the Registrant on February 28, 2002 was $28,859,843. The
market value calculation was determined using the closing price of $3.75 for the
Registrant's common stock on February 28, 2002, as reported on the NASDAQ
over-the-counter bulletin board.
As of February 28, 2002, 13,808,236 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 to be held on April 25, 2002 are incorporated by
reference into Part III of this Annual Report on Form 10-K.
CROSS REFERENCE INDEX
TO
FORM 10-K
PART I
PAGE
ITEM 1. DESCRIPTION OF BUSINESS 2
ITEM 2. DESCRIPTION OF PROPERTY 10
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK 27
ITEM 8. FINANCIAL STATEMENTS 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS 61
ITEM 11. EXECUTIVE COMPENSATION 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 61
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K 61
- ---------------
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 shareholder 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 and
include, among others, (i) increased competition with other financial
institutions, (ii) lack of sustained growth in the economy in the Company's
market area, (iii) rapid flucuations in interest rates, (iv) significant
downturns in the businesses of one or more large customers, (v) risks inherent
in originating loans, including prepayment risks, (vi) the fluctuations in
collateral values, the rate of loan charge-offs and the level for the provision
for losses on loans, and (vii) changes in the legislature and regulatory
environment. 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:
- - Cumberland Bank, a Tennessee state chartered bank with nine (9) offices
in Macon, Smith, Sumner and Warren Counties, Tennessee;
- - BankTennessee, a Tennessee state chartered bank with five (5) offices
in Shelby and Lauderdale Counties, Tennessee;
- - The Community Bank, a Tennessee state chartered bank, with three (3)
offices in Davidson and Williamson Counties, Tennessee;
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- - Bank of Dyer, a Tennessee state chartered bank with four (4) offices in
Gibson and Madison County, Tennessee; and
- - Bank of Mason, a Tennessee state chartered bank with one (1) office in
Tipton County, 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 in Murray, Kentucky that opened for business
on June 15, 1999 and has grown to total assets of more than $69 million at
December 31, 2001. We own a fifty percent (50%) interest in the Insurors Bank of
Tennessee, a state chartered, Federal Reserve member bank that opened for
business on November 20, 2000. The Insurors Bank has grown to total assets of
$21 million at December 31, 2001.
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. The Company had total assets of $668 million as of December
31, 2001.
We have seven (7) bank branch offices that are less than three years
old as of December 31, 2001. 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-two (22) years of banking
experience in Tennessee.
Our banks operate in twelve markets throughout Middle and West
Tennessee. We equally serve both metropolitan and rural areas. 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; however, construction and
development loans of approximately $74 million made up 14% of our loan portfolio
as of December 31, 2001.
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, 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. Our banks are not authorized to provide trust services.
Our banks are subject to the regulatory authority of the Department of
Financial Institutions of the State of Tennessee and the Federal Reserve Board
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 is subject to a quarterly statutory
assessment and 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.
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Employees
The Company and its subsidiaries had approximately 331 full-time
equivalent employees as of December 31, 2001. None of our employees 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 than 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,
particularly 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.
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. 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.
We have created a Corporate Loan Committee, which we believe brings
together our strongest and most experienced lending officers and utilizes them
to work with our local loan committees in analyzing, underwriting and
structuring large loan requests. This group will also be responsible for our
anticipated development and implementation of a common loan policy and
procedures for the Company.
Additionally, the position of Asset Quality Manager has been added at
the holding company to provide independent oversight of our banks' loan
portfolios. External loan review will also be contracted to conduct periodic
reviews. The banks' have adopted an 8-point internal loan grading system as well
as a uniform analysis of the loan loss reserve adequacy methodology. 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
4
of the Company. A report of loan review findings is presented to our Audit
Committee and 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 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.
Joint Ventures
The Company owns a 50% interest in The Murray Bank in Murray, Kentucky
and Insurors Bank of Tennessee, headquartered in Nashville, Tennessee. Both of
these investments are structured so that the Company does not have controlling
representation on the Board of Directors. Therefore, only the Company's initial
investment, adjusted for its pro rata share of operating results of each entity,
is included in the consolidated financial statements. The Murray Bank, which
opened in 1999, has approximately $70 million in total assets at December 31,
2001. Insurors Bank opened in November 2000 and has approximately $21 million in
assets at December 31, 2001. Certain services are provided by the Company to
both of these institutions for a fee, which is not significant to the Company's
financial statements. More information regarding these two entities can be found
in note 21 to the consolidated financial statements.
Monetary Policies
The result of operations of our banks 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
5
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 (the "BHCA"), 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 Gramm-Leach-Bliley
Act of 1999, 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 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 ("TDFI")
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. However, most of our banks are
members of the Federal Reserve Bank System. Therefore, our primary federal
banking regulator is the Federal Reserve. 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.
6
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 depository 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 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.
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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.
At December 31, 2001, the Company's Tier 1 risk-based Capital and Total
risk-based Capital ratios were 9.52% 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.
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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.
In 2001, cash dividends totaling $0.06 per share were declared (as
adjusted for stock splits). In the first quarter of 2002, a cash dividend was
declared in the amount of $0.015 cents per share payable on April 15, 2002 to
shareholders of record on March 1, 2002.
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
9
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.
ITEM 2. Description of Property
Our principal and executive offices are located at 4205 Hillsboro Pike,
Suite 204, 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 five (5) 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 Tipton 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 one office 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 offices 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 ATMs at leased locations in
Smith and Sumner Counties.
10
ITEM 3. Legal Proceedings
As of the date hereof, there are no material pending legal proceedings
to which the Company or any of its subsidiaries is a party or of which any of
its properties are subject; nor are there material proceedings known to the
Company or its subsidiaries to be contemplated by any governmental authority;
nor are there material proceedings known to the Company or its subsidiaries,
pending or contemplated, in which any director, officer or affiliate or any
principal security holder of the Company or any of its subsidiaries or any
associate of any of the foregoing, is a party or has an interest adverse to the
Company or any of its subsidiaries.
ITEM 4. Submission of Matters to a Vote of Shareholders
No matter was submitted to a vote of security holders during the
quarter ended December 31, 2001.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock is currently traded over-the-counter on the
OTC Bulletin Board. Prior to being traded on the OTC Bulletin Board, there was
no established public trading market for our shares. Accordingly, there was no
comprehensive record of trades or the prices of any trades prior to the shares
being listed on the OTC Bulletin Board. The following table reflects stock
prices for our shares to the extent any information is available for trades
prior to the fourth quarter of 2001, the date that the shares were first listed
on the OTC Bulletin Board and for trades after such date as reported on the OTC
Bulletin Board.
Cumberland Bancorp Incorporated Common Stock(1)
HIGH LOW
---- ---
2000:
First Quarter................................. $6.25 $6.25
Second Quarter................................ $6.25 $5.50
Third Quarter ................................ $5.50 $5.25
Fourth Quarter ............................... $5.25 $4.75
2001:
First Quarter................................. $4.75 $4.50
Second Quarter................................ $4.90 $4.00
Third Quarter ................................ $4.60 $3.96
Fourth Quarter................................ $4.13 $3.25
- -----------------
(1) The amounts per share have been adjusted for stock splits and stock
dividends prior to December 31, 2001.
As of February 28, 2002, we had approximately 1,115 record
shareholders. At that date, 13,808,236 shares were outstanding.
In 2001, cash dividends totaling $0.06 per share were declared (as
adjusted for stock splits). In the first quarter of 2002, a cash dividend was
declared in the amount of $0.015 per share payable on April 15, 2002 to
shareholders of record on March 1, 2002.
11
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 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."
ITEM 6. Selected Consolidated Financial Data
The table below provides selected consolidated financial data for the
Company as of and for each of the five years ended December 31, 1997, 1998,
1999, 2000 and 2001. This information does not include financial data of
BankTennessee or The Community Bank before the July 1997 merger of First Federal
Bancshares, Inc. with us. The merger was accounted for 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,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except per share amount)
Summary of Operations
Interest income $ 52,865 51,651 39,193 33,290 20,479
Interest expense 28,901 27,057 19,127 17,381 10,429
Net interest income 23,964 24,594 20,066 15,909 10,050
Provision for loan losses (6,377) (2,636) (1,623) (1,188) (1,390)
Noninterest income 7,048 5,771 4,290 4,237 3,390
Noninterest expense (24,408) (21,132) (17,109) (13,613) (8,696)
Income before income taxes 227 6,597 5,624 5,345 3,354
Income tax expense 18 2,436 2,113 2,003 1,220
Net earnings 209 4,161 3,511 3,342 2,134
Basic earnings per share 0.02 0.30 0.28 0.28 0.25
Diluted earnings per share 0.01 0.30 0.27 0.28 0.24
Dividends per common share 0.06 0.05 -- -- --
Book value per common share 2.85 2.86 2.57 2.01 1.71
Selected Period-End Balances
Total assets 667,511 643,457 525,559 408,706 330,335
Loans net of unearned income 522,245 507,217 440,316 321,547 269,378
Allowance for loan losses 9,023 6,137 5,146 4,012 3,214
Total deposits 549,424 524,142 435,252 357,404 285,049
12
Other borrowings 60,186 64,535 49,284 25,206 23,189
Shareholders' equity 39,313 39,476 35,275 22,059 18,650
Selected Average Balances
Total assets 671,690 576,622 453,378 372,967 226,220
Securities 32,344 23,468 25,886 26,612 14,631
Loans net of unearned income 512,918 476,339 374,714 293,665 184,792
Allowance for loan losses 7,027 5,635 4,196 3,504 2,603
Total deposits 550,569 485,708 387,941 319,796 196,219
Other borrowings 63,975 47,437 34,477 27,776 12,922
Shareholders' equity 40,056 37,366 27,200 20,607 13,543
Selected Operating Ratios
Annual % change in average loans 7.68% 27.12% 27.60% 58.92% 88.49%
Annual % change in average assets 16.49% 27.18% 21.56% 64.87% 80.43%
Return on average equity 0.52% 11.14% 12.91% 16.22% 15.76%
Return on average assets 0.03% 0.72% 0.77% 0.90% 0.94%
Per share amounts adjusted to reflect the effect of stock splits and stock
dividends.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion in conjunction with our
financial statements and the notes to those statements appearing elsewhere in
this document.
Critical Accounting Policies
The accounting principles followed by the Corporation and the methods
of applying these principles conform with United States generally accepted
accounting principles and with general practices within the banking industry.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Critical accounting policies relate to investments, loans, allowance for loan
losses, intangibles, revenues, expenses, stock options and income taxes. A
description of these policies, which significantly affect the determination of
the financial position, results in operations and cash flows, are summarized in
Note 1, Summary of Significant Accounting Policies in the Notes to Consolidated
Financial Statements and discussed elsewhere in this section.
Overview
The Company had several significant events that occurred during 2001
which affected its financial condition and results of operations. The Company
experienced poor earnings and a decline in growth of total assets during 2001 as
compared to prior years. Earnings were adversely impacted by large increases to
the provision for loan losses and a reduction in net interest margins, both of
which are discussed in more detail below. Significant management resources were
required for oversight of asset quality issues, which limited managements'
ability to focus on marketing and on overall Company growth. As further
explained in this document, economic conditions, including the abrupt decline in
interest rates, and the recessionary economic environment, were primary factors
contributing to the above.
Assets grew from $643.5 million at year-end 2000 to $667.5 million at
December 31, 2001, a $24.0 million increase or 3.7%. The primary changes in
assets were the $15.0 million increase in net loans and the $31.6 million
increase in securities. We funded these increases primarily by an increase in
deposits of
13
$25.3 million. Our total liabilities grew from $604 million at year end 2000 to
$628 million at December 31, 2001, a $24.2 million increase or 4.0%. In addition
to the deposit growth mentioned above, advances from the Federal Home Loan Bank
increased $4.6 million.
Additionally, in the third quarter of 2001, the Company completed a
Trust Preferred offering which raised approximately $4.0 million. This funding
source, for regulatory capital purposes, is treated as Tier I capital.
Shareholders' equity decreased $163,000 to $39.3 million at December
31, 2001. Our leverage capital ratio increased from 7.42% at December 31, 2000
to 7.47% at December 31, 2001. See note 17 to our consolidated financial
statements for more information relating to capital.
Results of Operations Year ended December 31, 2001 Compared to the Year ended
December 31, 2000
Net earnings were $209,000 in 2001 compared to $4.2 million in 2000.
Total revenues increased 4.3% while total expenses increased 10.6% during 2001
as compared to the prior year.
Net interest income decreased $630,000 or 2.6%, to $24.0 million in
2001 from $24.6 million in 2000. Net interest income was adversely affected by
the Federal Reserve's effort to stimulate economic growth by decreasing the
Federal funds rate a total of 475 basis points to 1.75% during 2001. Likewise,
banks followed by reducing the rate charged to their prime loan customers 475
basis points to 4.75%. This significant decline in interest rates accelerated
prepayments on both loans and securities. Additionally, variable rate loans were
reset to the lower market interest rates. This exposed the asset sensitive bias
of the banks' balance sheet. Interest-bearing liabilities were unable to reprice
downward at the same speed, degree or volume as earning assets. Unlike the
earning assets, interest-bearing liabilities did not have the ability to realize
100% of the continued decreases in market interest rates in this already low
rate environment. Once interest rates stabilized allowing interest-bearing
liabilities to cycle forward, net interest income improved.
The increase in the level of non-performing assets also heavily
contributed to this decline in net interest income. Lost interest totaling
$855,000 due to loans in a non-accrual status negatively impacted performance.
Non-accruals and foreclosed property levels increased $7 million and $4 million,
respectively, over the prior year.
The Company also recorded a full year's interest expense on the $8
million Trust Preferred securities issued in December 2000 and five months of
expense for the additional $4 million issued in July of 2001.
These factors combined to cause a reduction in net interest income.
The Company's net interest spread and net yield on earning assets were
3.98% and 3.90% respectively, in 2001 as compared to 4.69% and 4.65% in 2000.
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. As previously mentioned,
margin contraction resulted from the asset sensitive bias of the balance sheet
given the significant reduction in market interest rates coupled with asset
quality deterioration. The decline in the average yield on earning assets, which
fell from 9.76% in 2000 to 8.61% in 2001, reduced interest income significantly.
The yield on loans was 9.39% in 2001, compared to 10.17% in 2000. The lower
yield on loans was the primary factor driving the decrease in net interest
margin. More detail on changes in interest income and interest expense due to
changes in rates is shown on page 24.
The provision for loan losses was $6.4 million at December 31, 2001
compared to $2.6 million at December 31, 2000, a 141.9% increase. The increase
in the provision was attributable to the increase in
14
classified loans and net charge-offs. Net loan charge-offs were $3.5 million in
2001 compared to $1.7 million in 2000. Charge-offs increased due to increased
losses in commercial, real estate and consumer loans. Loan classifications
increased due to the economic downturn and management's aggressive
identification actions on loans to borrowers which otherwise are able to make
principal and interest payments, but, upon review, appear to have financial
weaknesses. During the second half of 2001, additional emphasis was placed on
reviewing and identifying weak and problem credits. Through extensive internal
and outside loan review, significant problem loans were identified. Additional
provisions for loan losses were necessary to provide an adequate allowance
related to these loans.
Noninterest income increased $1.3 million, or 22.1%, to $7.0 million in
2001 from $5.7 million in 2000. Service charges on deposit accounts continue to
be our largest source of noninterest income. These charges increased $880,000 or
32.9% in 2001 to $3.6 million. This compares to $2.7 million for 2000. The
increase resulted from an increase in the number of accounts subject to service
charges, repricing of certain customer services and a stronger emphasis on the
collection of fees. Mortgage banking income increased $517,000 or 63.7% from
2000 levels, primarily due to growth in mortgage activity related to falling
interest rates.
Noninterest expense increased $3.3 million, or 15.5%, to $24.4 million
in 2001 from $21.1 million in 2000. Included in noninterest expense are
increases in data processing expenses of $212,000 and occupancy expense of
$642,000. Salaries and benefits increased from $11.2 million in 2000 to $12.1
million in 2001, or an increase of $968,000 or 8.7%. Also, included in
noninterest expense is $505,000 in net losses of unconsolidated affiliates.
Other increases in miscellaneous operating expenses totaled $1.1 million related
to increases in loan fees expense, legal fees, and expenses related to other
real estate.
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,
15
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%.
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,
2001 2000 1999 1998 1997
--------- -------- -------- -------- --------
(In thousands)
Type of Loan
Real estate-construction and
development $ 73,713 73,706 80,789 55,220 42,819
Real estate-1 to 4 family
residential 181,675 181,723 157,820 140,138 121,928
Real estate other 68,089 63,450 49,708 12,555 26,956
Commercial, financial and
agricultural 142,122 131,548 102,385 71,070 38,977
Consumer 57,517 58,156 50,643 45,431 41,941
Other 1,115 1,396 1,744 746 208
--------- -------- -------- -------- --------
Total loans 524,231 509,979 443,089 325,160 272,829
Unearned income
and deferred fees (1,986) (2,762) (2,773) (3,613) (3,451)
--------- -------- -------- -------- --------
Net loans $ 522,245 507,217 440,316 321,547 269,378
========= ======== ======== ======== ========
Loan growth was $15.0 million, or 3.0%, during 2001, and $66.9 million,
or 15.2%, during 2000. Loan growth was less in 2001 primarily as a result of
declining economic conditions. Furthermore, managements' focus on managing asset
quality issues detracted from business development efforts.
At December 31, 2001, 1-4 family residential real estate loans
constituted 34.7% of total loans and construction and development loans
constituted 14.1% 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.
The following is a presentation of an analysis of maturities of loans
as of December 31, 2001:
Due in 1 year Due in 1 to 5 Due After 5
Type of Loan or less Years Years Total
--------- ------- ------ -------
(In thousands)
Real estate-construction & development $ 65,126 8,587 -- 73,713
Real estate-1-4 family residential 96,160 73,448 12,067 181,675
Real estate-other 27,371 31,682 9,036 68,089
Commercial, financial and agricultural 87,556 51,073 3,493 142,122
Consumer 25,794 31,523 200 57,517
Other 745 369 1 1,115
--------- ------- ------ -------
Total $ 302,752 196,682 24,797 524,231
========= ======= ====== =======
16
At December 31, 2001, $210 million in loans due after one year had
predetermined interest rates and $11 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, 61.7% is secured by
residential and other real estate.
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 inherent 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.
An analysis of our loss experience, is furnished in the following table
for the periods indicated:
Years Ended December 31,
2001 2000 1999 1998 1997
--------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of year $ 6,137 5,146 4,012 3,214 1,386
Increase due to acquisitions -- 58 152 -- 1,229
--------- -------- -------- -------- --------
Loans charged-off:
Real estate-construction & development (258) (73) -- (65) --
Real estate-1 to 4 single family (295) (414) (117) (45) (23)
Real estate-other (608) (62) -- -- (90)
Commercial, financial & agricultural (1,553) (614) (123) (54) (35)
Consumer (1,052) (704) (518) (324) (721)
Other (137) -- -- (24) --
--------- -------- -------- -------- --------
Total charge-offs $ (3,903) (1,867) (758) (512) (869)
--------- -------- -------- -------- --------
Charge-offs recovered:
Real estate - construction & development 19 -- -- 21 --
Real estate - 1-4 single family 34 5 9 2 11
Real estate - other 29 32 -- -- --
Commercial 112 10 19 5 1
Consumer 156 117 89 76 66
Other 62 -- -- 18 --
--------- -------- -------- -------- --------
Total recoveries $ 412 164 117 122 78
--------- -------- -------- -------- --------
17
Net loans charged-off (3,491) (1,703) (641) (390) (791)
Current year provision 6,377 2,636 1,623 1,188 1,390
--------- -------- -------- -------- --------
Balance at end of year $ 9,023 6,137 5,146 4,012 3,214
========= ======== ======== ======== ========
Loans at year end $ 522,245 507,217 440,316 321,547 269,378
Ratio of allowance to loans at year end 1.72% 1.21% 1.17% 1.25% 1.19%
Average loans $ 512,918 476,339 374,716 293,665 184,792
Ratio of net loans charged off to average loans 0.68% 0.35% 0.17% 0.13% 0.43%
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 0.68% in 2001 and 0.35% in 2000.
Charge-offs were higher due to real estate foreclosures and consumer
bankruptcies in 2001. Recessionary economic conditions, locally and on a
national level, have adversely affected borrowers, particularly those that were
marginally capitalized. During 2001, the provision for loan losses of $6.4
million was $3.7 million more than the preceding year. Factors which gave rise
to the increased provision in 2001 were primarily a substantial increase in loan
losses and non-performing loans.
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, (carried as other real estate on the balance
sheet), which represent real estate or personal property acquired through loan
defaults by customers.
The following table presents information regarding nonaccrual, past due
and restructured loans, and foreclosed properties at the dates indicated:
December 31,
2001 2000 1999 1998 1997
--------- -------- -------- -------- --------
(Dollars in Thousands)
Loans accounted for on a non-
accrual basis $ 12,625 5,608 2,446 1,745 1,561
Accruing loans which are
contractually past due 90 days or
more as to principal and interest
payments 1,168 345 241 467 86
Restructured loans (1) 252 693 652 443
--------- -------- -------- -------- --------
Total nonperforming loans 14,045 5,953 3,380 2,864 2,090
Foreclosed properties 7,330 3,142 2,400 610 630
- -----------------
(1) As of December 31, 2001, all restructured loans were in compliance with
their modified terms.
Non-performing loans were 2.7% and 1.2% of loans at December 31, 2001
and 2000, respectively. The dollar increase in non-performing loans during 2001
is due to a growing and maturing portfolio, along
18
with conditions in the marketplace. Additional interest income of approximately
$855,000 in 2001, $499,000 in 2000, $125,000 in 1999, $121,000 in 1998, and
$79,000 in 1997 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, 2001 on loans that have been accounted for on a non-accrual basis.
Management has internally classified approximately $4 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, 2001, 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.
Non-performing loans, net charge-offs and foreclosed properties
increased substantially during 2001. However, management believes the allowance
for loan losses and the carrying value of foreclosed properties is properly
stated at December 31, 2001. Substantial resources have been devoted to
identifying, grading and valuing problem assets during 2001. Although it is
likely that the Company will continue to have asset quality problems to deal
with in 2002, management believes that identifiable problem assets have been
appropriately provided for in the accompanying financial statements.
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,
2001 2000 1999
---------------- --------------- ---------------
Percent of Percent of Percent of
Allowance to Allowance to Allowance to
Total Total Total
Amount Allowance Amount Allowance Amount Allowance
------ ------------ ------ ------------ ------ ------------
Real estate - construction &
development ........................................... $1,444 16% 1,227 20% 1,029 20%
Real estate - 1-4 single family ......................... 541 6% 430 7% 257 5%
Real estate - other ..................................... 722 8% 368 6% 309 6%
Commercial, financial and ............................... 3,519 39% 1,289 21% 1,132 22%
agricultural
Consumer ................................................ 2,166 24% 1,964 32% 1,647 32%
Other ................................................... 180 2% 123 2% 103 2%
Unallocated ............................................. 451 5% 736 12% 669 13%
------ --- ----- --- ----- ---
Total ............................................ $9,023 100% 6,137 100% 5,146 100%
====== === ===== === ===== ===
19
As of December 31, 2001, real estate mortgage loans constituted 61.7%
of outstanding loans. Approximately $136 million, or 42%, 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 $55.5 million at year-end 2001, which is up
$31.6 million from year-end 2000. The securities portfolios comprised 8.3% of
total assets at year-end 2001. 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 32.1% of
securities held at year-end 2001 were pledged to secure public deposits and for
other purposes as required or permitted by law. 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 do
not hold securities of any single issuer that exceeded ten percent of
shareholders' equity.
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,
---------------------------------------
2001 2000 1999
------- ------ ------
(Dollars in thousands)
Available for sale:
U.S. Government and agencies $25,222 9,888 10,378
Obligations of SCM 3,933 2,866 2,727
Mortgage-backed 10,467 1,246 1,464
Other debt securities 1,863 233 262
Marketable equity securities 1,329 1,333 1,268
------- ------ ------
Total available for sale 42,814 15,566 16,099
------- ------ ------
Held to maturity:
U.S. Government and agencies 6,297 4,600 2,560
Obligations of SCM 918 654 230
Mortgage-backed 2,912 3,171 3,844
Other debt securities 2,608 -- 43
------- ------ ------
Total held to maturity 12,735 8,425 6,677
------- ------ ------
Total securities $55,549 23,991 22,776
------- ------ ------
20
The following table indicates, for the year ended December 31, 2001,
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 5 to Over
less 1 to 5 yrs 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 $ 503 5.62% 18,293 5.20% 5,711 5.71% 715 6.21% 25,222
Obligations of SCM -- -- 333 4.52% 1,412 4.76% 2,188 4.89% 3,933
Mortgage-backed 28 6.40% 7,155 5.27% 1,137 5.73% 2,147 5.22% 10,467
Marketable equity
securities(2) -- -- -- -- -- -- 1,329 6.90% 1,329
Other -- -- -- -- -- -- 1,863 6.65% 1,863
Held to maturity:
U.S. Government
and agencies 100 6.28% 1,710 5.06% 3,906 6.36% 581 5.56% 6,297
Obligations of SCM -- -- 45 4.15% 358 5.02% 515 4.26% 918
Mortgage-backed -- -- -- -- -- -- 2,912 6.19% 2,912
Other 2,608 8.90% 2,608
- -----------------------------------------------------------------------------------------------------------------------------------
Totals $ 631 27,536 12,524 14,858 55,549
- -----------------------------------------------------------------------------------------------------------------------------------
(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.
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. As of December 31, 2001, the balance of FHLB borrowings totaled $50.9
million, none of which mature before December 31, 2002.
Total deposits grew at a rate of 4.8% during 2001, resulting from the
maturing of our newer branch locations and more attractive pricing for deposits.
Deposit growth was greater than loan growth in 2001, resulting in a decrease in
loan to deposit ratio from 96.8% at year end 2000 to 95.0% at year end 2001. The
increase in deposit growth over loan growth resulted in an increase of
securities of $31.6 million at the end of 2001.
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
21
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
1999, 2000 and 2001 are represented by deposit category on the table on pages 24
through 25 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, 2001:
Time Certificates
of Deposit
-----------------
(In thousands)
3 months or less $ 30,798
3-12 months 96,151
Over 12 months 18,536
----------
Total $ 145,485
==========
22
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 shareholders' 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)
2001 2000 2001/2000 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) $512,918 9.39% $48,155 476,339 10.17% 48,465 3,722 (4,032) (310)
Securities 32,344 6.05% 1,958 23,468 6.55% 1,537 581 (160) 421
Federal funds sold 37,222 3.30% 1,227 18,419 6.00% 1,106 1,129 (1,008) 121
FHLB and FRB stock 4,513 8.27% 373 3,711 6.63% 246 53 74 127
Interest-bearing deposits in banks 26,739 4.31% 1,152 7,442 3.99% 297 770 85 855
-------- ----- ------- ------- ----- ------- ------ ------ -----
Total earning assets 613,736 8.61% $52,865 529,379 9.76% 51,651 6,255 (5,041) 1,214
===== ======= ===== ======= ====== ====== =====
Cash and due from banks 20,295 17,330
Allowance for loan losses (7,027) (5,635)
Other assets 44,686 35,548
-------- -------
Total assets $671,690 576,622
======== =======
Deposits:
NOW investments $ 40,467 2.29% 925 41,568 2.31% 960 (25) (10) (35)
Money market investments 106,954 3.42% 3,656 93,008 4.97% 4,623 693 (1,660) (967)
Savings 15,819 2.86% 453 16,288 2.79% 454 (13) 12 (1)
Time deposits $100,000 and over 126,854 5.40% 6,851 97,140 6.15% 5,975 1,828 (952) 876
Other time deposits 211,014 6.04% 12,745 196,611 6.10% 12,002 879 (136) 743
-------- ----- ------- ------- ----- ------- ------ ------ -----
Total interest-bearing deposits 501,108 4.92% 24,630 444,615 5.40% 24,014 3,362 (2,746) 616
Non interest-bearing demand deposits 49,461 -- 41,093 --
-------- ----- ------- ------- ----- ------- ------ ------ -----
Total deposits 550,569 4.47% 24,630 485,708 4.94% 24,014 3,362 (2,746) 616
Fed Funds purchased 6,305 4.23% 267 5,345 5.82% 311 56 (100) (44)
Notes payable 7,934 8.00% 635 7,950 7.50% 596 (1) 40 39
FHLB advances and other borrowings 49,736 5.29% 2,629 34,142 6.26% 2,136 10 483 493
Trust preferred securities 9,600 7.71% 740 -- -- -- 740 -- 740
-------- ----- ------- ------- ----- ------- ------ ------ -----
Total deposits and borrowed funds 624,144 4.63% 28,901 533,145 5.07% 27,057 4,167 (2,323) 1,844
----- ------- ----- ------- ------ ------ -----
Other liabilities 7,490 6,111
Shareholders' equity 40,056 37,366
-------- -------
Total liabilities and
shareholders' equity $671,690 576,622
======== =======
Net interest income $23,964 $24,594 2,088 (2,718) (630)
======= ======= ====== ====== ======
Net yield on earning assets 3.90% 4.65%
===== =====
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 $2,283 in 2001 and $3,164 in 2000.
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.
23
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 equivilent adjustments have been made since the effect of tax
exempt income is insignificant.
24
Equity and Capital Resources
Our capital ratio's were in the "well capitalized" category for all
three regulatory capital calculations at December 31, 2001. Our leverage capital
ratio was 7.47% in 2001 and 7.42% in 2000, with shareholders' equity of $39.3
million at year-end 2001.
The Company issued $8,000,000 of capital trust securities in December
2000, and another $4,000,000 during July 2001. As disclosed in note 15 to the
consolidated financial statements, these securities are included in Tier I
Capital, with certain limitations. Their holders are also entitled to receive
distributions based on a variable interest rate applied to the original
investment.
In September 1999, we completed an Initial Public Offering (IPO) of
1,400,000 shares of our common stock at a price of $6.25 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 94,000
shares valued at $588,000. To purchase the minority interest shares of Bank of
Dyer in 1999 we issued 15,408 shares of stock valued at approximately $99,000.
On January 31, 2001, the Company issued 53,250 shares to purchase the remaining
interest in Bank of Mason.
Items that represent common stock equivalents include 902,290 common
stock options outstanding at December 31, 2001. At December 31, 2001, there were
109,580 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,
-----------------------------------
2001 2000 1999
----- ------ ------
Return on average assets 0.03% 0.72% 0.77%
Return on average equity 0.52% 11.13% 12.91%
Average equity to average assets ratio 5.96% 6.48% 6.00%
Dividend payout ratio 3.00% 0.33% --
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 2000 was 98.1% and for 2001 was 93.2%. We do not know of
any trends or demands that are reasonably likely to result in liquidity
increasing or decreasing.
25
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 2001
follows:
Over 5
1-90 Days 91-365 Days 1-5 years Years Total
--------- ----------- --------- ------ -------
Interest earning assets:
Loans, net $ 170,554 135,833 194,754 21,104 522,245
Securities available for sale 10,114 12,130 15,713 4,857 42,814
Securities held to maturity 2,888 659 2,639 6,549 12,735
Federal funds sold 19,531 -- -- -- 19,531
Interest-earning deposits 635 3,928 -- -- 4,563
--------- ------- ------- ------ -------
Total interest earning assets 203,722 152,550 213,106 32,510 601,888
--------- ------- ------- ------ -------
Interest bearing liabilities:
Interest bearing demand deposits 174,328 -- -- -- 174,328
Savings deposits 18,572 -- -- -- 18,572
Time deposits 83,403 170,590 50,107 29 304,129
FHLB borrowings -- -- 8,852 42,000 50,852
Notes payable 2,000 -- 859 4,800 7,659
Federal funds purchased 1,675 -- -- -- 1,675
Trust preferred securities 12,000 -- -- -- 12,000
--------- ------- ------- ------ -------
Total interest bearing liabilities 291,978 170,590 59,818 46,829 569,215
--------- ------- ------- ------ -------
Rate sensitive gap $ (88,256) (18,040) 153,288 (14,319) 32,673
--------- ------- ------- ------ -------
Rate sensitive cumulative gap (88,256) (106,296) 46,992 32,673 32,673
--------- ------- ------- ------ -------
Cumulative gap as a percentage
of earnings assets (14.66)% (17.66)% 7.80% 5.42%
--------- ------- ------- ------ -------
Cumberland Bancorp's primary business is banking and the resulting
earnings, primarily net interest income, are susceptible to changes in market
interest rates. Net interest income represented 77% of net revenues (net
interest income and noninterest income) for 2001. Likewise, it is management's
goal to maximize net interest income within acceptable levels of interest rate
and liquidity risks. Repricing gap (the difference between assets and
liabilities that reprice within a specific time period) and simulation modeling
(projecting net interest income under various interest rate scenarios and
balance sheet assumptions) are the primary methods the bank uses in analyzing
and managing interest rate risk.
26
Gap analysis attempts to capture the amounts and timing of balances
exposed to changes in interest rates at a given point in time. Although our gap
table shows a liability sensitive bias, our position is a bias towards asset
sensitivity. The amount of change our deposit base realizes in relation to the
total change in market interest rates is significantly less than that of the
asset base. When this is taken into account, repricing assets are substantially
shorter in the three and six month time horizons with a more evenly matched one
year gap.
Simulation modeling projects net interest income under various interest
rate scenarios based on the optionality inherent in the balance sheet. At
December 31, 2001, with rates unchanged, net interest income is projected to
increase 13% over 2001, resulting from the continued repricing of funding
sources. The 100 basis points immediate rise in interest rates produces a 17%
increase in net interest income. This assumes management's ability to control
interest expense.
Both methods are inherently uncertain and cannot precisely estimate net
interest income nor predict the impact of changes in market interest rates on
net interest income. As such, investors are cautioned not to place undue
reliance on such estimates and models.
As shown in the table, we have a cumulative GAP of approximately
(14.66)% and (17.66)% at the end of 90 days and one year, respectively.
Management believes that this level of GAP is appropriate since many of the
liabilities that 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 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,
2001. 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.
27
EXPECTED MATURITY DATE -
YEAR ENDING DECEMBER 31,
2003 to 2005 to 2007 FAIR
(Dollars in Thousands) 2002 2004 2006 THEREAFTER TOTAL VALUE
------- ------- ------ ------ ------- -------
EARNING ASSETS:
Loans, net of unearned
interest:(1)
Variable rate 146,139 5,688 2,969 75 154,871 155,002
Average interest rate 6.04% 8.30% 7.80% 5.03% 6.16%
Fixed rate 156,579 105,618 85,197 19,980 367,374 372,818
Average interest rate 8.07% 8.50% 8.33% 7.43% 8.22%
Securities(2) 21,081 14,372 9,087 11,009 55,549 55,628
Average interest rate 5.31% 5.35% 6.37% 5.80% 5.59%
Federal funds sold 19,531 -- -- -- 19,531 19,531
Average interest rate 1.75% -- -- -- 1.75%
Interest-earning deposits
in financial institutions 4,563 -- -- -- 4,563 4,563
Average interest rate 2.13% -- -- -- 2.13%
Interest-bearing deposits 446,893 38,042 12,065 29 497,029 501,192
Average interest rate 3.14% 5.17% 6.58% 4.00% 3.38%
Federal funds purchased 1,675 -- -- -- 1,675 1,675
Average interest rate 1.75% -- -- -- 1.75%
Other borrowings -- 852 2,000 55,659 58,511 61,001
Average interest rate -- 4.53% 4.93% 5.29% 5.27%
------------------
(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.
28
ITEM 8. Financial Statements and Supplementary Data
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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United State of America.
/s/Heathcott & Mullaly, P.C.
Brentwood, Tennessee
March 1, 2002
29
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
(Dollars in thousands, except share amounts) 2001 2000
---------- -------
Assets:
Cash and due from banks $ 20,868 22,280
Interest-bearing deposits in financial institutions 4,563 14,988
Federal funds sold 19,531 33,025
Securities available for sale, at fair value 42,814 15,566
Securities held to maturity, fair value $12,814
and $8,405 at December 31, 2001 and 2000,
respectively 12,735 8,425
Loans, net of unearned income 522,245 507,217
Allowance for loan losses (9,023) (6,137)
---------- -------
Loans, net 513,222 501,080
---------- -------
Premises and equipment, net 23,871 23,467
Accrued interest receivable 4,693 5,644
Restricted equity securities 4,719 4,226
Investment in unconsolidated affiliates 5,195 4,983
Other real estate 7,330 3,142
Loan servicing rights 327 985
Other intangible assets 1,597 1,577
Other assets 6,046 4,069
---------- -------
Total assets $ 667,511 643,457
========== =======
Liabilities and Shareholders' Equity:
Deposits
Noninterest-bearing $ 52,395 46,629
Interest-bearing 497,029 477,513
---------- -------
Total deposits 549,424 524,142
---------- -------
Notes payable 7,659 8,749
Federal funds purchased 1,675 9,575
Advances from Federal Home Loan Bank 50,852 46,211
Accrued interest payable 3,994 4,694
Trust preferred securities 12,000 8,000
Other liabilities 2,594 2,610
---------- -------
Total liabilities 628,198 603,981
---------- -------
Shareholders' equity:
Common stock, $0.50 par value, authorized 40,000,000 shares;
shares issued - 13,808,236 in 2001 and 13,787,256 in 2000 6,904 3,447
Additional paid-in capital 22,289 25,526
Retained earnings 10,061 10,682
Accumulated other comprehensive income (loss) 59 (179)
---------- -------
Total shareholders' equity 39,313 39,476
---------- -------
Total liabilities and shareholders' equity $ 667,511 643,457
========== =======
See accompanying notes to consolidated financial statements.
30
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 2001, 2000 and 1999
(Dollars in thousands, except per share data) 2001 2000 1999
----------- ---------- ----------
Interest income:
Loans, including fees $ 48,155 48,465 36,528
Securities 1,958 1,537 1,502
Deposits in financial institutions 1,152 297 253
Federal funds sold 1,227 1,106 710
Federal Home Loan Bank dividends 373 246 200
----------- ---------- ----------
Total interest income 52,865 51,651 39,193
----------- ---------- ----------
Interest expense:
Time deposits of $100,000 or more 6,851 5,975 3,411
Other time deposits 17,779 18,039 13,639
Federal funds purchased 267 311 118
Other borrowings 4,004 2,732 1,959
----------- ---------- ----------
Total interest expense 28,901 27,057 19,127
----------- ---------- ----------
Net interest income 23,964 24,594 20,066
Provision for loan losses 6,377 2,636 1,623
----------- ---------- ----------
Net interest income after
provision for loan losses 17,587 21,958 18,443
----------- ---------- ----------
Other income:
Service charges on deposit accounts 3,551 2,671 1,683
Other service charges, commissions and fees 1,887 1,787 1,206
Mortgage banking activities 1,328 811 937
Gain on sale of SBA loans 282 502 464
----------- ---------- ----------
Total other income 7,048 5,771 4,290
----------- ---------- ----------
Other expenses:
Salaries and employee benefits 12,137 11,169 9,206
Occupancy 3,367 2,725 2,327
Deposit insurance premiums 152 211 209
Other operating 8,752 7,027 5,367
----------- ---------- ----------
Total other expenses 24,408 21,132 17,109
----------- ---------- ----------
Income before income taxes 227 6,597 5,624
Income tax expense 18 2,436 2,113
----------- ---------- ----------
Net earnings $ 209 4,161 3,511
----------- ---------- ----------
Net earnings per share - basic $ 0.02 0.30 0.28
Net earnings per share - diluted 0.01 0.30 0.27
=========== ========== ==========
Weighted average shares outstanding - basic 13,813,774 13,767,312 12,496,260
Weighted average shares outstanding - diluted 14,019,794 14,021,926 12,775,772
=========== ========== ==========
See accompanying notes to consolidated financial statements.
31
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 2001, 2000 and 1999
Accumulated Total
Common Stock Additional Other Share-
(Dollars in thousand, ------------------------ Paid-in Retained Comprehensive holders'
except per share data) Shares Amount Capital Earnings Income (Loss) Equity
---------- ------- ---------- -------- ------------- --------
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 taxes -- -- -- -- (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 $0.05 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
Purchase and retirement of common stock (47,000) (24) (259) -- -- (283)
Issuance of common stock in connection
with the acquisition of minority
interest of Bank of Mason 53,250 27 453 -- -- 480
Two for one stock split 6,899,878 3,450 (3,450) -- -- --
Exercise of stock options 8,480 4 19 -- -- 23
Dividends $0.06 per share -- -- -- (830) -- (830)
Comprehensive Income:
Net earnings -- -- -- 209 -- --
Other comprehensive income:
Change in unrealized loss on
securities available for sale,
net of $146 in income taxes -- -- -- -- 238 --
Total Comprehensive Income -- -- -- -- -- 447
---------- ------- ------ ------ ---- ------
Balance, December 31, 2001 13,808,236 $ 6,904 22,289 10,061 59 39,313
========== ======= ====== ====== ==== ======
See accompanying notes to consolidated financial statements.
32
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
(Dollars in thousands) 2001 2000 1999
-------- -------- --------
Net earnings $ 209 4,161 3,511
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Provision for loan losses 6,377 2,636 1,623
Depreciation and amortization 1,876 1,543 1,367
Operations of unconsolidated affiliates 505 308 104
Mortgage loans originated for sale (47,277) (65,311) (51,740)
Proceeds from sale of mortgage loans 42,396 66,196 52,494
Deferred income tax benefits (133) (423) (467)
(Increase) decrease in accrued interest receivable 951 (1,571) (877)
Increase (decrease) in accrued interest payable and other liabilities (716) 1,556 1,635
Other, net (1,873) (3,050) (3,169)
-------- -------- --------
Total adjustments 2,106 1,884 970
-------- -------- --------
Net cash provided by operating activities 2,315 6,045 4,481
-------- -------- --------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in financial institutions 10,425 (9,592) 16,600
(Increase) decrease in federal funds sold 13,494 (21,775) 3,000
Purchases of securities available for sale (38,118) (639) (3,635)
Proceeds from maturities and calls of securities available for sale 11,108 1,171 4,560
Purchases of securities held to maturity (11,632) (3,902) (1,350)
Proceeds from maturities and redemptions of securities held to maturity 7,322 2,147 4,079
Net increase in loans (21,768) (69,431) (109,825)
Cash received in purchase of branch, net -- -- 3,746
Investment in unconsolidated affiliates (212) (2,904) (1,935)
Purchases of premises and equipment (2,166) (10,329) (3,627)
Proceeds from sale of other real estate 3,942 1,175 1,346
-------- -------- --------
Net cash used by investing activities (27,605) (114,079) (87,041)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 25,282 88,890 58,375
Increase (decrease) in federal funds purchased (7,900) 7,300 2,275
Increase in advances from Federal Home Loan Bank 4,641 6,657 21,581
Proceeds from notes payable -- 4,325 675
Repayments of notes payable (1,090) (3,031) (453)
Proceeds from issuance of trust preferred securities 4,000 8,000 --
Dividends paid (795) (516) --
Repurchase and retirement of common stock (283) -- --
Proceeds from issuance of common stock 23 434 9,390
-------- -------- --------
Net cash provided by financing activities 23,878 112,059 91,843
-------- -------- --------
Net increase (decrease) in cash (1,412) 4,025 9,283
Cash and cash equivalents at beginning of year 22,280 18,255 8,972
-------- -------- --------
Cash and cash equivalents at end of year $ 20,868 22,280 18,255
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 29,601 25,435 18,626
Income taxes paid 1,627 3,097 2,660
-------- -------- --------
Non-Cash Activities:
Issuance of common stock - due to acquisitions $ 480 15 685
10% stock dividend -- -- 6,341
Assets acquired through foreclosure 8,130 1,888 3,052
-------- -------- --------
See accompanying notes to consolidated financial statements.
33
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Summary of Significant Accounting Policies
The accounting policies of Cumberland Bancorp, Incorporated and
Subsidiaries conform to accounting principles generally accepted in the
United States of America 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 accounting
principles generally accepted in the United States of America 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.
34
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(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 that 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 that, 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.
35
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(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.
Restricted Equity Securities
These amounts are stated at cost, and consist primarily of Federal Home
Loan Bank and Federal Reserve Bank Stock.
Loan Servicing Rights
Loan servicing rights represent purchased rights and the allocated
value of retained servicing rights on loans sold. Servicing assets are
expensed in proportion to, and over the period of, estimated net
servicing revenues. Impairment is evaluated based on the fair value of
the assets, using groupings of the underlying loans as to interest
rates and then, secondarily, as to geographic and prepayment
characteristics. Fair value is determined using prices for similar
assets with similar characteristics, when available, or based upon
discounted cash flows using market-based assumptions. Any impairment of
a grouping is reported as a valuation allowance.
Other Real Estate
Assets acquired through or instead of loan foreclosure are initially
recorded at fair value when acquired, establishing a new cost basis. If
fair value declines, a valuation allowance is recorded through expense.
Costs after acquisition are expensed.
Other Intangible Assets
Other intangible assets consist of goodwill and other unidentifiable
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 other
unidentified intangible is related to 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.
36
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Summary of Significant Accounting Policies, continued
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.
Loans -- 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 fair value.
Investments in unconsolidated affiliates -- The carrying amounts
reported in the balance sheet for investments in unconsolidated
affiliates approximate fair values.
Loan servicing rights --The carrying amounts reported in the balance
sheet for servicing rights approximate 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.
37
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Summary of Significant Accounting Policies, continued
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 carrying amounts, primarily due to variable rate coupons
associated with those 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 cash and due from banks.
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. 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. EPS has been adjusted for
stock splits.
Comprehensive Income
SFAS No. 130, "Comprehensive Income" 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.
Derivatives
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" requires all derivatives 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 Company's financial position
or operating results.
38
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Summary of Significant Accounting Policies, continued
Effect of New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets". These standards require all business
combinations to be recorded using the purchase method of accounting for
any transaction initiated after June 30, 2001. Under the purchase
method, all identifiable tangible and intangible assets and liabilities
of the acquired company must be recorded at fair value at date of
acquisition, and the excess of cost over fair value of net assets
acquired is recorded as goodwill. Identifiable intangible assets must
be separated from goodwill. Identifiable intangible assets with finite
useful lives will be amortized under the new standard, whereas
goodwill, both amounts previously recorded and future amounts
purchased, will cease being amortized starting in 2002. Annual
impairment testing will be required for goodwill with impairment being
recorded if the carrying amount of goodwill exceeds its implied fair
value. Adoption of these two standards on January 1, 2002 is not
expected to materially impact the Company's financial statements.
Reclassifications
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
(2) Interest Bearing Deposits
At December 31, 2001, the Company had demand deposits totaling
$2,491,000 at the Federal Home Loan Bank (FHLB). Additionally, the
Company held $1,927,000 in certificates of deposit with non-affiliated
banks. The Company also had demand deposits of $145,000 with
non-financial institutions.
At December 31, 2000, the Company had demand deposits totaling
$4,448,000 and certificates of deposits totaling $10,000,000 at FHLB.
In addition, the Company held $520,000 in demand deposits at
non-affiliated banks. The Company also held demand deposits of $20,000
with non-financial institutions.
39
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(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, 2001 and 2000.
----------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
----------------------------------------------------------------------------------------------
Available for sale
U.S. Treasury and U.S.
government agencies $25,044 190 (12) 25,222
Obligations of state and
political subdivisions 3,911 49 (27) 3,933
Mortgage-backed securities 10,428 49 (10) 10,467
Marketable equity securities 1,495 -- (166) 1,329
Other debt securities 1,843 21 (1) 1,863
----------------------------------------------------------------------------------------------
December 31, 2001 $42,721 309 (216) 42,814
----------------------------------------------------------------------------------------------
Held to maturity
U.S. Treasury and U.S.
government agencies $6,297 12 -- 6,309
Obligations of state and
political subdivisions 918 19 (1) 936
Mortgage-backed securities 2,912 33 (12) 2,933
Other debt securities 2,608 28 -- 2,636
----------------------------------------------------------------------------------------------
December 31, 2001 $12,735 92 (13) 12,814
----------------------------------------------------------------------------------------------
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 233 -- -- 233
----------------------------------------------------------------------------------------------
December 31, 2000 $15,801 45 (280) 15,566
----------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------
The carrying amounts and estimated fair value of securities at December
31, 2001 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.
40
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(3) Securities, continued
Available for sale Held to maturity
---------------------------------------------------
(Dollars in thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------------------------------------------------------
Due in one year or less $ 500 503 145 149
Due after one through five years 18,983 19,137 2,421 2,454
Due after five through ten years 5,748 5,791 4,976 4,981
Due after ten years 3,724 3,724 2,281 2,297
Marketable equity securities 1,495 1,329 - -
Mortgage-backed securities 10,428 10,467 2,912 2,933
Other debt securities 1,843 1,863 - -
---------------------------------------------------------------------------------------------
$42,721 42,814 12,735 12,814
---------------------------------------------------------------------------------------------
Securities carried at approximately $17,822,000 at December 31, 2001
and $15,283,000 at December 31, 2000 were pledged to secure deposits
and for other purposes as required or permitted by law.
At December 31, 2001, 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) 2001 2000
---------------------------------------------------------------------------------
Real estate - construction and development $ 73,713 73,706
Real estate - 1 to 4 family residential properties 181,675 181,723
Real estate - other 68,089 63,450
Commercial, financial and agricultural 142,122 131,548
Consumer 57,517 58,156
Other 1,115 1,396
---------------------------------------------------------------------------------
524,231 509,979
Net deferred loan fees and discounts (548) (608)
Unearned income (1,438) (2,154)
---------------------------------------------------------------------------------
$522,245 $507,217
---------------------------------------------------------------------------------
In addition to the loans shown above, loans serviced for others totaled
$69,758,000 and $102,622,000 at December 31, 2001 and 2000,
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 $5,207,000 and
$6,160,000 as of December 31, 2001 and 2000, 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 2001 and 2000, the Company advanced
$2,370,000 and $5,109,000 and received payments of $3,323,000 and
$3,096,000 on such loans.
41
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(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.
Financial Instruments with Off-Balance Sheet Risk (Dollars in Thousands)
-------------------------------------------------------------------------------
Contractual commitments to extend credit $69,268
Standby letters of credit 3,750
-------------------------------------------------------------------------------
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.
(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. Concentrations by type of loans are presented in
note 4.
42
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(7) Allowance for Loan Losses
Transactions in the allowance for loan losses were as follows:
(Dollars in thousands) 2001 2000 1999
--------------------------------------------------------------------------------------
Balance at beginning of year $6,137 5,146 4,012
Allowance for loan losses of Bank of Mason
due to acquisition -- 57 --
Increase in allowance due to acquisition of branch -- -- 152
Provisions for loan losses 6,377 2,636 1,623
Loans charged-off (3,903) (1,861) (758)
Recoveries of previously charged-off loans 412 159 117
--------------------------------------------------------------------------------------
Balance at end of year $9,023 6,137 5,146
--------------------------------------------------------------------------------------
The Company had approximately $14,045,000 and $5,953,000 at December
31, 2001 and 2000, 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 $1,893,000 and $893,000 at December 31,
2001 and 2000, respectively. If such loans had been on an accrual
basis, additional interest income would have recognized on the
statements of earnings of approximately $855,000, $499,000 and $125,000
in 2001, 2000 and 1999, respectively.
(8) Premises and Equipment
Premises and equipment are summarized as follows:
(Dollars in thousands) 2001 2000
---------------------------------------------------------------------------
Land $ 5,489 4,786
Buildings and improvements 15,593 13,806
Leasehold improvements 900 903
Furniture, fixtures and equipment 8,360 7,397
Automobiles 228 155
Construction-in-progress 643 1,931
----------------------------------------------------------------------------
31,213 28,978
Less accumulated depreciation 7,342 5,511
----------------------------------------------------------------------------
Net premises and equipment $23,871 23,467
----------------------------------------------------------------------------
Depreciation expense related to premises and equipment amounted to
$1,762,000 in 2001, $1,444,000 in 2000 and $1,114,000 in 1999.
During 2000, a director's construction company was paid $2,748,000 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.
43
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(9) Investment in Unconsolidated Affiliates
Investments in unconsolidated affiliates consist of the following at
December 31, 2001 and 2000:
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------- ------ -----
Investment in Murray Bank (50% ownership) $2,833 2,095
Investment in Insurors Bank of Tennessee (50% ownership) 2,095 2,681
Other investments in other unconsolidated affiliates 267 207
- --------------------------------------------------------------------------------- ------ -----
$5,195 4,983
- --------------------------------------------------------------------------------- ------ -----
The Company uses the equity method of accounting in recording
investments in the unconsolidated affiliates shown above. 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.
(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) 2001 2000
- --------------------------------------------------------------------------------- ------ -----
Federal Home Loan Bank $3,954 3,551
Federal Reserve Bank 652 562
Bankers Bank 100 100
Other 13 13
- --------------------------------------------------------------------------------- ------ -----
$4,719 4,226
- --------------------------------------------------------------------------------- ------ -----
(11) Other Intangible Assets
A summary of other intangible assets at December 31, 2001 and 2000
follows:
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------- ------ -----
Other unidentifiable intangibles $1,475 1,475
Goodwill 359 230
- --------------------------------------------------------------------------------- ------ -----
1,834 1,705
Accumulated amortization 237 128
- --------------------------------------------------------------------------------- ------ -----
Net intangible assets $1,597 1,577
- --------------------------------------------------------------------------------- ------ -----
Amortization expense related to intangible assets amounted to $114,000,
$103,000 and $25,000 in 2001, 2000 and 1999, respectively.
44
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(12) Deposits
A summary of deposits at December 31, 2001 and 2000 follows:
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------- -------- --------
Noninterest-bearing demand $ 52,395 46,629
Interest-bearing demand 174,328 140,781
Savings 18,572 15,662
Certificates of deposit of $100,000 or more 145,485 114,137
Other time 158,644 206,933
- --------------------------------------------------------------------------------- -------- --------
Total deposits $549,424 524,142
- --------------------------------------------------------------------------------- -------- --------
At December 31, 2001 scheduled maturities of time deposits are as
follows:
(Dollars in thousands)
--------------------------------------------------------------------------------------------- -----------------
One year or less $257,993
Due after one year through three years 34,054
Due after three years 12,082
--------------------------------------------------------------------------------------------- -----------------
$304,129
--------------------------------------------------------------------------------------------- -----------------
(13) Advances From Federal Home Loan Bank
The Federal Home Loan Bank (FHLB) of Cincinnati (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 $3,954,000 of such stock at December 31, 2001 to satisfy this
requirement.
At December 31, 2001 and 2000, advances from the FHLB totaled
$50,852,000 and $46,211,000, respectively. The interest rates on these
advances ranged from 3.83% to 6.71%. Qualifying loans totaling
$76,278,000 were pledged as security under a blanket pledge agreement
with the FHLB at December 31, 2001.
Maturities of the advances from FHLB at December 31, 2001 are as
follows:
(Dollars in thousands)
2004 $ 852
2005 1,000
Later years 49,000
----------------------------
$50,852
----------------------------
45
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(14) Notes Payable
Notes payable consist of the following:
(Dollars in thousands) 2001 2000
------------------------------------------------------------------------------------- ------------ ------------
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. $ 859 1,002
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
$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 the Company owns in any other banks. 2,000 2,000
$6,000,000 line of credit from a lending institution which bears interest at a rate
of 7.50%. Advances can no longer be made on this line. 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. 4,800 5,400
------------------------------------------------------------------------------------- ------------ ------------
$7,659 8,749
------------------------------------------------------------------------------------- ------------ ------------
46
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(14) Notes Payable, continued
Minimum annual principal payments for future years are as follows:
(Dollars in thousands)
2002 $ 844
2003 943
2004 943
2005 943
2006 943
Later years 3,043
-------------------
$7,659
-------------------
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 not in compliance with all of the provisions of the loan
covenants as of December 31, 2001. The Company has obtained a waiver of
these covenants from the lending institution.
One of the more significant covenants 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.
(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 5.38% at
December 31, 2001. The Company can defer payment of the cash
distributions on the securities at any time or from time to time for a
period not to exceed twenty consecutive quarters.
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, subject to
certain limitations, 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 as the Capital Securities
and both mature on December 25, 2025; however, the maturity of both may
be shortened to a date not earlier than December 25, 2005.
47
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(15) Trust Preferred Securities, continued
On July 31, 2001, Cumberland Bancorp, Incorporated, through Cumberland
Capital Trust II and with the assistance of its Placement Agent, sold
to institutional investors $4,000,000 of capital securities. Cumberland
Capital Trust II, a Connecticut business trust wholly owned by
Cumberland Bancorp, Incorporated, issued $4,000,000 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 358 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 31, April 30, July 31 and
October 31 each year commencing October 31, 2001. The rate was 5.46% at
December 31, 2001. The Company can defer payment on the securities at
any time or from time to time for a period not to exceed twenty
consecutive quarters.
Cumberland Bancorp, Incorporated has, through various contractual
arrangements, fully and unconditionally guaranteed all of Cumberland
Capital Trust II's obligations with respect to the capital securities.
These Capital Securities qualify as a Tier I Capital, subject to
certain limitations, and are presented in the Consolidated Balance
Sheets as Trust Preferred Securities. The sole asset of Cumberland
Capital Trust II is $4,000,000 of junior subordinated debentures issued
by Cumberland Bancorp, Incorporated. These junior subordinated
debentures also carry the same floating rate as the Capital Securities
and both mature on July 31, 2031; however, the maturity of both may be
shortened to a date not earlier than July 31, 2006.
(16) Income Taxes
Income tax expense (benefits) consist of the following:
(Dollars in thousands) 2001 2000 1999
- --------------------------------------------------------- ------- ------- ------
Current:
Federal $ 1,279 2,398 2,165
State 255 456 412
- --------------------------------------------------------- ------- ------- ------
Total current tax 1,534 2,854 2,577
- --------------------------------------------------------- ------- ------- ------
Deferred:
Federal (1,283) (357) (393)
State (238) (66) (74)
- --------------------------------------------------------- ------- ------- ------
Total deferred tax benefits (1,521) (423) (467)
- --------------------------------------------------------- ------- ------- ------
Tax benefits credited to shareholders' equity related
to exercise of stock options 5 5 3
- --------------------------------------------------------- ------- ------- ------
Total income tax expense $ 18 $ 2,436 2,113
- --------------------------------------------------------- ------- ------- ------
48
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(16) Income Taxes, continued
Significant temporary differences between tax and financial reporting
that result in deferred tax assets (liabilities) included in other
assets on the consolidated balance sheet are as follows at December 31,
2001 and 2000:
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------- -------- --------
Allowance for loan losses $ 3,323 2,164
Unrealized loss on securities -- 59
Deferred loan fees 135 100
Other 529 398
- --------------------------------------------------------------------------------- -------- --------
Total deferred tax assets 3,987 2,721
- --------------------------------------------------------------------------------- -------- --------
FHLB stock dividends (659) (562)
Premises and equipment (491) (480)
Unrealized gain on securities (87) --
Loan servicing rights (107) (356)
Other (88) (143)
- --------------------------------------------------------------------------------- -------- --------
Total deferred tax liabilities (1,432) (1,541)
- --------------------------------------------------------------------------------- -------- --------
Net deferred tax asset $ 2,555 1,180
- --------------------------------------------------------------------------------- -------- --------
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) 2001 2000 1999
- --------------------------------------------------------- ------- ------- ------
Computed expected provision for income taxes $ 77 2,243 1,912
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit 11 261 223
Tax exempt interest (75) (69) (48)
Other, net 5 1 26
- --------------------------------------------------------- ------- ------- ------
Total income tax expense $ 18 2,436 2,113
- --------------------------------------------------------- ------- ------- ------
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.
49
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(17) Minimum Capital Standards, continued
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, 2001 and 2000, that all capital adequacy
requirements to which they are subject are met.
As of December 31, 2001, 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, 2001 and 2000, are as follows:
To be well
capitalized under
Required prompt corrective
(Dollars in thousands) Minimum action provisions Actual
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 2001
Amount Ratios Amount Ratios Amount Ratios
Tier I to average assets -leverage
Cumberland Bancorp, Inc. $27,089 4.00% 33,861 5.00% 50,612 7.47%
Cumberland Bank 10,682 4.00% 13,352 5.00% 19,006 7.12%
BankTennessee 7,974 4.00% 9,968 5.00% 15,518 7.78%
The Community Bank 5,969 4.00% 7,461 5.00% 9,844 6.60%
Bank of Dyer 2,037 4.00% 2,547 5.00% 3,588 7.04%
Bank of Mason 426 4.00% 533 5.00% 1,001 9.40%
Tier I to risk-weighted assets
Cumberland Bancorp, Inc. 20,162 4.00% 30,243 6.00% 50,612 10.04%
Cumberland Bank 8,051 4.00% 12,076 6.00% 19,006 9.44%
BankTennessee 6,114 4.00% 9,171 6.00% 15,518 10.15%
The Community Bank 4,198 4.00% 6,296 6.00% 9,844 9.38%
Bank of Dyer 1,348 4.00% 2,022 6.00% 3,588 10.65%
Bank of Mason 217 4.00% 326 6.00% 1,001 18.43%
Total capital to risk-weighted
assets
Cumberland Bancorp, Inc. 40,323 8.00% 50,404 10.00% 56,877 11.28%
Cumberland Bank 16,102 8.00% 20,127 10.00% 21,526 10.69%
BankTennessee 12,228 8.00% 15,285 10.00% 17,450 11.42%
The Community Bank 8,395 8.00% 10,494 10.00% 11,157 10.63%
Bank of Dyer 2,696 8.00% 3,370 10.00% 4,013 11.91%
Bank of Mason 435 8.00% 543 10.00% 1,076 19.81%
50
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(17) Minimum Capital Standards, continued
To be well
capitalized under
Required prompt corrective
(Dollars in thousands) Minimum action provisions Actual
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 2000
Amount Ratios Amount Ratios Amount Ratios
Tier I to average assets -leverage
Cumberland Bancorp, Inc. $24,820 4.00% 31,025 5.00% 46,070 7.42%
Cumberland Bank 9,151 4.00% 11,438 5.00% 16,490 7.21%
BankTennessee 8,189 4.00% 10,236 5.00% 15,047 7.35%
The Community Bank 4,542 4.00% 5,677 5.00% 8,392 7.39%
Bank of Dyer 1,822 4.00% 2,352 5.00% 3,475 7.39%
Bank of Mason 359 4.00% 449 5.00% 934 10.41%
Tier I to risk-weighted assets
Cumberland Bancorp, Inc. 19,359 4.00% 29,038 6.00% 46,070 9.52%
Cumberland Bank 7,475 4.00% 11,212 6.00% 16,490 8.82%
BankTennessee 6,650 4.00% 9,975 6.00% 15,047 9.05%
The Community Bank 3,667 4.00% 5,500 6.00% 8,392 9.15%
Bank of Dyer 1,341 4.00% 2,012 6.00% 3,475 10.36%
Bank of Mason 189 4.00% 284 6.00% 934 19.72%
Total capital to risk-weighted
assets
Cumberland Bancorp, Inc. 38,718 8.00% 48,397 10.00% 52,207 10.79%
Cumberland Bank 14,949 8.00% 18,686 10.00% 18,823 10.07%
BankTennessee 13,300 8.00% 16,625 10.00% 17,125 10.30%
The Community Bank 7,334 8.00% 9,167 10.00% 9,399 10.25%
Bank of Dyer 2,682 8.00% 3,353 10.00% 3,830 11.42%
Bank of Mason 379 8.00% 474 10.00% 1,002 21.15%
Regulatory Actions - Bank of Dyer, a wholly-owned subsidiary of
Cumberland Bancorp, Inc., entered into a Memorandum of Understanding
(MOU) with the Vice President of the Federal Reserve Bank of St. Louis
(Federal Reserve) and The Commissioner of the Tennessee Department of
Financial Institutions (Commissioner) as a result of an examination of
the Bank conducted as of September 30, 2001 dated November 2, 2001. The
MOU addresses management, asset quality, credit administration, capital
adequacy, violations/contraventions, earnings, liquidity, and the
allowance for loan losses. Also, the MOU requires the Bank to submit
quarterly progress reports to the Commissioner and the Federal Reserve.
(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 $398,149
in 2001, $414,139 in 2000, and $273,848 in 1999.
51
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(19) Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows
at December 31, 2001 and 2000:
2001 2000
-------------------------- -------------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Value Value Value Value
- ------------------------------------------------------------------------------------------- -------------------------
Financial assets:
Cash and due from banks 20,868 20,868 22,280 22,280
Interest-bearing deposits in
financial institutions 4,563 4,563 14,988 14,988
Federal funds sold 19,531 19,531 33,025 33,025
Securities available for sale 42,814 42,814 15,566 15,566
Securities held to maturity 12,735 12,814 8,425 8,405
Loans, net of allowance 513,222 518,788 501,080 499,885
Accrued interest receivable 4,693 4,693 5,644 5,644
Restricted equity securities 4,719 4,719 4,226 4,226
Investment in unconsolidated
affiliates 5,195 5,195 4,983 4,983
Loan servicing rights 327 327 985 985
Financial liabilities:
Deposits with defined maturities 304,129 308,292 321,070 322,517
Deposits with undefined
maturities 245,295 245,295 203,072 203,072
Notes payable 7,659 8,088 8,749 8,730
Federal funds purchased 1,675 1,675 9,575 9,575
Advances from FHLB 50,852 52,913 46,211 45,105
Accrued interest payable 3,994 3,994 4,694 4,694
Trust preferred securities 12,000 12,000 8,000 8,000
Notional Fair Notional Fair
Amounts Value Amount Value
- ----------------------------------------- --------- -------- ------- ------
Off-balance sheet financial instruments:
Commitments to extend credit 69,268 -- 71,045 --
Standby letters of credit 3,750 -- 3,060 --
The carrying values in the preceding table are included in the
consolidated balance sheets under the applicable captions.
52
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(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.
(Dollars in thousands, except per share data) 1999
--------------------------------------------------------------------------------------------------------------
Total revenue:*
CBI, as originally reported $22,696
BDI 1,660
--------------------------------------------------------------------------------------------------------------
CBI, as restated $24,356
--------------------------------------------------------------------------------------------------------------
Net income:
CBI, as originally reported $3,270
BDI 241
--------------------------------------------------------------------------------------------------------------
CBI, as restated $3,511
--------------------------------------------------------------------------------------------------------------
*Total revenue is net interest income and noninterest income
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 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 $10 million in total assets. On January 31,
2001, 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, 2001, future minimum lease commitments
are as follows:
(Dollars in thousands)
--------------------------------------------------------------------------
2002 $222
2003 216
2004 111
2005 30
2006 21
Thereafter 56
--------------------------------------------------------------------------
$656
--------------------------------------------------------------------------
Rentals relating to these agreements which are included in occupancy
expense amounted to $235,000 in 2001, $265,000 in 2000 and $196,000 in
1999.
53
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(21) Commitments and Contingencies, continued
During 2001, the subsidiaries of the Company leased certain premises
from related parties. The related expense from the leases totaled
approximately $20,000.
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 445,000 shares (as adjusted for the
March 1998 and March 2001 stock split) of the Company's common stock
for $2.25 per share (as adjusted for the March 1998 and March 2001
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 $125,000
and $26,000 were reported in 2001 and 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.
The investors that bought the remaining 50% of the Murray Bank
exercised their rights to purchase $250,000 worth of Cumberland
Bancorp, Incorporated 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 operating losses of approximately $1,187,000 and $492,000 for
the years ended December 31, 2001 and 2000.
54
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(21) Commitments and Contingencies, continued
Data for The Murray Bank (TMB) and Insurors Bank of Tennessee (IBOT) as
of December 31, 2001 is as follows:
TMB IBOT
- ---------------------------------------------------------------------- -------- --------
Assets:
Cash and due from banks $ 3,114 591
Fed funds sold 5,051 900
Securities
Available for sale 9,380 3,475
Held to maturity 450 --
Loans, net 48,631 15,413
Premises and equipment 1,965 441
Investment in restricted stock 180 328
Accrued interest receivable 531 86
Other assets 257 68
- ---------------------------------------------------------------------- -------- --------
Total assets $ 69,559 21,302
- ---------------------------------------------------------------------- -------- --------
Liabilities and Shareholders' Equity:
Total deposits
Borrowings $ 62,104 13,978
Accrued interest payable 1,203 2,997
Other liabilities 392 43
188 95
- ---------------------------------------------------------------------- -------- --------
Total liabilities 63,887 17,113
- ---------------------------------------------------------------------- -------- --------
Total shareholders' equity 5,672 4,189
- ---------------------------------------------------------------------- -------- --------
Net interest income $ 1,835 419
Provision for loan losses 373 --
Non interest income 492 16
Non interest expense 1,778 1,622
Income tax expense 51 --
Net income 125 (1,187)
- ---------------------------------------------------------------------- -------- --------
In the normal course of business there are commitments outstanding and
contingent liabilities such as legal proceedings pending against the
Company and its subsidiaries. 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.
55
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(22) Stock Options, continued
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)
2001 2000 1999
As Reported Proforma As Reported Proforma As Reported Proforma
-----------------------------------------------------------------------------------------------
Net income $ 209 7 4,161 3,960 3,511 3,344
Basic earnings
per share 0.02 0.00 0.30 0.29 0.28 0.27
Diluted earnings
per share 0.01 0.00 0.30 0.28 0.27 0.26
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 0.69%
in 2001, 0.8% in 2000 and 0% in prior years, risk-free interest rate of
6.0% in all years, expected lives of five years, and expected
volatility of 112% in 2001, 40% in 2000 and 47% in 1999.
The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 2001, 2000 and 1999
was $3.26, $5.19 and $6.09, respectively.
Stock 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.
56
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(22) Stock Options, continued
A summary of the stock option activity for 2001, 2000 and 1999 is as
follows:
Weighted
Shares Shares Option Average
Available Under Shares Exercise
(Dollars in thousands, except per share data) for Option Option Exercisable Price
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 312,580 787,420 $ 2.73
Granted (85,500) 85,500 -- 6.25
Becoming exercisable -- -- 167,284 2.73
Forfeited -- (19,250) -- 2.73
Exercised -- (2,400) --
- --------------------------------------------------------- -------- -------- -------- --------
Outstanding at December 31, 1999 227,080 851,270 167,284 3.08
Granted (87,500) 87,500 -- 6.25
Becoming exercisable -- 164,604 2.73
Forfeited -- (13,640) -- 2.73
Exercised -- (2,660) -- 2.73
- --------------------------------------------------------- -------- -------- -------- --------
Outstanding at December 31, 2000 139,580 922,470 331,888 3.39
Granted (30,000) 30,000 -- 4.12
Becoming exercisable -- -- 323,408 2.73
Forfeited -- (41,700) -- 2.73
Exercised -- (8,480) -- 2.73
- --------------------------------------------------------- -------- -------- -------- --------
Outstanding at December 31, 2001 109,580 902,290 655,296 3.22
- --------------------------------------------------------- -------- -------- -------- --------
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) 2001 2000 1999
- --------------------------------------------------------- ---------- ---------- ----------
For basic net earnings per share and diluted net earnings
per share, net earnings 209 4,161 3,511
- --------------------------------------------------------- ---------- ---------- ----------
Weighted average shares outstanding - basic 13,813,774 13,767,312 12,496,260
Effect of dilutive securities - stock options 206,020 254,614 279,012
- --------------------------------------------------------- ---------- ---------- ----------
Weighted average shares outstanding - diluted 14,019,794 14,021,926 12,775,772
- --------------------------------------------------------- ---------- ---------- ----------
Net earnings per share - basic $ 0.02 0.30 0.28
Net earnings per share - diluted 0.01 0.30 0.27
(23) Other Operating Expenses
Other operating expenses consist of the following:
Years ended December 31,
(Dollars in thousands) 2001 2000 1999
- -------------------------------------------------------- ------- ------- ------
Data processing $ 1,593 1,381 907
Advertising 369 414 441
Stationery, printing and supplies 509 506 494
Postage, freight and courier 367 311 221
Directors' fees 445 443 418
Other 5,469 3,972 2,886
- --------------------------------------------------------- ------- ------- ------
$ 8,752 7,027 5,367
- --------------------------------------------------------- ------- ------- ------
57
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(24) Quarterly Financial Data (unaudited)
------------------------------------
Earnings per share
Interest Net interest Provision for Net
income income loan losses income Basic Fully diluted
--------- ------------ ------------- ------- ----- ---------------
2001
First quarter $14,300 6,168 262 956 0.07 0.07
Second quarter 13,542 5,915 790 54 0.04 0.04
Third quarter 13,211 5,961 3,333 (1,162) (0.8) (0.08)
Fourth quarter 11,812 5,920 1,992 (128) (0.01) (0.01)
2000
First quarter 11,643 5,718 424 948 0.07 0.07
Second quarter 12,459 6,050 843 1,022 0.07 0.07
Third quarter 13,679 6,425 547 1,273 0.09 0.09
Fourth quarter 13,870 6,401 822 918 0.07 0.07
58
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(25) Parent Company Only Financial Information
Condensed Balance Sheets (Dollars in thousands)
---------------------------------------------------------------------------------------------------------------
December 31,
Assets 2001 2000
---------------------------------------------------------------------------------------------------------------
Cash $ 2,693 6,411
Investment in subsidiaries 50,062 44,514
Investment in unconsolidated affiliates 4,928 5,429
Premises and equipment 239 54
Goodwill 343 68
Other assets 2,877 949
-------- --------
$ 61,142 57,425
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Notes payable $ 7,659 8,749
Accrued interest 804 713
Other liabilities 994 239
Subordinate debt securities 12,372 8,248
-------- --------
Total liabilities 21,829 17,949
Total shareholders' equity 39,313 39,476
-------- --------
$ 61,142 57,425
======== ========
Condensed Statements of Earnings
---------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
---------------------------------------------------------------------------------------------------------------
Income:
Dividends from subsidiaries $ -- -- 800
Other dividend -- -- 4
Other income 33 41 13
------- ------ ------
33 41 817
------- ------ ------
Expenses:
Interest expense 1,375 603 578
Other expense 1,122 1,323 929
------- ------ ------
2,497 1,926 1,507
------- ------ ------
Loss before income taxes and equity in undistributed
earnings of subsidiaries
Income tax benefit (2,464) (1,885) (690)
1,112 732 558
------- ------ ------
Income (loss) before equity in undistributed earnings of
subsidiaries (1,352) (1,153) (132)
Equity in undistributed earnings of subsidiaries 1,561 5,314 3,643
------- ------ ------
Net earnings $ 209 4,161 3,511
======= ====== ======
59
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(25) Parent Company Only Financial Information, continued
Condensed Statements of Cash Flows (Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 209 4,161 3,511
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Equity in undistributed earnings of subsidiaries (1,561) (5,314) (3,643)
Operations of unconsolidated affiliates 505 308 104
Depreciation and amortization 34 32 15
Increase in accrued interest payable 91 456 149
Other, net (671) (384) 55
------ ------ ------
Net cash provided (used) by operating activities (1,393) (741) 191
------ ------ ------
Cash flows from investing activities:
Investment in commercial bank subsidiaries (3,749) (5,366) (3,000)
Investment in unconsolidated affiliates (212) (2,904) (1,935)
Purchases of premises and equipment (219) (29) (20)
------ ------ ------
Net cash used by investing activities (4,180) (8,299) (4,955)
------ ------ ------
Cash flows from financing activities:
Proceeds from notes payable 4,325 675
Repayment of notes payable (1,090) (3,031) (453)
Proceeds from trust preferred securities 4,000 8,000 --
Proceeds from issuance of common stock 23 434 9,390
Repurchase of common stock (283) -- --
Dividends paid on common stock (795) (516) --
------ ------ ------
Net cash provided by financing activities 1,855 9,212 9,612
------ ------ ------
Net increase (decrease) in cash (3,718) 172 4,848
Cash at beginning of year 6,411 6,239 1,391
------ ------ ------
Cash at end of year $ 2,693 6,411 6,239
======= ====== ======
60
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, 2001.
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 "Election of
Directors" in the Company's definitive proxy materials relating to the Annual
Meeting of Shareholders to be held April 25, 2002. The information required by
this item for other executive officers is set forth below:
Mark C. McDowell (45) has served as our Asset Quality Manager since
November 2001. Since July, 1997 Mr. McDowell previously served as our Chief
Administrative Officer responsible for overseeing all administrative functions,
including regulatory and financial matters. 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.
Andy LoCascio (37) has been our Chief Financial Officer since November,
2001 and is responsible for overseeing all financial and regulatory matters.
Previously, Mr. LoCascio served as Chief Financial Officer of BankTennessee in
Collierville, Tennessee from January, 2001 through October, 2001. Mr. LoCascio
served as Senior Financial Officer of Lincoln Federal Savings Bank in
Plainfield, Indiana from October, 1997 through December, 2000. Previously, Mr.
LoCascio served as a bank examiner for the Indiana Department of Financial
Institutions. Mr. LoCascio serves on our Audit and Management Committees.
ITEM 11. Executive Compensation
The information required by this item with respect to executive
compensation is incorporated herein by reference to the section entitled
"Executive Compensation" in the Company's definitive proxy materials relating to
the Annual Meeting of Shareholders to be held April 25, 2002.
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
section titled "Stock Ownership" in the Company's definitive proxy materials
relating to the Annual Meeting of Shareholders to be held April 25, 2002.
ITEM 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related
transactions is incorporated herein by reference to the section titled "Certain
Relationships and Related Transactions" in the Company's definitive proxy
materials relating to the Annual Meeting of Shareholders to be held April 25,
2002.
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.
61
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 $12,000,000 in subordinated debentures in connection
with the offering of trust preferred securities to institutional investors by
Cumberland Capital Trust I and Cumberland Capital Trust II. Copies of the
various transaction documents associated with the trust preferred offerings will
be filed with the Commission upon request.
(b) Reports on Form 8-K
None.
62
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CUMBERLAND BANCORP, INCORPORATED
By: /s/ Joel Porter
-------------------------------------------
Joel Porter
President (Principal Executive Officer)
Date: April 1, 2002
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 Officer) and April 1, 2002
Joel Porter Director
/s/ Andy LoCascio
- -------------------------------------------- Chief Financial Officer (Principal Financial April 1, 2002
Andy LoCascio and Accounting Officer)
/s/ John Wilder Chairman April 1, 2002
- ---------------------------------------------
John Wilder
/s/ Danny Herron
- --------------------------------------------- Director April 1, 2002
Danny Herron
/s/ Tom E. Paschal
- -------------------------------------------- Director April 1, 2002
Tom E. Paschal
/s/ Tom Brooks
- --------------------------------------------- Director April 1, 2002
Tom Brooks
/s/ Ronald Gibson
- --------------------------------------------- Director April 1, 2002
Ronald Gibson
63
/s/ Frank Inman, Jr.
- --------------------------------------------- Director April 1, 2002
Frank Inman, Jr.
/s/ Alex Richmond
- --------------------------------------------- Director April 1, 2002
Alex Richmond
/s/ John S. Shepherd
- --------------------------------------------- Director April 1, 2002
John S. Shepherd
/s/ James Rout
- --------------------------------------------- Director April 1, 2002
James Rout
/s/ Paul Priddy
- --------------------------------------------- Director April 1, 2002
Paul Priddy
/s/ Paul Pratt, Sr.
- --------------------------------------------- Director April 1, 2002
Paul Pratt, Sr.
/s/ R. Todd Vanderpool
- --------------------------------------------- Director April 1, 2002
R. Todd Vanderpool
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).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors.
65