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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
Commission File Number 0-27393
CUMBERLAND BANCORP, INCORPORATED
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(Exact Name of Registrant As Specified in Its Charter)
Tennessee 62-1297760
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(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
4205 Hillsboro Pike, Suite 204, Nashville, TN 37215
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(Address of Principal Executive Offices and Zip Code)
(615) 383-4758
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(Registrant's Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common stock outstanding: 13,914,816 shares at July 31, 2002.
CUMBERLAND BANCORP, INCORPORATED
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 (unaudited) 3
and December 31, 2001 (audited)
Consolidated Statements of Earnings (Loss) - For the three months and 4
six months ended June 30, 2002 and 2001 (unaudited).
Consolidated Statements of Changes in Shareholders' Equity - For the 5
six months ended June 30, 2002 and 2001 (unaudited).
Consolidated Statements of Cash Flows - For the six months ended 6
June 30, 2002 and 2001 (unaudited).
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 8-13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings. 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities. 14
Item 4. Submission of Matters to a Vote of Security Holders. 14
Item 5. Other Information. 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
ITEM 1. FINANCIAL STATEMENTS
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
June 30, December 31,
(Dollars in thousands, except share amounts) 2002 2001
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Assets:
Cash and due from banks $ 35,501 20,868
Interest-bearing deposits in financial institutions 4,369 4,563
Federal funds sold 36,931 19,531
Securities available for sale 41,017 42,814
Securities held to maturity, fair value $10,398 at June 30, 2002
and $12,814 at December 31, 2001 10,289 12,735
Loans 520,454 522,245
Allowance for loan losses (10,214) (9,023)
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Loans, net 510,240 513,222
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Premises and equipment 23,157 23,871
Accrued interest receivable 3,940 4,693
Restricted equity securities 4,928 4,719
Investment in unconsolidated affiliates 5,491 5,195
Other real estate 5,615 7,330
Loan servicing rights 265 327
Other intangible assets 1,589 1,597
Other assets 7,249 6,046
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Total assets $ 690,581 667,511
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Liabilities and Shareholders' Equity:
Deposits
Noninterest-bearing $ 50,281 52,395
Interest-bearing 524,851 497,029
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Total deposits 575,132 549,424
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Notes payable 5,600 7,659
Federal funds purchased 2,755 1,675
Advances from Federal Home Loan Bank 50,852 50,852
Accrued interest payable 3,460 3,994
Other liabilities 2,243 2,594
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Total liabilities 640,042 616,198
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Trust preferred securities 12,000 12,000
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Shareholders' equity:
Common stock, $0.50 par value, authorized 20,000,000 shares;
shares issued -13,877,976 in 2002 and 13,808,236 in 2001 6,939 6,904
Additional paid-in capital 22,444 22,289
Retained earnings 8,817 10,061
Accumulated other comprehensive income (loss) 339 59
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Total shareholders' equity 38,539 39,313
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Total liabilities and shareholders'
equity $ 690,581 667,511
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3
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------
(Dollars in thousands except per share data) 2002 2001 2002 2001
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Interest income:
Loans, including fees $ 9,830 12,469 20,014 25,391
Securities 669 303 1,413 673
Deposits in financial institutions 26 542 48 946
Federal funds sold 217 116 366 635
Federal Home Loan Bank dividends 68 112 125 197
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Total interest income 10,810 13,542 21,966 27,842
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Interest expense:
Time deposits of $100,000 or more 1,004 1,864 2,149 3,748
Other time deposits 2,772 4,873 5,621 9,831
Federal funds purchased 9 63 42 177
Notes payable, advances from Federal Home Loan Bank, and trust
preferred securities 911 827 1,872 2,003
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Total interest expense 4,696 7,627 9,684 15,759
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Net interest income 6,114 5,915 12,282 12,083
Provision for loan losses 3,727 790 4,619 1,052
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Net interest income after provision
for loan losses 2,387 5,125 7,663 11,031
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Other income:
Service charges on deposit accounts 947 902 1,803 1,705
Other service charges, commissions and fees 443 383 759 783
Mortgage banking activities 424 225 777 461
Gain on sale of SBA loans 0 238 37 238
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Total other income 1,814 1,748 3,376 3,187
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Other expenses:
Salaries and employee benefits 3,287 3,065 6,364 6,121
Occupancy 862 888 1,737 1,651
Other operating 2,245 2,083 4,350 4,122
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Total other expenses 6,394 6,036 12,451 11,894
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Income (loss) before income taxes (2,193) 837 (1,412) 2,324
Income tax expense (benefit) (855) 294 (581) 825
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Net earnings (loss) $ (1,338) 543 (831) 1,499
Other comprehensive income (loss) 529 (38) 280 105
Total comprehensive income (loss) (809) 505 (551) 1,604
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Net earnings (loss) per share - basic $ (0.10) 0.04 (0.06) 0.11
Net earnings (loss) per share - diluted (0.10) 0.04 (0.06) 0.11
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Weighted average shares outstanding - basic 13,833,280 13,799,901 13,823,123 13,820,425
Weighted average shares outstanding - diluted 13,977,697 14,029,124 13,970,035 14,055,110
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4
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Shareholders'
(Dollars in thousands) Shares Amount Capital Earnings Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------
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 880 -- 2 -- -- 2
Dividends $0.03 per share -- -- -- (416) -- (416)
Comprehensive Income:
Net income -- -- -- 1,499
Other Comprehensive Income:
Change in unrealized loss on securities
available for sale net of $64 in income taxes -- -- -- -- 105
Total Comprehensive Income 1,604
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Balance, June 30, 2001 13,800,636 6,900 22,272 11,765 (74) 40,863
==============================================================================================================================
Balance, December 31, 2001 13,808,236 $6,904 22,289 10,061 59 39,313
Exercise of stock options 69,740 35 155 -- -- 190
Dividends $0.03 per share -- -- -- (413) -- (413)
Comprehensive Income:
Net income (loss) -- -- -- (831) -- --
Other Comprehensive Income:
Change in unrealized loss on securities
available for sale net of $172 in income taxes -- -- -- -- 280 --
Total Comprehensive Income (loss) (551)
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Balance, June 30, 2002 13,877,976 $6,939 22,444 8,817 339 38,539
==============================================================================================================================
5
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------
(Dollars in thousands) 2002 2001
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Net earnings (loss) $ (831) 1,499
Adjustments to reconcile net earnings
to net cash provided (used) by operating activities:
Provision for loan losses 4,619 1,052
Depreciation and amortization 886 1,043
Operations of unconsolidated affiliates 728 297
Mortgage loans originated for sale (16,398) (18,231)
Proceeds from sale of mortgage loans 25,792 15,860
(Increase) decrease in accrued interest receivable 753 291
Increase in accrued interest payable and other liabilities (885) 874
Other, net (1,685) (3,783)
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Total adjustments 13,810 (2,597)
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Net cash provided (used) by operating activities 12,979 (1,098)
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Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in financial institutions 194 (36,767)
(Increase) decrease in federal funds sold (17,400) 11,236
Purchases of securities available for sale (12,420) (8,772)
Purchases of securities held to maturity (2,481) (7,641)
Proceeds from maturities and redemptions of securities available for sale 16,133 5,943
Proceeds from maturities and redemptions of securities held to maturity 3,291 3,576
Net increase in loans (11,031) (8,049)
Investment in unconsolidated affiliates (1,024) (435)
Purchases of premises and equipment (172) (1,918)
Proceeds from sale of other real estate 1,851 2,422
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Net cash used by investing activities (23,059) (40,405)
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Cash flows from financing activities:
Net increase in deposits 25,708 37,053
Decrease in federal funds purchased 1,080 (5,715)
Increase (decrease) in advances from Federal Home Loan Bank -- 7,077
Repayments of notes payable (2,059) (947)
Dividends paid (206) (208)
Purchase and retirement of common stock -- (283)
Proceeds from issuance of common stock 190 --
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Net cash provided by financing activities 24,713 36,977
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Net change in cash 14,633 (4,526)
Cash and due from banks at beginning of year 20,868 22,280
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Cash and due from banks at end of period $ 35,501 17,754
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Supplemental disclosure of cash flow information:
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Interest paid $ 10,218 14,460
Income taxes paid 349 1,522
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6
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements as of June 30, 2002 and for the
six month periods ended June 30, 2002 and 2001 were prepared on the same basis
as the audited financial statements and, in the opinion of management, include
all adjustments, consisting of normal recurring adjustments, to present fairly
the information. They do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating results for the three month and six month periods ending June 30, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. For further information, refer to the 2001
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K.
7
CUMBERLAND BANCORP, INCORPORATED
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The purpose of this discussion is to provide insight into the financial
condition and results of operations of the Company and its subsidiaries. This
discussion should be read in conjunction with the consolidated financial
statements. Reference should also be made to the Company's Annual Report on Form
10-K, for a more complete discussion of factors that impact liquidity, capital
and the results of operations.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
The words "anticipate," "could," "expects," and "believes" and similar
expressions are intended to identify such forward-looking statements but other
statements not based on historical information may also be considered
forward-looking. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release any modifications or revisions to
these forward-looking statements to reflect events or circumstances occurring
after the date hereof or to reflect the occurrence of unanticipated events.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions investors that future
financial and operating results may differ materially from those projected in
forward-looking statements made by, or on behalf of, the Company. Such
forward-looking statements involve known and unknown risks and uncertainties,
including, but not limited to, sudden adverse interest rate changes, inadequate
allowance for loan losses and loss of key personnel. These risks and
uncertainties may cause the actual results or performance of the Company to be
materially different from any future results or performance expressed or implied
by such forward-looking statements. The Company's future operating results
depend on a number of factors which were derived utilizing numerous assumptions
and other important factors that could cause actual results to differ materially
from those projected in forward-looking statements.
OVERVIEW
Cumberland Bancorp continued to experience asset growth throughout the first six
months of 2002 primarily as a result of increased deposit growth as recently
opened branches matured and attracted new customers. Loan receivables declined
slightly from the previous year end totals as management remained focused on
deterioration in asset quality. A substantial provision for loan losses
resulting primarily from increased loan charge-offs caused a loss for the second
quarter of $1.3 million and for the six months ended June 30, 2002 of $831,000.
Interest income remains adversely impacted from the reduction in market interest
rates experienced in 2001. However, interest expense associated with the
Company's high level of time deposits benefited from these same rate reductions,
allowing improvement in the net interest margin.
8
RESULTS OF OPERATIONS
Cumberland Bancorp's results of operations depend primarily upon the level of
net interest income, noninterest income and its noninterest expenses. For the
six months ended June 30, 2002 net earnings decreased to a net loss of $831,000
and for the three months ended June 30, 2002 net earnings decreased to a net
loss of $1.3 million as compared to the same periods in 2001. Provision expense
for the allowance for loan losses continues to negatively impact earnings and
totaled $4.6 million and $3.7 million for the six and three month periods of
2002, respectively. Loan charge offs for the same time periods equaled $3.8
million and $1.2 million.
NET INTEREST INCOME
Net interest income represents the amount by which interest earned on various
earning assets exceeds interest paid on deposits and other interest-bearing
liabilities and is the most significant component of the Company's earnings. The
Company's total interest income, excluding tax equivalent adjustments, decreased
$5.8 million or 21.0% during the six months ended June 30, 2002 and $2.7 million
or 20.2% for the three months ended June 30, 2002 as compared to the same
periods in 2001. The decrease in total interest income was primarily
attributable to the cycling forward of assets repricing to the 475 basis point
reduction in market interest rates throughout 2001. Additionally, prepayments on
loans and called securities have increased the level of low-earning Federal
funds sold. Although down to $11.7 million from the previous year end level of
$14 million because of loan charge-offs and foreclosures, the level of
nonperforming loans continues to restrict interest income. Had such loans been
performing in the six month period ended June 30, 2002, interest income would
have increased by $599,000. Excess cash from deposit growth has been invested in
securities. Interest income from the securities portfolio increased 110% for the
six months ended June 30, 2002 compared to the same period in 2001.
Interest expense decreased $6.1 million or 38.5% for the six months ended June
30, 2002 and $2.9 million or 38.4% in the three months ended June 30, 2002
compared to 2001. The overall decrease in total interest expense for the first
six months of 2002 as compared to 2001 was attributable to the lower interest
rate environment. Maturing time deposits as well as new deposit growth are
bearing considerably lower interest rates than those paid in 2001. Additionally,
the holding company's bank indebtedness, which has relatively high interest
cost, was reduced by $2.2 million since June 30, 2001. The foregoing resulted in
an increase in net interest income, before the provision for loan losses, of
$199,000 or 1.6% for the six months ended June 30, 2002 and an increase of
$199,000 or 3.4% for the three months ending June 30, 2002 as compared to the
same periods in 2001.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $4.6 million for the six months ended June 30,
2002 and $3.7 million for the three months ended June 30, 2002 compared to $1.1
million and $790,000, respectively, in 2001. Loan charge-offs of $3.8 million
over the six month period ended June 30, 2002 warranted the additional
provision. Net charge-offs were more than anticipated due to unforeseen losses
associated with attempts to resolve and/or liquidate previously identified
problem credits. Furthermore, management has made additional provisions for
losses on loans previously identified as impaired, consistent with revised
expectations inherent in these relationships. Deteriorating economic conditions
have placed stress on some of our commercial and consumer borrowers causing
weaknesses and inability to pay our loan obligation. Our west Tennessee banks in
particular have experienced a higher than normal amount of bankruptcies which
account for a large portion of these charge off numbers. The provision for loan
losses is based on past loan experience and other factors, which in management's
judgment, deserve current recognition in estimating probable loan losses. Such
factors include past loan loss experience, growth and composition of the loan
portfolio, internal review of specific problem loans, the result of recent
regulatory examinations, the relationship
9
of the allowance for loan losses to outstanding loans, and current economic
conditions that may affect the borrower's ability to repay. Management has in
place a system designed for monitoring its loan portfolio in an effort to
identify potential problem loans. The provision for loan losses raised the
allowance for loan losses to $10.2 million, an increase of 13.2% from $9.0
million at December 31, 2001. The allowance for loan losses as a percentage of
total outstanding loans was approximately 2.0% at June 30, 2002 compared to 1.7%
at December 31, 2001.
The level of the allowance and the amount of the provision involve evaluation of
uncertainties and matters of judgment. Although management believes the
allowance for loan losses at June 30, 2002 to be adequate, further deterioration
in problem credits and other real estate or the impact of deteriorating economic
conditions on other businesses, could require increases in the provision for
loan losses and could result in future charges to earnings which could have a
significant negative impact on net earnings. Furthermore, management believes
that continued deterioration in the economy in both the Company's primary market
area and nationally could have a significant impact on loans not currently
identified as problems as well as those that are identified.
NONINTEREST INCOME
The components of the Company's noninterest income include service charges on
deposit accounts, other fees and commissions, mortgage banking activities, gain
on sale of SBA loans, gain on sale of fixed assets and gain on sale of other
real estate. Total noninterest income increased 5.9% to $3.4 million and 3.8% to
$1.8 million for the six month and three month periods ending June 30, 2002,
respectively, compared to the same periods in 2001. The largest component of the
bank's noninterest income is revenue generated on deposit accounts. Service
charges on deposit accounts increased $98,000 or 5.7% during the six months
ended June 30, 2002 and 5.0% to $947,000 for the three months ended June 30,
2002 compared to the same periods in 2001. Management has increased the overall
fee structure on deposit accounts in an effort to generate more noninterest
income. Revenue from mortgage banking activities increased $316,000 or 68.5%
during the six months ended June 30, 2002 and $199,000 or 88.4% for the three
months ended June 30, 2002 compared to the same period last year. Mortgage loan
activity increased during 2002 stemming from the favorable interest rate
environment. Other service charges, fees and commissions totaled $759,000 and
$783,000 during the six months ended June 30, 2002 and 2001, respectively, a
decrease of $24,000 or 3.1% and $443,000 and $383,000 during the three months
ended June 30, 2002 and 2001, respectively, an increase of $60,000 or 15.7%.
Gains on sales of SBA loans during the six months ended June 30, 2002 were
$37,000 compared to $238,000 in the same period in 2001.
NONINTEREST EXPENSE
Noninterest expense consists primarily of salaries and employee benefits,
occupancy expenses, furniture and equipment expenses, data processing expenses
and other operating expenses, including minority interest in net earnings of
unconsolidated affiliates. Total noninterest expense increased $557,000 or 4.7%
during the first six months ended June 30, 2002 and $358,000 or 5.9% during the
three months ended June 30, 2002 compared to the same periods in 2001. The
increases in noninterest expense are primarily attributable to increases in
salaries and employee benefits, and other costs necessary to support the
Company's expanded operations. The number of full-time equivalent employees
decreased to 289 at June 30, 2002, from 300 at June 30, 2001.
INCOME TAXES
The Company recorded an income tax benefit of $581,000 for the six months ended
June 30, 2002 and $855,000 for the three months ended June 30, 2002. This
reflects a decrease of $1.4 million for the six month period and $1.1 million
for the three month period from 2001 and is directly related to the decline in
pretax income.
10
FINANCIAL CONDITION
BALANCE SHEET SUMMARY
The Company's total assets increased 3.5% to $690.6 million at June 30, 2002
from $667.5 million at December 31, 2001. This increase in total assets was
funded primarily from the 4.7% increase in deposits of $25.7 million. Loans, net
of allowance for loan losses, totaled $510.2 million at June 30, 2002 or a 0.6%
decrease compared to $513.2 million at December 31, 2001. Significant management
resources were required for oversight of asset quality related issues, which
limited management's ability to focus on marketing and on overall loan growth.
The allowance for loan losses increased to $10.2 million or 13.2% at June 30,
2002 compared to the preceding year end balance of $9.0 million. Securities
decreased $4.2 million or 7.6% to $51.3 million at June 30, 2002 from $55.5
million at December 31, 2001. Federal Funds sold increased $17.4 million or
89.1% to $36.9 million at June 30, 2002 from $19.5 million at December 31, 2001.
Total liabilities increased by 3.9% to $640 million at June 30, 2002 compared to
$616.2 million at December 31, 2001. This increase was composed primarily of a
$25.7 million or 4.7% increase in total deposits. Notes payable decreased $2.1
million or 26.9% since the previous year end to $5.6 million. There was no
change in the $50.9 million in outstanding Federal Home Loan Bank advances.
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". These pronouncements apply to impaired loans
except for large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment including credit card, residential
mortgage, and consumer installment loans.
A loan is impaired when it is probable that the Company will be unable to
collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Impaired loans are measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, the Company shall
recognize an impairment by creating a valuation allowance with a corresponding
charge to the provision for loan losses or by adjusting an existing valuation
allowance for the impaired loan with a corresponding charge or credit to the
provision for loan losses.
The Company's first mortgage single family residential and consumer loans are
divided into various groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment and thus are not subject to the provisions
of SFAS Nos. 114 and 118. Substantially all other loans of the Company are
evaluated for impairment under the provisions of SFAS Nos. 114 and 118.
The Company considers all loans subject to the provisions of SFAS 114 and 118
that are on nonaccrual status to be impaired. Loans are placed on nonaccrual
status when doubt as to timely collection of principal or interest exists, or
when principal or interest is past due 90 days or more unless such loans are
well-secured and in the process of collection. Delays or shortfalls in loan
payments are evaluated with various other factors to determine if a loan is
impaired. The decision to place a loan on nonaccrual status is also based on an
evaluation of the borrower's financial condition, collateral, liquidation value,
and other factors that affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all interest
accrued on the loan in the current fiscal year is reversed from income, and all
interest accrued and uncollected from the prior year is charged off against the
11
allowance for loan losses. Thereafter, interest on nonaccrual loans is
recognized as interest income only to the extent that cash is received and
future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A nonaccrual loan may be restored to accruing status
when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt.
Other loans may be classified as impaired when the current net worth and
financial capacity of the borrower or of the collateral pledged, if any, is
viewed as inadequate. In those cases, such loans have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt, and if such deficiencies
are not corrected, there is a probability that the Company will sustain some
loss. In such cases, interest income continues to accrue as long as the loan
does not meet the Company's criteria for nonaccrual status.
The Company charges off loans, including loans that are individually evaluated
for impairment, in the period in which they are deemed uncollectible.
Net charge-offs were $3.8 million and $1 million for the six month periods
ending June 30, 2002 and 2001, respectively. Net charge-offs were more than
anticipated due to unforeseen losses associated with attempts to resolve and/or
liquidate previously identified problem credits. Total non-performing loans at
June 30, 2002 were $11.7 million or 2.2% of total loans as compared to $14
million or 2.7% of total loans at December 31, 2001. Other real estate was $5.6
million at June 30, 2002, a decrease from the $7.3 million level at December 31,
2001. The decrease in other real estate was primarily related to the sale of one
piece of commercial real estate by the Company in the second quarter of 2002.
LIQUIDITY AND ASSET MANAGEMENT
The Company's management seeks to maximize net interest income by managing the
Company's assets and liabilities within appropriate constraints on capital,
liquidity and interest rate risk. Liquidity is the ability to maintain
sufficient cash levels necessary to fund operations, meet the requirements of
depositors and borrowers and fund attractive investment opportunities. Higher
levels of liquidity bear corresponding costs, measured in terms of lower yields
on short-term, more liquid earning assets and higher interest expense involved
in extending liability maturities.
Liquid assets including cash, due from banks and federal funds sold totaled
$76.8 million. In addition, the Company has $41 million in securities classified
as available for sale that could be sold for liquidity needs.
The Company's primary source of liquidity is a stable core deposit base. In
addition, loan payments provide a secondary source. Borrowing lines with
correspondent banks, FHLB and Federal Reserve augment these traditional sources.
Interest rate risk (sensitivity) focuses on the earnings risk associated with
changing interest rates. Management seeks to maintain profitability in both
immediate and long-term earnings through funds management/interest rate risk
management. The Company's rate sensitivity position has an important impact on
earnings. Senior management of the banks meet monthly to analyze the rate
sensitivity position of the subsidiary banks. These meetings focus on the spread
between the banks' cost of funds and interest yields generated primarily through
loans and investments.
12
The Company's securities portfolio consists of earning assets that provide
interest income. For those securities classified as held-to-maturity the Company
has the ability and intent to hold these securities to maturity or on a
long-term basis. Securities classified as available-for-sale include securities
intended to be used as part of the Company's asset/liability strategy and/or
securities that may be sold in response to changes in interest rate, prepayment
risk, the need or desire to increase capital and similar economic factors.
Securities totaling approximately $24.9 million mature or will be subject to
rate adjustments within the next twelve months.
A secondary source of liquidity is the Company's loan portfolio. At June 30,
2002, loans of approximately $366.6 million either will become due or will be
subject to rate adjustments within twelve months from the respective date.
Continued emphasis will be placed on structuring adjustable rate loans.
As for liabilities, certificates of deposits of approximately $269.4 million
will become due during the next twelve months. Historically, there has been no
significant reduction in immediately withdrawable accounts such as negotiable
order of withdrawal accounts, money market demand accounts, demand deposit and
regular savings. Management anticipates that there will be no significant
withdrawals from these accounts in the future. However, future decreases in
rates could have a negative effect on total deposits.
The holding company's bank borrowings and trust preferred securities have
certain interest payment requirements, and the holding company has certain
operating expenses, which require dividends or management fees from the
Company's bank subsidiaries in order to be funded. The Company's recent asset
quality problems may result in prior regulatory approval being required in order
for its subsidiaries to make such payments to the holding company. Failure to
obtain these prior approvals would likely require the holding company to find
alternative sources of funding in order to make such payments. The Company
anticipates that it will be able to meet required payments on its outstanding
bank debt and trust preferred securities for the next four quarters through
available cash resources and such alternative sources of funding.
CAPITAL POSITION AND DIVIDENDS
At June 30, 2002, total shareholders' equity was $38.5 million or 5.6% of total
assets. The decrease in shareholders' equity during the six months ended June
30, 2002 results from the Company's net loss of $831,000.
The Company's principal regulators have established minimum risk-based capital
requirements and leverage capital requirements for the Company. These guidelines
classify capital into two categories of Tier I and total risk-based capital.
Total risk-based capital consists of Tier I (or core) capital (essentially
common equity less intangible assets) and Tier II capital (essentially
qualifying long-term debt, of which the Company and subsidiary banks have none,
and a part of the allowance for loan losses). In determining risk-based capital
requirements, assets are assigned risk-weights of 0% to 100%, depending on
regulatory assigned levels of credit risk associated with such assets. The
risk-based capital guidelines require the subsidiary banks and the Company to
have a total risk-based capital ratio of 8.0% and a Tier I risk-based capital
ratio of 4.0%. Trust preferred securities are allowed to be counted in Tier I
capital, subject to certain limitations. At June 30, 2002, the Company's total
risk-based capital ratio was 10.64% and its Tier I risk-based capital ratio was
approximately 9.38% compared to ratios of 11.28% and 10.04%, respectively at
December 31, 2001. The required Tier I leverage capital ratio (Tier I capital to
average assets for the most recent quarter) for the Company is 4.0%. At June 30,
2002, the Company had a leverage ratio of 7.10%, compared to 7.5% at December
31, 2001.
IMPACT OF INFLATION
Although interest rates are significantly affected by inflation, the inflation
rate is immaterial when reviewing the Company's results of operations.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's 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 the Company's 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 the Company's operations, the Company does not maintain any
foreign currency exchange or commodity price risk.
Interest rate risk (sensitivity) management focuses on the earnings risk
associated with changing interest rates. Management seeks to maintain
profitability in both immediate and long-term earnings through funds
management/interest rate risk management. The Company's rate sensitivity
position has an important impact on earnings. Senior management of the
subsidiary banks meet monthly to analyze the rate sensitivity position. These
meetings focus on the spread between the cost of funds and interest yields
generated primarily through loans and investments.
The Company's net interest income immediately benefits from an increase in
market interest rates due to the asset sensitive bias of its balance sheet. This
posture does expose net interest income to falling interest rates in the near
term until interest rates stabilize. At June 30, 2002 there had been no material
change in the Company's sensitivity position as compared to at December 31,
2001.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the shareholders was held on April 25, 2002.
(b) To consider and act upon a proposal to amend the Company's Amended
and Restated Charter to classify the Company's Board of Directors into
three classes of directors with staggered three year terms of office;
Total
Shares Broker
Voted For Against Abstentions Non-Votes
-------------------------------------------------------------------------------
8,094,745 7,742,981 314,182 37,582 0
14
(c) To elect (4) Class I Directors, four (4) Class II directors, and
five (5) Class III directors to serve for one year, two years, and
three years, respectively, and until their successors are duly elected
and qualified, if the shareholders of the company approve the amendment
to the Company's Amended and Restated Charter to classify the Company's
Board of Directors into three classes, or to elect those same thirteen
(13) directors to serve until the next Annual Meeting and until their
successors are duly elected and qualified, if the Company's
shareholders do not approve the amendment to the Company's Amended and
Restated Charter;
Total
Shares Broker
Voted For Against Abstentions Non-Votes
Class I
Paul Pratt 8,094,745 8,058,345 0 36,400 0
Paul Priddy 8,094,745 8,05,8345 0 36,400 0
Tom Brooks 8,094,745 8,077,345 0 17,400 0
Ronald Gibson 8,094,745 8,056,745 0 38,000 0
Total
Shares Broker
Voted For Against Abstentions Non-Votes
Class II
Danny Herron 8,094,745 8,058,345 0 36,400 0
James Rout 8,094,745 8,086,845 0 7,900 0
Alex Richmond 8,094,745 8,058,345 0 36,400 0
R. Todd Vanderpool 8,094,745 7,905,365 0 189,380 0
Total
Shares Broker
Voted For Against Abstentions Non-Votes
Class III
Frank Inman, Jr. 8,094,745 8,077,245 0 17,500 0
Tom Paschal 8,094,745 8,058,345 0 36,400 0
Joel Porter 8,094,745 7,929,243 0 165,502 0
John S. Shepherd 8,094,745 8,074,661 0 20,084 0
John S. Wilder, Sr. 8,094,745 7,927,321 0 167,424 0
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certifications pursuant to 18 USC 1350 - the
Sarbanes-Oxley Act of 2002
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cumberland Bancorp, Incorporated
(Registrant)
DATE: August 14, 2002 /s/ Joel Porter
----------------------------------
Joel Porter, President (Principal Executive Officer)
DATE: August 14, 2002 /s/ Andy LoCascio
------------------------------------
Andy LoCascio
Chief Financial Officer
16