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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY , 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CUMBERLAND BANCORP, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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TENNESSEE 6021 62-1297760
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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CUMBERLAND BANCORP, JOEL PORTER
INCORPORATED PRESIDENT
4205 HILLSBORO ROAD, SUITE 212 CUMBERLAND BANCORP, INCORPORATED
NASHVILLE, TENNESSEE 37215 4205 HILLSBORO ROAD, SUITE 212
(615) 377-9395 NASHVILLE, TENNESSEE 37215
(ADDRESS AND TELEPHONE NUMBER OF (615) 377-9395
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) (NAME, ADDRESS, AND TELEPHONE
NUMBER OF AGENT FOR SERVICE)
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COPY TO:
BOB F. THOMPSON
BASS, BERRY & SIMS PLC
2700 FIRST AMERICAN CENTER
NASHVILLE, TENNESSEE, 37238
(615) 742-6200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE(1) REGISTRATION FEE
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Common stock...................... 700,000 $12.50 $8,750,000 $2,432.50
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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OUR GROWTH
- graph of five year growth in stockholders' equity
- graph of five year growth in net income
- graph of five year growth in Assets, Loans, and Deposits
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED , 1999
PROSPECTUS
700,000 SHARES
CUMBERLAND BANCORP, INCORPORATED
COMMON STOCK
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This is an offering of 700,000 shares of common stock by Cumberland
Bancorp, Incorporated. We are a Tennessee bank holding company with three
Tennessee state-chartered bank subsidiaries in Tennessee and a fifty
percent-owned federal savings bank subsidiary in Kentucky. The offering price is
$12.50 per share.
There is currently no public market for the common stock.
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PER SHARE TOTAL PROCEEDS(1)
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Offering price............................. $12.50 $8,750,000
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(1) Before deducting offering expenses estimated to be approximately $100,000,
including filing fees, legal and accounting fees, printing and other
miscellaneous expenses.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE BEFORE MAKING A DECISION TO INVEST IN OUR COMMON
STOCK.
SHARES OF OUR COMMON STOCK ARE NOT DEPOSITS, SAVINGS ACCOUNTS, OR OTHER
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 1999.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Cautionary Statement Regarding Forward-Looking Statements... 10
How to Participate in This Offering......................... 10
Use of Proceeds............................................. 11
Dividend Policy............................................. 11
Capitalization.............................................. 12
Dilution.................................................... 13
Selected Consolidated Financial Data........................ 14
Management's Discussion and Analysis
of Financial Condition and Results of Operations.......... 15
Business.................................................... 33
Supervision and Regulation.................................. 45
Management.................................................. 51
Transactions with Executive Officers and Directors.......... 57
Principal Shareholders...................................... 58
Market Price of and Dividends on Our Common
Equity and Related Stockholder Matters.................... 59
Description of Capital Stock................................ 60
Shares Eligible for Future Sale............................. 64
Plan of Distribution........................................ 65
Legal Matters............................................... 65
Experts..................................................... 65
Where You Can Find More Information......................... 66
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PROSPECTUS SUMMARY
This summary highlights selected information from this document. It does
not contain all of the information that is important to you. You should
carefully read this entire document in order to understand fully the offering
before making a decision to invest in our common stock. The terms "company,"
"we," and "our" as used in this document generally refer to Cumberland Bancorp,
Incorporated, and its subsidiaries as a consolidated entity, except where it is
made clear that it means only Cumberland (the parent company). Also, sometimes
we refer to our Tennessee banking subsidiaries, collectively, as "our banks" or
"the banks."
OFFERING HIGHLIGHTS (PAGE )
We are offering 700,000 shares of our common stock to the general public.
Persons interested in the offering may purchase no less than 400 shares and no
more than 20,000 shares. This offer will expire upon the earlier of the sale of
all 700,000 shares or 5:00 p.m. Nashville time , 1999, unless extended by
our board. We reserve the right to reject any subscription tendered after we
have received subscriptions for more than 700,000 shares. See "How to
Participate in this Offering," on page for the specific steps to take in order
to purchase shares under this offering.
ABOUT CUMBERLAND BANCORP, INCORPORATED (PAGE )
We are a bank holding company headquartered in Nashville, Tennessee. We
provide banking and other financial services. We conduct our banking business
primarily through three bank subsidiaries, all of which are in Tennessee:
- BankTennessee, with its main office in Collierville, Tennessee, and
branch offices in Collierville, Downtown Memphis, East Memphis and
Ripley, Tennessee, and
- Cumberland Bank, with its main office in Carthage, Tennessee, and branch
offices in Gallatin, Gordonsville, White House and Portland, Tennessee,
and
- The Community Bank, which operates as The Bank of Brentwood in Brentwood,
The Bank of Green Hills in Nashville and The Bank of Franklin in
Franklin, Tennessee.
Cumberland Bank also operates non-bank subsidiaries including:
- Cumberland Finance, Inc., with offices in Gallatin and Murfreesboro,
Tennessee, and
- CBC Financial Services, Inc., which provides brokerage services and
financial estate planning from offices in Carthage and Gallatin,
Tennessee, and
- InsureTennessee, Inc., a fifty percent (50%) subsidiary of CBC Financial
Services which provides insurance agency services from offices in
Carthage and Collierville, Tennessee.
As of March 31, 1999, our total assets were about $391 million, our
deposits were about $338 million and our shareholders' equity was about $21.4
million.
OUR HISTORY (PAGE )
Our present company resulted from a merger of equals between the two parent
holding companies of BankTennessee, Cumberland Bank and The Community Bank of
Nashville. The merger occurred in July of 1997.
BankTennessee was originally chartered in 1934 as First Federal Savings &
Loan Association. First Federal was converted to a commercial bank at the time
of the merger in 1997, and changed its name to BankTennessee. Jack Everett has
served as the bank's president since 1992. Its current assets are in excess of
$150 million.
Cumberland Bank was chartered in 1976 as The Savings & Loan Association of
Smith County, Tennessee. Cumberland Bank was converted to a state commercial
bank in 1991 and has grown since then from one office with about $46 million in
assets to a commercial bank with five offices in five different communities with
assets in excess of $150 million. Tom Paschal has served as the bank's president
since 1986.
The Community Bank started out as First Southern Savings & Loan in 1975.
First Southern
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was acquired by First Federal in 1992 and has grown since 1993 from a savings
and loan with one office with about $10 million in assets to a commercial bank
with three offices and approximately $90 million in assets. Danny Herron has
served as the bank's president since 1993.
The three operating banks now have thirteen banking offices in six
counties. In addition, we operate insurance and finance company subsidiaries of
Cumberland Bank at five additional locations.
Our three bank subsidiaries collectively have grown more than 25% in each
of the last two years, growing their assets from $238 million at year end 1996
to $373 million at year end 1998. With the opening of our office in Franklin,
Tennessee and other planned branch expansion, it is expected that our growth
will continue.
The growth has been directed by senior managers of our bank subsidiaries
with an average of more than twenty years of banking experience in Tennessee.
OPERATIONAL STRATEGIES (PAGE )
We operate according to the following business strategies:
- LOCAL DECISION MAKING -- Each of our banks has a separate board comprised
of local business people allowing it to be responsive to that community's
needs and trends. We give each branch manager and individual loan officer
authority and discretion to price loans and services and to approve loans
in order to respond quickly and efficiently to the needs of each of our
customers.
- RELATIONSHIP BANKING -- We believe our business and individual customers
want to develop long-term, multi-purpose relationships with bankers they
can trust. We believe our past experience serving Tennessee businesses
and individuals and our focus on superior relationship management are our
best tools to enhance overall profitability.
- FULL LINE OF BANKING PRODUCTS -- We seek to offer the personalized
service and local decision making characteristic of community banks while
providing a greater diversity of financial services associated with much
larger financial institutions. We continue to enhance our product mix
through both strategic acquisitions and internal growth. The formation
and development of Cumberland Finance, CBC Financial Services and
InsureTennessee provides customers with nontraditonal types of lending as
well as insurance and investment services not normally identified with
traditional community banks.
PURPOSE OF OFFERING (PAGE )
We will use the proceeds of this offering for investment in both pending
and potential bank acquisitions, to supplement the capital of existing banks,
and for other general corporate purposes.
ADDRESS AND TELEPHONE NUMBER
Our principal executive offices are located at 4205 Hillsboro Road, Suite
212, Nashville, Tennessee 37215. Our telephone number is (615) 377-9395.
THE MURRAY BANK (PAGE )
We entered into a joint venture with BancKentucky, Inc., to form and
operate a federal savings bank called The Murray Bank. By virtue of the
agreement, we own a 50% interest in the voting common stock of The Murray Bank.
The Murray Bank is located at 1000 Whitnell Street in Murray, Kentucky and began
operations as of June 15, 1999. The board of directors of The Murray Bank is
comprised of four of our directors as well as each of the nine organizers of
BancKentucky. The Murray Bank management expects to capitalize on the banking
skills, managerial expertise, and operational resources of our company as well
as their long-term relationships with the Murray, Calloway County community. We
also believe the recent sale of the two largest depository institutions in
Calloway County to large regional banks provide opportunity for a local
community bank alternative like The Murray Bank. As a federal thrift, The Murray
Bank will be regulated by the Office of Thrift Supervision.
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THE OFFERING
Common stock offered by us.......... 700,000 shares
Offering price...................... $12.50 per share
Common stock to be outstanding after
the offering........................ 6,281,677(1)
Use of proceeds..................... We plan to use the net proceeds for
pending and proposed bank acquisitions,
to supplement the capital of our
existing bank subsidiaries, and for
other general corporate purposes. For
further details, see "Use of Proceeds."
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(1) This information is based on the number of shares actually outstanding on
June 30, 1999, including the ten percent (10%) stock dividend effective
March 26, 1999. It excludes 430,510 shares of common stock (as adjusted to
incorporate the 10% stock dividend) subject to outstanding options under our
employee stock option plan, and outstanding rights to acquire up to $500,000
of our shares at 1.5 times our book value per share, or approximately 83,333
shares at June 30, 1999, held by individuals who are investors in our joint
venture partner under The Murray Bank joint venture agreement.
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
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FOR YEARS ENDING DECEMBER 31,
MARCH 31, MARCH 31, ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income -- tax
equivalent..................... $ 7,789 6,783 30,614 17,995 9,353 7,721 5,424
Interest expense................. 4,068 3,698 16,021 9,219 4,529 3,667 2,318
------- ------- ------- ------- ------- ------ ------
Net interest income.............. 3,721 3,085 14,593 8,776 4,824 4,054 3,106
Provision for loan losses........ (212) (125) (1,164) (1,368) (415) (357) (231)
Noninterest income............... 1,247 1,001 4,014 3,190 1,505 1,197 683
Noninterest expense.............. (3,529) (2,862) (12,568) (7,674) (4,562) (3,296) (2,182)
------- ------- ------- ------- ------- ------ ------
Income before income taxes....... 1,227 1,099 4,875 2,924 1,352 1,598 1,376
Income tax expense............... 457 420 1,857 1,081 513 615 515
------- ------- ------- ------- ------- ------ ------
Net earnings..................... 770 679 3,018 1,843 839 983 861
Basic earnings per share......... 0.14 0.12 0.55 0.48 0.35 0.41 0.36
Diluted earnings per share....... 0.14 0.12 0.54 0.46 0.33 0.39 0.35
Dividends per common share....... 0.00 0.00 0.00 0.00 0.00 0.05 0.04
Book value per common share...... 3.84 3.50 3.95 3.34 2.68 2.36 1.95
SELECTED PERIOD-END BALANCES
Total assets..................... 391,404 333,366 373,856 298,509 102,688 89,301 71,158
Loans -- net of unearned
income......................... 317,622 250,103 296,547 245,201 83,196 67,897 55,390
Allowance for loan losses........ 3,795 3,078 3,790 3,014 1,194 1,048 753
Total deposits................... 337,940 280,257 325,444 255,699 90,596 78,088 61,182
Other borrowings................. 26,752 30,419 25,206 23,189 5,026 4,633 4,918
Stockholders' equity............. 21,417 17,347 19,660 16,565 6,566 5,672 4,695
SELECTED AVERAGE BALANCES
Total Assets..................... 377,545 305,388 340,197 194,394 97,314 79,608 66,354
Securities....................... 22,718 18,472 22,491 10,763 5,549 5,947 6,235
Loans -- net of unearned
income......................... 303,633 247,705 268,564 160,615 76,091 62,071 50,078
Allowance for loan losses........ 3,792 3,044 3,296 2,403 991 901 697
Total deposits................... 327,473 267,979 289,576 167,049 85,625 63,358 52,950
Other borrowings................. 25,670 30,419 27,612 12,922 4,701 4,813 3,860
Stockholders' equity............. 19,957 17,159 18,150 11,120 6,119 5,170 4,410
SELECTED OPERATING RATIOS
Annual % change in average
loans.......................... *21.08% *63.15% 67.21% 111.08% 22.59% 23.87% 20.46%
Annual % change in average
assets......................... *7.99% *26.09% 75.00% 99.76% 22.24% 19.97% 12.09%
Return on average equity......... 15.43% 15.83% 16.63% 16.57% 13.71% 18.82% 18.87%
</TABLE>
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* Percentages based on the increase from the prior quarter's averages,
annualized over four quarters.
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
consider carefully the following risk factors together with the cautionary
statement that follows this section and the other information included in this
prospectus before purchasing our common stock.
WE MAY NOT BE ABLE TO SELL ALL OF THE SHARES WE ARE OFFERING WHICH WILL RESULT
IN AN INABILITY TO RAISE THE NET PROCEEDS WE NEED FOR THE GROWTH WE HAVE
PLANNED.
We do not have firm-commitment underwriters for this offering and instead
are offering our shares for purchase directly through our officers, directors
and employees; we are not required to sell a minimum amount of shares before
accepting any purchases. As a result, we may not be able to raise the capital we
desire through this offering to fund our planned growth. Further, the offering
may extend for up to a maximum of three months, and during the offering period
it is unlikely that shareholders will be able to sell shares for prices above
the offering price.
WE RISK LOSING CUSTOMERS BECAUSE WE COMPETE WITH OFTEN LARGE, MORE COMPREHENSIVE
FINANCIAL SERVICE INSTITUTIONS FOR CUSTOMER LENDING AND INVESTMENT BUSINESS IN
THE MARKETS WE SERVE.
The banking and financial services business is highly competitive,
especially in Memphis and Nashville, Tennessee generally, and in the market
areas of BankTennessee and The Community Bank specifically. As of June 30, 1998,
BankTennessee had 0.71% and 2.02% of the total bank deposits in Shelby and
Lauderdale Counties, its primary markets, respectively. The Community Bank had
less than one percent of the total bank deposits in Williamson and Davidson
Counties, its primary markets, respectively. Our banks compete for loans,
deposits and customers and the delivery of other financial services with other
commercial banks, savings and loan associations, securities and brokerage
companies, mortgage companies, insurance companies, finance companies, money
market funds, credit unions, and other non-bank financial service providers.
Many of these competitors have much greater total assets and capitalization than
us. These larger institutions have higher lending limits, have greater access to
capital markets and offer a broader array of financial services, such as trust
services and international banking services, than our banks. Furthermore, the
recent flurry of "megamergers" between larger multi-regional banks and between
banks and other financial services industries is indicative of a rapidly
changing banking environment where technology and the reduction of regulatory
barriers may adversely affect smaller, traditional community banks like us. See
"Business -- Market Areas " and "-- Competition" for additional information on
the market areas we serve and other financial institutions with which we
compete.
THERE WILL BE NO ESTABLISHED TRADING MARKET FOR THE SHARES BEING OFFERED;
THEREFORE, THEY MAY NOT BE EASILY SALEABLE AND MAY EXPERIENCE A VOLATILE MARKET
PRICE.
Following the offering contemplated by this prospectus, trading in our
common stock will be conducted in the over-the-counter market, in which
securities that do not meet the Nasdaq Stock Market, Inc. listing requirements
are traded by brokerage firms. Consequently, selling our shares will be more
difficult because smaller quantities of them can be bought and sold,
transactions could be delayed, and security analyst reports and news media
coverage of our operations may be reduced or nonexistent. These factors could
result in lower prices and larger spreads of the bid and ask prices for our
shares. Purchasers of our shares should have a long-term investment intent and
recognize that the
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absence of an active and liquid trading market may make it difficult to sell our
shares and may have an adverse effect on the price of our shares.
BECAUSE THERE IS NO ACTIVE TRADING MARKET, OUR MANAGEMENT ARBITRARILY DETERMINED
THE OFFERING PRICE FOR THE SHARES.
Prior to this offering, there was no active trading market in our stock.
The offering price has been arbitrarily determined by our board of directors
without the assistance of underwriters or other valuation experts and may not be
indicative of the price at which shares may be bought or sold after the
offering.
OUR KEY MANAGEMENT PERSONNEL MAY LEAVE AT ANY TIME.
Our future success depends to a significant extent on the continued service
of our key management personnel, especially our banks' presidents. We do not
have employment agreements with any of our personnel. The loss of the services
of one or more of our key employees could have a material adverse effect on our
business. We can provide no assurance that we will be able to retain any of our
key officers and employees or attract and retain qualified personnel in the
future.
WE CURRENTLY EXPECT THAT THE MURRAY BANK WILL EXPERIENCE STARTUP LOSSES.
The Murray Bank first commenced business on June 15, 1999. As a start-up
bank, it is likely that it will lose money its first few years of operations and
possible that it may never achieve long-term profitability.
WE DO NOT OPERATE UNDER A STRONG CENTRALIZED MANAGEMENT MODEL, LIKE MOST BANK
HOLDING COMPANIES, WHICH MAY SLOW OUR CORPORATE DECISION MAKING AND LIMIT
OPPORTUNITIES FOR GROWTH.
Our president serves on a part-time basis, and coordination of banking and
corporate policies is left almost exclusively to our board, executive committee,
and management committee, leaving many day-to-day operational decisions to our
banks and their respective presidents. We believe this emphasis on local control
of our banks allows each bank to operate more efficiently and effectively, and
that our management and board provide adequate oversight and support of our
banks as well as develop and implement effective and thoughtful policies and
plans for our company. However, we cannot know for certain what effect, if any,
the lack of a full-time chief executive officer, chief financial officer, or
other executive management personnel has on corporate decision making and growth
compared to typical bank holding companies with strong centralized management.
WE HAVE RELATIVELY HIGH AMOUNTS OF CONSTRUCTION AND DEVELOPMENT LOANS, WHICH
HAVE A GREATER CREDIT RISK THAN RESIDENTIAL MORTGAGE LOANS OR A MORE DIVERSIFIED
LOAN PORTFOLIO.
Construction and development lending is a more significant portion of our
loan portfolio than is typical for banks and bank holding companies in our area.
We carry a high dollar percentage of construction and development loans in our
portfolio, i.e., approximately 17.8% of our total loans as of December 31, 1998.
This type of lending is generally considered to have higher credit risks than
traditional single-family residential lending because the principle is
concentrated in a limited number of loans with repayment dependent on the
successful operation of the related real estate project. Consequently, these
loans are more sensitive to adverse conditions in the real estate market or the
general economy. These loans are generally less predictable and more difficult
to evaluate and monitor, and collateral may be difficult to dispose of in a
market decline. If our banks experience significant construction loan loss
because we inaccurately estimated the cost
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and value of construction loan projects or because of a general economic
downturn, our banks could experience earnings loss which would reduce our net
tangible book value and the value of our shares.
THE AMOUNT OF OUR NONPERFORMING LOANS HAS INCREASED OVER THE LAST YEAR, WHICH
HAS THE EFFECT OF REDUCING OUR NET INCOME AND RETURN ON ASSETS, AND MAY SIGNAL
THE POSSIBILITY OF FUTURE LOAN LOSSES AND FURTHER REDUCED NET INCOME, ESPECIALLY
IF THIS TREND CONTINUES.
Nonperforming loans are loans made by our banks or finance company
subsidiaries that are past-due more than 90 days beyond the contractual payment
terms or maturity. The amount of our nonperforming loans increased 33.3% in
dollar amounts in 1998 from $2.1 million, or 0.86% of loans, at December 31,
1997 to $2.8 million, or 0.94% of loans, at December 31, 1998, and to $3.1
million, or 0.98% of loans, at March 31, 1999. We would have recorded additional
interest income of $121,000 in 1998 if all loans accounted for on a nonaccrual
basis had been in compliance with their original terms.
WE, AS WELL AS OUR BANKS, OPERATE IN A HIGHLY REGULATED ENVIRONMENT AND ARE
SUPERVISED AND EXAMINED BY VARIOUS FEDERAL AND STATE REGULATORY AGENCIES WHO MAY
ADVERSELY AFFECT OUR ABILITY TO CONDUCT BUSINESS.
The Tennessee Department of Financial Institutions and the Board of
Governors of the Federal Reserve System supervise and examine our banks. Because
our deposits are federally insured up to $100,000, the Federal Deposit Insurance
Corporation also regulates our banks. The Federal Reserve also regulates us, as
a bank holding company. In addition, the Office of Thrift Supervision supervises
and regulates The Murray Bank, which is a federal savings bank. These and other
regulatory agencies impose certain regulations and restrictions on our banks,
including:
- meeting explicit standards as to capital and financial condition;
- limitations on the permissible types, amounts and extensions of credit
and investments;
- restrictions on permissible non-banking activities; and
- restrictions on dividend payments.
Federal and State regulatory agencies have extensive discretion and power
to prevent or remedy unsafe or unsound practices or violations of law by banks
and bank holding companies. As a result, we must expend significant time and
expense to assure that we are in compliance with regulatory requirements and
agency practices.
We, as well as our banks, also undergo periodic examinations by one or more
regulatory agencies. Following such examinations, we may be required, among
other things, to make additional provisions to our allowance for loan loss or to
restrict our operations. These actions would result from the regulators'
judgements based on information available to them at the time of their
examination. Our banks' operations are also governed by a wide variety of state
and federal consumer protection laws and regulations. These federal and state
regulatory restrictions limit the manner in which we, and our banks, may conduct
business and obtain financing. These laws and regulations can and do change
significantly from time to time, and any such change could adversely affect us.
See "Supervision and Regulation" for further information on the rules,
regulations and agencies that govern us.
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PROPOSED FEDERAL FINANCIAL SERVICES MODERNIZATION LEGISLATION MAY ADVERSELY
AFFECT SMALLER BANK HOLDING COMPANIES AND BANKS LIKE US AND OUR BANKS.
Financial services modernization legislation currently being considered by
Congress could impact the banking industry more dramatically than any other
legislation in recent history. This legislation is expected to permit
affiliations between securities and banking companies, to permit bank holding
companies to engage in insurance and securities underwriting, and to otherwise
streamline bank holding company supervision, among other items. By allowing
securities firms and insurance companies to offer banking products through
affiliated banks, this legislation would increase competition for new and
existing business.
REGULATORY AGENCIES COULD SEVERELY LIMIT OUR FUTURE EXPANSION PLANS.
We are required to obtain permission from the Federal Reserve in order to
acquire banks or thrifts. The opening of new branches by our existing bank
subsidiaries or the formation of new banks or thrifts also requires approval of
federal and state bank regulatory agencies. Regulatory agencies could prohibit
or otherwise significantly restrict any of our expansion plans or any expansion
plans of our banks.
CHANGES IN INTEREST RATES MAY SIGNIFICANTLY DECREASE OUR NET INTEREST INCOME
AND, THUS, OUR PROFITABILITY.
The results of operations of banking institutions generally, and of our
banks specifically, are materially affected by general economic conditions, the
monetary and fiscal policies of the federal government and the regulatory
policies of governmental authorities as well as other factors that affect market
rates of interest. Our profitability is significantly dependent on "net interest
income," which is the difference between interest income on interest-earning
assets, like loans and investments, and interest expense on interest-bearing
liabilities, like deposits and borrowings. Thus, any change in general market
interest rates, whether as a result of changes in monetary policies of the
Federal Reserve or otherwise, can have a significant effect on our net interest
income. Although our banks actively manage their exposure to interest rate
changes, these changes are beyond their control and our banks cannot fully
insulate themselves from the effective rate changes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
additional information on the interest rate sensitivity of our banks' financial
statements.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN YOUR SHARES.
Investors purchasing shares of common stock in this offering will incur
immediate and substantial dilution in pro forma net tangible book value per
share. If we were to sell all 700,000 shares available in this offering at
$12.50 per share, the pro forma net book value of your shares at March 31, 1999
would have been $4.79, or $7.71 less than your purchase price. See "Dilution."
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH COULD FURTHER
DILUTE YOUR OWNERSHIP INTEREST AND MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR
STOCK.
Future sales of substantial amounts of common stock in the public market or
the perception that those sales could occur could adversely affect the market
price of our common stock and those sales could dilute your ownership interest.
8
<PAGE> 13
WE WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS RESULTING FROM THIS
OFFERING.
The net proceeds of this offering will be used to fund investments in our
pending branch expansion and possible bank acquisitions and to supplement the
capital of our existing banks as well as for other general corporate purposes.
While these are the anticipated uses for the proceeds from this offering,
certain unforeseen events or changed business conditions could result in the
application of the proceeds of this offering in a manner other than as described
in this prospectus. See "Use of Proceeds."
WE USE SOFTWARE, HARDWARE AND INTERNET-BASED TECHNOLOGY THAT COULD MALFUNCTION
BECAUSE OF THE YEAR 2000 PROBLEM AND ADVERSELY AFFECT THE DELIVERY OF OUR BANKS'
SERVICES TO THEIR CUSTOMERS.
We and our banks depend upon a significant number of computer software
programs and operating systems to conduct our business, many of which are
provided by third-party vendors, including our primary software vendor,
Information Technology, Inc., and our outside service bureau, FIDATA. This
technology and data is used in creating and delivering bank products and
services, and in our internal operations, like billing and accounting. The
software and services these vendors provide are critical to our operations. We
cannot assure you that our third-party software, hardware or services will be
functional at or before Year 2000, or updated on a timely basis in order to be
functional, which could result in lost revenues, increased operating costs, the
loss of clients, or other business interruptions, any of which could adversely
affect our results of operations and financial condition. In addition to FIDATA
and ITI, we have identified other information technology vendors and outside
vendors that we do business with who we believe provide services which are
mission critical and have requested assurances from these vendors that their
programs are also Year 2000 compliant. We can receive information from the FDIC
about FIDATA and ITI's Year 2000 readiness based on FDIC examination of those
entities. However, for vendors that are not examined by the FDIC or other
regulators, we must rely on those vendors' representations and the validation
testing we are able to undertake. Consequently, we are in the process of
developing and finalizing a contingency plan in the event that an outside
vendor, like our local power company, is unable to provide critical services at
Year 2000. Besides the costs incurred as a result of business interruptions that
could occur, our failure to adequately address Year 2000 compliance issues could
also result in claims of mismanagement, misrepresentation or breach of contract
and related litigation, all of which could be costly and time-consuming to
defend. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000."
OUR CAPITAL BASE MAY NOT BE ABLE TO SUSTAIN OUR TARGET RATE OF GROWTH,
PARTICULARLY IF OUR LOAN LOSS ALLOWANCE IS UNABLE TO ABSORB ACTUAL FUTURE LOAN
LOSSES.
Our ability to sustain the internal growth of our banks and to acquire new
financial service businesses is closely tied to the size and quality of our
banks' loan portfolios, our largest asset. We believe that our consolidated
allowance for loan losses is adequate to absorb any inherent losses in the loan
portfolios of our banks. However, actual future loan losses may, in fact, exceed
our current estimates. If actual losses are greater than expected, it would
become necessary to increase the provision for loan losses. This would adversely
impact net income, which could possibly create losses and reduce our capital
beyond acceptable regulatory levels. If so, bank regulators would likely limit
our future growth.
9
<PAGE> 14
YOU WILL NOT RECEIVE A CASH DIVIDEND FOR THE SHARES YOU PURCHASE FOR THE NEXT
SEVERAL YEARS AND MAY NEVER RECEIVE A CASH DIVIDEND.
You should not expect to receive dividend income from the purchase of these
shares for the next several years and should recognize that your investment in
these shares may never result in dividend income or be a significant source of
that form of income. We have not declared cash dividends as a matter of
practice. Because of our current capital limitations and plans for growth, we
have no current plan to change our policy. See "Dividend Policy."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document that are subject
to risks and uncertainties. These forward-looking statements include information
about possible or assumed future results of our operations or performance after
the offering. Also, when we use any of the words "believes," "expects,"
"anticipates," or similar expressions, we are making forward-looking statements.
Many possible events or factors could affect our future financial results and
the performance of our bank subsidiaries, and any potential acquisitions, and
could cause those results or performances to differ materially from those
expressed in our forward-looking statements. These possible events or factors
include the following:
- legal and regulatory risks and uncertainties;
- economic, political and competitive forces affecting our businesses,
markets, constituencies or securities; and
- the risk that our analyses of these risks and forces could be incorrect,
or that the strategies we've developed to deal with them may not succeed.
We recognize that all forward-looking statements are necessarily speculative,
speak only as of the date made, and advise readers that various risks and
uncertainties, such as those described above, could cause actual results for
future periods to differ materially. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, we can give no
assurance that any expectations will prove to have been correct. The
forward-looking statements contained in this prospectus are not within the safe
harbor for forward-looking statements contained in Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended since this is an initial public offering.
HOW TO PARTICIPATE IN THIS OFFERING
Procedure for participating in this offering.
1. Complete, date and sign the subscription agreement which is included
with this prospectus. Make sure you follow the instructions within the
subscription agreement when completing it.
2. Make a check payable to the order of "Cumberland Bancorp, Incorporated,"
in the amount of $12.50 times the number of shares you wish to purchase.
3. Persons participating in this offering must purchase at least 400 shares
and may not purchase more than 20,000 shares.
10
<PAGE> 15
4. Return the completed subscription agreement and check to:
Cumberland Bancorp, Incorporated
Attn: Mark McDowell
4205 Hillsboro Road, Suite 212
Nashville, Tennessee 37215
5. Upon receipt of proper payment and a completed and duly executed
subscription agreement, you will be entitled to receive a certificate
representing the number of shares purchased, which shall be validly
issued, fully paid and nonassessable. Certificates will be mailed as
soon as reasonably possible following receipt of payment and the
subscription agreement.
6. The subscription agreement is irrevocable.
OFFERING PERIOD/RIGHT TO REJECT
Shares are being offered on a first come first-served basis until the
earlier of the sale of all 700,000 shares or sixty (60) days from the date of
this prospectus (unless extended by our board for up to an additional thirty
(30) days). We reserve the right to reject any subscription tendered after all
700,000 shares have been subscribed for.
USE OF PROCEEDS
If all of the 700,000 shares available in this offering are sold at $12.50
per share, we will receive approximately $8,650,000 after deduction of our
expenses.
We intend to use the net proceeds of this offering for investment in both
pending and potential branch expansion and possible bank acquisitions, to
supplement the capital of our existing banks, and for other general corporate
purposes. We expect that approximately $1.0 million will be used specifically as
additional capital for our existing banks. We cannot specify with certainty
other particular uses for the net proceeds to be received upon the completion of
the offering. Accordingly, our management will have broad discretion in applying
the net proceeds. Pending their use, we intend to invest the proceeds from this
offering in short-term interest bearing securities.
DIVIDEND POLICY
As a bank holding company, various federal and state regulatory limitations
tied to the capitalization of our banks limit our ability to declare cash
dividends. We do not expect to declare any cash dividends for the next several
years. Any future determination to pay cash dividends will be at the discretion
of our board of directors, whose judgment is restricted by the federal and state
limitations on our ability to declare dividends.
We are a legal entity separate and distinct from our bank subsidiaries.
Funds available for payment of dividends by us principally consist of dividends
paid to us by our banks. Due to the development status of one of our banks and
the growth of our branches, our banks cannot pay us dividends now, and will not
likely to be able to pay them to us for several years. There are also statutory
and regulatory limitations on the amount of dividends that may be paid to us by
our banks. See "Supervision and Regulation -- Dividend Restrictions" for further
information on these limitations and the general restrictions on our ability to
declare dividends.
11
<PAGE> 16
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999. Our
capitalization is presented on:
- an actual basis;
- a pro forma, as adjusted, basis to give effect to the receipt of the
estimated net proceeds from the sale of the 700,000 shares of common
stock offered in this offering at an assumed public offering price of
$12.50 per share and after deducting estimated offering expenses of
$100,000.
This information is qualified by and should be read in conjunction with our
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
accompanying notes included in other parts of this prospectus.
MARCH 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
ADJUSTED FOR
ACTUAL OFFERING
------- ------------
<S> <C> <C>
Stockholders' Equity:
Common Stock, 20,000,000 authorized shares; 5,581,677
shares outstanding prior to the offering, and
6,281,677 shares to be outstanding after the
offering............................................ $ 2,791 $ 3,141
Additional paid-capital................................ 15,569 23,869
Retained earnings...................................... 3,143 3,143
Accumulated other comprehensive income (loss).......... (86) (86)
------- -------
Total stockholders' equity.......................... $21,417 $30,067
------- -------
Total capitalization................................ $21,417 $30,067
------- -------
</TABLE>
12
<PAGE> 17
DILUTION
As of March 31, 1999, our net tangible book value was approximately $21.4
million or $3.84 per share of common stock. Net tangible book value per share
represents the amount of our total tangible assets (including loan servicing
rights) less total liabilities, divided by the shares of common stock
outstanding as of March 31, 1999. After giving effect to the issuance and sale
of the 700,000 shares of common stock offered in this offering, and the
application of the estimated net proceeds, our pro forma net tangible book value
as of March 31, 1999, would have been $30.0 million or $4.79 per share. This
represents an immediate increase in net tangible book value of $0.95 per share
to existing shareholders and an immediate dilution of $7.71 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Offering price per share.................................... $12.50
Net tangible book value per share at March 31, 1999....... 3.84
Increase in net tangible book value per share attributable
to new investors....................................... 0.95
Pro forma net tangible book value per share after
offering.................................................. 4.79
------
Dilution per share to new investors......................... $ 7.71
======
</TABLE>
The following table summarizes, on a pro forma basis, as of March 31, 1999,
the differences between the total consideration and the average price per share
paid to us for shares of our common stock during the past five years by our
officers, directors and their affiliates and that were paid by investors
purchasing shares of common stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Officers, Directors and
Affiliates.................. 685,100 49.5% $ 295,217 3.3% $ 0.43
New investors................. 700,000 50.5 8,750,000 96.7 12.50
--------- ---- ---------- ----
Total.................... 1,385,100 100% $9,045,217 100%
========= ==== ========== ====
</TABLE>
- -------------------------
* For purposes of this table, the amounts paid by such persons for shares of
First Federal, adjusted to the exchange ratio in our merger with First
Federal, are included.
The discussion and tables above assume no exercise of any stock options
outstanding as of March 31, 1999. As of March 31, 1999, there were options
outstanding to purchase a total of 403,260 shares of common stock with a
weighted average exercise price of $5.45 per share. If any of these options are
exercised, there will be further dilution to new investors. See
"Capitalization," and note 19 of the notes to our financial statements.
13
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
(unaudited)
The table below provides selected consolidated financial data for our
company as of and for the three months ended March 31, 1999 and 1998, and as of
and for the five years ended December 31, 1998, 1997, 1996, 1995 and 1994. This
information does not include financial data of the predecessors of BankTennessee
or The Community Bank in existence before the 1997 merger of First Federal
Bancshares, Inc. into us, which was accounted for using the purchase method of
accounting. As a result, data presented for the three years ended December 31,
1996, 1995 and 1994 does not compare directly to data presented for the two
years ended December 31, 1998 and 1997, which are also not directly comparable
to each other. 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 prospectus.
<TABLE>
<CAPTION>
FOR YEARS ENDING DECEMBER 31,
MARCH 31, MARCH 31, ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS, AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income -- tax equivalent....... $ 7,789 6,783 30,614 17,995 9,353 7,721 5,424
Interest expense........................ 4,068 3,698 16,021 9,219 4,529 3,667 2,318
------- ------- ------- ------- ------- ------ ------
Net interest income..................... 3,721 3,085 14,593 8,776 4,824 4,054 3,106
Provision for loan losses............... (212) (125) (1,164) (1,368) (415) (357) (231)
Noninterest income...................... 1,247 1,001 4,014 3,190 1,505 1,197 683
Noninterest expense..................... (3,529) (2,862) (12,568) (7,674) (4,562) (3,296) (2,182)
------- ------- ------- ------- ------- ------ ------
Income before income taxes.............. 1,227 1,099 4,875 2,924 1,352 1,598 1,376
Income tax expense...................... 457 420 1,857 1,081 513 615 515
------- ------- ------- ------- ------- ------ ------
Net earnings............................ 770 679 3,018 1,843 839 983 861
Basic earnings per share................ 0.14 0.12 0.55 0.48 0.35 0.41 0.36
Diluted earnings per share.............. 0.14 0.12 0.54 0.46 0.33 0.39 0.35
Dividends per common share.............. 0.00 0.00 0.00 0.00 0.00 0.05 0.04
Book value per common share............. 3.84 3.50 3.95 3.34 2.68 2.36 1.95
SELECTED PERIOD-END BALANCES
Total assets............................ 391,404 333,366 373,856 298,509 102,688 89,301 71,158
Loans-net of unearned income............ 317,622 250,103 296,547 245,201 83,196 67,897 55,390
Allowance for loan losses............... 3,795 3,078 3,790 3,014 1,194 1,048 753
Total deposits.......................... 337,940 280,257 325,444 255,699 90,596 78,088 61,182
Other borrowings........................ 26,752 30,419 25,206 23,189 5,026 4,633 4,918
Stockholders' equity.................... 21,417 17,347 19,660 16,565 6,566 5,672 4,695
SELECTED AVERAGE BALANCES
Total Assets............................ 377,545 305,388 340,197 194,394 97,314 79,608 66,354
Securities.............................. 22,718 18,472 22,491 10,763 5,549 5,947 6,235
Loans-net of unearned income............ 303,633 247,705 268,564 160,615 76,091 62,071 50,078
Allowance for loan losses............... 3,792 3,044 3,296 2,403 991 901 697
Total deposits.......................... 327,473 267,979 289,576 167,049 85,625 63,358 52,950
Other borrowings........................ 25,670 30,419 27,612 12,922 4,701 4,813 3,860
Stockholders' equity.................... 19,957 17,159 18,150 11,120 6,119 5,170 4,410
SELECTED OPERATING RATIOS
Annual % change in average loans........ *21.08% *63.15% 67.21% 111.08% 22.59% 23.87% 20.46%
Annual % change in average assets....... *7.99% *26.09% 75.00% 99.76% 22.24% 19.97% 12.09%
Return on average equity................ 15.43% 15.83% 16.63% 16.57% 13.71% 18.82% 18.87%
</TABLE>
- -------------------------
* Percentages based on the increase from the prior quarter's averages,
annualized over four quarters.
14
<PAGE> 19
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
prospectus.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
RESULTS OF OPERATIONS. Our income increased $91,000, or 13.4%, to $770,000
for the three months ended March 31, 1999, from $679,000 for the three months
ended March 31, 1998. Increased net interest income and increased noninterest
income both contributed to the increased net income.
Net interest income increased $636,000, or 20.6%, to $3.7 million for the
three months ended March 31, 1999, from $3.1 million for the three months ended
March 31, 1998. The increase in net interest income was due primarily to a $35.1
million, or 11.3%, increase in average earning assets and an increase in the
percentage of average earning assets invested in loans.
The provision for loan losses was $212,000 for the three months ended March
31, 1999, compared to $125,000 for the three months ended March 31, 1998. The
increase in the provision for 1999 was primarily attributable to a $132,000
increase in net charge-offs in the first quarter of 1999 as compared to the same
period in 1998. We experienced net charge-offs of $207,000 for the three months
ended March 31, 1999, an annualized ratio of net charge-offs to average loans of
0.27%. By comparison, we experienced net charge-offs of only $60,000 for the
three months ended March 31, 1998, an annualized ratio of net charge-offs to
average loans of 0.09%. The increase in net loan charge-offs for the 1999 first
quarter is primarily due to increased consumer loan losses at our Cumberland
Bank subsidiary and to a $75,000 construction loan guaranty default at our
BankTennessee subsidiary.
Noninterest income increased $246,000, or 25%, to $1.2 million for the
three months ended March 31, 1999, from $1.0 million for the three months ended
March 31, 1998. The increase is primarily attributable to an increase in service
charges on deposits, and increases in other service charges, commissions and
fees.
Noninterest expense increased $667,000, or 23%, to $3.5 million for the
three months ended March 31, 1999, from $2.9 million for the three months ended
March 31, 1998. The largest component of noninterest expense is salaries and
benefits, which increased $400,000, or 27%, to $1.9 million for the three months
ended March 31, 1999, from $1.5 million for the three months ended March 31,
1998. The increased personnel costs are attributable to the expanded number of
branches operated by our banks and the additional offices of Cumberland Banks'
non-depository InsureTennessee and CBC Financial Services operations. We also
expensed $50,000 for our share of organizational costs associated with the
charter and start-up of The Murray Bank in the first quarter of 1999. Other
increased noninterest expenses were primarily due to overall growth.
Our efficiency ratio for the three months ended March 31, 1999, computed by
dividing noninterest expense into the total of net interest income and
noninterest income, was 71%, compared to 70% for the three months ended March
31, 1998.
15
<PAGE> 20
FINANCIAL CONDITION AT MARCH 31, 1999. Our total assets grew from $373.9
million at year-end 1998 to $391.4 million at March 31, 1999, a $17.5 million
increase. The primary changes in assets included a $21 million increase in
loans, net of unearned income and an increase of federal funds sold of $5.1
million. We funded these increases primarily by an increase in deposits of $12.5
million and by decreasing $10.2 million in our interest-bearing deposits held in
other institutions.
Our total liabilities grew from $354.2 million at year end 1998 to $370.0
million at March 31, 1999, a $15.8 million increase. Of this growth, deposits
accounted for $12.5 million, and federal funds purchased were $2.0 million.
From year-end 1998 to March 31, 1999, our equity grew $1.7 million. During
the first quarter, we privately placed $1.0 million in common stock with
investors in Franklin, Tennessee, the site of our new branch of The Community
Bank. Growth in our retained earnings also increased our equity. Our leverage
capital ratio increased from 5.31% at December 31, 1998 to 5.46% at March 31,
1999. See note 13 to our consolidated financial statements for more information
relating to capital.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
The comparison of 1998 to 1997 operating results is substantially affected
by our merger with First Federal, which occurred on July 1, 1997. The income for
The Community Bank and BankTennessee in 1997 are only included in the second six
months of the Results of Operations.
Net interest income increased $5.8 million, or 66%, to $14.6 million in
1998 from $8.8 million in 1997. Of this increase, $2.8 million, or 32%, is
attributable to the addition of First Federal's assets and liabilities in
mid-year 1997. The remaining $3.6 million, or 31%, increase is a result of
growth in average earning assets of our Cumberland Bank subsidiary throughout
the year, and our BankTennessee and Community Bank subsidiaries for the last six
months.
The Company's net interest spread and net yield on earning assets were
4.08% and 4.52% respectively, in 1998 as compared to 4.38% and 4.75% in 1997.
The decrease in net interest spread and net yield on earning assets was the
result of yields on earning assets declining faster than rates paid on interest
bearing liabilities. Net interest spread represents the difference in the yield
on earning assets and the rate paid on interest bearing liabilities. Net yield
on earning assets is net interest income divided by average earning assets.
The provision for loan losses was $1.2 million in 1998 compared to $1.4
million in 1997. The decrease in the provision was primarily attributable to
lower charge-offs in 1998, partially offset by an increase in loan volume due to
growth and our merger with First Federal.
Noninterest income increased $824,000, or 26%, to $4.0 million in 1998 from
$3.2 million in 1997. Noninterest income of First Federal for the first sixth
months of 1997 (prior to the merger) was $413,000. After adjusting for the
$550,000 gain on the sale of a branch that was recognized during the last half
of 1997, noninterest income increased $1.4 million, or 43%. In addition to the
effect of a full year of noninterest income from BankTennessee and The Community
Bank, noninterest income also increased because of improved mortgage banking
operations due to market conditions and gains on sales of Small Business
Administration loans.
16
<PAGE> 21
Noninterest expense increased $4.9 million, or 64%, to $12.6 million in
1998 from $7.7 million in 1997. Of the increase, $2.6 million, or 34%, is
related to the effect of BankTennessee's and The Community Bank's operations in
1998. The remaining $2.3 million increase, or 30%, is a result of our overall
growth. Salaries and benefits increased from $3.8 million in 1997 to $6.5
million in 1998 or an increase of 71%. The increase is due to the large increase
in total employees who work for BankTennessee and The Community Bank. Our
efficiency ratio in 1998 was 67.5%, compared to 64.1% in 1997.
Net income increased $1.2 million or 64%, to $3 million in 1998. Of this
increase, $400,000 is due to the effects of the merger with First Federal.
Return on average assets during 1998 and 1997 was 0.89% and 0.95% respectively,
and return on average equity was 16.63% in 1998 compared to 16.57% for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
There are substantial increases in practically every category of the
Statement of Earnings when comparing 1996 to 1997, primarily as a result of the
merger with First Federal as of July 1, 1997.
Net interest income increased $4.0 million, or 82%, to $8.8 million in 1997
from $4.8 million in 1996. The inclusion of six months of First Federal results
accounts for $3.8 million of the increase, or 79%. The remaining $200,000 or 4%
increase is a result of overall growth in earning assets. Average earning assets
increased $91 million during 1997, primarily due to $84.5 million growth of
average net loans.
Our net interest yield declined from 5.16% in 1996 to 4.75% in 1997. The
decrease in net interest yield was the result of yields on earning assets
declining coupled with a rise in the cost of funds. The overall cost of funds
rose 11 basis points from 1996 to 1997. The yield on earning assets declined 25
basis points from 10.0% to 9.75% during 1997 compared to 1996.
The provision for loan losses was $1.4 million in 1997 compared to $400,000
in 1996. The merger with First Federal created $300,000 of the increase. The
remaining increase in the provision was required to properly fund the allowance
for loan losses as a result of the substantial increase in net loans and an
increase in net charge-offs during 1997.
Noninterest income increased $1.7 million, or 112%, to $3.2 million in
1997. Of this, $1.2 million or 80%, was a result of the merger with First
Federal while $500,000, or 32%, was due to our overall growth. There was a
non-recurring gain of $550,000 from the sale of a retail branch by our
BankTennessee subsidiary in late 1997. Other service charges and fees generated
$700,000 of income in 1997 compared to $300,000 from this source in 1996. Fees
derived from secondary market mortgage loan sales generated an increase of
$400,000 during 1997. SBA loan sales by BankTennessee contributed $200,000
during 1997.
Noninterest expense increased $3.1 million, or 68%, to $7.7 million in
1997. Of this increase, $2.8 million, or 61%, is related to the merger. The
remaining $300,000 increase is a result of our overall growth. These amounts
reflect the higher cost of operating three bank subsidiaries. Salaries and
benefits increased from $1.9 million in 1996 to $3.8 million in 1997, or an
increase of 97%. The increase is due to the large increase of employees working
at BankTennessee and The Community Bank. Our efficiency ratio in 1997 improved
to 64.1%, compared to 72.0% in 1996.
17
<PAGE> 22
Net income increased $1.0 million, or 120%, to $1.8 million in 1997. The
increase in net income was due primarily to the effects of the merger with First
Federal. Return on average assets during 1997 and 1996 was 0.95% and 0.86%
respectively, and return on average equity was 16.57% in 1997 compared to 13.71%
for 1996.
LOANS
The following table presents various categories of loans contained in our
banks' loan portfolios for the periods indicated and the total amount of all
loans for that period:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TYPE OF LOAN
Real estate -- construction
and development............. $ 52,769 40,559 5,684 3,684 4,905
Real estate -- 1 to 4 family
residential................. 125,547 108,331 31,175 21,577 17,721
Real estate other............. 12,555 26,184 4,828 10,458 8,706
Commercial, financial and
agricultural................ 68,830 36,682 17,143 10,815 7,065
Consumer...................... 39,258 36,273 26,074 23,157 18,515
Other......................... 672 83 181 353 252
-------- ------- ------ ------ ------
Total loans................... $299,631 248,112 85,085 70,044 57,164
Unearned income and deferred
fees........................ (3,084) (2,911) (1,889) (2,147) (1,774)
-------- ------- ------ ------ ------
Net loans................... $296,547 245,201 83,196 67,897 55,390
======== ======= ====== ====== ======
</TABLE>
Loan growth was $51.5 million, or 20.8%, during 1998, and $163 million, or
191.6%, during 1997. Approximately $120 million of the 1997 increase in loans
was the result of the mid-year 1997 merger with First Federal. We believe that
the loan growth reported in 1998 approximates the normal trend for our three
operating bank subsidiaries. Loans continued to grow during 1998 as a result of
strong economic conditions in our banks' primary markets, with commercial loans
experiencing the largest growth. We believe that commercial loans and loans to
the residential real estate industry will continue to be our two primary loan
categories.
At December 31, 1998, 1-4 family residential real estate loans constituted
42% of total loans and construction and development loans constituted 18% 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 or where there are already contracts for sale. Most of our
real estate loans are secured by properties located in the primary service areas
of our banks.
18
<PAGE> 23
The following is a presentation of an analysis of maturities of loans as of
December 31, 1998:
<TABLE>
<CAPTION>
DUE IN 1 DUE IN 1 TO DUE AFTER
YEAR OR LESS 5 YEARS 5 YEARS TOTAL
------------ ----------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
TYPE OF LOAN
Real estate -- construction &
development.................... $ 51,399 1,315 55 52,769
Real estate -- 1-4 family
residential.................... 72,928 41,944 10,675 125,547
Real estate -- other............. 9,968 2,264 323 12,555
Commercial, financial and
agricultural................... 45,083 21,352 2,395 68,830
Consumer......................... 19,117 20,070 71 39,258
Other............................ 640 32 -- 672
-------- ------ ------ -------
Total.......................... $199,135 86,977 13,519 299,631
======== ====== ====== =======
</TABLE>
At December 31, 1998, $96.2 million in loans due after one year had
predetermined interest rates and $6.5 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, 63.7% is secured by
residential real estate. Management believes this type of lending has allowed us
to maintain low levels of charge-offs and non-performing loans. However, the
real estate lending market has traditionally been sensitive to interest rates,
and the volume of such loans may decline if interest rates increase.
PROVISION FOR LOAN LOSSES AND ASSET QUALITY
The provision for loan losses represents charges made to earnings to
maintain an adequate allowance for loan losses. The allowance is maintained at
an amount believed to be sufficient to absorb losses in the loan portfolio.
Factors considered in establishing an appropriate allowance include a careful
assessment of the financial condition of the borrower; a realistic 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; a
comprehensive 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 like loan concentrations,
local economy, and the nature and volume of loans.
19
<PAGE> 24
An analysis of our loss experience, as well as a breakdown of the allowance
for possible loan losses, is furnished in the following table for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year...... $ 3,014 1,194 1,048 753 640
Allowance for First Federal
Bancshares, Inc. at date of
acquisition..................... -- 1,229 -- -- --
-------- ------- ------ ------ ------
Loans charged-off:
Real estate -- construction &
development.................. (65) -- -- -- --
Real estate -- 1 to 4 single
family....................... (45) (23) (5)
Real estate -- other............ -- (90) -- -- --
Commercial, financial &
agricultural................. (49) (34) -- --
Consumer........................ (312) (708) (302) (107) (159)
Other........................... (24) -- -- -- --
-------- ------- ------ ------ ------
Total charge-offs............ (495) (855) (307) (107) (159)
-------- ------- ------ ------ ------
Charge-offs recovered:
Real estate -- construction &
development.................. 21 -- -- -- --
Real estate -- 1-4 single
family....................... 2 11 -- -- --
Real estate -- other............ 0 -- -- -- --
Commercial...................... 5 1 -- -- --
Consumer........................ 61 66 38 45 41
Other........................... 18 -- -- -- --
-------- ------- ------ ------ ------
Total recoveries............. 107 78 38 45 41
-------- ------- ------ ------ ------
Net loans charged-off............. (388) (777) (269) (62) (118)
Current year provision............ 1,164 1,368 415 357 231
-------- ------- ------ ------ ------
Balance at end of year............ $ 3,790 3,014 1,194 1,048 753
======== ======= ====== ====== ======
Loans at year end................. 296,547 245,201 83,196 67,897 55,390
Ratio of allowance to loans at
year end........................ 1.28% 1.23% 1.43% 1.54% 1.36%
Average loans..................... 268,564 160,615 76,091 62,102 50,078
Ratio of net loans charged off to
average loans................... 0.14% 0.48% 0.35% 0.07% 0.24%
</TABLE>
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
20
<PAGE> 25
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 0.14% in 1998 and 0.48% in 1997. Charge-offs were higher in 1997 due
to consumer loan losses for Cumberland Bank and Cumberland Finance, its finance
company subsidiary. As a result of the imposition of more stringent consumer
loan underwriting standards, consumer loan charge-offs and consequently net
charge-offs declined in 1998. During 1998, the provision for loan losses of $1.2
million was almost $200,000 less than the preceding year. Factors which gave
rise to the increased provision in 1997 were a substantial increase in consumer
loan losses in Cumberland Bank's portfolio and similar loan losses in Cumberland
Finance.
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 removed from income. Another element associated
with asset quality is foreclosed properties, 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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual
basis............................. $1,726 $1,561 $565 $ 478 $709
Accruing loans which are
contractually past due 90 days or
more as to principal and interest
payments.......................... $ 373 $ 67 $420 $ 554 $216
Restructured loans.................. $ 652 $ 443 $ 0 $ 0 $ 0
------ ------ ---- ------ ----
Total Nonperforming loans(1)........ $2,751 $2,071 $985 $1,032 $925
Foreclosed Properties............... $ 610 $ 603 $ 0 $ 92 $ 0
</TABLE>
- -------------------------
(1) As of December 31, 1998, all restructured loans were in compliance with
their modified terms.
Non-performing loans were 0.9% of loans at December 31, 1998 and 1997. The
dollar increase in non-performing loans during 1998 was due to a growing and
maturing portfolio, and less attributable to conditions in the marketplace.
Additional interest income of approximately $121,000 in 1998, $79,000 in 1997,
$33,000 in 1996, $26,000 in 1995 and $40,000 in 1994 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, 1998 on loans that have been accounted for
on a non-accrual basis.
Management has internally classified approximately $5.9 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"
21
<PAGE> 26
due to payment history, decline in the borrower's 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 weaknesses that jeopardize the liquidation of the debt. Loans
classified as "doubtful" have all the weaknesses inherent in ones 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, 1998, there are no loans
classified by our regulators or management as loss, doubtful or substandard that
have not been disclosed above.
The allocation of the allowance for loan losses by loan category at
December 31, of the years indicated is presented below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------------
1998 1997
----------------------------------- ----------------------------------
PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT AMOUNT TOTAL LOANS AMOUNT AMOUNT TOTAL LOAN
------- ---------- ------------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Real estate -- construction
& development............. $ 758 20% 18% $ 603 20% 16%
Real estate -- 1-4 single
family.................... 190 5% 42% 151 5% 44%
Real estate -- other........ 152 4% 4% 121 4% 11%
Commercial, financial and
agriculture............... 834 22% 23% 452 15% 14%
Consumer.................... 1,137 30% 12% 754 25% 14%
Other....................... 76 2% 1% 60 2% 1%
Unallocated................. 644 17% -- 873 29% --
------ ------
Total................... $3,791 100% 100% $3,014 100% 100%
====== === === ====== === ===
</TABLE>
As of December 31, 1998, real estate mortgage loans constituted 64% of
outstanding loans. Approximately $130.3 million, or 68.3%, 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 $52.8 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.
22
<PAGE> 27
SECURITIES
Our banks' securities portfolios are primarily used as a source of
liquidity. Total securities were $20.7 million at year-end 1998, which is up
$5.7 million from year-end 1997. The securities portfolios comprised 5.5% of
total assets at year-end 1998. 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, all
newly-purchased securities have been designated as "Available for Sale" to
increase flexibility for asset liability management. Approximately 27% of
securities held at year-end 1998 were pledged for public deposits. Other than
commitments to originate or sell mortgage loans, our banks do not invest in
off-balance sheet 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 and municipalities. The majority
of the mortgage-backed securities are instruments of United States' Government
agencies. In addition, we enter into federal funds transactions with our
principal correspondent banks, and act as a net seller of those funds. We did
not hold securities of any single issuer that exceeded ten percent of
stockholders' 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.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1998 1997
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Available for sale:
U.S. Government and agencies............................. $ 7,971 $ 1,401
Mortgage-backed.......................................... 2,690 1,062
Other debt securities.................................... -- 676
Marketable equity securities............................. 1,140 1,011
------- -------
Total available for sale.............................. $11,801 $ 4,150
======= =======
Held to maturity:
U.S. Government and agencies............................. 4,169 4,560
Mortgage-backed.......................................... 4,763 6,128
Other debt securities.................................... -- 204
------- -------
Total held to maturity................................ 8,932 10,892
------- -------
Total securities...................................... $20,733 $15,042
======= =======
</TABLE>
23
<PAGE> 28
The following table indicates, for the year ended December 31, 1998, 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:
<TABLE>
<CAPTION>
1 YR 1 TO 5 TO OVER
OR LESS AVERAGE 5 YRS AVERAGE 10 YRS AVERAGE 10 YRS AVERAGE TOTAL
BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE
------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government and
agencies......... $ -- -- 7,005 5.5% 510 6.10% 456 6.3% 7,971
Mortgage-backed.... -- -- -- 2,690 6.1% 2,690
Marketable equity
securities(2).... -- -- -- 1,140 N/A 1,140
Held to maturity:
U.S. Government and
agencies......... 500 5.8% 2,560 6.5% 1,000 6.1% 109 6% 4,169
Mortgage-backed.... -- -- -- 4,763 6.5% 4,763
---- ----- ----- ----- ------
Totals........... $500 9,565 1,510 9,158 20,733
==== ===== ===== ===== ======
</TABLE>
- -------------------------
(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. There are no tax exempt obligations in our banks'
securities portfolio.
(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 Federal Home Loan Bank 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 more costly than
deposit funding, are typically the lowest cost borrowed funds available to
institutions like our banks. Our banks utilize long-term borrowings from the
FHLB to lengthen the overall maturity of the liability side of the balance
sheet. Of a total $18.0 million in FHLB borrowings at year-end 1998, $13.2
million mature after December 31, 1999.
Total deposits grew at a rate of 27.3% during 1998, resulting from the
opening of new branch locations and more attractive pricing for deposits.
Deposit growth was greater than loan growth during 1998, resulting in a decline
of the loan-to-deposit ratio from 95.9% at year-end 1997 to 91.1% at year-end
1998. To utilize these excess funds, federal funds sold and interest-bearing
deposit balances were increased. Total interest-bearing deposits increased $64.8
million from year-end 1997 to year-end 1998, while federal funds sold increased
$4.3 million during 1998.
We operate retail bank branches in six different Tennessee counties and
have fifty percent (50%) ownership of a stand-alone federal savings bank in one
Kentucky county
24
<PAGE> 29
through a joint venture. Each local market has it own unique deposit customer
base. Deposit growth has been strong in the new communities where additional
branches have been established. In general, large certificates of deposit tend
to be more sensitive to interest rate levels, making these deposits less
reliable sources of funding for 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 1996,
1997, and 1998 are represented by deposit category on the table on pages and
of this section of the prospectus.
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, 1998:
<TABLE>
<CAPTION>
TIME
CERTIFICATES
OF DEPOSIT
--------------
(IN THOUSANDS)
<S> <C>
3 months or less................................. $15,324
3-6 months....................................... 16,536
6-12 months...................................... 11,025
over 12 months................................... 16,375
-------
Total............................................ $59,260
=======
</TABLE>
25
<PAGE> 30
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 daily balances of each
principal category of assets, liabilities and stockholders' equity of our
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. The table is presented on a taxable equivalent
basis.
<TABLE>
<CAPTION>
1998 1997 1998/1997 CHANGE
------------------------------ ----------------------------- --------------------------
AVERAGE INTEREST REVENUE/ AVERAGE INTEREST REVENUE/ DUE TO DUE TO
BALANCE RATE EXPENSE BALANCE RATE EXPENSE VOLUME RATE(1) TOTAL
-------- -------- -------- ------- -------- -------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net loans(2 and 3).................. $268,564 10.28% 27,619 160,615 10.30% 16,549 11,123 500 11,623
-------- ----- ------- ------- ----- ------ ------ ---- ------
Securities(4):
Available for sale................ 11,562 5.95% 688 1,750 6.86% 120 673 (118) 555
Held to maturity.................. 10,929 6.39% 698 9,013 6.71% 605 129 (36) 93
-------- ----- ------- ------- ----- ------ ------ ---- ------
Total securities................ 22,491 6.16% 1,386 10,763 6.74% 725 802 (154) 648
-------- ----- ------- ------- ----- ------ ------ ---- ------
Federal funds sold.................. 14,802 5.17% 765 8,844 5.43% 480 323 (38) 285
FHLB and FRB stock.................. 2,541 7.20% 183 1,451 6.82% 99 74 22 96
Interest-bearing deposits in
banks............................. 14,575 4.54% 661 2,896 4.90% 142 573 (54) 519
-------- ----- ------- ------- ----- ------ ------ ---- ------
Total earning assets, net of
allowance for loan losses......... 322,973 9.48% 30,614 184,569 9.75% 17,995 12,895 276 13,171
===== ======= ===== ====== ====== ==== ======
Cash and due from banks............. 5,924 3,250
Allowance for loan losses........... (3,296) (2,403)
Other assets........................ 14,596 8,978
-------- -------
Total assets.................... $340,197 194,394
======== =======
Deposits:
NOW investments................... $ 19,532 2.76% 540 12,305 2.66% 327 192 21 213
Money market investments.......... 58,797 4.91% 2,886 26,033 4.94% 1,285 1,617 (16) 1,601
Savings........................... 10,811 3.22% 348 7,900 3.29% 260 96 (8) 88
Time deposits $100,000 and over..... 55,592 5.51% 3,065 28,450 6.82% 1,939 1,850 (724) 1,126
Other time deposits............... 124,382 6.00% 7,468 82,025 5.61% 4,605 2,378 485 2,863
-------- ----- ------- ------- ----- ------ ------ ---- ------
Total interest-bearing
deposits...................... 269,114 5.32% 14,307 156,713 5.37% 8,416 6,133 (242) 5,891
Non interest-bearing demand
deposits.......................... 20,462 -- -- 10,336 -- -- -- -- --
-------- ----- ------- ------- ----- ------ ------ ---- ------
Total deposits.................. 289,576 4.94% 14,307 167,049 5.04% 8,416 6,133 (242) 5,891
Federal funds purchased............. 533 5.82% 31 (31) 0 (31)
Note payable........................ 6,590 8.00% 527 2,994 8.42% 252 303 (28) 275
FHLB advances....................... 21,022 5.65% 1,187 9,395 5.53% 520 6 661 667
-------- ------- ------- ------ ------ ---- ------
Total deposits and borrowed
funds......................... 317,188 5.05% 16,021 179,971 5.12% 9,219 6,411 391 6,802
----- ------- ----- ------ ------ ---- ------
Other liabilities................... 4,859 3,302
Stockholders' equity................ 18,150 11,120
-------- -------
Total liabilities and
stockholders' equity.......... $340,197 194,393
======== =======
Net interest income................. $14,593 8,776 6,453 (115) 6,338
======= ====== ====== ==== ======
Net yield on earning assets......... 4.52% 4.75%
===== =====
</TABLE>
- -------------------------
(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 $1,719,000 in 1998 and $1,003,000
in 1997.
(3) Nonaccrual loans are included in average loan balances and the associated
income (recognized on a cash basis) is included in interest.
(4) We do not have any tax-exempt securities.
26
<PAGE> 31
CUMBERLAND BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS, NET INTEREST REVENUE AND
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE, CONTINUED
<TABLE>
<CAPTION>
1997 1996 1997/1996 CHANGE
------------------------------ ----------------------------- --------------------------
AVERAGE INTEREST REVENUE/ AVERAGE INTEREST REVENUE/ DUE TO DUE TO
BALANCE RATE EXPENSE BALANCE RATE EXPENSE VOLUME RATE(1) TOTAL
-------- -------- -------- ------- -------- -------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net loans(2 and 3).................. $160,615 10.30% 16,549 76,091 11.11% 8,454 9,391 (1,296) 8,095
-------- ----- ------ ------- ----- ------ ------ ------ ------
Securities(4):
Available for sale................ 1,750 6.86% 120 5,339 6.33% 338 (227) 9 (218)
Held to maturity.................. 9,013 6.71% 605 210 5.71% 12 503 90 593
-------- ----- ------ ------- ----- ------ ------ ------ ------
Total securities................ 10,763 6.74% 725 5,549 6.31% 350 276 99 375
-------- ----- ------ ------- ----- ------ ------ ------ ------
Federal funds sold.................. 8,844 5.43% 480 8,475 5.12% 434 19 27 46
FHLB and FRB stock.................. 1,451 6.82% 99 468 7.05% 33 69 (3) 66
Interest-bearing deposits in
banks............................. 2,896 4.90% 142 2,979 2.75% 82 (2) 62 60
-------- ----- ------ ------- ----- ------ ------ ------ ------
Total earning assets, net of
allowance for loan losses..... 184,569 9.75% 17,995 93,562 10.00% 9,353 9,753 (1,111) 8,642
===== ====== ===== ====== ====== ====== ======
Cash and due from banks............. 3,250 1,033
Allowance for loan losses........... (2,403) (991)
Other assets........................ 8,978 3,710
-------- -------
Total assets.................... $194,394 97,314
======== =======
Deposits:
NOW investments................... 12,305 2.66% 327 7,870 2.15% 169 95 63 158
Money market investments.......... 26,033 4.94% 1,285 6,812 2.88% 196 553 536 1,089
Savings........................... 7,900 3.29% 260 6,541 2.94% 192 40 28 68
Time deposits $100,000 and over..... 28,450 6.82% 1,939 19,496 6.13% 1,196 549 194 743
Other time deposits................. 82,025 5.61% 4,605 38,435 6.38% 2,453 2,782 (630) 2,152
-------- ----- ------ ------- ----- ------ ------ ------ ------
Total interest-bearing
deposits...................... 156,713 5.37% 8,416 79,154 5.31% 4,206 4,019 191 4,210
Non interest-bearing demand
deposits.......................... 10,336 -- 0 6,471 0.00% 0 0 0 0
-------- ----- ------ ------- ----- ------ ------ ------ ------
Total deposits.................. 167,049 5.04% 8,416 85,625 4.91% 4,206 4,019 191 4,210
Federal funds purchased............. 533 5.82% 31 0 0.00% 0 0 31 31
Note payable........................ 2,994 8.42% 252 729 8.50% 62 193 (3) 190
FHLB advances....................... 9,395 5.53% 520 3,972 6.57% 261 4 255 259
-------- ------ ------- ------ ------ ------ ------
Total deposits and borrowed
funds......................... 179,971 5.12% 9,219 90,326 5.01% 4,529 4,216 474 4,690
----- -----
Other liabilities................... 3,302 869
Stockholders' equity................ 11,120 6,119
-------- -------
Total liabilities and
stockholders' equity.......... $194,393 97,314
======== =======
Net interest income................. $8,776 4,824 5,537 (1,585) 3,952
====== ====== ====== ====== ======
Net yield on earning assets......... 4.75% 5.16%
===== =====
</TABLE>
- -------------------------
(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 $1,003,000 in 1997 and $424,000 in
1996.
(3) Nonaccrual loans are included in average loan balances and the associated
income (recognized on a cash basis) is included in interest.
(4) We do not have any tax-exempt securities.
27
<PAGE> 32
EQUITY AND CAPITAL RESOURCES
We were "well capitalized" for leverage and Tier One capital calculations;
we were "adequately capitalized" for total capital to risk-weighted assets
purposes. Our bank subsidiaries were considered "well capitalized" for
regulatory purposes during 1997 and 1998. Our leverage capital ratio was 5.31%
in 1998 and 5.77% in 1997, with stockholders' equity of $19.7 million at
year-end 1998. For a discussion of capital requirements see "Supervision and
Regulation -- Capital Requirements." We declared a 10% stock dividend effective
March 26, 1999. Also in March 1999, we sold 100,000 shares of stock for
$1,000,000 to a group of Franklin, Tennessee investors to support the new
Franklin branch opened there by The Community Bank.
There have been no cash dividends paid during 1997 or 1998. We do not
intend to pay cash dividends on common stock for the next several years. Our
current strategy is to support equity growth by retaining net profits rather
than paying cash dividends.
Items that represent common stock equivalents include 403,260 common stock
options outstanding at December 31, 1998, adjusted to reflect the March 1999 10%
stock dividend. At December 31, 1999, there were 146,740 additional common
shares available for grant under our 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Return on average assets....................... 0.89% 0.95% 0.86%
Return on average equity....................... 16.63% 16.57% 13.70%
Average equity to average assets ratio......... 5.34% 5.72% 6.29%
Dividend payout ratio.......................... -- -- --
</TABLE>
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 1997 was 96.1% and for 1998 was 92.7%. We do not know of
any trends or demands that are reasonably likely to result in liquidity
increasing or decreasing.
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<PAGE> 33
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
1998 follows:
<TABLE>
<CAPTION>
OVER 5
1-90 DAYS 91-365 DAYS 1-5 YEARS YEARS TOTAL
--------- ----------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net................ $111,560 82,314 91,092 11,581 296,547
Securities available for
sale................... -- -- 7,005 4,796 11,801
Securities held to
maturity............... -- 500 2,560 5,872 8,932
Federal funds sold........ 12,750 -- -- -- 12,750
Interest-earning
deposits............... 21,996 -- -- -- 21,996
-------- ------- ------- ------ -------
Total interest earning
assets............... $146,306 82,814 100,657 22,249 352,026
======== ======= ======= ====== =======
Interest bearing
liabilities:
Interest bearing demand
deposits............... $105,263 -- -- -- 105,263
Savings deposits.......... 10,589 -- -- -- 10,589
Time deposits............. 48,477 86,631 50,741 -- 185,849
FHLB borrowings........... -- 4,836 3,138 10,000 17,974
Notes payable............. -- 453 4,135 2,645 7,233
-------- ------- ------- ------ -------
Total interest bearing
liabilities.......... $164,329 91,920 58,014 12,645 326,908
======== ======= ======= ====== =======
Rate sensitive gap.......... $(18,023) (9,106) 42,643 9,604 25,118
-------- ------- ------- ------ -------
Rate sensitive cumulative
gap....................... $(18,023) (27,129) 15,514 25,118 25,118
Cumulative gap as a
percentage of earnings
assets.................... -5.12% -7.71% 4.41% 7.13%
======== ======= ======= ====== =======
</TABLE>
As shown in the table, we have a cumulative negative GAP of approximately 5.1%
and 7.7% at the end of 90 days and one year, respectively. Management believes
that this level of negative GAP is appropriate since many of the liabilities
which are immediately repriceable can be effectively repriced more slowly than
the assets which are contractually immediately repriceable in a rising rate
environment. Conversely, those liabilities can often be repriced downward more
rapidly than contractually required assets repricing in a downward rate
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.
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<PAGE> 34
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, 1998. 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.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE --
YEAR ENDING DECEMBER 31,
----------------------------
2000 TO 2002 TO FAIR
1999 2001 2003 THEREAFTER TOTAL VALUE
-------- ------- ------- ---------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned
interest:(1)
Variable rate.......... $117,340 5,080 1,401 0 123,821 123,821
Average interest
rate................ 9.17% 7.95% 8.61% -- 9.11%
Fixed rate............. 76,533 38,918 45,693 11,582 172,726 174,079
Average interest
rate................ 9.40% 9.79% 9.32% 8.40% 9.40%
Securities(2)............ 500 3,587 5,978 10,668 20,733 20,751
Average interest
rate................ 5.30% 5.10% 5.35% 6.22% 5.75%
Federal funds sold....... 12,750 -- -- -- 12,750 12,750
Average interest
rate................ 4.75% -- -- -- 4.75%
Interest-earning deposits
in financial
institutions........... 21,996 -- -- -- 21,996 21,996
Average interest
rate................ 4.80% -- -- -- 4.80%
Interest-bearing
deposits............... 250,960 41,967 8,774 -- 301,701 303,111
Average interest
rate................ 5.54% 5.89% 6.02% -- 5.60%
Other borrowings......... 5,288 5,205 2,068 12,644 25,207 25,146
Average interest
rate................ 6.48% 6.55% 8.00% 5.98% 6.37%
</TABLE>
- -------------------------
(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.
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<PAGE> 35
YEAR 2000
OVERVIEW. Many existing computer systems and software products use only a
two digit field to identify the year. These programs were designed without
considering the impact once the calendar rolls over to "00". If not corrected,
computer applications could fail or create inaccurate results by or at the Year
2000. As a result, computer systems and software may need to be upgraded to
comply with Year 2000 requirements or risk system failure or miscalculations
causing disruptions of normal business activities. The Federal Reserve and the
FDIC have required that we and our banks accomplish specific Year 2000 actions
by specific dates.
STATE OF READINESS. In the fall of 1997, we began to make preliminary
assessments of the Year 2000 readiness of all of our information technology
systems, including the computer hardware and software that support our financial
and administrative systems, as well as our non-information technology systems.
Our plan for addressing Year 2000 has five phases as prescribed by federal
banking authorities:
- AWARENESS of the Year 2000 issues;
- ASSESSMENT of which hardware and software were mission critical and what
hardware and software were in need of upgrade or replacement;
- RENOVATION, repair or replacement of non-compliant hardware and software;
- TESTING of existing software and hardware and remedial action taken; and
- IMPLEMENTATION and verification of the effectiveness of contingency
plans.
We have completed the testing phase for both information technology and
non-information technology systems and are currently in the final phase of our
Y2K plan.
We do not have internally developed software. Consequently, we have
reviewed the software obtained from third parties incorporated into our
products, and have sought assurances from vendors that this licensed software is
Year 2000 compliant. In particular, our outside service bureau, FIDATA, and our
primary software vendor, Information Technology, Inc., have provided assurances
that their programs are Year 2000 compliant. Additionally, we have tested each
of these programs to validate FIDATA's and ITI's representations. Finally, we
have identified and found our internal non-information technology systems to be
Year 2000 compliant.
COSTS. Since September 1997, we have expensed more than $100,000 in actual
costs in connection with identifying, evaluating or addressing Year 2000
compliance issues. The majority of this cost has been to replace or upgrade
non-compliant systems such as older PCs and certain banking equipment. Most of
our other expenses have related to, and are expected to continue to relate to,
the operating costs associated with time spent by employees implementing our
contingency plans. We do not possess information necessary to determine the loss
of productivity or reduction in earnings due to meeting these compliance
requirements.
WORST-CASE SCENARIO. We believe that our most reasonably possible
worst-case scenario would occur if we incurred a complete loss of FIDATA and
ITI's services, and each of their back-up contingency plans failed to work
properly. This could potentially affect our ability to handle daily banking
business for our customers in the first quarter or second quarter of 2000
depending on the nature of the affected systems. If we determine that FIDATA or
ITI are unable to meet processing requirements on a timely basis, we would
utilize alternative back-up processing systems which would cause us to incur
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<PAGE> 36
additional costs. However, there can be no assurances that the back-up
contingency systems will function properly and in the manner intended. We will
continue to monitor this and any other areas of exposure and develop contingency
plans accordingly.
RISKS. We are not currently aware of any Year 2000 compliance problems
relating to our systems' operation that would harm our business, results of
operations and financial conditions, other than previously discussed. We can not
assure you that we will not discover Year 2000 compliance issues in our hardware
or purchased software that will require substantial revision. In addition, we
cannot assure you that third-party software, hardware or services incorporated
into our operations will not need to be revised or replaced, all of which could
be time consuming and expensive.
The failure to modify or replace our third-party software, hardware, or
services on a timely basis could result in lost revenues, increased operating
costs, the loss of customers, or other business interruptions, any of which
could adversely affect results of operations and financial condition. Moreover,
the failure to adequately address Year 2000 compliance issues in our operations
could result in claims of mismanagement, misrepresentation or breach of contract
and related litigation, which could be costly and time-consuming to defend.
In addition, there can be no assurances that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. The failure by such entities to
be Year 2000 compliant could result in a systemic failure beyond our control,
such as prolonged financial system, telecommunications or electrical failure.
This could prevent our customers from accessing our banks' systems, which could
adversely affect our results of operations and financial condition. If these
systems were to fail, we would provide services to our clients on a manual basis
until our Year 2000 issues could be corrected.
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<PAGE> 37
BUSINESS
GENERAL
We are a Tennessee bank holding company headquartered in Nashville,
Tennessee. We conduct our banking business through three (3) bank subsidiaries:
Cumberland Bank, a Tennessee state chartered bank with five (5) offices in Smith
and Sumner Counties, Tennessee, BankTennessee, a Tennessee state chartered bank
with five (5) offices in Shelby and Lauderdale Counties, Tennessee and The
Community Bank, a Tennessee state chartered bank which merged with us, along
with BankTennessee in 1997, with three (3) offices in Davidson and Williamson
Counties, Tennessee. Our Tennessee banks are collectively referred to as our
bank subsidiaries or our banks. We also own a fifty percent (50%) interest in
The Murray Bank, a federal savings bank, which opened its doors June 15, 1999.
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 following table represents our banks' growth in branch offices and
total assets from the years ended December 31, 1993 and December 31, 1996 to
June 30, 1999. Data for BankTennessee and The Community Bank for 1993 and 1996
are for their respective predecessor entities.
<TABLE>
<CAPTION>
12/31/93 12/31/96 6/30/99
------------ ------------ ------------
<S> <C> <C> <C>
BankTennessee
Branch Offices..................... 2 3 5
Total Assets....................... $ 72,200,000 $ 97,400,000 $160,200,000
Cumberland Bank
Branch Offices..................... 2 4 5
Total Assets....................... $ 63,500,000 $102,700,000 $157,600,000
The Community Bank
Branch Offices..................... 1 1 3
Total Assets....................... $ 11,500,000 $ 35,300,000 $ 89,300,000
Total
Bank Branch Offices................ 5 8 13
Bank Subsidiaries Total Assets..... $147,200,000 $235,400,000 $407,100,000
</TABLE>
We have six (6) bank branch offices that are less than three years old as
of June 30, 1999. 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 (20) years of banking experience in
Tennessee.
Cumberland Bank has been in business in Smith County for more than twenty
(20) years. It was originally organized as a state savings and loan association
in 1975 in Carthage and converted to a Tennessee state bank in 1991. Its first
office was in Carthage with later expansion to Gallatin. Cumberland Bank also
has a well established base in Sumner County with offices in Gallatin, White
House, and most recently Portland, Tennessee. Another office has been opened in
Gordonsville in Smith County. Cumberland
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<PAGE> 38
Bank expects to open two additional offices before September 30, 1999, one in a
Cross Plains, Robertson County, Tennessee grocery store and one in Lafayette,
Macon County, Tennessee. Cumberland Bank provides lending and other financial
services through its subsidiary, Cumberland Finance, Inc., which has offices in
Gallatin and Murfreesboro, Tennessee. Cumberland Bank offers investment services
and other financial services through its subsidiary CBC Financial Services,
Inc., which has offices in Carthage and Gallatin, Tennessee. CBC Financial
Services manages and owns a fifty percent (50%) interest in a full-service,
independent insurance agency, InsureTennessee, Inc. InsureTennessee represents
more than twenty (20) different companies offering automobile, home life,
health, disability and other types of insurance. InsureTennessee shares an
office location in Carthage with CBC Financial Services and recently moved into
a new office in Collierville, Tennessee in BankTennessee's building on New
Byhalia Road.
BankTennessee was originally organized as a federal savings association,
First Federal Savings and Loan Association in 1934 and later changed its name to
First Federal Bank of Memphis. It converted to a Tennessee state bank in 1997.
BankTennessee's senior management team has over seventy-five (75) years of
banking experience, with three former bank presidents on staff. BankTennessee is
one of Tennessee's largest Small Business Administration lenders according to
"SBA Lenders." Also, residential construction loans account for a substantial
percentage of BankTennessee's loan portfolio compared to other Tennessee banks.
BankTennessee's growth is evidenced by current construction of two new bank
buildings -- a $2.6 million new main office in Collierville and a new branch
office in Ripley, Tennessee.
The Community Bank was originally organized as a federal savings
association, First Southern Federal Savings Bank, and later First Federal Bank
of Nashville, in 1976. It converted to a Tennessee state bank in 1997. It has
three (3) offices, one in Nashville, Tennessee, opened in 1976, one in
Brentwood, Williamson County, opened in 1996, and one in Franklin, Williamson
County, opened in 1999.
Except for Smith, Lauderdale and northern Sumner Counties which are
predominantly rural, our banks are located in growing metropolitan areas
including Collierville and eastern Shelby County in Metropolitan Memphis, and
Green Hills, Brentwood, Franklin and Gallatin in Metropolitan Nashville.
Management believes that the markets in which our banks operate offer an
environment for continued growth with respect to our target market, which
includes local consumers, professionals and small businesses. Our banks do not
have a concentration of deposits obtained from a single person or entity, or a
small group of persons or entities, the loss of which would have a material
adverse effect on our business or the business of our banks. Construction and
development loans of approximately $53 million made up 18% of our loan portfolio
as of December 31, 1998.
We have entered into a joint venture agreement with BancKentucky, Inc., a
Kentucky unitary thrift holding company, under which we have acquired a fifty
percent (50%) interest in The Murray Bank, a de novo federal savings bank
located in Murray, Calloway County, Kentucky. BancKentucky owns the remaining
interest in the bank. The venture became effective as of June 15, 1999 with the
opening of The Murray Bank for business on that date. For additional information
on the joint venture with BancKentucky and the operation of The Murray Bank,
please see "Business -- The Murray Bank."
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<PAGE> 39
OPERATIONAL STRATEGIES
We operate according to the following business strategies:
LOCAL DECISION MAKING. Foundational to our business strategy is an
emphasis on decision making at the local branch level. Each of our banks has a
separate board comprised of local businesspeople allowing it to be responsive to
local community needs and trends. Each branch manager and individual loan
officer is given authority and discretion to price loans and services and to
approve loans in order to respond quickly and efficiently to the needs of each
of our banks' customers.
RELATIONSHIP BANKING. We focus on serving Tennessee businesses and
individuals through a banking relationship characterized by long-term,
multi-service relationships. Drawing upon this experience and the customer
networks of their loan officers and assisted by centralized information
technology, our banks seek to effectively price and provide related bank
services to enhance overall profitability. Our banks seek to compete with other
providers of financial services primarily through superior relationship
management, rather than price competition.
FULL LINE OF BANKING PRODUCTS. We seek to offer the personalized service
and local decision making characteristic of community banks while providing a
greater diversity of financial services associated with regional and
super-regional financial institutions. We expect to continue to enhance our
product mix through both strategic acquisitions and internal development. The
creation and development of Cumberland Finances, CBC Financial Services, and
InsureTennessee allows for the establishment of nontraditional structured
lending as well as insurance and investment services not otherwise connected
with traditional full-service banks.
MARKET AREAS
We operate principally in four (4) market areas in Tennessee: Shelby
County, Smith County, Sumner County, and Southern Davidson/Williamson County. We
also have a bank branch in Lauderdale County and a finance company office in
Rutherford County. The following discussion of market areas contains the most
recent information available from filings with the OTS and FDIC as compiled by
Sheshunff Information Services, Inc. Population figures and average household
income are estimated as of 1998 average. Employment statistics come from the
Department of Employment Security Public Information Office and are annual
averages for 1998.
SHELBY COUNTY. Our largest market area is Shelby County which is served
through BankTennessee. From June 1995 through June 1998, total deposits for all
commercial banks and savings institutions in the Shelby County market have
increased approximately 33% from $10.3 billion to $13.7 billion. We have four
(4) offices in Shelby County and approximately 38% of our deposits were located
there at December 31, 1998. BankTennessee competes with several regional and
super-regional banking institutions as well as numerous smaller community banks,
and had a less than 1% share of bank deposits in this market as of June 30,
1998.
Shelby County, the most populous county in Tennessee at 1998, had an
estimated population of 873,707 and an estimated average household income of
approximately $54,361, the third highest per capita income in Tennessee. The
average unemployment rate in 1998 for the county was 3.7%.
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<PAGE> 40
The economic base of Shelby County is a mix of manufacturing, distribution,
retail, financial and other professional services.
SMITH COUNTY. We serve the Smith County market through Cumberland Bank.
From June 1995 to June 1998, total deposits for all commercial banks and savings
institutions in Smith County have increased approximately 28% from $216 million
to $279 million. We currently have two (2) branch offices in Smith County and
20% of our deposits were located there at December 31, 1998. As of June 30,
1998, Cumberland Bank had a 22.1% share of the Smith County bank deposit market.
Smith County is located 50 miles east of Nashville, Tennessee and is just
outside of the Nashville metropolitan statistical area. The county seat is
Carthage, which is also the County's largest community, with a population of
2,731. While farming, mining, and agribusiness remain an important and vital
part of Smith County's economy, commercial and industrial activities have gained
in economic importance. Smith County had an estimated population of 16,090, an
average household income of $39,237 and an average unemployment rate in 1998 of
3.7%. The Smith County labor pool is highly independent and rooted in a strong,
rural work ethic tradition. Manufacturing accounts for over 35% of total
employment. No significant change is expected in the unemployment rate as
industry and business continues to grow in Smith County.
SUMNER COUNTY. We serve the Sumner County market through Cumberland Bank,
with branches located in Gallatin, White House, and Portland, Tennessee. Also,
two of Cumberland Bank's three subsidiaries, CBC Financial Services and
Cumberland Finance, both have offices located in Gallatin. From June 1995 to
June 1998, total deposits for all commercial banks and savings institutions in
Sumner County have increased approximately 8%, from $944 million to $1.02
billion. At December 31, 1998, approximately 18% of our deposits were located in
Sumner County. As of June 30, 1998, Cumberland Bank had a 5.16% share of the
Sumner County bank deposit market. Sumner County is one of eight counties in the
Nashville metropolitan statistical area. The largest cities in Sumner County are
Gallatin and Hendersonville. Sumner County had an estimated population of
124,176, and an average household income of $55,649. The average unemployment
rate for Sumner County in 1998 was 3.3%.
The economic base in Sumner County is primarily manufacturing, with
additional emphasis on administrative services and retail sales.
SOUTHERN DAVIDSON COUNTY AND WILLIAMSON COUNTY. We serve Southern Davidson
and northern Williamson Counties through The Bank of Brentwood, The Bank of
Franklin, and The Bank of Green Hills. Since 1995, total deposits for all
commercial banks and savings institutions in Davidson County have increased
approximately 10%, from $8.71 billion to $9.77 billion. The Bank of Green Hills
has one location in Davidson County, and 12% of our deposits are located there.
As of June 30, 1998, the Bank of Green Hills had a less than 1% share of the
Davidson County bank deposit market where it competes with several regional and
super-regional banking institutions.
From June 1995 to June 1998, total deposits for all commercial banks,
savings institutions and branches of foreign banks in Williamson County have
decreased approximately 4% from $1.80 billion to $1.73 billion. The Bank of
Brentwood and The Bank of Franklin are located in Williamson County, and 8% of
our deposits are located there. As of June 30, 1998, The Bank of Brentwood had a
less than 1% share of the Williamson County bank deposit market. The Bank of
Franklin was not yet established at that time.
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<PAGE> 41
Davidson County, home to Nashville, had an estimated population of 538,916,
the second most populous county in Tennessee in 1998, and had an estimated
average household income of approximately $60,387, the second highest per capita
income of any county in the state. Williamson County is one of the eight
counties in the Nashville metropolitan statistical area. It had an estimated
population of 112,747 in 1998, and an estimated average household income of
$85,301, the highest of any county in the state. According to the U.S. Census
Bureau, between 1990 and 1998, the cities of Franklin and Brentwood in
Williamson County increased population by 53.9% and 42.3% respectively. The
average unemployment rate for Davidson County in 1998 was 2.5% and in Williamson
County was 1.7%. The economic base of Davidson and Williamson Counties is a mix
of government, professional and financial services, healthcare, tourism and
other service industries and manufacturing.
LAUDERDALE COUNTY. We serve Lauderdale County through a BankTennessee
office in Ripley. From June 1995 to June 1998, total deposits for all commercial
banks and savings institutions in Lauderdale County have increased approximately
4% from $282 million to $292 million. As of June 30, 1998, BankTennessee had a
2.02% share of the Launderdale County bank deposit market. Lauderdale County had
an estimated population of 23,917, and an estimated average household income of
$31,646 in 1998. The average unemployment rate for Lauderdale County in 1998 was
8.1%. The economic base of Lauderdale County is primarily manufacturing and
agriculture.
SELECT EMPLOYEES AND DIRECTORS OF OUR BANKS
We have several individual employees throughout our organization, as
identified below, who perform vital administrative and lending services that
contribute to the overall success of our banks.
<TABLE>
<S> <C>
Cumberland Bank
Jeff Bond bank-wide administrative supervision
Larry Hensley Smith County consumer lending supervision
Shelia Ferrell bank-wide administrative oversight
Dan Herron Gallatin office lending and administration
Patrick Suttle Portland office lending and supervision
Billy Jackson White House office lending and supervision
The Community Bank
Larry Kain bank-wide lending supervision
Marry Bennie Wilson construction lending supervision
Chuck Issacs Franklin lending and administrative supervision
Janice Simpson Green Hills lending and administrative supervision
Paul Pratt bank director and business development
BankTennessee
Wright Cox, III bank-wide mortgage supervision
Martha Owen bank-wide administrative supervision
Randy Lankford bank director and business development
</TABLE>
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<PAGE> 42
LENDING AND DEPOSIT ACTIVITIES
Our banks provide a range of retail and commercial banking services
designated to meet the borrowing and depository needs of small and medium size
businesses and consumers in the communities serviced by them. The interest rates
charged on loans vary with the degree of risk, maturity and amount of the loan,
and are further subject to competitive pressures, money market rates,
availability of funds, and government regulations. Our banks have no foreign
loans or highly leveraged transaction loans, as defined by the Federal Reserve.
All of the loans in our banks' loan portfolios have been originated by our
banks. Each of our banks conducts its lending activities pursuant to the loan
policies adopted by our board of directors. These loan policies grant individual
loan officers authority to make secured and unsecured notes and loans in
specific dollar amounts with those amounts being lower for unsecured loans.
Larger loans must be approved by senior officers or various loan committees. Our
banks' management information systems and loan review policies are designed to
monitor lending sufficiently to ensure adherence to our banks' loan policies.
COMMERCIAL REAL ESTATE LOANS. Our banks' commercial real estate loans
include permanent mortgage loans on commercial and industrial properties and
development loans. These loans are originated on both an annual line of credit
basis and on a fixed-term basis generally ranging from one to seven years. In
making lending decisions, our banks generally consider, among other things, the
overall quality of the loan, the credit of the borrower, the value of the real
estate, the projected income stream of the property and the reputation and
quality of management constructing or administering the property. No one factor
is determinative and such factors may be accorded different weights in any
particular lending decision. As a general rule, our banks also require that
these loans be guaranteed by one or more of the individuals who have a
significant equity investment in the property. Commercial real estate loans
generally have prime-based interest rates which adjust more rapidly to interest
rate fluctuations and bear higher rates of interest than other types of loans.
Accordingly, income from this type of loan should be more responsive to the
changes in the general level of interest rates.
RESIDENTIAL REAL ESTATE LOANS. Residential mortgage products include
adjustable rate as well as conventional, fixed rate loans with terms of fifteen
to thirty years. Residential mortgage loans must satisfy underwriting standards
that typically require that the homes pledged to secure the loans must be either
owner occupied or investor property which are single family residences, the
value of which has been determined by appraisal, and based on down payments and
financial responsibility of the buyer. Each of our banks is a member of the
Federal Home Loan Bank of Cincinnati. Our banks are active in the sale of
mortgage loans in the secondary market. These sales accounted for 23.9% of our
total non-interest income in 1998.
COMMERCIAL BUSINESS LOANS. Our banks' commercial lending activities
generally involve small to medium size companies located in Smith, Shelby,
Davidson, Williamson and Sumner Counties, Tennessee. The banks make both secured
and unsecured loans for working capital, equipment purchases and other general
purposes, although the majority of commercial lending is done on a secured
basis. Typically, these commercial business loans are for under $500,000 and are
secured by the receivables, inventory, equipment, and/or general corporate
assets of the borrowers. These loans are originated on both an annual line of
credit basis and on a fixed-term basis ranging from one to seven years.
Commercial business loans typically have prime-based interest rates and carry a
higher degree of credit
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risk than residential mortgage loans because they are more likely to be
adversely affected by unfavorable economic conditions. Over the past year ending
December 31, 1998, we have seen an approximately 83.1% increase in our
commercial business lending. Commercial business loans constituted 22.5% of our
loan portfolio at March 31, 1999.
CONSUMER LOANS. Types of consumer loans originated by our banks, other
than residential real estate loans, include personal installment loans
(generally secured by motor vehicles and having fixed interest rates), home
equity loans (originated on both a line of credit basis and on a fixed-term
basis ranging from five to fifteen years) and personal unsecured lines of
credit. Consumer loans offered typically involve a higher degree of credit risk
than residential loans secured by first mortgages, but also carry higher yields
and shorter maturities.
CONSTRUCTION LOANS. Our banks originate construction loans for land
acquisition, residential development or income-producing property development.
We originate these loans both on a fixed and variable basis for a term generally
of one year. We consider this type of lending to have higher credit risks than
single-family residential lending because the principal is concentrated in a
limited number of loans and borrowers and repayment of these loans is dependent
on the successful operation of the related real estate project and thus may be
subject, to a greater extent, to adverse conditions in the real estate market or
the economy, generally. Our banks' risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value upon completion of the project and the estimated cost of the project. If
the estimated cost of construction or development proves to be inaccurate, our
banks may be compelled to advance funds beyond the amount originally committed
to permit completion of the project. If the estimate of value proves to be
inaccurate, our banks may be confronted, at or prior to the maturity of the
loan, with a project value which is insufficient to assure full repayment. As
loan payments become due, the cash flow from the project may not be adequate to
service total debt and we may have to agree with the borrower to modify the
terms of the loan. In addition, by nature these loans are generally less
predictable and more difficult to evaluate and monitor and collateral securing
them may be difficult to dispose of. Our banks have sought to minimize these
risks by lending primarily to established companies and generally restricting
such loans to their primary market area.
DEPOSIT ACTIVITIES. Our banks offer several types of deposit and personal
banking programs designed to attract both short-term and long-term funds from
the general public by providing an assortment of accounts and rates, including
the following accounts: commercial and retail demand deposit accounts; NOW
Accounts; IRAs; regular savings accounts; other retail deposit services such as
fixed rate, fixed maturity certificates of deposit, money market accounts, and
ATMs, and other personal miscellaneous services such as safe deposit boxes,
night depository services, traveler's checks, merchant credit cards, direct
deposit of payroll, official bank checks, money orders, and U.S. savings bonds.
Our banks' deposit accounts are insured by the FDIC up to $100,000 per account.
A majority of the depositors of our banks are from the local market areas
surrounding each of their offices.
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
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directors, we depend, to a great degree, upon the judgment of our loan officers
and senior management at each bank to assess and control lending risks.
Individual loan officers have discretionary authority to approve certain
loans at each of our banks without prior approval. The discretionary limit at
BankTennessee varies by loan officer based upon seniority. For example, the
bank's president has discretionary approval authority up to $750,000 for some
secured loans, while executive vice presidents have discretionary approval
authority up to $250,000 for some secured loans. At Cumberland Bank, some
individual loan officers have discretionary approval authority up to $100,000 on
some secured loans while the bank's president has discretionary approval
authority up to $500,000 on secured loans. At The Community Bank, some
individual loan officers have discretionary approval authority of up to $250,000
on some secured loans.
Each of our banks utilize a loan committee comprised of officers and
outside bank directors to review loan requests exceeding the discretionary limit
of the loan officer or branch manager, or for which the loan officer or branch
manager chooses not to exercise his or her discretionary authority. Each of the
banks also has its own officer loan committee, reflecting our emphasis on local
control and decision making.
Loans are reviewed periodically by both our banks' senior lending officers
and our independent external auditors. We utilize this process to grade each of
our banks' loans and determine the adequacy of our banks' loan loss reserve.
ASSET/LIABILITY MANAGEMENT
Each of our banks has a committee comprised of its senior officers and
outside directors charged with managing assets and liabilities. 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 any variances and reporting
management's course of action in light of any budget variances. Each of our
banks' boards of directors reviews our asset liability management policy
annually.
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
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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 the bond division of First Tennessee
National Bank and by Vining-Sparks IBG, a fixed-income brokerage firm.
NON-DEPOSITORY BUSINESS
CUMBERLAND FINANCE, INC. Cumberland Finance, a wholly-owned subsidiary of
Cumberland Bank, was formed in 1994 for the purpose of offering high risk,
higher yield credit to people located in Smith County, Tennessee. In 1995,
Cumberland Finance expanded its operations to Murfreesboro in Rutherford County,
Tennessee. Cumberland Finance was profitable in its first year of operations but
has struggled financially since then due to problems associated with growth and
underwriting functions. Recent changes in local management indicate a trend
toward profitability.
CBC FINANCIAL SERVICES, INC. CBC Financial Services, a wholly-owned
subsidiary of Cumberland Bank, opened its first office in Carthage, Tennessee in
1993 and thereafter expanded its operations to Gallatin, Tennessee in 1997. It
provides both full-service brokerage services and financial estate planning
services to customers within Smith and Sumner Counties, Tennessee. CBC Financial
Services has experienced operating losses in recent years as a result of costs
attributable to its growth, but expects to be profitable in 2000, based upon
current trends of increased gross revenue and decreased monthly losses. Under
its current management, CBC Financial Services has grown to a business with over
$24 million in assets under administration as of March 31, 1999.
INSURETENNESSEE, INC. InsureTennessee is a fully-licensed insurance
agency, owned fifty percent (50%) by CBC Financial Services and fifty percent
(50%) by a long-time West Tennessee insurance agent. It provides insurance
products to customers in Shelby, Sumner and Smith Counties, Tennessee through
its offices in Carthage, Gallatin and most recently Memphis, Tennessee.
InsureTennessee experienced operating losses the past year as a result of costs
attributable to its growth, but expects to be profitable in 2000, based upon
current trends of increased gross revenue and decreased monthly losses. Over the
last twelve months, InsureTennessee has more than doubled its personnel.
THE MURRAY BANK
On October 1, 1998, we entered into a joint venture with BancKentucky for
the purposes of forming and operating a federal savings bank pursuant to Section
5(c) of the Home Owners Loan Act, as amended. By virtue of the joint venture, we
own a fifty percent (50%) interest in the voting common stock of The Murray Bank
a federal savings bank located at 1000 Whitnell Street, Murray, Kentucky.
BancKentucky owns the additional fifty percent (50%) of The Murray Bank. The
Murray Bank opened for business to the public on June 15, 1999.
Of the 20,000 shares of common stock, no par value issued by The Murray
Bank, we acquired 10,000 of these shares at $215 per share for a total
consideration of $2.15 million. The board of directors of The Murray Bank
consists of thirteen (13) directors, of which four (4) have been designated by
us. Under the terms of our agreement with BancKentucky, we also provide
investment, accounting, auditing, human resource management, and loan review
services to The Murray Bank on a fee for services basis, and
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will continue to do so as long as we have beneficial ownership of at least fifty
percent (50%) of the voting stock of The Murray Bank.
FUTURE GROWTH
Our objective is to become a leading provider of financial services
throughout Tennessee and parts of Kentucky through our current and possible
future bank subsidiaries, and our nondepository businesses.
CURRENT MARKET AREAS. Our primary growth strategy is to enhance our core
banking business in the markets we already serve. We expect to accomplish this
by expanding our physical branches in those markets, as shown by our new and
larger branch buildings in Collierville and Ripley, Tennessee, as well as our
new bank branch in Franklin, Tennessee. We also believe we can continue to
capitalize on the lending experience of our senior bank officers to generate
loan growth. We believe that our emphasis on decision making at the local branch
level and the quality of our relationship banking are foundational to local bank
growth.
We plan to continue expansion and development of our non-depository
businesses, Cumberland Finance, CBC Financial Services, and InsureTennessee, in
the communities our banks serve. We have seen these operations expand over the
last five years at an aggregate rate of one additional office per year. We
expect all of these operations to achieve profitability within the next year. We
are already looking for possible new markets for these businesses as well as for
new business opportunities for us and our banks.
NEW MARKET AREAS. In order to grow our company throughout the state of
Tennessee and into Kentucky as we would like, we intend to open de novo branches
of our banks in new market areas as well as acquire existing banks and bank
branches of other banks. By September 1999, we expect to open two new branches
of Cumberland Bank, one in Lafayette, Macon County, Tennessee and one in a
grocery store in Cross Plains, Robertson County, Tennessee. In addition, we
recently have had discussions with other West and Middle Tennessee banks about
possible acquisitions and expect to continue to seek other opportunities to
expand our banking business into new Tennessee markets. Also, based upon the
success we expect to have with The Murray Bank, we want to explore new
opportunities to enter into joint ventures with other Tennessee and Kentucky
investor groups to open de novo banks or savings institutions.
We believe that our joint venture with BancKentucky, our branch expansion
plans and our plans for future joint ventures and acquisitions are in our
shareholders' best interests. We also believe that our continued growth through
such acquisitions will provide a greater market presence, and therefore greater
flexibility and financial service capabilities in order to enhance performance
and opportunities for profitable growth and allow us to better compete in the
changing and competitive financial services industry.
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. Additional
significant competition for savings deposits comes from other investment
alternatives, such as money market mutual funds and corporate and government
securities. Primary factors in competing for loans are the range and quality of
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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 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 directly to our customers. Also, consumer finance companies and mortgage
companies are not subject to the same kind of regulatory restrictions as our
banks. We further believe that the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 has increased, and will continue to increase, competitive
pressures in each of our banks' markets by permitting entry of additional
competitors.
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 with smaller community banks.
SEASONALITY
We do not believe that the deposits or the business of the banks in general
are seasonal in nature. The deposits may, however, vary with the local and
national economy. Deposits may also be temporarily reduced later this year by
concerns about the Year 2000 issue. We believe that this should not have a
material effect on our planning and policy making for each of our banks.
EMPLOYEES
At December 31, 1998, BankTennessee employed 64 full-time equivalent
employees; Cumberland Bank and its subsidiaries employed 79 full-time equivalent
employees, and The Community Bank had 30 full-time equivalent employees. We have
4 full-time equivalent employees who are not employees of the bank subsidiaries.
All four of these persons are on the payroll of a bank subsidiary for
administrative purposes, but the banks are reimbursed monthly by us for their
salaries and benefits. None of our or our banks' employees are represented by a
collective bargaining group. We consider relations with our employees to be
excellent.
PROPERTIES
Our principal and executive offices are located at 4205 Hillsboro Road,
Suite 212, 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 at five offices located in Shelby and Lauderdale Counties,
Tennessee. Cumberland Bank currently conducts business at five offices located
in Sumner and Smith Counties, Tennessee. CBC Financial Services
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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, and InsureTennessee conducts
business at two offices, one in Smith County that it shares with CBC Financial
Services and one in Shelby County that it shares with BankTennessee.
We own all of our branch office locations except for six leased locations,
which include Cumberland Bank's office in Gallatin, The Community Bank's offices
in Green Hills and Franklin, BankTennessee's Toddle House office, Cumberland
Finance's Murfreesboro office, and CBC Financial Services' office in Carthage.
We believe that each of our offices and branch facilities are of a size and
design that sufficiently and efficiently meet the needs of employees, customers,
and prospective customers of a full-service banking and financial services
business for the locations these offices serve.
LEGAL PROCEEDINGS
The nature of the banking business generates a certain amount of litigation
against us and our banks involving matters in the ordinary course of business.
None of the legal proceedings currently pending or threatened to which we or our
subsidiaries are a party or to which any of our properties are subject will
have, or have, in the opinion of management, a material effect on our business
or financial condition.
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SUPERVISION AND REGULATION
We, along with our banks, are governed by state and federal banking laws
and regulations which impose specific requirements or restrictions and provide
for general regulatory oversight with respect to virtually all aspects of our
and our banks' operations. These laws and regulations are generally intended to
protect depositors, not shareholders. The following summaries of statutes and
regulations affecting banks and bank holding companies do not purport to be
complete. These summaries are qualified in their entirety by reference to the
statutes and regulations described.
GENERAL
As a bank holding company, we are regulated under the Bank Holding Company
Act of 1956, as amended, and are inspected, examined and supervised by the Board
of Governors of the Federal Reserve System. Under the BHCA, bank holding
companies generally may not acquire the ownership or control of more than 5% of
the voting shares, or substantially all the assets, of any company, including a
bank, without the Federal Reserve's prior approval. In addition, bank holding
companies generally may engage, directly or indirectly, only in banking and such
other activities as are determined by the Federal Reserve to be closely related
to banking.
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 supervises and
regularly examines our banks. Our banks' deposits are insured by the FDIC
through the Bank Insurance Fund, and therefore are governed by the provisions of
the Federal Deposit Insurance Act and examined by the FDIC. The TDFI and the
FDIC regulate or monitor virtually all areas of our banks' operations. The
Murray Bank is a federal savings bank organized under the laws of the United
States of America. The Murray Bank is primarily regulated and examined by the
Office of Thrift Supervision. The FDIC and the Federal Reserve also regulate
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
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markets despite any impact of these branching powers, but there can be no
assurance that future developments will not affect our banks' ability to compete
effectively.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act requires that,
in connection with examinations of financial institutions within their
respective jurisdictions, the federal bank regulatory agencies responsible for
evaluating us and our banks, evaluate the record of the financial institutions
in meeting the credit needs of their local communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation of
those institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
CAPITAL REQUIREMENTS
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;
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- cumulative perpetual preferred stock with an original maturity of 20
years or more and related surplus;
- hybrid capital instruments defined as instruments with characteristics of
both debt and equity, perpetual debt and mandatory convertible debt
securities; and
- in an amount up to 50% of Tier I capital, eligible term subordinated debt
and intermediate-term preferred stock with an original maturity of five
years or more, including related surplus.
Investments in unconsolidated banking and finance subsidiaries, investments
in securities subsidiaries and reciprocal holdings of capital instruments must
be deducted from capital. The federal regulatory agencies may require other
deductions on a case-by-case basis.
Under the risk-weighted capital guidelines, balance sheet assets and
certain off-balance sheet items like standby letters of credit, are assigned to
one of four risk-weight categories according to the nature of the asset and its
collateral or the identity of any obligor or guarantor. These four categories
are 0%, 20%, 50% or 100%. For example, cash is assigned to the 0% risk category,
while loans secured by one-to-four family residences are assigned to the 50%
risk category. The aggregate amount of assets and off-balance sheet items in
each risk category is adjusted by the risk-weight assigned to that category to
determine weighted values, which are added together to determine the total
risk-weighted assets for the banking organization. Accordingly, an asset, like a
commercial loan, which is assigned to a 100% risk category is included in
risk-weighted assets at its nominal face value, whereas a loan secured by a
single-family home mortgage is included at only 50% of its nominal face value.
The application ratios are equal to capital, as determined, divided by
risk-weighted assets, as determined.
LEVERAGE CAPITAL REQUIREMENTS. The federal regulatory agencies have issued
a final regulation requiring certain banking organizations to maintain
additional capital of 1% to 2% above a 3% minimum Tier I leverage capital ratio
equal to Tier I capital, less intangible assets, to total assets. In order for
an institution to operate at or near the minimum Tier I leverage capital ratio
of 3%, the banking regulators expect that the institution would have
well-diversified risk, no undue rate risk exposure, excellent asset quality,
high liquidity and good earnings. In general, the bank would have to be
considered a strong banking organization, rated in the highest category under
the bank rating system and have no significant plans for expansion. Higher Tier
I leverage capital ratios of up to 5% will generally be required if all of the
above characteristics are not exhibited, or if the institution is undertaking
expansion, seeking to engage in new activities, or otherwise faces unusual or
abnormal risks.
Institutions not in compliance with these regulations are expected to be
operating in compliance with a capital plan or agreement with that institution's
regulator. If they do not do so, they are deemed to be engaging in an unsafe and
unsound practice and may be subject to enforcement action. Failure to maintain a
Tier I leverage capital ratio of at least 2% of assets constitutes an unsafe and
unsound practice and may result in enforcement action against an institution
justifying termination of that institution's FDIC insurance.
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
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resources adequate to support each of our banks. This support may be required at
times when we may not have the resources to provide it. Any depository
institution insured by the FDIC can be held liable for any loss incurred, or
reasonably expected to be incurred, by the FDIC in connection with the default
of a commonly-controlled, FDIC-insured depository institution like a bank
subsidiary. Additionally, depository institutions insured by the FDIC may be
held liable to the FDIC for any loss incurred or reasonably expected to be
incurred in connection with any assistance provided by the FDIC to a commonly-
controlled, FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance. All of our banks are FDIC-insured depository institutions. Also, in
the event that such a default occurred with respect to one of our banks, any
capital loans from us to that bank would be subordinate in right of payment to
payment of the bank's depositors and other of the bank's obligations.
DIVIDEND RESTRICTIONS
Federal and Tennessee law limits the payment of dividends by banks. Under
Tennessee law, the directors of a state bank, after making proper deduction for
all expenditures, expenses, taxes, losses, bad debts, and any write-offs or
other deductions required by the TDFI, may credit net profits to the bank's
undivided profits account. Thereafter, the bank may quarterly, semi-annually, or
annually declare a dividend from that account in an amount judged expedient by
the bank's board of directors. Before declaring the dividend, the board of
directors must deduct any net loss from the undivided profits account and
transfer to the bank's surplus account (1) the amount, if any, required to raise
the surplus to 50% of the capital stock and (2) the amount required, if any, but
not less than 10% of net profits, to make the paid-in-surplus account equal the
capital stock account. Thereafter, the bank may declare a dividend if the bank
is adequately reserved against deposits and those reserves will not be impaired
by the declaration of the dividend.
A state bank, with the approval of the TDFI, may transfer funds from its
surplus account to the undivided profits or retained earnings account or any
part of its paid-in-capital account. The payment of dividends by any bank is
dependent upon its earnings and financial condition and, also may be limited by
federal and state regulatory agency protections against unsafe or unsound
banking practices. The payment of dividends could, depending upon the financial
condition of a bank, constitute an unsafe or unsound banking practice. When a
bank's surplus account is less than its capital stock account, Tennessee law
imposes other restrictions on dividends. Finally, the FDIC prohibits a state
bank, the deposits of which are insured by the FDIC, from paying dividends if it
is in default in the payment of any assessments due the FDIC.
The Federal Reserve also imposes dividend restrictions on our banks as
state member banks of the Federal Reserve. Our banks may not declare or pay a
dividend if that dividend would exceed the bank's undivided profits, unless the
bank has received the prior approval of the Board of Governors of the Federal
Reserve and at least two-thirds of the shareholders of each class of stock
outstanding. 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 and at least two-thirds of the
shareholders of each class of stock outstanding. Permanent capital is defined as
the total of a bank's perpetual preferred stock and related surplus, common
stock and surplus, and
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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.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of each of our banks are insured up to regulatory limits by
the FDIC and we are required under the FDIC's deposit insurance assessments to
maintain the Bank Insurance Fund (BIF) and Savings Association Insurance Fund
(SAIF). The FDIC has adopted regulations establishing a permanent risk-related
deposit insurance assessment system. Each financial institution is assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- and further assigned to one of three subgroups within a
capital group. A bank's assignment is based on supervisory evaluations by the
institution's primary federal regulator and, if applicable, other information
relevant to the institution's financial condition and the risk posed to the
applicable insurance fund. The assessment rate applicable to our banks in the
future will depend in part upon the risk assessment classification assigned to
each bank by the FDIC and in part on the BIF assessment schedule adopted by the
FDIC. Institutions are prohibited from disclosing the risk classification to
which they have been assigned. The Deposit Insurance Funds Act of 1996 provides
for assessments to be imposed on insured depository institutions with respect to
deposits insured by the BIF and the SAIF. Currently, the annual insurance
premiums on bank deposits insured by the BIF and SAIF vary between $0.00 to
$0.27 per $100 of deposits. The assessment rate for our banks is currently
$.0001470 per $100 of insured 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
49
<PAGE> 54
against bank deposits, open market operations in United States' 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.
YEAR 2000 COMPLIANCE
Financial institutions are highly dependent on complex computer systems and
networks to conduct their business. Financial institutions are also adversely
affected by developments that adversely affect the businesses or operations of
their customers. For these reasons, the potential inability of computers to
recognize the Year 2000 presents a major challenge to us and our banks. In
recognition of the potential effect of the Year 2000 problem, the Federal
Reserve and other regulatory authorities have issued numerous directives to bank
holding companies and financial institutions requiring comprehensive
investigation and remediation of possible Year 2000 problems. These directives
address the computer systems used by the banks and those used by customers and
vendors. Management believes that we, along with our banks, are currently in
compliance with each bank regulatory directive issued on Year 2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Year 2000."
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<PAGE> 55
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our board of directors presently consists of 11 voting members and one
non-voting director emeritus. Each of the voting directors is elected at the
annual shareholders meeting to serve a one-year term. Our executive officers are
appointed by our board of directors and have the authority to perform those
duties set forth by resolution of our board of directors. The following table
sets forth certain information concerning our executive officers and directors
as of June 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS
Joel Porter(1)(2)...................... 58 President (our Principal Executive
Officer); Director
John S. ("Jack") Everett(1)(2)......... 59 President of BankTennessee; Director
Danny Herron(1)(2)..................... 41 President of The Community Bank;
Director
Tom E. Paschal(1)(2)................... 53 Secretary; President of Cumberland Bank;
Director
DIRECTORS
John S. Wilder, Sr.(1)................. 78 Chairman of our Board
Tom Brooks............................. 70 Director
Jerry Cole............................. 67 Director
Frank Inman, Jr.(1).................... 62 Director
Alex Richmond(3)....................... 49 Director
Wayne Rodgers.......................... 59 Director; Executive Vice President of
BankTennessee
John S. Shepherd....................... 62 Director
DIRECTOR EMERITUS
Herman W. Cox, Jr. .................... 77 Director Emeritus
KEY EMPLOYEE
Mark McDowell.......................... 42 Chief Administrative Officer
</TABLE>
- -------------------------
(1) Member of executive committee.
(2) Member of management committee.
(3) Member of audit committee along with Chairman Dr. Eugene Smith and Mr. Tom
Price.
There are no family relationships between any of our executive officers.
JOEL PORTER has served as our president since our formation, although he
does not devote his full time to that position and is not compensated for his
services as president. Mr. Porter is a named partner of the law firm of Burch,
Porter & Johnson, PLLC, located in Memphis, where he has practiced since 1964.
Mr. Porter is also the president of two
51
<PAGE> 56
finance and investment firms, Porter Development and Porter Investment. Mr.
Porter has served as a member of our board of directors since 1986. He has also
served as a director and board chairman of BankTennessee since 1992, a director
of Cumberland Bank since 1986, a director of The Community Bank since 1992, and
a director of The Murray Bank since June 1999.
JOHN S. "JACK" EVERETT has served as the president of BankTennessee in
Collierville since February 1992. Mr. Everett has served as a director of The
Community Bank since 1993 and is that board's chairman. Mr. Everett has also
served as a director of Cumberland Bank since 1986, BankTennessee since 1992,
and The Murray Bank since June 1999. He has served as one of our directors since
1992.
DANNY HERRON has served as president of The Community Bank since 1993. Mr.
Herron has served as a director of The Community Bank since 1993, and as one of
our directors since 1997.
TOM PASCHAL has served as the president and chief executive officer of
Cumberland Bank since 1986. He has also served as our secretary since 1991. Mr.
Paschal has served as a director of Cumberland Bank since 1990, a director of
Cumberland Finance since 1995, a director of Cumberland Services since 1995, and
as one of our directors since 1990.
JOHN S. WILDER, SR. has served as a member of our board of directors since
1992 and is currently our Chairman of the Board. Mr. Wilder has served as the
Lieutenant Governor of the State of Tennessee since 1971, and is the longest
sitting Lieutenant Governor of any state in United States' history. Mr. Wilder
also serves as a director of the Cumberland Bank, The Community Bank, The Murray
Bank and of BankTennessee. He serves as a director of United Foods, Inc. and as
a member of its compensation committee. Mr. Wilder is a director and part owner
of Health Management, Inc., a waste disposal firm in Somerville, Tennessee. Mr.
Wilder is also a partner of Longtown Farms, a farming business in Mason,
Tennessee, and a Vice President and part-owner of Longtown Supply, Inc., a
service station and farming supply business in Mason, Tennessee.
TOM BROOKS has served on our board of directors since July 1997. Mr. Brooks
retired from work as a pharmacist at Brooks Pharmacy, a Super D franchise he
owned in Collierville until 1996. Mr. Brooks served as vice mayor and alderman
of Collierville from 1975 to 1999, and was a member of its planning commission
from 1955 to 1999. Mr. Brooks also serves as a director of BankTennessee where
he has served since 1992.
JERRY COLE has served as one of our directors since 1995. Mr. Cole retired
from the Agriculture Department of the University of Tennessee in 1994 where he
had served as an extension agent for the previous thirty-two (32) years. Mr.
Cole has served on the board of directors of Cumberland Bank since 1990 where he
currently serves as that board's chairman. Mr. Cole has served as a director of
Cumberland Finance since 1995.
FRANK INMAN, JR. has served on our board of directors since 1991. Mr. Inman
is the president and chairman of the board of directors of Inman Construction
Corp., a general contractor, a position he has held since 1970. Mr. Inman has
also served as a director of Cumberland Bank since 1986.
ALEX RICHMOND has served as a director on our board of directors since
1990. Mr. Richmond has been a grocer for many years, and has owned two grocery
stores, G&R, Inc. and D.A.G. Foods, since 1991. Mr. Richmond serves as president
of G&R, Inc. and
52
<PAGE> 57
president of Consolidated Investors, a small business investment firm. Mr.
Richmond is a partner in Richmond & Franklin, a real estate investment company,
and is the owner of Richco, Inc., a Tennessee company that operates primarily as
a purchaser of grocery stores. Mr. Richmond also serves as a director and
secretary of DeKalb Finance, a Tennessee finance company. He has served as a
director of Cumberland Bank since 1990.
WAYNE RODGERS has served as the executive vice president of BankTennessee
since 1992 and was appointed in June 1999 to serve as a director on our board in
the place of Mr. Herman W. Cox, Jr. He is responsible for overseeing the lending
function and retail branches of the bank. He also is the supervisor of the SBA
lending program for the bank. Mr. Rodgers serves on the loan, audit, asset and
liability management and CRA/compliance committees of the bank. He has been a
director of BankTennessee since 1992.
JOHN S. SHEPHERD has been a member of our board of directors since July
1997. Since 1993, Mr. Shepherd has been self-employed engaged principally in
investing and as a merchant in Collierville, Tennessee. Mr. Shepherd has been a
member of the Memphis/ Shelby County Board of Adjustment since 1972 and its
chairman since 1996. Mr. Shepherd has served as a director of BankTennessee
since 1992 and The Murray Bank since June 1999.
HERMAN W. COX, JR. served on our board of directors beginning July of 1997
and is a non-voting director emeritus as of July 1999. Mr. Cox owns and operates
McGinnis Oil Co., a gasoline distributor in Collierville, Tennessee, a business
he has operated since 1939. Mr. Cox has served on the board of directors of
BankTennessee since 1992. Mr. Cox served as mayor from 1975 to 1999 and was a
member of the board of aldermen from 1959 to 1999. Mr. Cox is the father of
Herman W. Cox III.
MARK C. MCDOWELL has served as our chief administrative officer since July
1997. Mr. McDowell is responsible for overseeing our administrative functions,
including regulatory and financial matters as well as shareholder issues. Mr.
McDowell served as president of Community Bancserve, a bank consulting business,
from January 1996 to July 1997. From 1980 to 1996, Mr. McDowell served as a bank
examiner for the Tennessee Department of Financial Institutions, serving as
director of its Applications Section beginning in 1989.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors and the board of directors of our banks operate
through several standing committees. Below is a description of each relevant
committee indicating members of each committee and the frequency with which each
committee meets.
EXECUTIVE COMMITTEE. The executive committee is charged with the review of
corporate matters presented, or to be presented, to our board of directors,
making recommendations to the board of directors on policy matters and making
executive decisions on matters that do not require a meeting of the full board
of directors. Review of expansion possibilities and corporate opportunities as
well as oversight of general corporate governance matters are the chief
functions of our executive committee. The executive committee held four meetings
during 1998.
MANAGEMENT COMMITTEE. The management committee is charged with the review
of banking matters presented, or to be presented, to our board of directors,
making recommendations to our board of directors on policy matters at our bank
subsidiaries' level
53
<PAGE> 58
and making executive decisions on matters that do not require a meeting of the
full board of directors. Our management committee focuses on our and our bank
and non-bank subsidiaries' operations, including management of personnel matters
and financial results. The management committee was formed in March 1999 and has
held one meeting.
AUDIT COMMITTEE OF COMPANY. Our audit committee reviews our accounting
practices and procedures, as well as the scope of our audit. Additionally, the
committee assists in the recommendation of the appointment of our independent
auditors. The audit committee was formed in March 1999, and has held three
meetings. Each of our banks also has an audit committee.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation we paid for services rendered to us during 1996, 1997 and 1998, by
our Chief Executive Officer and our other three most highly compensated
executive officers who were serving as executive officers at the end of 1998 and
whose salaries were in excess of $100,000 in 1998. We do not have a designated
"Chief Executive Officer." Joel Porter is our president and is considered our
principal executive officer. However, Mr. Porter receives no compensation as
president and receives compensation only for his service as a director or
committee member of the executive committee.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------------- AWARDS
OTHER ANNUAL ALL OTHER SECURITIES
FISCAL COMPENSATION COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) ($)(2) OPTIONS
--------------------------- ------ ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John S. "Jack" Everett................... 1998 153,000 28,000 -- 46,000 13,750
President of BankTennessee 1997 140,000 15,000 -- 43,000 --
1996 135,000 10,000 -- 39,000 --
Tom Paschal.............................. 1998 110,000 24,000 -- 30,000 13,750
President of Cumberland Bank, 1997 90,000 18,000 -- 25,000 --
our Secretary and Chief 1996 85,000 8,000 -- 15,000 --
Operating Officer
Danny Herron............................. 1998 90,000 10,000 -- 17,000 13,750
President of The Community Bank 1997 85,000 10,000 -- 10,000 --
1996 75,000 7,000 -- 4,000 --
Wayne Rodgers............................ 1998 109,000 9,000 -- 6,000 13,750
Executive Vice President 1997 100,000 10,000 -- 5,000 --
of BankTennessee 1996 90,000 8,000 -- 6,000 --
</TABLE>
- -------------------------
(1) Does not include perquisites and other personal benefits paid to our
executive officers, which totaled less than 10% of the total salary and
bonus reported for the years indicated.
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<PAGE> 59
(2) Represents matching contributions to our 401(k) plan, benefits derived from
our payments for term life insurance for our officers, and directors fees
received by each individual. The amount of such benefits for 1998 is set
forth in the following table:
<TABLE>
<CAPTION>
401(K) TERM LIFE DIRECTORS'
PLAN INSURANCE FEES
------ --------- ----------
<S> <C> <C> <C>
Jack Everett.............................. 6,000 3,000 37,000
Tom Paschal............................... 6,000 5,000 19,000
Danny Herron.............................. 5,000 0 12,000
Wayne Rodgers............................. 6,000 0 0
</TABLE>
COMPENSATION OF DIRECTORS
All of our directors receive a director's fee of $1,000 for each board
meeting attended and $1,000 for each committee meeting attended. Persons serving
as directors for any of our banks who are not also employees of that bank,
receive additional compensation for each bank board and committee meeting
attended. In addition, each person who serves as chairman of a bank board of
directors, committee, or our board receives twice the compensation of other
members for each meeting attended. Directors are reimbursed for their expenses
incurred in connection with their activities as our directors.
1998 STOCK OPTION PLAN
We adopted a stock option plan in March 1998. The purpose of the plan is to
attract, retain and reward directors, officers, and key employees by offering
equity interest in our company. Currently, all directors and employees are
eligible to participate in the 1998 plan. The plan provides for the grants of
nonqualified stock options. Nonqualified stock options are stock options which
do not constitute "incentive stock options" within the meaning of Section 422A
of the Internal Revenue Code.
Our board of directors authorized a total of 550,000 shares of common stock
for issuance under our plan, adjusted to incorporate the March 26, 1999 10%
stock dividend. As of June 30, 1999, we have granted options for the purchase of
430,510 shares of common stock to employees and directors. The number of shares
granted under each option is adjusted for any stock dividends or stock splits
authorized by the board of directors. The consummation of this offering does not
accelerate or otherwise affect the vesting of options under our plan and will
not affect the number of shares underlying the options granted.
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<PAGE> 60
ISSUANCE OF COMPANY OPTIONS
The following table sets forth key information with respect to the grant of
stock options under our stock option plan. No options were exercised (or
exercisable) by any officers, including those identified, for the year ended
December 31, 1998.
INDIVIDUAL OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
NUMBER OF PERCENT OF APPRECIATION FOR
SECURITIES TOTAL OPTIONS OPTION TERM
UNDERLYING GRANTED EXERCISE ($)(2)
OPTIONS FISCAL YEAR PRICE(1) EXPIRATION -----------------
NAME GRANTED (1998)(%) ($/SHARE) DATE 5% 10%
---- ---------- ------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Joel Porter.......... 8,250 0.022 5.45 2/29/2004 15,290 34,690
John Wilder.......... 8,250 0.022 5.45 2/29/2004 15,290 34,690
Jack Everett......... 13,750 0.036 5.45 2/29/2004 25,490 57,820
Danny Herron......... 13,750 0.036 5.45 2/29/2004 25,490 57,820
Tom Paschal.......... 13,750 0.036 5.45 2/29/2004 25,490 57,820
Wayne M. Rodgers..... 13,750 0.036 5.45 2/29/2004 25,490 57,820
</TABLE>
- -------------------------
(1) Adjusted to reflect the 10% stock dividend declared in March 1999.
(2) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the SEC and, therefore, are not intended to forecast
possible future appreciation, if any, of our common stock price.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
None of our executive officers or other officers has an employment
contract.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors serves as our compensation committee. Compensation
decisions are made by the full board of directors based upon recommendations of
the management of each of our banks. Our board of directors determines
independently compensation decisions for our banks' presidents. No interlocking
relationship exists between our board of directors (or management) and the board
of directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past. See "Transactions with Directors,
Executive Officers and Others."
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<PAGE> 61
TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
INDEBTEDNESS OF MANAGEMENT
We have, and expect to have in the future, banking and other business
transactions in the ordinary course of our banking business with our directors,
officers, and 5% beneficial owners and their affiliates, including members of
their families or corporations, partnerships, or other organizations in which
our officers or directors have a controlling interest, on substantially the same
terms (including price, or interest rates and collateral) as those prevailing at
the time for comparable transactions with unrelated parties. Any of these
banking transactions will not involve more than the normal risk of
collectability nor present other unfavorable features to us. At December 31,
1998, the outstanding principal amount of indebtedness of these loans, including
amounts available under lines of credit, by BankTennessee, Cumberland Bank and
The Community Bank to our affiliates aggregated $3,240,000 which represented
approximately 1.08% of the banks' total loans net of unearned interest.
We believe that all of these transactions were made on terms as favorable
to us as transactions we have with other customers of the banks. We also believe
that our banks' loan approval processes for these loans to officers and
directors was no different than the loan approval processes for other customers
of our banks.
CERTAIN OTHER TRANSACTIONS AND BUSINESS RELATIONSHIPS
Mr. Frank Inman, one of our directors, owns and operates Inman Construction
Company, which has been chosen as general contractor of our new Collierville
main office. Construction of the building is on a "cost plus" basis and an
expected price of approximately $2.6 million. Inman Construction Company will
employ Everett Construction Company as a sub-contractor for the project. Everett
Construction Company is owned by Mr. Greg Everett and Mr. John Everett, sons of
Mr. Jack Everett, one of our directors and president of BankTennessee. An
outside evaluation was obtained for the fair market cost of this project. This
evaluation was furnished to the TDFI and Federal Reserve, who have approval
authority over this transaction. The BankTennessee board and our board have
approved this transaction.
We have entered into a lease-purchase agreement for property in Lafayette,
Macon County, Tennessee, on which to locate our new Cumberland Bank branch. Two
of our directors, Mr. Tom Paschal and Mr. Alex Richmond, each own a twenty
percent (20%) interest in the property. The agreement contemplates Cumberland
Bank entering into a lease not to exceed $2,800 per month, and retaining an
option to purchase the property for $250,000. Cumberland Bank retained an
independent licensed real estate appraiser that performed an evaluation of the
property and lease terms to market comparable prices and lease terms and found
the property and the terms to fall within market comparables. The transaction
was consummated July 29, 1999. Our board and the Cumberland Bank board have
reviewed and approved the transaction. The appraiser's evaluation along with the
bank branch application have been filed with the TDFI and the Federal Reserve
Bank of Atlanta.
We have employed Mr. Joel Porter's law firm, Burch, Porter & Johnson, PLLC,
from time to time. Fees and expenses arose out of general corporate and other
ordinary course of business services provided by Burch Porter, and account for
significantly less than one percent (1%) of the law firm's 1998 gross revenue.
We believe that the above transactions were made on terms as favorable to
us as we would have received from unaffiliated third parties.
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<PAGE> 62
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of June 30, 1999, certain information
with respect to the beneficial ownership of our common stock held by directors,
executive officers, and each person known to our management to own beneficially,
directly, or indirectly, more than five percent (5%) of our shares, and all
directors and executive officers as a group. Except as otherwise indicated, the
shareholders listed in the table have sole voting and investment power with
respect to all our shares shown as beneficially owned by them. The address of
all the beneficial owners listed is 4205 Hillsboro Road, Suite 212, Nashville,
Tennessee 37215.
The percentage ownership in the table below is based on 5,581,677 shares
outstanding as of June 30, 1999. Shares of common stock subject to options
currently exercisable or exercisable within 60 days of this prospectus are
deemed outstanding for the purpose of computing the percentage ownership of the
person holding the options but are not deemed outstanding for computing the
percentage ownership of any other person.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED
AS A RESULT OF
OPTIONS CURRENTLY
EXERCISABLE OR
EXERCISABLE WITHIN PERCENTAGE OF
NUMBER OF SHARES 60 DAYS OF THE DATE SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF THIS PROSPECTUS OUTSTANDING
- ------------------------ ------------------ ------------------- -------------
<S> <C> <C> <C>
Joel Porter..................... 906,622(1) 1,650 16.2
John Wilder..................... 686,143(2) 1,650 12.3
Jack Everett.................... 225,585(3) 2,750 4.0
Tom Brooks...................... 197,619 2,750 3.5
Jerry Cole...................... 47,916 1,650 *
Herman W. Cox, Jr............... 41,214 2,750 *
Danny Herron.................... 33,000 2,750 *
Frank Inman..................... 157,973(4) 1,650 2.8
Tom Paschal..................... 99,066 2,750 1.8
Alex Richmond................... 72,545(5) 1,650 1.3
Wayne Rodgers................... 59,670 2,750 1.2
John Shepherd................... 250,681 1,650 4.5
Mark McDowell................... 65,680(6) 1,100 1.2
All executive officers and
directors as a group (13
persons)...................... 2,852,906 27,500 51.1
</TABLE>
- -------------------------
* Less than one percent
(1) Includes 14,216 shares held by Mr. Porter as trustee for his daughter.
(2) Includes 104,201 shares held by Mr. Wilder's spouse.
(3) Includes 127,111 shares held by Mr. Everett's spouse.
(4) Includes 43,397 shares held by Mr. Inman's spouse.
(5) Includes 4,895 shares held by Mr. Richmond as custodian for his son.
(6) Includes 990 shares held by the two son's of Mr. McDowell.
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<PAGE> 63
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
We have no established public trading market for our shares. Accordingly,
there is no comprehensive record of trades or the prices of any trades. The
following table reflects stock prices for our shares to the extent any
information is available. We have not declared any cash dividends in the past
two fiscal years nor have we declared any cash dividends during this fiscal
year.
CUMBERLAND BANCORP INCORPORATED COMMON STOCK(1)
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997:
First Quarter...................................... $ 3.79 $ 3.50
Second Quarter..................................... $ 3.79 $ 3.75
Third Quarter...................................... $ 5.45 $ 4.77
Fourth Quarter..................................... $ 5.45 $ 4.29
1998:
First Quarter...................................... $ 5.45 $ 4.55
Second Quarter..................................... $13.64 $ 5.45
Third Quarter...................................... $14.55 $11.82
Fourth Quarter..................................... $12.73 $10.91
1999:
First Quarter...................................... $12.27 $ 9.09
Second Quarter..................................... $13.50 $12.00
Third Quarter (through July , 1999).............. $ -- $ --
</TABLE>
- -------------------------
(1) The amounts per share have been adjusted for a 3-for-1 stock split effective
June 30, 1997; a 2-for-1 stock split effective March 1, 1998 and a 10% stock
dividend effective March 26, 1999.
As of June 30, 1999 we had approximately 544 record shareholders. At that
date, 5,581,677 shares were outstanding. Of the 5,581,677 shares outstanding,
100,000 shares were subject to the resale restrictions of Rule 144. Options to
purchase 430,510 of our shares were also outstanding. In addition, investors of
our joint venture partner have the right to acquire up to $500,000 of shares at
1.5 times our book value per share, or approximately 83,333 shares at June 30,
1999.
We did not declare any dividends for the fiscal years ended December 31,
1998 or 1997, or through the six months ended June 30, 1999. 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 dividends to us. The ability of the banks to pay
cash dividends is restricted by applicable regulations of the TDFI and the
Federal Reserve. As a result, we may not be able to declare a dividend to
holders of the shares even if the present dividend policy were to change. See
"Supervision and Regulation -- Dividend Restrictions."
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<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description of our capital stock and the provisions of our
charter and by-laws are only summaries and are qualified by reference to our
charter and by-laws filed as exhibits to the registration statement of which
this prospectus is a part.
We are authorized to issue 20,000,000 shares of common stock of which
5,581,677 shares were outstanding as of June 30, 1999. As of June 30, 1999,
550,000 shares were reserved for issuance under our stock option plan, under
which options underlying 430,510 shares have been granted. Our common stock is
the only class of capital stock we are authorized to issue.
COMMON STOCK
The holders of our shares are entitled to one vote per share and, in
general, assuming the presence of a quorum, a majority of votes cast with
respect to a matter is sufficient to authorize action upon routine matters.
Directors are elected by a majority of the shares represented at a shareholders
meeting upon establishment that a majority of the shares entitled to be voted
are present at a meeting. Each shareholder entitled to vote in such election is
entitled to vote each share of stock for as many persons as there are directors
to be elected. Our shareholders may not accumulate their votes in the election
of directors. In general, amendments to our charter must be approved by a
majority of the votes cast. A merger or share exchange required to be approved
by our shareholders must be approved by a majority of the votes entitled to be
cast. Additionally, dissolution or the sale of all or substantially all of our
property, other than in the usual and regular course of business, must be
approved by a majority of all votes entitled to be cast.
LIQUIDATION
In the event of our liquidation, dissolution or winding-up, holders of our
shares are entitled to share ratably in all assets remaining after payment of
liabilities.
PREEMPTIVE RIGHTS
No holder of our shares has any preemptive rights to purchase, subscribe
for, or otherwise acquire any additional shares of our stock or any securities
exchangeable for or convertible into our shares.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of our common stock are available for
future issuance without shareholder approval. These additional shares may be
used for a variety of corporate purposes, including future offerings to raise
additional capital, corporate acquisitions and employee benefit plans. The
existence of authorized but unissued shares of common stock could make it harder
or discourage an attempt to obtain control of us by a proxy contest, tender
offer, merger or otherwise.
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<PAGE> 65
CHANGES IN CONTROL
Neither our charter nor our by-laws provide for specific shareholder rights
or limitations upon a change, or potential change, in control. We will be
subject to the Tennessee Business Combination Act described below upon
effectiveness of this registration statement.
LEGISLATION REGARDING TENNESSEE BUSINESS COMBINATIONS
The Tennessee Business Combination Act provides that any corporation to
which the Combination Act applies, including us, shall not engage in any
"business combination" with an "interested shareholder" for a period of five
years from the date that the shareholder became an interested shareholder unless
prior to the date someone becomes an interested shareholder the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the shareholder becoming an interested
shareholder.
The Combination Act defines "business combination" generally to mean any:
(1) merger or consolidation; (2) share exchange; (3) sale, lease, exchange,
pledge, mortgage, transfer or other disposition (in one transaction or a series
of transactions) of assets representing 10% or more of (A) the market value of
consolidated assets, (B) the market value of the corporation's outstanding
shares or (C) the corporation's consolidated net income; (4) issuance or
transfer of shares from the corporation to the interested shareholder; (5) plan
of liquidation; (6) transaction in which the interested shareholder's
proportionate share of the outstanding shares of any class of securities is
increased; or (7) financing arrangements under which the interested shareholder,
directly or indirectly, receives a benefit except proportionately as a
shareholder.
Under the Combination Act an "interested shareholder" generally is defined
as any person who is the direct or indirect beneficial owner of 10% or more of
any class or series of the outstanding voting stock, or any affiliate or
associate of the corporation who has been the direct or indirect beneficial
owner of 10% or more of the voting power of any class or series of the
corporation's stock at any time within the five year period preceding the date
in question. Consummation of a business combination that is subject to the five-
year moratorium is permitted after the period provided the transaction (1)
complies with all applicable charter and by-law requirements and applicable
Tennessee law and (2) is approved by at least two-thirds of the outstanding
voting stock not beneficially owned by the interested shareholder, or when the
transaction meets defined fair price criteria. The fair price criteria include
the requirement that the per share consideration received in the combination by
each of the shareholders is equal to the highest of:
- the highest per share price paid by the interested shareholder during the
preceding five-year period for shares of the same class or series plus
interest from that date at a treasury bill rate less the aggregate amount
of any cash dividends paid and the market value of any dividends paid
other than in cash since that earliest date, up to the amount of that
interest;
- the highest preferential amount, if any, that the class or series is
entitled to receive on liquidation; or
- the market value of the shares on either the date the business
combination is announced or the date when the interested shareholder
reaches the 10% threshold, whichever is higher, plus interest less
dividends as set forth above.
61
<PAGE> 66
The Tennessee Greenmail Act prohibits us from purchasing or agreeing to
purchase any of our securities, at a price in excess of fair market value, from
a holder of 3% or more of any class of our securities who has beneficially owned
the securities for less than two years. We can make this purchase if it has been
approved by the affirmative vote of a majority of the outstanding shares of each
class of voting stock issued by us or we make an offer of at least equal value
per share to all holders of shares of that class.
The effect of this legislation may be to render more difficult a change of
control of a corporation by delaying, deferring or preventing a tender offer or
takeover attempt that a shareholder might consider to be in the shareholder's
best interest, including an attempt that might result in the payment of a
premium over the market price for the shares held by the shareholder, and may
promote continuity of the corporation's management by rendering it more
difficult for shareholders to remove or change the incumbent members of the
board of directors.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our charter provides that, to the fullest extent permitted by Tennessee
law, a director will not be liable to us or our shareholders for monetary
damages for a breach of his or her fiduciary duty as a director. Under the
Tennessee Business Corporation Act, directors have a fiduciary duty which is not
eliminated by this provision in our charter. In some circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, our charter provides that each director will continue to
be subject to liability for
- Any breach of the director's duty of loyalty to the corporation or its
shareholders;
- Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or
- Payment of dividends when prohibited by the TBCA.
This charter provision does not affect the director's responsibilities under any
other laws, including the federal securities laws or state or federal
environmental laws. Our charter provides that we shall have the power to
indemnify any director or officer to the fullest extent permitted by the TBCA
even after that director or officer has ceased to be one of our directors or
officers. The TBCA provides that a corporation may indemnify any director or
officer against liability incurred in connection with a proceeding if the
director or officer acted in good faith or reasonably believed, in the case of
conduct in his or her official capacity with the corporation, that the conduct
was in the corporation's best interest. In all other civil cases, a corporation
may indemnify a director or officer who reasonably believed that his or her
conduct was not opposed to the best interest of the corporation. In connection
with any criminal proceeding, a corporation may indemnify any director or
officer who had no reasonable cause to believe that his or her conduct was
unlawful.
In actions brought by or in the right of the corporation, however, the TBCA
does not allow indemnification if the director or officer is adjudged to be
liable to the corporation. Similarly, the TBCA prohibits indemnification of a
director or officer if the director or officer is adjudged liable in a
proceeding because a personal benefit was improperly received.
62
<PAGE> 67
In cases when the director or officer is wholly successful, on the merits
or otherwise, in the defense of any proceeding brought because of his or her
status as a director or officer of the corporation, the corporation must
indemnify the director or officer against reasonable expenses incurred in the
proceeding. Also, the TBCA provides that a court may order a corporation to
indemnify a director or officer for reasonable expense if, in consideration of
all relevant circumstances, the court determines that the individual was fairly
and reasonably entitled to indemnification, whether or not the individual acted
in good faith or reasonably believed his or her conduct was in the corporation's
best interest.
Under our charter, we may also purchase and maintain insurance to protect
our directors or officers against any liability asserted against them or
incurred by them arising out of their status as one of our officers or
directors. This insuring of our directors and officers under our charter is
extended to the fullest extent permitted by the TBCA and is allowed whether or
not we would have the power or would be required to indemnify that director or
officer under the terms of any agreement or bylaw or the TBCA.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is Illinois Stock
Transfer Company. Its address is 209 West Jackson Blvd., Suite 903, Chicago,
Illinois 60606-6905, and its telephone number at this location is 312-427-2953.
63
<PAGE> 68
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, we had [ ] shares outstanding,
[ ] of which are held by our "affiliates." Upon completion of this offering,
we will have [ ] shares outstanding, excluding [ ] shares issuable upon
the exercise of outstanding options. Of the shares outstanding upon completion
of this offering, a total of approximately [ ] shares, including the shares
sold pursuant to the offering, will be freely tradeable without restriction
under the Securities Act. The remaining [ ] shares outstanding upon the
completion of the offering may be resold publicly only upon registration under
the Securities Act or in compliance with an exemption from the registration
requirements of the Securities Act, such as Rule 144, or Rule 701, which are
summarized below. Our affiliates generally will be able to sell our shares only
in accordance with the limitations of Rule 144 under the Securities Act.
RULE 144:
In general under Rule 144 as currently in effect, beginning ninety (90)
days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year is entitled to sell, within any
three-month period, a number of shares that is not more than the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
- the average weekly trading volume of the common stock on the
Over-the-Counter Market during the four calendar weeks before a notice of
the sale on Form 144 is filed.
Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(k):
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the ninety (90) days before a sale, and who has beneficially owned
the restricted shares for at least two years, is entitled to sell the shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
RULE 701:
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us under
a stock option plan, such as our stock option plan, or other written agreement
can resell those shares ninety (90) days after the effective date of this
offering in reliance on Rule 144, but without complying with some of its
restrictions, including its holding period requirement.
STOCK OPTIONS:
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering 550,000 shares of common stock reserved for
issuance under our stock option plan. As of June 30, 1999, options to purchase
430,510 shares of common stock were issued and outstanding of which 80,652 are
vested as of the date of this
64
<PAGE> 69
prospectus. The registration statement covering our stock options is expected to
be filed and become effective as soon as practicable after the effective date of
this registration statement.
Prior to the offering, there has been no public trading market for our
shares, and no predictions can be made as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the prevailing market
price of our shares after completion of the offering. Sales of substantial
amounts of our shares in the public market could have an adverse affect on
prevailing market prices.
PLAN OF DISTRIBUTION
We will sell shares directly to investors on our behalf acting through our
employees, officers and directors, each of whom performs substantial duties on
our behalf other than in connection with this offering. None of these officers
will be separately compensated either directly or indirectly for his or her
services in connection with this offering. We will, however, pay all of the
expenses incident to the offering and sale of our shares. We will not compensate
any brokers or sales agents in connection with this offering.
This offer is not contingent upon the sale of any minimum number of shares
and all proceeds from the sale of any shares offered hereby will be immediately
available for our use. See "Use of Proceeds." There can be no assurance that any
of the shares offered under this offering will be sold. This offering will close
sixty (60) days from the date of this prospectus unless extended for up to an
additional thirty (30) days by our board of directors. We will have the sole
right to accept offers to purchase shares and may reject any proposed purchase
of shares in whole or in part. We reserve the right to withdraw, cancel or
modify the offering of the shares at any time, without notice. For more
information on the distribution of our shares see "How to Participate in this
Offering."
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon by Bass, Berry & Sims PLC, Nashville, Tennessee.
EXPERTS
The audited financial statements and schedules for the two years ended
December 31, 1997 and 1998 included in this prospectus and elsewhere in the
registration statement have been audited by Heathcott & Mullaly, P.C.,
independent certified public accountants, and the financial statements for the
year ended December 31, 1996 have been audited by Maggart & Associates, P.C.,
certified public accountants, and are qualified as indicated in their report of
the statements. Audited financial statements and reports are included in this
prospectus in reliance upon the authority of those firms as experts in giving
those reports.
65
<PAGE> 70
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 that registers the shares
of common stock offered hereby. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules filed with the registration statement. For more information about us
and our common stock, you should review the registration statement and the
exhibits and schedules filed with the registration statement. Statements
contained in this prospectus regarding the contents of any contract or any other
document to which reference is made are not necessarily complete, and, in each
instance, you should review the copy of the contract or other document filed as
an exhibit to the registration statement. A copy of the registration statement
and the exhibits and schedules filed with the registration statement may be
inspected and copied at the following location of the Securities and Exchange
Commission:
PUBLIC REFERENCE ROOM
450 FIFTH STREET, N.W.
WASHINGTON, D.C. 20549
You may also obtain copies of all or any part of the registration statement from
that office at prescribed rates. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference room. The Securities and Exchange Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http://www.sec.gov.
Prior to filing the registration statement of which this prospectus is a
part, we were not subject to the reporting requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934. Upon effectiveness of the registration
statement, we will become subject to the informational and periodic reporting
requirements of the Exchange Act, and consequently, will file periodic reports,
proxy statements and other information with the Securities and Exchange
Commission. Those periodic reports, proxy statements and other information will
be available for inspection and copying at the public reference facility
referenced above. We intend to register the securities offered by this
registration statement under the Exchange Act simultaneously with the
effectiveness of the registration statement and to furnish our shareholders with
annual reports containing financial statements examined and reported on by our
independent public accountants, and quarterly reports for the first three fiscal
quarters of each fiscal year containing unaudited interim financial information.
66
<PAGE> 71
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Cumberland Bancorp,
Incorporated 1998, 1997 and 1996 (audited)
Report of Independent Accountants for 1998 and 1997....... F-2
Report of Independent Accountants for 1996................ F-3
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Earnings....................... F-5
Consolidated Statements of Changes in Stockholders'
Equity................................................. F-6
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-8
Financial Statements of Cumberland Bancorp, Incorporated
March 31, 1999 (unaudited)
Consolidated Balance Sheets............................... F-34
Consolidated Statements of Earnings....................... F-35
Consolidated Statements of Cash Flows..................... F-36
Notes to Consolidated Financial Statements................ F-37
</TABLE>
F-1
<PAGE> 72
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cumberland Bancorp, Incorporated
We have audited the consolidated balance sheets of Cumberland Bancorp,
Incorporated and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
consolidated financial statements of the Company for the year ended December 31,
1996 were audited by other auditors whose report, dated March 29, 1997,
expressed a qualified opinion on those statements as a result of the auditors
being unable to audit the Company's investment in Cumberland Life Insurance
Company.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 1997 financial statements present fairly, in
all material respects, the consolidated financial position of Cumberland
Bancorp, Incorporated and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ HEATHCOTT & MULLALY, P.C.
Brentwood, Tennessee
March 19, 1999
F-2
<PAGE> 73
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cumberland Bancorp, Incorporated
We have audited the consolidated statement of earnings, changes in
stockholders' equity and cash flows for the year ended December 31, 1996. 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 audit.
Except as discussed in the following paragraph, we conducted our audit in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the statement of earnings, changes in stockholders' equity and cash flows are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of earnings,
changes in stockholders' equity and cash flows. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement of earnings,
changes in stockholders' equity and cash flows. We believe that our audit
provides a reasonable basis for our opinion.
We were unable to obtain audited financial statements supporting the
Company's investment in Cumberland Life Insurance Company stated at $226,166 at
December 31, 1996, or its equity in Cumberland Life Insurance Company's earnings
of $1,166, which is included in net earnings for the year then ended; nor were
we able to satisfy ourselves about the carrying value of the investment or the
equity in its earnings by other auditing procedures.
In our opinion, except for the effects of such adjustments, if any, as
might have been determined to be necessary had we been able to examine evidence
regarding the investment and earnings of Cumberland Life Insurance Company, the
consolidated statement of earnings, changes in stockholders' equity and cash
flows referred to above present fairly, in all material respects, the results of
operations and cash flows of Cumberland Bancorp, Incorporated for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Maggart & Associates, P.C.
Nashville, Tennessee
March 29, 1997
F-3
<PAGE> 74
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks............................ $ 7,458,262 7,570,649
Interest-bearing deposits in financial
institutions..................................... 21,995,642 9,427,320
Federal funds sold................................. 12,750,000 8,475,000
Securities available for sale, at fair value....... 11,800,925 4,150,085
Securities held to maturity, fair value $8,949,951
in 1998 and $10,878,340 in 1997.................. 8,932,217 10,892,472
Loans.............................................. 296,547,232 245,200,545
Allowance for loan losses.......................... (3,789,815) (3,014,157)
------------ -----------
Loans, net.................................... 292,757,417 242,186,388
------------ -----------
Premises and equipment............................. 9,863,442 7,983,456
Accrued interest receivable........................ 2,736,977 2,487,193
Federal Home Loan Bank and Federal Reserve Bank
stock -- restricted.............................. 2,648,172 2,478,372
Other real estate.................................. 609,623 603,405
Servicing rights................................... 1,087,412 746,216
Other assets....................................... 1,215,847 1,508,150
------------ -----------
Total assets.................................. $373,855,936 298,508,706
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
DEPOSITS
Noninterest-bearing.............................. $ 23,742,218 18,831,265
Interest-bearing................................. 301,701,988 236,867,736
------------ -----------
Total deposits................................ 325,444,206 255,699,001
------------ -----------
Notes payable...................................... 7,233,125 4,531,250
Federal funds purchased............................ -- 1,200,000
Advances from Federal Home Loan Bank............... 17,973,144 17,457,526
Accrued interest payable........................... 2,234,245 1,767,383
Other liabilities.................................. 1,310,774 1,288,573
------------ -----------
Total liabilities............................. 354,195,494 281,943,733
------------ -----------
STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value, authorized
20,000,000 shares in 1998; 4,974,252 shares
issued in 1998. Authorized 5,000,000 shares in
1997, 4,954,788 shares issued in 1997............ 2,487,126 2,477,394
Additional paid-in capital......................... 8,529,554 8,422,449
Retained earnings.................................. 8,715,898 5,697,554
Accumulated other comprehensive income (loss)...... (72,136) (32,424)
------------ -----------
Total stockholders' equity.................... 19,660,442 16,564,973
------------ -----------
Total liabilities and stockholders' equity.... $373,855,936 298,508,706
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 75
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees........................ $27,618,799 16,548,503 8,454,096
Securities................................... 1,385,819 725,368 349,858
Deposits in financial institutions........... 661,164 141,750 82,445
Federal funds sold........................... 765,296 479,982 434,486
Federal Home Loan Bank and Federal Reserve
Bank dividends............................. 182,854 99,123 32,600
----------- ---------- ---------
Total interest income................... 30,613,932 17,994,726 9,353,485
----------- ---------- ---------
INTEREST EXPENSE:
Time deposits of $100,000 or more............ 3,065,320 1,939,364 1,196,847
Other time deposits.......................... 11,241,136 6,476,196 3,009,561
Federal funds purchased...................... -- 30,914 --
Notes payable and advances from Federal Home
Loan Bank.................................. 1,714,745 772,485 322,793
----------- ---------- ---------
Total interest expense.................. 16,021,201 9,218,959 4,529,201
----------- ---------- ---------
Net interest income..................... 14,592,731 8,775,767 4,824,284
PROVISION FOR LOAN LOSSES.................... 1,163,612 1,367,860 415,180
----------- ---------- ---------
Net interest income after provision for
loan losses........................... 13,429,119 7,407,907 4,409,104
----------- ---------- ---------
OTHER INCOME:
Service charges on deposit accounts.......... 1,148,350 844,418 720,045
Other service charges, commissions and
fees....................................... 949,824 719,262 278,624
Mortgage banking activities.................. 1,379,722 689,289 277,317
Gain on sale of SBA loans.................... 514,959 221,866 --
Gain on sale of branch....................... -- 550,000 --
Real estate sales............................ 21,482 165,494 229,116
----------- ---------- ---------
Total other income...................... 4,014,337 3,190,329 1,505,102
----------- ---------- ---------
OTHER EXPENSES:
Salaries and employee benefits............... 6,513,592 3,802,636 1,934,795
Occupancy.................................... 972,716 453,011 196,826
Cost of real estate sales.................... 22,609 170,400 238,869
Deposit insurance premiums................... 198,468 126,334 541,398
Other operating.............................. 4,860,970 3,121,295 1,650,150
----------- ---------- ---------
Total other expenses.................... 12,568,355 7,673,676 4,562,038
----------- ---------- ---------
Income before income taxes.............. 4,875,101 2,924,560 1,352,168
INCOME TAX EXPENSE........................... 1,856,757 1,081,395 513,253
----------- ---------- ---------
Net earnings............................ $ 3,018,344 1,843,165 838,915
=========== ========== =========
Net earnings per share -- basic.............. $ 0.55 0.48 0.35
Net earnings per share -- diluted............ 0.54 0.46 0.33
=========== ========== =========
Weighted average shares
outstanding -- basic....................... 5,459,523 3,842,480 2,374,541
Weighted average shares
outstanding -- diluted..................... 5,560,439 3,971,484 2,575,478
=========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 76
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
---------------------- PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
--------- ---------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.................... 331,212 $ 993,636 1,161,992 3,535,228 (18,799) 5,672,057
Proceeds from sale of 6,406 shares of common
stock....................................... 6,406 19,218 57,037 -- -- 76,255
Issuance of 33,283 shares of common stock
pursuant to declaration of stock dividend... 33,283 99,849 418,367 (518,216) -- --
Cash dividends................................ -- -- -- (1,538) -- (1,538)
Comprehensive Income:
Net earnings................................ 838,915
Other Comprehensive Income:
Change in unrealized loss on securities
available for sale, net of $11,837 in
income tax benefits..................... (19,353)
Total Comprehensive Income.................... -- -- -- -- 819,562
--------- ---------- --------- --------- ------- ----------
BALANCE, DECEMBER 31, 1996.................... 370,901 1,112,703 1,637,396 3,854,389 (38,152) 6,566,336
Conversion of stock options to 39,231 shares
of common stock............................. 39,231 117,692 (117,692) -- -- --
Income tax benefit from exercise of stock
options..................................... -- -- 77,284 -- -- 77,284
Three-for-one stock split..................... 820,263 -- -- -- -- --
Issuance of 1,135,749 shares of common stock
in connection with the acquisition of First
Federal Bancshares, Inc..................... 1,135,749 1,135,749 5,886,711 -- -- 7,022,460
Proceeds from sale of 111,250 shares of common
stock....................................... 111,250 111,250 938,750 -- -- 1,050,000
Comprehensive Income:
Net earnings................................ -- -- -- 1,843,165 --
Other Comprehensive Income:
Change in unrealized loss on securities
available for sale, net of $3,511 in
income taxes............................ -- -- -- -- 5,728
Total Comprehensive Income.................... 1,848,893
Subsequent two-for-one stock split............ 2,477,394 -- -- -- -- --
--------- ---------- --------- --------- ------- ----------
BALANCE, DECEMBER 31, 1997.................... 4,954,788 2,477,394 8,422,449 5,697,554 (32,424) 16,564,973
Sale of 19,464 shares of common stock to
employees................................... 19,464 9,732 107,105 -- -- 116,837
Comprehensive Income:
Net earnings................................ -- -- -- 3,018,344 --
Other Comprehensive Income
Change in unrealized loss on securities
available for sale net of $24,240 in
income tax benefits..................... -- -- -- -- (39,712)
Total Comprehensive Income.................... 2,978,632
--------- ---------- --------- --------- ------- ----------
BALANCE, DECEMBER 31, 1998.................... 4,974,252 $2,487,126 8,529,554 8,715,898 (72,136) 19,660,442
========= ========== ========= ========= ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 77
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
NET EARNINGS................................................ $ 3,018,344 1,843,165 838,915
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Provision for loan losses................................... 1,163,612 1,367,860 415,180
Depreciation and amortization............................... 1,007,467 460,122 215,351
Gain on sale of branch...................................... -- (550,000) --
Mortgage loans originated for sale.......................... (74,812,889) (20,374,347) (3,800,000)
Proceeds from sale of mortgage loans........................ 76,154,827 20,424,552 5,789,971
Deferred income tax benefits................................ (55,193) (204,310) (38,299)
Increase in accrued interest receivable..................... (249,784) (453,808) (90,924)
Increase (decrease) in accrued interest payable and other
liabilities............................................... 466,862 387,688 (24,009)
Other, net.................................................. (162,799) (72,447) (39,107)
------------ ----------- -----------
Total adjustments....................................... 3,512,104 985,310 2,428,163
------------ ----------- -----------
Net cash provided by operating activities............... 6,530,448 2,828,475 3,267,078
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash received -- acquisition of First Federal
Bancshares, Inc........................................... -- 14,965,087 --
Net decrease in interest-bearing deposits in financial
institutions.............................................. (12,568,322) (4,427,320) (5,000,000)
(Increase) decrease in federal funds sold................... (4,275,000) (1,400,000) 7,275,000
Purchases of securities available for sale.................. (19,373,474) (1,920,416) (4,037,032)
Proceeds from maturities and redemptions of securities
available for sale........................................ 11,552,834 2,449,277 3,886,259
Proceeds from sale of securities available for sale......... -- -- 471,639
Purchases of securities held to maturity.................... (4,489,061) (5,000,000) (210,000)
Proceeds from maturities and redemptions of securities held
to maturity............................................... 6,449,316 2,108,322 --
Net increase in loans....................................... (53,076,579) (42,454,838) (17,557,690)
Purchase of and improvements to other real estate........... (27,700) (383,975) --
Cash used in sale of branch................................. -- (915,659) --
Purchases of premises and equipment......................... (2,735,865) (2,387,398) (186,726)
Proceeds from sale of other real estate..................... 21,482 65,475 92,000
------------ ----------- -----------
Net cash used by investing activities................... (78,522,369) (39,301,445) (15,266,550)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.................................... 69,745,205 34,917,176 12,385,450
Increase (decrease) in federal funds purchased.............. (1,200,000) 1,200,000 --
Increase (decrease) in advances from Federal Home Loan
Bank...................................................... 515,618 2,991,488 (788,192)
Proceeds from notes payable................................. 3,000,000 -- 1,431,250
Repayments of notes payable................................. (298,125) -- (250,000)
Proceeds from issuance of common stock...................... 116,837 1,050,000 76,255
Dividends paid.............................................. -- -- (1,538)
------------ ----------- -----------
Net cash provided by financing activities............... 71,879,535 40,158,664 12,853,225
------------ ----------- -----------
Net increase (decrease) in cash......................... (112,387) 3,685,694 853,753
Cash and cash equivalents at beginning of year.............. 7,570,649 3,884,955 3,031,202
------------ ----------- -----------
Cash and cash equivalents at end of year.................... $ 7,458,262 7,570,649 3,884,955
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ 15,694,513 9,236,022 4,553,210
Income taxes paid........................................... 1,842,143 1,210,444 617,747
============ =========== ===========
NON-CASH ACTIVITIES:
Issuance of common stock -- acquisition of First Federal
Bancshares, Inc........................................... $ -- 7,022,460 --
Issuance of common stock -- conversion of stock options..... -- 117,692 --
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 78
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Cumberland Bancorp, Incorporated and
Subsidiaries conform to generally accepted accounting principles and to general
practices within the banking 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 wholly-owned
subsidiaries, Cumberland Bank, BankTennesse, and The Community Bank. Also
included in the consolidated financial statements are Cumberland Bank's
wholly-owned subsidiaries Cumberland Finance, Inc., Cumberland Mortgage Company,
Inc., Cumberland Life Insurance Company, Inc., Cumberland Services, Inc., and
Cumberland Services, Inc.'s fifty percent owned subsidiary, InsureTennessee.
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 Cumberland Bank,
BankTennesse, and The Community Bank. The Banks provide a variety of banking
services to individuals and businesses through their branches in Brentwood,
Carthage, Collierville, Gallatin, Gordonsville, Green Hills, Memphis, Portland,
Ripley, and White House, 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.
Cumberland Bank's subsidiaries, Cumberland Mortgage Company, Inc.,
Cumberland Life Insurance Company, Inc., Cumberland Services, Inc., and
InsureTennessee, Inc. are headquartered in Carthage, Tennessee. Cumberland
Finance, Inc. has offices in Gallatin and Murfreesboro, Tennessee. Cumberland
Finance, Inc. provides consumer loan services. Cumberland Mortgage Company, Inc.
develops real estate. Cumberland Life Insurance Company, Inc. is a reinsurance
company for credit insurance products. Cumberland Services, Inc. provides
brokerage services. InsureTennessee sells property and casualty insurance.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE> 79
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
INVESTMENT 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.
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 stockholders' equity. Realized gains and losses are
reported in earnings based on the adjusted cost of the specific security sold.
LOANS
Loans which the Company has the positive intent and ability to hold to
maturity are stated at the principal amount outstanding. Unearned discounts,
deferred loan fees and the allowance for loan losses are shown as reductions of
loans. Loan origination fees are deferred, to the extent they exceed direct
origination costs, and recognized over the life of the related loans as yield
adjustments. Interest income on loans is computed based on the outstanding loan
balance.
Loans are generally placed on nonaccrual when a loan is specifically
determined to be impaired or when the collection of interest is less than
probable or collection of any amount of the principal is doubtful, after
considering economic and business conditions and collection efforts. Any unpaid
interest previously accrued on those loans is reversed from income. Interest
income generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received on such loans
are applied as a reduction of the loan principal balance. Interest income on
other nonaccrual loans is recognized only to the extent of interest payments
received.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level which, in
management's judgement, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan
F-9
<PAGE> 80
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
portfolio, including the nature of the portfolio, credit concentrations, trends
in historical loss experience, specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. Because of uncertainties
associated with the regional economic conditions, collateral values, and future
cash flows on impaired loans, it is reasonably possible that management's
estimate of credit losses inherent in the loan portfolio and the related
allowance may change materially in the near term. The allowance is increased by
a provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries.
MORTGAGE BANKING ACTIVITIES
The Banks originate mortgage loans for sale and these loans are generally
sold at origination. Loans held for sale are carried at the lower of cost or
fair value. Origination fees are recorded as income when the loans are sold to
third party investors.
TRANSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". The statement, which supercedes SFAS No. 122, provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on application of a financial-components
approach that focuses on control. It distinguishes transfers of financial assets
that are sales from transfers of assets that are secured borrowings. The
adoption of SFAS 125 did not have a material effect on the Company's financial
position or results of operations.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Deprecation has been computed on straight-line and accelerated
methods, based on the estimated useful lives of the respective asset.
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.
F-10
<PAGE> 81
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform with current
presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
LOAN SERVICING ASSETS -- The carrying amounts reported in the balance sheet
for servicing rights approximates their fair value.
LOANS RECEIVABLE -- For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently offered for loans with similar terms to
borrowers of similar credit quality.
FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK STOCK -- The carrying
amounts reported in the balance sheet for Federal Home Loan Bank and Federal
Reserve Bank stock approximates its 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 approximates their fair value.
NOTES PAYABLE, AND FEDERAL HOME LOAN BANK ADVANCES -- The fair values of
notes payable and advances from the Federal Home Loan Bank are estimated using
discounted
F-11
<PAGE> 82
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes amounts in the balance sheet caption,
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 stockholders 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. All prior period
EPS data has been restated to reflect implementation of this statement. EPS has
also been adjusted for the 1999 10% stock dividend, the 1998 two-for-one stock
split, 1997 three-for-one stock split, and the 1996 10% stock dividend as if the
stock splits and dividends occurred as of the earliest period presented.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 1997, the FASB issued SFAS No. 130, "Comprehensive Income". The
statement establishes standards for reporting and presentation of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. This statement requires that
companies (i) classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial condition.
This statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information". The statement establishes standards for
disclosure about operating segments in annual financial statements and selected
information in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise". This statement
F-12
<PAGE> 83
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
becomes effective for the Company's fiscal year ending December 31, 1998, and
requires that comparative information from earlier years be restated to conform
to its requirements. The adoption of the provisions of this statement did not
have a material impact on the Company.
In October 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This Statement amends SFAS No. 65, which required that retained
securities be classified as trading securities. SFAS No. 134 allows these
securities to be classified as trading, held to maturity or available for sale
based on the intent and ability of the enterprise. This Statement is effective
January 1, 1999, and is not expected to materially impact the Company's
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new Statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. This Statement is effective for all
quarters of fiscal years beginning after June 15, 1999; which for the Company
will mean the first quarter of 2000. This Statement is not expected to
materially impact the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-up Activities." This Statement
requires that the costs of start-up activities, including organization costs, be
expensed as incurred. When adopted, previously capitalized start-up and
organization costs should be written off and reported as the cumulative effect
of a change in accounting principle. The Statement is effective for fiscal years
beginning after December 15, 1998 and is not expected to materially impact the
Company's financial position or results of operations.
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for the
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings based
on a control-oriented "financial components" approach. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes liabilities
when extinguished. The adoption of this standard required a change in the method
used to recognize mortgage servicing rights, increasing both the amortization
expense as well as the servicing income.
SFAS No. 128, "Earnings per Share", was adopted as of January 1, 1997. This
standard specifies the computation, presentation and disclosure requirements for
earnings per share (EPS). The objective of SFAS No. 128 is to simplify the
computation and to make the United States' standard more compatible with EPS
standards of other countries and with that of the International Accounting
Standards Committee. The Company now
F-13
<PAGE> 84
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
presents on the statement of earnings both earnings per share and diluted
earnings per share for all periods presented.
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This standard requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the expected undiscounted future cash flows from the use of the
asset and its eventual disposition are less than the carrying amount of the
asset, an impairment loss is recognized. The impairment loss is measured based
upon the present value of the expected future cash flows.
2. INTEREST BEARING DEPOSITS IN FINANCIAL INSTITUTIONS
At December 31, 1998, the Company had certificates of deposit with the
Federal Home Loan Bank totaling $17,500,000. The certificates bear interest
ranging from 4.75% to 5.83% and have maturities ranging from seven days to two
years, with penalties for early withdrawal. Any penalties for early withdrawal
would not have a material effect on the financial statements.
The majority of the certificates are short-term with maturities ranging
from 7 to 87 days and bear interest ranging from 4.75% to 5.10%. One $500,000
certificate has a 185 day maturity with interest at 4.80%, and one other
$500,000 certificate has a 730 day maturity and bears interest of 5.825%.
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, 1998 and 1997.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and U.S.
government agencies........... $ 7,948,580 29,517 6,917 7,971,180
Mortgage-backed securities...... 2,692,170 8,063 10,083 2,690,150
Marketable equity securities.... 1,229,058 -- 89,463 1,139,595
----------- ------ ------- ----------
December 31, 1998............. $11,869,808 37,580 106,463 11,800,925
=========== ====== ======= ==========
</TABLE>
F-14
<PAGE> 85
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Treasury and U.S.
government agencies........... $ 4,169,208 20,983 147 4,190,338
Mortgage-backed securities...... 4,763,009 39,746 43,142 4,759,613
----------- ------ ------- ----------
December 31, 1998............. $ 8,932,217 60,729 43,289 8,949,951
=========== ====== ======= ==========
AVAILABLE FOR SALE
U.S. Treasury and U.S.
government agencies........... $ 1,401,861 -- 987 1,400,874
Mortgage-backed securities...... 1,052,623 18,178 8,514 1,062,287
Other debt securities........... 666,683 9,269 -- 675,952
Marketable equity securities.... 1,086,518 -- 75,546 1,010,972
----------- ------ ------- ----------
December 31, 1997............. $ 4,207,685 27,447 85,047 4,150,085
=========== ====== ======= ==========
HELD TO MATURITY
U.S. Treasury and U.S.
government agencies........... $ 4,559,812 12,400 2,750 4,569,462
Mortgage-backed securities...... 6,128,301 74,080 98,371 6,104,010
Other debt securities........... 204,359 509 -- 204,868
----------- ------ ------- ----------
December 31, 1997............. $10,892,472 86,989 101,121 10,878,340
=========== ====== ======= ==========
</TABLE>
The carrying amounts and estimated fair value of securities at December 31,
1998 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.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------------ ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less......... $ -- -- 500,000 502,250
Due after one through five
years......................... 6,997,955 7,004,585 2,560,000 2,578,333
Due after five through ten
years......................... 500,000 510,135 1,000,000 1,000,400
Marketable equity securities.... 1,229,058 1,139,595 -- --
Mortgage-backed securities...... 2,692,170 2,690,150 4,763,010 4,759,614
SBA loan pool participation
certificates.................. 450,625 456,460 109,207 109,354
----------- ---------- --------- ---------
$11,869,808 11,800,925 8,932,217 8,949,951
=========== ========== ========= =========
</TABLE>
F-15
<PAGE> 86
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Securities carried at approximately $5,607,686 at December 31, 1998 were
pledged to secure deposits and for other purposes as required or permitted by
law. The fair value of the securities portfolio is established by an independent
pricing service as of the approximate dates indicated.
At December 31, 1998, the Company did not hold securities of any single
issuer, other than obligations of the U.S. Treasury, other U.S. Government
agencies, and the Federal Home Loan Bank stock, whose aggregate book value
exceeded ten percent of stockholders' equity.
4. LOANS
A summary of loans outstanding by category follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Real estate -- construction and development........ $ 52,769,280 40,558,700
Real estate -- 1 to 4 family residential
properties....................................... 125,547,670 108,330,832
Real estate -- other............................... 12,554,931 26,183,872
Commercial, financial and agricultural............. 68,829,998 36,681,925
Consumer........................................... 39,257,801 36,273,384
Other.............................................. 671,800 82,903
------------ -----------
299,631,480 248,111,616
Net deferred loan fees and discounts............... (587,732) (569,220)
Unearned income.................................... (2,496,516) (2,341,851)
------------ -----------
$296,547,232 245,200,545
============ ===========
</TABLE>
In addition to the loans shown above, loans serviced for others totaled
$104,320,728 and $88,277,742 at December 31, 1998 and 1997, 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. 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.
Direct and indirect loans to officers and directors during 1998 are as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1997.............................. $ 3,124,658
New loan disbursements.................................. 1,901,871
Repayments.............................................. (1,786,095)
-----------
Balance at December 31, 1998.............................. $ 3,240,434
===========
</TABLE>
F-16
<PAGE> 87
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
<TABLE>
<S> <C>
Contractual commitments to extend credit.................. $58,762,574
Standby letters of credit................................. $ 2,021,250
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Banks evaluate each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Banks upon extension of credit is based on management's
credit evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
Letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Banks have a recourse obligation for 90 days from the purchase date for
loans sold to investors. At December 31, 1998, loans sold to the investors with
existing recourse approximated $16,231,074 (for The Community Bank and
BankTennessee only). The obligation on these loans relates to performance by the
borrower.
6. CONCENTRATIONS OF CREDIT
The Bank grants agribusiness, commercial, construction, and individual
loans to customers located primarily within the middle and western portion of
Tennessee. Although the Bank has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent upon the
construction industry. Concentration by type of loans are presented in note 4.
F-17
<PAGE> 88
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR............... $3,014,157 1,194,131 1,047,800
Allowance for loan losses of First Federal
Bancshares, Inc. at acquisition date..... -- 1,229,164 --
Provisions charged to operating expense.... 1,163,612 1,367,860 415,180
Loans charged off.......................... (494,907) (855,125) (306,215)
Recoveries on previously charged-off
loans.................................... 106,953 78,127 37,366
---------- --------- ---------
BALANCE AT END OF YEAR..................... $3,789,815 3,014,157 1,194,131
========== ========= =========
</TABLE>
The Company had approximately $1,726,000 and $1,561,000 at December 31,
1998 and 1997, respectively, in loans which were considered impaired under SFAS
114. Non-accrual loans totaled $564,516 at December 31, 1996. Accrual of
interest had been discontinued on these loans as of those dates. The allowance
for loan losses related to these loans was approximately $214,000 and $173,000
at December 31, 1998 and 1997, respectively. If such loans had been on an
accrual basis, interest income would have been approximately $121,000, $79,000
and $33,000 higher in 1998, 1997 and 1996, respectively.
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Land.................................................. $ 3,155,003 2,911,727
Buildings and improvements............................ 3,949,103 2,715,323
Leasehold improvements................................ 1,110,332 485,810
Furniture, fixtures and equipment..................... 3,504,775 2,542,527
Automobiles........................................... 121,317 117,129
Construction-in-progress.............................. 480,881 898,434
----------- ---------
12,321,411 9,670,950
Less accumulated depreciation......................... 2,457,969 1,687,494
----------- ---------
NET PREMISES AND EQUIPMENT............................ $ 9,863,442 7,983,456
=========== =========
</TABLE>
Depreciation expense related to premises and equipment amounted to $855,879
in 1998, $433,741 in 1997 and $215,351 in 1996.
Construction-in-progress at December 31, 1998 is related to new office
facilities being constructed in Collierville, Portland and Ripley, Tennessee.
Total costs, including furnishings and equipment, is expected to be
approximately $600,000 for Ripley, $500,000
F-18
<PAGE> 89
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for Portland and $2,300,000 for Collierville. The anticipated completion dates
for the projects extend through March, 2000.
9. DEPOSITS
A summary of deposits at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Noninterest-bearing demand......................... $ 23,742,218 18,831,265
Interest-bearing demand............................ 105,263,489 64,292,522
Savings............................................ 10,588,844 9,449,144
Certificates of deposit of $100,000 or more........ 59,260,296 45,653,816
Other time......................................... 126,589,359 117,472,254
------------ -----------
TOTAL DEPOSITS..................................... $325,444,206 255,699,001
============ ===========
</TABLE>
10. ADVANCES FROM FEDERAL HOME LOAN BANK
The Company is currently participating in a program with the Federal Home
Loan Bank (FHLB) of Cincinnati to provide funds to the public for affordable
housing. The FHLB advances funds to the Company with the requirement that the
advances are secured by qualifying loans, essentially home mortgages (1-4 family
residential). To participate in this program, the Company is required to be a
member of the Federal Home Loan Bank and own stock in the FHLB. The Company has
$2,427,800 of such stock at December 31, 1998 to satisfy this requirement.
At December 31, 1998 and 1997, advances from the FHLB totaled $17,973,144
and $17,457,526, respectively. The interest rates on these advances ranged from
5.40% to 9.125%. Qualifying loans totaling $26,959,716 were pledged as security
under a blanket pledge agreement with the FHLB at December 31, 1998.
Maturities of the advances from FHLB are as follows:
<TABLE>
<S> <C>
1999............................................ $ 4,835,785
2000............................................ 2,334,854
2001............................................ 556,535
2002............................................ 240,374
2003............................................ 1,188
Later years....................................... 10,004,408
-----------
$17,973,144
===========
</TABLE>
F-19
<PAGE> 90
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
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 in ten
annual installments of $143,125 commencing on June
15, 1998. The note is secured by 100% of the common
stock of Cumberland Bank............................. $1,288,125 1,431,250
As a result of the acquisition of First Federal
Bancshares, Inc., the Company assumed a 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 30,
2002. The note is secured by 100% of the common stock
of BankTennessee and The Community Bank.............. 1,045,000 1,200,000
As a result of the acquisition of First Federal
Bancshares, Inc., the Company assumed a note payable
to a lending institution which bears interest at
prime rate. Interest is payable quarterly and
principal is payable in one installment of $40,000 on
March 31, 2002, and 24 quarterly installments
commencing on June 30, 2002 of $77,500. The note is
secured by 100% of the common stock of BankTennessee
and The Community Bank............................... 1,900,000 1,900,000
$6,000,000 line of credit from a lending institution
which bears interest at a rate of 7.50%. Advances can
be made on the line from inception to March 31, 2000.
Interest is payable quarterly and principal is
payable in ten annual installments of $600,000
commencing April 1, 2000. The note is secured by 100%
of the common stock of Cumberland Bank,
BankTennessee, and The Community Bank................ 3,000,000 --
---------- ---------
$7,233,125 4,531,250
========== =========
</TABLE>
F-20
<PAGE> 91
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum annual principal payments for future years are as follows:
<TABLE>
<S> <C>
1999............................................. $ 453,125
2000............................................. 453,125
2001............................................. 1,053,125
2002............................................. 1,130,625
2003............................................. 1,053,125
Later years........................................ 3,090,000
----------
$7,233,125
==========
</TABLE>
The Company has agreed to certain covenants in connection with the notes
payable to the lending institution. These covenants include, among other things,
minimum financial ratios for the subsidiary Banks. The Banks were in compliance
with all of the provisions of the loan covenants as of December 31, 1998.
The Company entered into a new loan agreement for a $6,000,000 line of
credit during 1998. In the loan agreement, the lending institution placed a
covenant restricting capital. The covenant states if the Company is current on
principal and interest payments, it will be permitted to pay dividends to the
stockholders not exceeding twenty-five percent of net earnings.
12. INCOME TAXES
The provision for income taxes (benefits) consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- -------
<S> <C> <C> <C>
CURRENT:
Federal...................................... $1,619,444 979,294 465,624
State........................................ 292,506 188,139 85,928
---------- --------- -------
Total current tax.......................... 1,911,950 1,167,433 551,552
---------- --------- -------
DEFERRED:
Federal...................................... (46,479) (172,017) (32,245)
State........................................ (8,714) (32,293) (6,054)
---------- --------- -------
Total deferred (benefit)................... (55,193) (204,310) (38,299)
---------- --------- -------
Tax benefits credited to stockholders' equity
related to exercise of stock options....... -- 118,272 --
---------- --------- -------
Total provision for income taxes........... $1,856,757 1,081,395 513,253
========== ========= =======
</TABLE>
F-21
<PAGE> 92
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant temporary differences between tax and financial reporting that
give rise to deferred tax assets (liabilities) are as follows at December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- -------
<S> <C> <C> <C>
Allowance for loan losses.................. $ 1,233,385 928,485 378,308
Unrealized loss on securities.............. 36,311 25,339 23,343
Deferred loan fees......................... 142,312 145,727 --
Other...................................... -- 82,288 --
----------- ---------- -------
Total deferred tax assets................ 1,412,008 1,181,839 401,651
----------- ---------- -------
FHLB stock................................. (410,631) (347,361) --
Premises and equipment..................... (444,945) (482,550) (20,792)
Loan servicing rights...................... (421,901) (283,562) --
----------- ---------- -------
Total deferred tax liabilities........... (1,277,477) (1,113,473) (20,792)
----------- ---------- -------
Net deferred tax asset..................... $ 134,531 68,366 380,859
=========== ========== =======
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- -------
<S> <C> <C> <C>
Computed expected provision for income
taxes...................................... $1,657,534 994,350 459,737
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax
benefit................................. 193,054 109,011 53,054
Other, net................................. 6,169 (21,966) 462
---------- --------- -------
Total income tax expense................ $1,856,757 1,081,395 513,253
========== ========= =======
</TABLE>
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 were then 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.
13. 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
F-22
<PAGE> 93
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
framework for prompt corrective action, the Banks must meet specific capital
guidelines that involve quantitative measures of the Banks' assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain 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, 1998 and 1997, that
the Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Banks as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Banks must maintain minimum 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 Banks' category.
The Company and the Banks' actual capital amounts and ratios at December
31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
REQUIRED PROMPT CORRECTIVE
MINIMUM ACTION PROVISIONS ACTUAL
----------- ----------------- ----------
<S> <C> <C> <C>
DECEMBER 31, 1998
CUMBERLAND BANCORP, INC.
Amount:
Tier I to average assets -- leverage... $14,793,120 18,491,400 19,645,000
Tier I to risk-weighted assets......... 11,064,040 16,596,060 19,645,000
Total capital to risk-weighted
assets.............................. 22,128,080 27,660,100 23,107,000
Ratios:
Tier I to average assets -- leverage... 4.00% 5.00% 5.31%
Tier I to risk-weighted assets......... 4.00% 6.00% 7.10%
Total capital to risk-weighted
assets.............................. 8.00% 10.00% 8.35%
CUMBERLAND BANK
Amount:
Tier I to average assets -- leverage... $ 6,052,200 7,565,250 10,073,000
Tier I to risk-weighted assets......... 4,311,560 6,467,340 10,073,000
Total capital to risk-weighted
assets.............................. 8,623,120 10,778,900 11,426,000
</TABLE>
F-23
<PAGE> 94
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
REQUIRED PROMPT CORRECTIVE
MINIMUM ACTION PROVISIONS ACTUAL
----------- ----------------- ----------
<S> <C> <C> <C>
Ratios:
Tier I to average assets -- leverage... 4.00% 5.00% 6.66%
Tier I to risk-weighted assets......... 4.00% 6.00% 9.35%
Total capital to risk-weighted
assets.............................. 8.00% 10.00% 10.60%
BANKTENNESSEE
Amount:
Tier I to average assets -- leverage... $ 5,643,520 7,054,400 9,664,000
Tier I to risk-weighted assets......... 4,250,160 6,375,240 9,664,000
Total capital to risk-weighted
assets.............................. 8,500,320 10,625,000 10,992,000
Ratios:
Tier I to average assets -- leverage... 4.00% 5.00% 6.85%
Tier I to risk-weighted assets......... 4.00% 6.00% 9.10%
Total capital to risk-weighted
assets.............................. 8.00% 10.00% 10.35%
THE COMMUNITY BANK
Amount:
Tier I to average assets -- leverage... $ 3,102,560 3,878,200 4,876,000
Tier I to risk-weighted assets......... 2,136,760 3,205,140 4,876,000
Total capital to risk-weighted
assets.............................. 4,273,520 5,341,900 5,415,000
Ratios:
Tier I to average assets -- leverage... 4.00% 5.00% 6.29%
Tier I to risk-weighted assets......... 4.00% 6.00% 9.13%
Total capital to risk-weighted
assets.............................. 8.00% 10.00% 10.14%
DECEMBER 31, 1997
CUMBERLAND BANCORP, INC.
Amount:
Tier I to average assets -- leverage... $11,467,440 14,334,300 16,521,851
Tier I to risk-weighted assets......... 9,132,057 13,698,086 16,521,851
Total capital to risk-weighted
assets.............................. 18,264,114 22,830,143 19,375,619
Ratios:
Tier I to average assets -- leverage... 4.00% 5.00% 5.77%
Tier I to risk-weighted assets......... 4.00% 6.00% 7.23%
Total capital to risk-weighted
assets.............................. 8.00% 10.00% 8.48%
</TABLE>
F-24
<PAGE> 95
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
REQUIRED PROMPT CORRECTIVE
MINIMUM ACTION PROVISIONS ACTUAL
----------- ----------------- ----------
<S> <C> <C> <C>
CUMBERLAND BANK
Amount:
Tier I to average assets -- leverage... $ 4,746,880 5,933,600 7,948,820
Tier I to risk-weighted assets......... 3,632,457 5,448,686 7,948,820
Total capital to risk-weighted
assets.............................. 7,264,914 9,081,143 9,083,820
Ratios:
Tier I to average assets -- leverage... 4.00% 5.00% 6.70%
Tier I to risk-weighted assets......... 4.00% 6.00% 8.75%
Total capital to risk-weighted
assets.............................. 8.00% 10.00% 10.00%
BANKTENNESSEE
Amount:
Tier I to average assets -- leverage... $ 4,553,560 5,691,950 8,262,000
Tier I to risk-weighted assets......... 3,513,080 5,269,620 8,262,000
Total capital to risk-weighted
assets.............................. 7,026,160 8,782,700 9,318,000
Ratios:
Tier I to average assets -- leverage... 4.00% 5.00% 7.26%
Tier I to risk-weighted assets......... 4.00% 6.00% 9.41%
Total capital to risk-weighted
assets.............................. 8.00% 10.00% 10.61%
THE COMMUNITY BANK
Amount:
Tier I to average assets -- leverage... $ 2,167,000 2,708,750 3,724,000
Tier I to risk-weighted assets......... 1,560,960 2,341,440 3,724,000
Total capital to risk-weighted
assets.............................. 3,121,920 3,902,400 4,164,000
Ratios:
Tier I to average assets -- leverage... 4.00% 5.00% 6.87%
Tier I to risk-weighted assets......... 4.00% 6.00% 9.54%
Total capital to risk-weighted
assets.............................. 8.00% 10.00% 10.67%
</TABLE>
14. 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 $288,057 in 1998, $138,839 in 1997
and $30,323 in 1996.
F-25
<PAGE> 96
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from
banks................. $ 7,458,262 7,458,262 7,570,649 7,570,649
Interest-bearing
deposits in financial
institutions.......... 21,995,642 21,995,642 9,427,320 9,427,320
Federal funds sold...... 12,750,000 12,750,000 8,475,000 8,475,000
Securities available for
sale.................. 11,800,925 11,800,925 4,150,085 4,150,085
Securities held to
maturity.............. 8,932,217 8,949,951 10,892,472 10,878,340
Loans, net of
allowance............. 292,757,417 294,109,911 242,186,388 242,479,958
Accrued interest
receivable............ 2,736,977 2,736,977 2,487,193 2,487,193
FHLB and FRB stock...... 2,648,172 2,648,172 2,478,372 2,478,372
Servicing rights........ 1,087,412 1,087,412 746,216 746,216
FINANCIAL LIABILITIES:
Deposits with defined
maturities............ $185,849,655 187,258,692 163,126,070 163,169,365
Deposits with undefined
maturities............ 139,594,551 139,594,551 92,572,931 92,572,931
Notes payable........... 7,233,125 7,233,125 4,531,250 4,531,250
Federal funds
purchased............. -- -- 1,200,000 1,200,000
Advances from FHLB...... 17,973,144 17,912,970 17,457,526 17,441,814
Accrued interest
payable............... 2,234,245 2,234,245 1,767,383 1,767,323
</TABLE>
16. ACQUISITION
On July 1, 1997, the Company acquired 100% of the outstanding common stock
of First Federal Bancshares, Inc. (FFBI) for consideration totaling $7,022,460.
The consideration was in the form of the Company's common stock. The
shareholders of FFBI received 1.2489 shares of the Company's stock for each
share of FFBI common stock surrendered. FFBI owned 100% of the common stock of
First Federal Bank, F.S.B. of Memphis (First Federal-Memphis) which owned 100%
of the common stock of First Federal Bank, F.S.B. of Nashville (First
Federal-Nashville). The acquisition has been accounted for in accordance with
the purchase method of accounting. The purchase price
F-26
<PAGE> 97
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exceeded the historical book value of FFBI at acquisition date by $1,429,332.
Such amount has been allocated to the assets purchased to the extent of their
fair market value in accordance with purchase accounting. Simultaneous with the
acquisition, First Federal-Memphis and First Federal-Nashville amended their
charters and renamed the banks. First Federal-Memphis changed its name to
BankTennessee and First Federal-Nashville changed its name to The Community
Bank. Results of operations of BankTennessee and The Community Bank from July 1,
1997 through December 31, 1997 are included in the 1997 consolidated financial
statements. Consideration in connection with the transaction consisted of
1,135,749 shares of Cumberland Bancorp, Incorporated common stock.
Summarized historical financial information of First Federal Bancshares,
Inc. as of June 30, 1997 is as follows:
<TABLE>
<S> <C>
Securities............................................... $ 10,508,958
Loans, net............................................... 119,238,430
Other assets............................................. 23,878,408
------------
Total assets........................................... $153,625,796
============
Deposits................................................. $131,848,166
Other liabilities........................................ 16,184,502
Stockholders' equity..................................... 5,593,128
------------
Total liabilities and stockholders' equity............. $153,625,796
============
</TABLE>
Pro forma net earnings and per share information for year ending December
31, 1997 as if the acquisition occurred January 1, 1997 are as follows:
<TABLE>
<S> <C>
Net earnings -- as reported................................ $1,843,165
Net earnings -- pro forma.................................. 2,231,196
Net earnings per share -- basic -- as reported............. 0.48
Net earnings per share -- basic -- pro forma............... 0.44
Net earnings per share -- diluted -- as reported........... 0.46
Net earnings per share -- diluted -- pro forma............. 0.43
</TABLE>
Pro forma amounts are not necessarily indicative of the actual results that
would have been realized if the acquisition had occurred January 1, 1997.
F-27
<PAGE> 98
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. 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, 1998, future minimum lease
commitments are as follows:
<TABLE>
<S> <C>
1999............................................ $193,566
2000............................................ 164,966
2001............................................ 101,744
2002............................................ 89,100
2003............................................ 89,100
Thereafter......................................... 44,500
--------
$682,976
========
</TABLE>
Rentals relating to these agreements which are included in occupancy
expense amounted to $212,334 in 1998 and $134,404 in 1997.
During 1997, the Company entered into an agreement with a group of
investors to open a BankTennesse branch in Ripley, Tennessee. In return, these
investors purchased 222,500 shares (as adjusted for the March 1998 stock split)
of the Company's common stock for $4.41 per share (as adjusted for stock split
and dividends). 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.
The Company has a commitment to invest approximately $2,150,000
representing a 50% interest in a de novo bank in Murray, Kentucky. In connection
with this commitment, the Company has advanced $275,000 for purchase of real
estate and $185,000 relating to organization and start-up costs. The Company's
pro rata portion of the organization and start-up costs of approximately $92,500
have been expensed. The remaining portion is expected to be reimbursed from
proceeds from the initial capitalization and is carried in other assets.
The investors that have committed to buy the remaining 50% will be given
the opportunity to buy $250,000 worth of stock based upon a price of 1.5
multiplied by the Company's book value that becomes exercisable if a charter is
granted to the Murray Bank by the OTS. The Company has agreed to allow these
investors to buy an additional $250,000 in Cumberland Bancorp, Incorporated
stock at a price of 1.5 multiplied by the Company's book value if the Murray
Bank attains certain financial objectives.
In the normal course of business there are commitments outstanding and
contingent liabilities such as legal proceedings pending against the Bank. In
the opinion of management, no material adverse effect on the financial position
is anticipated as a result of these items.
F-28
<PAGE> 99
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SALE OF ASSETS
On August 4, 1997, BankTennessee sold its Oakland branch operation and its
assets and liabilities to Concord EFS, Inc. The branch had assets with a book
value of $208,218 which consisted primarily of loans and office property and
equipment. The branch's liabilities totaled $1,673,876 which consisted primarily
of deposits. The Bank had a net gain of $550,000 on the sale of this asset.
19. STOCK OPTIONS
The Company issues non-qualified stock options under various plans to
employees, non-employee directors, and bank advisory board members. The plans
provide for the issuance of the Company's common stock at a price equal to its
fair market value 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, including the 10% stock dividend approved in March, 1999.
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 not have been materially
affected in 1998, 1997 or 1996.
On May 8, 1997, the Board of Directors of the Company, amended all existing
stock option plans. All previously issued options were deemed exercisable. For
the options exercised the shareholder would receive the net value of the option
(fair value less exercise price) in the Company's common stock. All options not
exercised by July 1, 1997 would be forfeited. As a result, all outstanding
options were exercised on June 30, 1997 which resulted in the Company issuing
39,231 shares of common stock (235,386 shares after giving effect to the stock
splits).
Effective March 1, 1998, 366,600 shares (adjusted to 403,260 to reflect the
March, 1999 stock dividend) were granted under a stock option plan adopted in
1998. These options generally become exercisable at a rate of 20% per year until
all become fully vested on March 1, 2003. The options expire February 29, 2004.
F-29
<PAGE> 100
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the stock option activity for 1998, 1997 and 1996 is as
follows (after giving effect to the stock dividends and stock split):
<TABLE>
<CAPTION>
SHARES WEIGHTED
AVAILABLE SHARES OPTION AVERAGE
FOR UNDER SHARES EXERCISE
OPTION OPTION EXERCISABLE PRICE
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding at January 1,
1996.......................... -- 454,476 281,985 $1.38
Granted......................... -- 116,160 116,160 2.14
Exercised....................... -- (30,855) (30,855) 1.38
Forfeited....................... -- (3,630) (3,630) --
-------- -------- -------- -----
Outstanding at December 31,
1996.......................... -- 536,151 363,660 1.54
BOD action...................... -- -- 172,491 1.54
Granted......................... -- 21,998 21,998 1.54
Exercised....................... -- (558,149) (558,149) 1.54
-------- -------- -------- -----
Outstanding at December 31,
1997.......................... -- -- -- --
New plan -- 1998................ 550,000
Granted......................... (403,260) 403,260 -- 5.45
-------- -------- -------- -----
Outstanding at December 31,
1998.......................... 146,740 403,260 -- $5.45
======== ======== ======== =====
</TABLE>
The following table sets forth the computation of basic net earnings per
share and diluted net earnings per share.
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
For basic net earnings per share and diluted
net earnings per share, net earnings......... $3,018,344 1,843,165 838,915
========== ========= =========
Weighted average shares outstanding -- basic... 5,459,523 3,842,480 2,374,541
Effect of dilutive securities -- stock
options...................................... 100,916 129,004 200,937
---------- --------- ---------
Weighted average shares
outstanding -- diluted....................... 5,560,439 3,971,484 2,575,478
========== ========= =========
Net earnings per share -- basic................ $ 0.55 0.48 0.35
========== ========= =========
Net earnings per share -- diluted.............. 0.54 0.46 0.33
========== ========= =========
</TABLE>
20. SUBSEQUENT EVENT
During January 1998, the Company's Board of Directors approved a
two-for-one stock split effective on March 1, 1998 to stockholders of record at
the close of business on February 1, 1998. In March of 1999, the Board of
Directors approved a 10% stock dividend. All earnings per share data has been
restated as if the split and dividend had occurred at the beginning of the years
presented.
The Company issued 100,000 shares at $10 per share for a total of
$1,000,000 in March, 1999.
F-30
<PAGE> 101
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. OTHER OPERATING EXPENSES
Other operating expenses consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Data processing.................... $ 732,665 298,561 160,622
Advertising........................ 349,440 156,837 89,406
Stationary, printing and
supplies......................... 336,337 130,233 125,298
Postage, freight and courier....... 142,307 128,973 66,972
Directors' fees.................... 335,392 175,735 74,008
Other.............................. 2,964,829 2,230,956 1,133,844
---------- --------- ---------
$4,860,970 3,121,295 1,650,150
========== ========= =========
</TABLE>
22. PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
ASSETS 1998 1997
------ ----------- -----------
<S> <C> <C>
Cash.............................................. $ 1,386,737 672,547
Securities, available for sale.................... 236,016 82,816
Investment in subsidiaries........................ 24,635,283 19,947,346
Premises and equipment............................ 22,921 3,322
Other assets...................................... 818,416 477,751
----------- -----------
$27,099,373 21,183,782
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable..................................... $ 7,233,125 4,531,250
Accrued interest.................................. 108,261 5,448
Other liabilities................................. 97,545 82,111
----------- -----------
Total liabilities............................ 7,438,931 4,618,809
----------- -----------
Total stockholders' equity........................ $19,660,442 16,564,973
----------- -----------
$27,099,373 21,183,782
=========== ===========
</TABLE>
F-31
<PAGE> 102
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
INCOME:
Dividends from subsidiaries.............. $ 600,000 344,000 243,000
Dividends from securities................ 1,925 17,518 31,592
Other income............................. 13,448 2,921 --
---------- ---------- --------
615,373 364,439 274,592
---------- ---------- --------
EXPENSES:
Interest expense......................... 527,327 252,180 61,643
Other expense............................ 423,532 385,122 67,322
---------- ---------- --------
950,859 637,302 128,965
---------- ---------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES........................... (335,486) (272,863) 145,627
Income tax benefit....................... 358,629 284,590 36,707
---------- ---------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES............... 23,143 11,727 182,334
Equity in undistributed earnings of
subsidiaries........................... 2,995,201 1,831,438 656,581
---------- ---------- --------
Net earnings............................. $3,018,344 1,843,165 838,915
========== ========== ========
</TABLE>
F-32
<PAGE> 103
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................. $ 3,018,344 1,843,165 838,915
Adjustments to reconcile net earnings to net
cash provided (used) by operating
activities:
Equity in undistributed earnings of
subsidiaries............................ (2,995,201) (1,831,438) (656,581)
Depreciation and amortization.............. 4,128 203,762 --
Increase in accrued interest payable....... 5,448 3,051 (1,797)
Other, net................................. (403,087) 127,717 (84,073)
----------- ---------- ---------
Net cash provided (used) by operating
activities............................ (370,368) 346,257 96,464
----------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in commercial bank subsidiary..... (1,725,000) (1,450,000) (500,000)
Purchase of securities available for sale.... (153,200) -- --
Purchase of premises and equipment........... (7,450) (3,417) --
----------- ---------- ---------
Net cash used by investing activities... (1,885,650) (1,453,417) (500,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in bank overdraft................... -- -- (122,724)
Proceeds from notes payable.................. 4,829,375 -- 1,431,250
Repayment of notes payable................... (298,125) -- (250,000)
Proceeds from issuance of common stock....... 116,837 1,050,000 76,255
Cash dividends paid.......................... -- -- (1,538)
----------- ---------- ---------
Net cash provided by financing
activities............................ 4,648,087 1,050,000 1,133,243
----------- ---------- ---------
Net increase (decrease) in cash.............. 2,392,069 (57,160) 729,707
Cash at beginning of year.................... 672,547 729,707 --
----------- ---------- ---------
Cash at end of year.......................... $ 1,386,737 672,547 729,707
=========== ========== =========
NON-CASH ACTIVITIES:
Issuance of common stock -- acquisition of
First Federal Bancshares, Inc. ............ $ -- 7,022,460 --
Issuance of common stock -- conversion of
stock options.............................. -- 117,692 --
=========== ========== =========
</TABLE>
F-33
<PAGE> 104
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks.............................. $ 8,057 7,458
Interest-bearing deposits in financial
institutions....................................... 11,772 21,996
Federal funds sold................................... 17,875 12,750
Securities available for sale, at fair value......... 10,243 11,801
Securities held to maturity, fair value $7,486,000 at
March 31, 1999 and $8,950,000 at December 31,
1998............................................... 7,444 8,932
Loans................................................ 317,622 296,547
Allowance for loan losses............................ (3,795) (3,790)
-------- -------
Loans, net...................................... 313,827 292,757
-------- -------
Premises and equipment............................... 10,478 9,863
Accrued interest receivable.......................... 3,057 2,737
Federal Home Loan Bank and Federal Reserve Bank
stock -- restricted................................ 3,722 2,648
Other real estate.................................... 745 610
Servicing rights..................................... 1,045 1,088
Other assets......................................... 3,139 1,216
-------- -------
Total assets.................................... $391,404 373,856
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
DEPOSITS
Noninterest-bearing................................ $ 24,448 23,742
Interest-bearing................................... 313,492 301,702
-------- -------
Total deposits.................................. 337,940 325,444
-------- -------
Notes payable........................................ 7,289 7,233
Federal funds purchased.............................. 2,000 --
Advances from Federal Home Loan Bank................. 17,463 17,973
Accrued interest payable............................. 1,976 2,234
Other liabilities.................................... 3,319 1,312
-------- -------
Total liabilities............................... 369,987 354,196
-------- -------
STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value, authorized 20,000,000
shares; 5,581,677 shares issued in 1999. 4,974,252
shares issued in 1998.............................. 2,791 2,487
Additional paid-in capital........................... 15,569 8,529
Retained earnings.................................... 3,143 8,716
Accumulated other comprehensive income (loss)........ (86) (72)
-------- -------
Total stockholders' equity...................... 21,417 19,660
-------- -------
Total liabilities and stockholders' equity...... $391,404 373,856
======== =======
</TABLE>
F-34
<PAGE> 105
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
----------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
INTEREST INCOME:
Loans, including fees.................................. $ 7,093 6,130
Securities............................................. 325 305
Deposits in financial institutions..................... 172 88
Federal funds sold..................................... 145 203
Federal Home Loan Bank and Federal Reserve Bank
dividends............................................ 54 57
---------- ---------
Total interest income............................. 7,789 6,783
---------- ---------
INTEREST EXPENSE:
Time deposits of $100,000 or more...................... 731 724
Other time deposits.................................... 2,942 2,568
Federal funds purchased................................ 10 5
Notes payable and advances from Federal Home Loan
Bank................................................. 385 401
---------- ---------
Total interest expense............................ 4,068 3,698
---------- ---------
Net interest income............................... 3,721 3,085
Provision for loan losses.............................. 212 125
---------- ---------
Net interest income after provision for loan losses.... 3,509 2,960
---------- ---------
OTHER INCOME:
Service charges on deposit accounts.................... 324 239
Other service charges, commissions and fees............ 547 474
Mortgage banking activities............................ 290 288
Gain on sale of SBA loans.............................. 86 --
---------- ---------
Total other income................................ 1,247 1,001
---------- ---------
OTHER EXPENSES:
Salaries and employee benefits......................... 1,904 1,507
Occupancy.............................................. 434 377
Other operating........................................ 1,191 978
---------- ---------
Total other expenses.............................. 3,529 2,862
---------- ---------
Income before income taxes........................ 1,227 1,099
Income tax expense..................................... 457 420
---------- ---------
Net earnings...................................... $ 770 679
========== =========
Net earnings per share -- basic........................ $ 0.14 0.12
Net earnings per share -- diluted...................... 0.14 0.12
========== =========
Weighted average shares outstanding -- basic........... 5,509,566 5,450,267
Weighted average shares outstanding -- diluted......... 5,629,145 5,452,431
========== =========
</TABLE>
F-35
<PAGE> 106
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NET EARNINGS................................................ $ 770 679
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Provision for loan losses................................... 212 125
Depreciation and amortization............................... 205 162
Mortgage loans originated for sale.......................... (11,650) (14,930)
Proceeds from sale of mortgage loans........................ 11,703 14,875
Deferred income tax benefits................................ (3) 11
Increase in accrued interest receivable..................... (187) (97)
Increase in accrued interest payable and other
liabilities............................................... (125) 114
Other, net.................................................. 234 1,036
-------- -------
Total adjustments...................................... 389 1,296
-------- -------
Net cash provided by operating activities.............. 1,159 1,975
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase (decrease) in interest-bearing deposits in
financial institutions.................................... 10,224 (2,178)
Increase in federal funds sold.............................. (5,125) (15,125)
Purchases of securities available for sale.................. (653) (9,023)
Proceeds from maturities and redemptions of securities
available for sale........................................ 1,137 1,814
Purchases of securities held to maturity.................... -- (1,566)
Proceeds from maturities and redemptions of securities held
to maturity............................................... 1,488 --
Net increase in loans....................................... (21,335) (4,908)
Purchase of and improvements to other real estate........... (135) (69)
Purchases of premises and equipment......................... (820) (688)
Increase in advance to de novo bank......................... (383) --
-------- -------
Net cash used by investing activities.................. (15,602) (31,743)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.................................... 12,496 24,558
Increase (decrease) in federal funds purchased.............. 2,000 (1,200)
Increase (decrease) in advances from Federal Home Loan
Bank...................................................... (510) 5,930
Proceeds from notes payable................................. 275 2,500
Repayments of notes payable................................. (219) --
Proceeds from issuance of common stock...................... 1,000 --
-------- -------
Net cash provided by financing activities.............. 15,042 31,788
-------- -------
Net increase (decrease) in cash........................ 599 2,020
Cash and cash equivalents at beginning of year.............. 7,458 7,571
-------- -------
Cash and cash equivalents at end of year.................... $ 8,057 9,591
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ 4,326 3,584
Income taxes paid........................................... 100 25
======== =======
</TABLE>
F-36
<PAGE> 107
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements as of March 31, 1999 and
for the three months ended March 31, 1999 and 1998 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 period ending March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information refer to the 1998 consolidated
financial statements and footnotes thereto included elsewhere in this document.
STOCKHOLDERS' EQUITY
The Company sold 100,000 shares of common stock at a price of $10 per share
during the three months ended March 31, 1999.
F-37
<PAGE> 108
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Cautionary Statement Regarding Forward-Looking Statements... 10
How to Participate in this Offering......................... 10
Use of Proceeds............................................. 11
Dividend Policy............................................. 11
Capitalization.............................................. 12
Dilution.................................................... 13
Selected Consolidated Financial Data........................ 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Business.................................................... 33
Supervision and Regulation.................................. 45
Management.................................................. 51
Transactions with Executive Officers and Directors.......... 57
Principal Shareholders...................................... 58
Market Price of and Dividends on Our Common Equity and
Related Stockholder Matters............................... 59
Description of Capital Stock................................ 60
Shares Eligible for Future Sale............................. 64
Plan of Distribution........................................ 65
Legal Matters............................................... 65
Experts..................................................... 65
Where You Can Find More Information......................... 66
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF
ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT
RELY ON IT. WE ARE NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE
AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
UNTIL 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT
BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENT OR SUBSCRIPTIONS.
CUMBERLAND BANCORP, INCORPORATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses incurred and to be
incurred in connection with the issuance and distribution of the securities
registered pursuant to this registration statement:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 2,450
*Printing and engraving expenses............................ $ 19,400
*Accounting fees and expenses............................... $ 20,000
*Legal fees and expenses.................................... $ 50,000
*Transfer Agent and Registrar fees and expenses............. $ 1,000
*Blue Sky fees and expenses................................. $ 600
*Miscellaneous expenses..................................... $ 6,550
--------
Total.................................................. $100,000
========
</TABLE>
- -------------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATION OF LIABILITY
The Tennessee Business Corporation Act (the "Tennessee Act") authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their shareholders for monetary damages for breach of
directors' fiduciary duty. The duty of care requires that, when acting on behalf
of the corporation, directors must exercise an informed business judgment based
upon all material information reasonably available to them. Absent the
limitations now authorized by the Tennessee Act, directors are accountable to
corporations and their shareholders for monetary damages only for conduct
constituting gross negligence in the exercise of their duty of care. Although
the statute does not change the directors' duty of care, it enables corporations
to limit available relief to equitable remedies such as injunction or
rescission. The Charter of the Company limits the liability of directors (in
their capacity as directors but not in their capacity as officers) to the
Company or its shareholders to the fullest extent permitted by the laws of the
State of Tennessee, as so amended.
Specifically, directors of the Company will not be personally liable to the
Company or its shareholders for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty; (ii) for any acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; or (iii) for
unlawful distributions. The Charter provides that if the Tennessee Act is
amended after the effective date of the Charter to authorize corporate action
further eliminating or limiting the personal liability of the directors, then
the liability of a director of the Company will be eliminated or limited to the
fullest extent permitted by the laws of the State of Tennessee, as so amended.
The inclusion of this provision in the Charter may have the effect of
reducing the likelihood of derivative litigation against directors, and may
discourage or deter
II-1
<PAGE> 110
shareholders or management from bringing a lawsuit against directors or officers
for breach of their duty of care, even though such an action, if successful,
might otherwise have benefitted the Company and its shareholders.
INDEMNIFICATION AND INSURANCE
The Company Charter and Bylaws provide that the Company shall indemnify its
directors and officers to the full extent permitted by the law of the State of
Tennessee. Section 48-15-502 of the Tennessee Act provides that a corporation
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or contemplated action, suit or proceeding,
whether civil, criminal or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
The Company has obtained an insurance policy that insures its directors and
officers against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The registrant has sold and issued the following unregistered securities in
the last three years. These shares have been adjusted retroactively to reflect
our 2-for-1 stock split effective March 1, 1998 and our 10% stock dividend
effective March 26, 1999.
- On July 1, 1997, 2,757,573 shares of our common stock (which includes
First Federal options that were converted into immediately vested and
exercised options for 258,925 of our shares) to First Federal Bancshares,
Inc. shareholders in connection with our merger, exempted under Section
3(a)(11) of the Securities Act, at an aggregate consideration of
$7,022,460;
- On December 31, 1997, 244,750 shares of our common stock to a Ripley,
Tennessee investor group in connection with the opening of the Ripley
bank branch, in a private placement under Sections 3(a)(11) and 4(2) of
the Securities Act, at $4.29 per share for an aggregate purchase price of
$1.05 million;
- In July and August 1998, 21,410 shares of our common stock to key company
employees under Section 3(a)(11) of the Securities Act at $5.45 per share
for an aggregate purchase price of $116,837; and
- In March 1999, 100,000 shares of our common stock to a Franklin,
Tennessee investor group in connection with the opening of the Franklin
bank branch, in a private placement under Sections 3(a)(11) and 4(2) of
the Securities Act at $10.00 per share for an aggregate purchase price of
$1.0 million.
II-2
<PAGE> 111
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) List of Exhibits
<TABLE>
<S> <C> <C>
3.1 -- Amended Charter of Cumberland Bancorp, Incorporated
(restated electronically for SEC filing purposes only)
3.2 -- Bylaws of Cumberland Bancorp, Incorporated
4.1 -- Specimen Common Stock Certificate.
4.2 -- Article 8 of our Charter (included in Charter filed as
Exhibit 3.1)
4.3 -- Article I of our Bylaws (included in Bylaws filed as Exhibit
3.2)
* 5 -- Opinion of Bass, Berry & Sims PLC
*10.1 -- 1998 Stock Option Plan of Cumberland Bancorp, Incorporated
10.2 -- Joint Venture Agreement dated as of October 1, 1998 by and
between Cumberland Bancorp, Inc. and BancKentucky and
Addendum to Joint Venture Agreement dated as of October 31,
1998.
21 -- Subsidiaries of Cumberland Bancorp, Incorporated
23.1 -- Consent of Heathcott & Mullaly, P.C.
23.2 -- Consent of Maggart & Associates, P.C.
23.3 -- Consent of Bass, Berry & Sims PLC (included in opinion filed
as Exhibit 5)
27.1 -- Financial Data Schedule for fiscal year end December
31,1998.
27.2 -- Financial Data Schedule for three months ended March 31,
1999.
</TABLE>
- -------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
II-3
<PAGE> 112
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant further undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Cumberland
Bancorp, Incorporated has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Nashville, State of Tennessee, on this 30th day of July, 1999.
CUMBERLAND BANCORP, INCORPORATED
By: /s/ JOEL PORTER
---------------------------------------
Joel Porter
President (Principal Executive Officer)
POWER OF ATTORNEY
The Registrant and each person whose signature appears below constitutes
and appoints Joel Porter and Tom Paschal, and any agent for service named in
this Registration Statement and each of them, his, her, or its true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him, her, or it and in his, her, or its name, place and
stead, in any and all capacities, to sign and file (i) any and all amendments
(including post-effective amendments) to this Registration Statement, with all
exhibits thereto, and other documents in connection therewith, and (ii) a
registration statement, and any and all amendments thereto, relating to the
offering covered hereby filed pursuant to Rule 462(b) under the Securities Act
of 1933, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and things requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he, she, or it
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<S> <C> <C>
/s/ JOEL PORTER President and Director July 29, 1999
- --------------------------------------------------- (Principal Executive Officer)
Joel Porter
/s/ JOHN WILDER Chairman July 28, 1999
- ---------------------------------------------------
John Wilder
/s/ MARK MCDOWELL Chief Administrative Officer July 28, 1999
- --------------------------------------------------- (Principal Financial and
Mark McDowell Accounting Office)
/s/ JOHN S. EVERETT Director July 29, 1999
- ---------------------------------------------------
John S. Everett
/s/ DANNY HERRON Director July 29, 1999
- ---------------------------------------------------
Danny Herron
</TABLE>
II-5
<PAGE> 114
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<S> <C> <C>
/s/ TOM E. PASCHAL Director July 28, 1999
- ---------------------------------------------------
Tom E. Paschal
/s/ WAYNE RODGERS Director July 28, 1999
- ---------------------------------------------------
Wayne Rodgers
/s/ TOM BROOKS Director July 28, 1999
- ---------------------------------------------------
Tom Brooks
/s/ JERRY COLE Director July 28, 1999
- ---------------------------------------------------
Jerry Cole
/s/ FRANK INMAN, JR. Director July 29, 1999
- ---------------------------------------------------
Frank Inman, Jr.
/s/ ALEX RICHMOND Director July 29, 1999
- ---------------------------------------------------
Alex Richmond
/s/ JOHN S. SHEPHERD Director July 28, 1999
- ---------------------------------------------------
John S. Shepherd
</TABLE>
II-6
<PAGE> 115
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
3.1 -- Amended Charter of Cumberland Bancorp, Incorporated
(restated electronically for SEC filing purposes only)
3.2 -- Bylaws of Cumberland Bancorp, Incorporated
4.1 -- Specimen Common Stock Certificate.
4.2 -- Article 8 of our Charter (included in Charter filed as
Exhibit 3.1)
4.3 -- Article I of our Bylaws (included in Bylaws filed as Exhibit
3.2)
* 5 -- Opinion of Bass, Berry & Sims PLC
*10.1 -- 1998 Stock Option Plan of Cumberland Bancorp, Incorporated
10.2 -- Joint Venture Agreement dated as of October 1, 1998 by and
between Cumberland Bancorp, Inc. and BancKentucky and
Addendum to Joint Venture Agreement dated as of October 31,
1998.
21 -- Subsidiaries of Cumberland Bancorp, Incorporated
23.1 -- Consent of Heathcott & Mullaly, P.C.
23.2 -- Consent of Maggart & Associates, P.C.
23.3 -- Consent of Bass, Berry & Sims PLC (included in opinion filed
as Exhibit 5)
27.1 -- Financial Data Schedule for fiscal year end December
31,1998.
27.2 -- Financial Data Schedule for three months ended March 31,
1999.
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
[RESTATED ELECTRONICALLY FOR
SEC FILING PURPOSES ONLY]
AMENDED
CHARTER
OF
CUMBERLAND BANCORP, INCORPORATED
The undersigned natural person, having capacity to contract and acting
as incorporator of a corporation under the Tennessee General Corporation Act,
adopts the following charter for such corporation:
1. The name of the corporation is Cumberland Bancorp, Incorporated.
2. The duration of the corporation is perpetual.
3. The address of the principal office of the corporation in the State
of Tennessee shall be 1000 Main Street, P.O. Box 410, Carthage, TN 37030.
4. The corporation is for profit.
5. The purposes for which the corporation is organized are:
(a) To invest in and hold stock in one or more savings and loan
associations or other financial institutions and to act as a holding company for
savings and loan associations and/or other financial institutions, and in
connection therewith and/or in aid thereof:
(i) To organize or promote or facilitate the organization
of any corporation, association, partnership,
syndicate, joint venture, or other entity under the
laws of Tennessee, the United States of America, or
any other state, district, country, nation or
government, for the purpose of transacting,
promoting, or carrying on any lawful business or
purpose;
(ii) To acquire by purchase, lease, or otherwise, and to
own, hold, operate, develop, lease, mortgage, pledge,
sell, transfer or otherwise invest and trade or deal
in any manner permitted by law, real estate and
personal property of every kind and description, or
any interest therein.
<PAGE> 2
(b) In general, to carry on any business and to have and exercise all
of the powers conferred by the laws of the State of Tennessee upon corporations
formed thereunder; to do any and all of the acts and things herein set forth to
the same extent as natural persons could do, in any part of the world, as
principal, factor, agent, contractor, trustee, or otherwise, either alone or in
syndicates or otherwise in conjunction with any person, entity, syndicate,
partnership, association or corporation or any governmental, municipal, or
public authority, domestic or foreign; to establish and maintain offices and
agencies, and to exercise all of its corporate powers and rights throughout the
world.
(c) The foregoing clauses shall be construed as powers as well as
objects and purposes and the matters expressed in each clause unless herein
otherwise expressly provided, shall be in no wise limited by reference to, or
inference from, the terms of any other clause, but shall be regarded as
independent objects, purposes and powers; and the enumeration of specific
objects, purposes and powers shall not be construed to limit or restrict in any
manner the meaning of general terms, or the general powers of the corporation;
nor shall the expression of one thing be deemed to exclude another not
expressed, although it be of like nature.
6. The maximum number of shares that the corporation is authorized to
issue is 20,000,000 shares of common capital stock with a par value of One
Dollar ($1.00) per share, which shares collectively shall have unlimited voting
rights and the right to receive the net assets of the corporation upon
dissolution.
7. The business and affairs of the corporation shall be managed by a
Board of Directors:
a.) The number of Directors and their terms shall be as specified in
the Bylaws of the corporation.
2
<PAGE> 3
b.) Whenever the Board of Directors is required or permitted to take
action by vote, such action may be taken without a meeting on written consent,
setting forth the action so taken signed by all of the Directors entitled to
vote thereon, and any such action shall be as valid and effective as any
resolution duly adopted at a regular or special meeting of the Directors.
c.) There shall not be cumulative voting for directors.
8. The shareholders of the corporation shall not be entitled to
preemptive rights to purchase, subscribe for, or otherwise acquire any shares of
the corporation of any class now or hereafter authorized, or any securities
exchangeable for or convertible into such shares, or any warrants or other
instruments evidencing rights or options to subscribe for, purchase, or
otherwise acquire such shares.
9. Whenever the shareholders of the corporation are required or
permitted to take any action by vote, such action may be taken without a meeting
on written consent, setting forth the action so taken executed by holders of
record of all of the then issued and outstanding capital stock of the
corporation, and such action shall be as valid and effective as any action taken
at a regular or special meeting of the shareholders.
10. The corporation shall not commence business until the consideration
of One Thousand ($1,000.00) Dollars has been received for the issuance of
shares.
11. (a) To the fullest extent that the Tennessee Business Corporation
Act as it exists on the date hereof or as it may hereafter be amended permits
the limitation or elimination of the liability of directors, a director of the
corporation shall not be personally liable to the corporation or its
shareholders for monetary damages for a breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its shareholders, (ii) for acts
3
<PAGE> 4
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, or (iii) under Section 48-18-304 of the Tennessee
Business Corporation Act, as the same exists or hereafter may be amended. If the
Tennessee Business Corporation Act hereafter is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the corporation, in addition to the limitation on personal liability
provided herein, shall be limited to the fullest extent permitted by the amended
Tennessee Business Corporation Act. This Article 11 shall not eliminate or limit
the liability of a director for any act or omission occurring prior to the date
when this Article 11 became effective, if such a limitation or elimination of
liability of a director for such acts or omission is prohibited by the Tennessee
Business Corporation Act as then in effect. Any repeal or modification of this
Article 11 by the shareholders of the corporation shall be prospective only, and
shall not adversely affect any limitation on the personal liability of a
director of the corporation existing at the time of such repeal or modification.
(b) The corporation shall have the power to indemnify any director,
officer, employee, agent of the corporation or any other person who is serving
at the request of the corporation in any such capacity with another corporation,
partnership, joint venture, trust, or other enterprise, (including, without
limitation, any employee benefit plan) to the fullest extent permitted by the
Tennessee Business Corporation Act as it exists on the date hereof or as it may
hereafter be amended, and any such indemnification may continue as to any person
who has ceased to be a director, officer, employee, or agent and may inure to
the benefit of the heirs, executors, and administrators of such a person.
(c) By action of its Board of Directors, notwithstanding any interest
of the directors in the action, the corporation may purchase and maintain
insurance, in such amounts as the Board of
4
<PAGE> 5
Directors deems appropriate, to protect any director, officer, employee or agent
of the corporation or any other person who is serving at the request of the
corporation in any such capacity with another corporation, partnership, joint
venture, trust, or other enterprise (including, without limitation, any employee
benefit plan) against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such (including, without
limitation, expenses, judgments, fines, and amounts paid in settlement) to the
fullest extent permitted by the Tennessee Business Corporation Act as it exists
on the date hereof or as it may hereafter be amended, and whether or not the
corporation would have the power or would be required to indemnify such person
under the terms of any agreement or by-law or the Tennessee Business Corporation
Act. For the purposes of this paragraph (c), "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan.
5
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
SAVINGS AND LOAN ASSOCIATION HOLDING COMPANY
OF SMITH COUNTY, INC.
(A Tennessee Corporation)
ARTICLE I
SHAREHOLDERS
1. SHARE CERTIFICATES. The shares of the corporation shall be
represented by certificates which shall set forth thereon the statements
prescribed by ss.48-1-501 and 48-1-509 of the Tennessee General Corporation Act
("General Corporation Act") and by other applicable provisions of law, and which
shall be signed by the President or a Vice President and the Secretary or an
Assistant Secretary of the corporation and may be sealed with the seal of the
corporation or a facsimile thereof. The signatures of the President or a Vice
President and the Secretary or an Assistant Secretary upon a certificate may be
facsimiles if the certificate is manually signed on behalf of a transfer agent
or a registrar, other than the corporation itself or an employee of the
corporation. In case any officer who has signed or whose facsimile signature has
been placed upon such certificate shall have ceased to be such officer before
such certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer at the date of its issuance.
No certificate shall be issued for any share until such share is fully
paid.
2. FRACTIONAL SHARE INTERESTS OR SCRIP. The corporation may, when
necessary or desirable in order to effect share transfers, share distributions
or reclassifications, mergers, consolidations or reorganizations, issue a
fraction of a share, make arrangements or provide reasonable opportunity for any
person entitled to a fractional interest in a share to sell such fractional
interest or to purchase such additional fractional interests as may be necessary
to acquire a full share, pay in cash the fair value of fractions of a share as
of the time when those entitled to receive such fractions are determined, or
issue scrip in registered or bearer form, over the manual facsimile signature of
an officer of the corporation or its agent, which shall entitle the holder to
receive a certificate for a full share upon the surrender of such scrip
aggregating a full share. A certificate for a fractional share shall, but scrip
shall not unless otherwise provided therein, entitle the holder to exercise
voting rights, to receive dividends thereon and to participate in any of the
assets of the corporation in the event of liquidation.
The Board of Directors may cause scrip to be issued subject to the
condition that it shall become void if not exchanged for certificates
representing full shares before a specified date, or subject to the condition
that the shares for which scrip is exchangeable may be sold by the corporation
and the proceeds thereof distributed to the holders of scrip, or subject to any
other
<PAGE> 2
conditions which the Board of Directors may deem advisable. Such conditions
shall be stated or fairly summarized on the face of the certificate.
3. SHARE TRANSFERS. Upon compliance with any provisions restricting the
transferability of shares that may be set forth in the Articles of
Incorporation, these Bylaws, or any written agreement in respect thereof,
transfers of shares of the corporation shall be made only on the books of the
corporation by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary of
the corporation, or with a transfer agent or a registrar and on surrender of the
certificate or certificates for such shares properly endorsed and the payment of
all taxes thereon, if any. Except as may be otherwise provided by law, the
person in whose name shares stand on the books of the corporation shall be
deemed the owner thereof for all purposes as regard the corporation; provided
that whenever any transfer of shares shall be made for collateral security, and
not absolutely, such fact, if known to the Secretary of the corporation, shall
be so expressed in the entry of transfer.
4. RECORD DATE FOR SHAREHOLDERS. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or entitled to receive payment of any dividend, or in
order to make a determination of shareholders for any other purpose, the Board
of Directors of the corporation may provide that the stock transfer books shall
be closed for a stated period but not to exceed, in any case, sixty days. If the
stock transfer books shall be closed for the purpose of determining the
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten days immediately preceding such meeting.
In lieu of closing the stock transfer books, the Board of Directors may fix in
advance a date as the record date for any such determination of shareholders,
such date in any case to be not more than sixty days and, in case of a meeting
of shareholders, not less than ten days prior to the date on which the
particular action, requiring such determination of shareholders, is to be taken.
If the stock transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for the determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, the determination shall
apply to any adjournment thereof, unless the Board of Directors fixes a new
record date under this section for the adjourned meeting.
5. MEANING OF CERTAIN TERMS. As used herein, in respect of the right to
notice of a meeting of shareholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "shareholder" or "shareholders"
refers to an outstanding share or shares and to a holder or holders of record of
outstanding shares when the corporation is authorized to issue only one class of
shares, and said reference is also intended to include any outstanding share or
shares of and any holder or holders of record of outstanding shares of any class
upon which or upon whom the Articles of Incorporation
2
<PAGE> 3
confer such rights where there are two or more classes or series of shares or
upon which or upon whom the General Corporation Act confers such rights
notwithstanding that the Articles of incorporation may provide for more than one
class or series of shares, one or more of which are limited or denied such
rights thereunder.
6. SHAREHOLDER MEETINGS.
- TIME. The annual meeting shall be held on the date fixed from time to
time by the directors. A special meeting shall be held on the date fixed from
time to time by the directors except when the General Corporation Act confers
the right to call a special meeting of the shareholders.
- PLACE. Annual meetings and special meetings shall be held at such
place within or without the State of Tennessee as shall be stated in the notice
of any such meeting.
- CALL. Annual meetings may be called by the directors or the President
or the Secretary or by any officer instructed by the directors or the President
to call the meeting. Special meetings may be called in like manner or by the
holders of at least one-tenth of the shares entitled to vote at such meeting.
- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER OF NOTICE. Written notice
stating the place, day and hour of the meeting, and in case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
delivered not less than ten days (or not less than any such other minimum period
of days as may be prescribed by the General Corporation Act) nor more than sixty
days before the date of the meeting, either personally or by first class mail,
by or at the direction of the President, the Secretary or the officer or persons
calling the meeting to each shareholder. The notice of any annual or special
meeting shall also include, or be accompanied by, any additional statements,
information, or documents prescribed by the General Corporation Act. If mailed,
such notice shall be deemed to be delivered when deposited in the United States
mail addressed to the shareholder at his address as it appears on the stock
transfer books of the corporation, with postage thereon prepaid. When a meeting
is adjourned to another time or place, it shall not be necessary to give any
notice of the adjourned meeting if the time and place to which the meeting is
adjourned are announced at the meeting at which the adjournment is taken, and at
the adjourned meeting any business may be transacted that might have been
transacted on the original date of the meeting. If, however, the Board of
Directors shall fix a new record date for the adjourned meeting, notice of the
adjourned meeting shall be given each shareholder of record on the new record
date. Whenever any notice is required to be given to any shareholder, a waiver
thereof in writing signed by him, whether before or after the time stated
therein, shall be the equivalent to the giving of such notice. Attendance of a
shareholder at a meeting shall constitute a waiver of notice of the meeting,
except where the shareholder attends the meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
3
<PAGE> 4
- VOTING LIST. The officer or agent having charge of the stock transfer
books for shares of the corporation shall make, at least ten days before each
meeting of shareholders, a complete list of the shareholders entitled to vote at
such meeting or any adjournment thereof, with the address of and the number and
class and series, if any, or shares held by, each. Such list, for a period of
ten days prior to such meeting, shall be kept on file at the registered office
of the corporation in the State of Tennessee, at the principal place of business
of the corporation or at the office of the transfer agent or registrar of the
corporation and shall be subject to inspection by any shareholder at any time
during usual business hours. Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to the inspection of any
shareholder at any time during the meeting. The original stock transfer books
shall be prima facie evidence as to who are the shareholders entitled to examine
such list or transfer books or to vote at any meeting of shareholders.
- CONDUCT OF MEETING. Meetings of the shareholders shall be presided
over by one of the following officers in the order of seniority and if present
and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board,
if any, the President, a Vice President, or, if none of the foregoing is in
office and present and acting, by a chairman to be chosen by the shareholders.
The Secretary of the corporation, or in his absence, an Assistant Secretary,
shall act as secretary of every meeting, but, if neither the Secretary nor an
Assistant Secretary is present, the Chairman of the meeting shall appoint a
secretary of the meeting.
- PROXY REPRESENTATION. Every shareholder or his duly authorized
attorney-in-fact may authorize another person or persons to act for him by proxy
in all matters in which a shareholder is entitled to participate, whether for
the purpose of determining his presence at a meeting, or whether by waiving
notice of any meeting, voting or participating at a meeting, or expressing
consent or dissent without a meeting, or otherwise. Every proxy shall be signed
by the shareholder or by his duly authorized attorney-in-fact, and filed with
the Secretary of the corporation. No proxy shall be valid after eleven months
from the date thereof, unless otherwise provided in the proxy. Except as may
otherwise be provided by the General Corporation Act, any proxy may be revoked.
- QUORUM. A majority of the shares shall constitute a quorum.
- VOTING. Except as the General Corporation Act, the Articles of
Incorporation, or these Bylaws shall otherwise provide, the affirmative vote of
the majority of the shares represented at the meeting, a quorum being present,
shall be the act of the shareholders. After a quorum has been established at a
shareholders' meeting, the subsequent withdrawal of shareholders, so as to
reduce the number of shareholders at the meeting below the number required for a
quorum, shall not affect the validity of any action taken at the meeting or any
adjournment thereof.
7. WRITTEN ACTION. Any action required to be taken or which may be
taken at a meeting of the shareholders may be taken without a meeting, without
prior notice and without a vote,
4
<PAGE> 5
if a consent in writing, setting forth the action so taken, shall be signed by
all of the shareholders and shall be filed with the Secretary of the
corporation.
ARTICLE II
BOARD OF DIRECTORS
1. FUNCTIONS GENERALLY - COMPENSATION. All corporate powers shall be
exercised by or under the authority of, and the business and affairs of the
corporation shall be managed under the direction of its Board of Directors. The
Board may fix the compensation of directors.
2. QUALIFICATION AND NUMBER. Each director shall be a natural person of
full age. A director need not be a shareholder, a citizen of the United States,
or a resident of the State of Tennessee. The initial Board of Directors shall
consist of _______ persons, which shall be the fixed number of directors until
changed. The number of directors may be increased or decreased by an amendment
of these Bylaws or by the directors or shareholders, but no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director. The number of directors shall never be less than one. The
Board of Directors shall consist of the number of directors fixed herein.
3. ELECTION AND TERM. The initial Board of Directors shall consist of
the directors elected at the organization meeting of incorporators, each of whom
shall hold office until the first annual meeting of shareholders and until his
successor has been elected and qualified or until his earlier resignation,
removal from office or death. Thereafter, each director who is elected at an
annual meeting of shareholders, and any director who is elected in the interim
to fill a vacancy or a newly created directorship, shall hold office until the
next successive annual meeting of shareholders and until his successor has been
elected and qualified or until his earlier resignation, removal from office or
death. In the interim between annual meetings of shareholders or of special
meetings of shareholders called for the election of directors, any vacancies in
the Board of Directors, including vacancies created by reason of increase in the
number of directors, and including vacancies resulting from the removal of
directors by the shareholders which have not been filled by said shareholders,
may be filled by the affirmative vote of a majority of the remaining directors,
although less than a quorum exists.
4. MEETINGS.
- TIME. Meetings shall be held at such time as the Board shall fix,
except that the first meeting of a newly elected Board shall be held as soon
after its election as the directors may conveniently assemble.
5
<PAGE> 6
- PLACE. Meetings shall be held at such place within or without the
State of Tennessee as shall be fixed by the Board.
- CALL. No call shall be required for regular meetings for which the
time and place have been fixed. Special meetings may be called by the Chairman
of the Board, if any, the Vice-Chairman of the Board, if any, or the President,
or by any two directors.
- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required
for regular meetings for which the time and place have been fixed. Written,
oral, or any other mode of notice of the time and place shall be given for
special meetings in sufficient time for the convenient assembly of the directors
thereat. The notice or waiver of notice of any meeting need not specify the
business to be transacted or the purpose of the meeting. Any requirement of
furnishing a notice shall be waived by any director who signs a waiver of notice
of such meeting and a waiver of any and all objections to the place of the
meeting, the time of the meeting, or the manner in which it has been called or
convened, except when a director states, at the beginning of the meeting, any
objection to the transaction of business because the meeting is not lawfully
called or convened.
- QUORUM AND ACTION. A majority of the full Board of Directors shall
constitute a quorum except as may be otherwise provided in the Articles of
Incorporation. Except as otherwise provided herein, and except as may be
otherwise provided by the General Corporation Act or the Articles of
Incorporation, the act of the Board shall be the act of a majority of directors
present at a meeting at which a quorum is present.
Members of the Board of Directors may participate in a meeting of said
Board by means of a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other at
the same time, and participation by such means shall be deemed to constitute
presence in person at a meeting.
A majority of the directors present, whether or not a quorum exists,
may adjourn any meeting of the Board of Directors to another time and place.
Notice of any such adjourned meeting shall be given to the directors who were
not present at the time of the adjournment, to the other directors.
- CHAIRMAN OF THE MEETING. Meetings of the Board of Directors shall be
presided by the following directors in the order of seniority and if present and
acting - the Chairman of the Board, if any, the Vice-Chairman of the Board, if
any, the President, or any other director chosen by the Board.
6. REMOVAL OF DIRECTORS. At a meeting of shareholders called expressly
for that purpose, any director or the entire Board of Directors may be removed
from office with or without cause, in the manner set forth in the Articles of
Incorporation.
6
<PAGE> 7
7. COMMITTEES. Whenever the number of directors shall consist of three
or more, the Board of Directors may, by resolution adopted by a majority of the
full Board, designate from among its members an Executive Committee and one or
more other committees, each of which, to the extent provided in the resolution,
shall have and may exercise all of the authority of the Board of Directors,
except such authority as may not be delegated under the General Corporation Act.
5. WRITTEN ACTION. Any action required to be taken at a meeting of
directors, or any action which may be taken at a meeting of directors or of a
committee thereof, if any, may be taken without a meeting if a consent in
writing, setting forth the action so to be taken, shall be signed by all of the
directors or all of the members of the committee, as the case may be.
ARTICLE III
OFFICERS
The corporation shall have a President, a Secretary, and a Treasurer,
each of whom shall be elected by the directors from time to time, and may have
one or more Vice Presidents and such other officers and assistant officers and
agents as may be deemed necessary, each or any of whom may be elected or
appointed by the directors or may be chosen in such manner as the directors
shall determine. Any two or more offices may be held by the same person.
Unless otherwise provided in the resolution of election or appointment,
each officer shall hold office until the meeting of the Board of Directors
following the next annual meeting of shareholders and until his successor has
been elected and qualified.
The officers and agents of the corporation shall have the authority and
perform the duties in the management of the corporation as determined by the
resolution electing or appointing them, as the case may be.
The Board of Directors may remove any officer or agent whenever in its
judgment the best interests of the corporation will be served thereby.
ARTICLE IV
REGISTERED OFFICE AND AGENT - SHAREHOLDERS RECORD
The initial address of the principal office of the corporation is
Highway 25, Carthage, Tennessee, 37030, and the name of the initial registered
agent of the corporation at that address is Joel Porter.
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The corporation shall keep at its registered office in the State of
Tennessee or at its principal place of business, or at the office of its
transfer agent or registrar, a record of its shareholders, giving the names and
addresses of all shareholders and the number, class and series, if any, of the
shares held by each shareholder and shall keep on file at said registered office
the voting list of shareholders for a period of at least ten days prior to any
meeting of shareholders.
ARTICLE V
CORPORATE SEAL
The corporate seal shall have inscribed thereon the name of the
corporation and shall be in such form and contain such other words and/or
figures as the Board of Directors shall determine or the law require.
ARTICLE VI
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be subject
to change, by the Board of Directors.
ARTICLE VII
CONTROL OVER BYLAWS
The Board of Directors shall have power to adopt, alter, amend or
repeal the Bylaws, and Bylaws adopted by the Board of Directors or by the
shareholders may be repealed or changed and new Bylaws may be adopted by the
shareholders, except as otherwise provided herein or in the Articles of
Incorporation. The shareholders may prescribe in any Bylaw made by them that
such Bylaw shall not be altered, amended or repealed by the Board of Directors.
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<PAGE> 1
EXHIBIT 4.1
NUMBER SHARES
CB-
CUMBERLAND BANCORP, INC.
CARTHAGE, TENNESSEE
--------------
CUSIP
--------------
THIS CERTIFIES THAT
SPECIMEN
is the owner of
SHARES OF THE COMMON STOCK PAR VALUE OF
- --------------------------- CUMBERLAND BANCORP, INC.-----------------------
transferable only on the books of the Corporation by the holder hereof in
person or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to
be signed by its duly authorized officers.
Dated:
SEAL
SECRETARY PRESIDENT
Countersigned:
ILLINOIS STOCK TRANSFER COMPANY
(Chicago, Illinois)
Transfer Agent
By Authorized Signature
<PAGE> 1
EXHIBIT 10.2
JOINT VENTURE AGREEMENT
This JOINT VENTURE AGREEMENT (the "Agreement") is made as of October 1,
1998 by and between CUMBERLAND BANCORP, INC., a corporation organized and
existing under the laws of the State of Tennessee, with offices at 1001 N. Main
Str., Carthage, Tennessee 37030, and a registered bank holding company pursuant
to the Bank Holding Company Act of 1956, as amended ("Cumberland") and
BANCKENTUCKY, INC., a corporation organized and existing under the laws of the
Commonwealth of Kentucky, with offices at 405 South 12th Str., Murray, Kentucky
42071 (hereinafter referred to as the "Murray Group"),
WITNESSETH:
WHEREAS, BancKentucky, Inc. is a new corporation formed by a group
primarily located in Murray, Kentucky to undertake a stock offering and to serve
as a unitary thrift company for a de novo federal savings bank;
WHEREAS, Cumberland and the Murray Group desire to enter into a joint
venture agreement to form, own and carry out the business of such federal
savings bank with its main office to be located in Murray, Calloway County,
Kentucky, in accordance with the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements and covenants contained herein, Cumberland and the Murray Group
hereby agree as follows:
ARTICLE 1.
DEFINITIONS
In addition to terms defined elsewhere herein, the following terms
shall have the following meanings when used herein (any term defined in the
singular shall have the same meaning when used in the plural and vice versa):
1.1 "AFFILIATE" of Cumberland or the Murray Group shall mean any
corporation, company, partnership, joint venture, association, organization or
other entity that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with, such Party.
1.2 "BENEFICIAL OWNERSHIP" by a person of a security, or a security
"beneficially owned" by a person, shall be determined for the purposes of this
Agreement in the same manner as provided in Rule 13d-3 of the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
1.3 "BOARD OF DIRECTORS" OR "BOARD" shall mean the Board of Directors
of FSB.
<PAGE> 2
1.4 "BYLAWS" shall mean the bylaws of the FSB.
1.5 "CHARTER" shall mean the charter of the FSB.
1.6 "CLOSING" shall mean the closing described in Article 7 herein to
consummate the transactions contemplated hereby.
1.7 "COMMON STOCK" shall mean the common stock of the FSB, par value
$10.00 per share.
1.8 "DIRECTOR" shall mean a member of the Board of Directors of the
FSB.
1.9 "EQUITY SECURITIES" shall mean any securities having voting rights
with respect to the election of the Board.
1.10 "FAIR MARKET VALUE" of the Common Stock shall mean the value as
determined by an annual evaluation of the Common Stock of the FSB, without
taking in consideration an acquisition or control premium for such shares. Fair
market value shall be determined by agreement of the parties at each annual
meeting of shareholders or, in the event such agreement can not be reached by
the parties, then the parties shall select an appraiser/evaluator to determine
the value of applicable stock. In the event the parties can not agree upon one
such appraiser/evaluator, then each party shall select an appraiser/evaluator to
determine the value of applicable stock and, if necessary, the two
appraisers/evaluators will select a third appraiser/evaluator and two of the
three agreeing to the value for stock will set and determine its value.
1.11 "FEDERAL BANK REGULATORY AUTHORITIES" shall mean the Office of
Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC")
and the Board of Governors of the Federal Reserve System ("FRB"), as the context
requires.
1.12 "FSB" shall mean the federal savings bank to be formed by the
Parties for the purposes set forth herein.
1.13 "GOVERNMENTAL APPROVAL" shall mean any consent, approval,
authorization, permit, exemption, license or other action of or by, ro any
notice to or filing or registration with, any governmental authority or agency
or regulatory or administrative body, including federal bank regulatory
authorities and state bank regulatory authorities and the expiration of any
required stays to such approval.
1.14 "INITIAL BUSINESS PLAN" shall mean the initial three (3) year
business plan of the FSB submitted to Federal Bank Regulatory Authorities.
1.15 "INITIAL CAPITAL" shall mean the initial capital of the FSB agreed
to by the Parties.
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1.16 "REPRESENTATIVES" shall have the meaning set forth in Section
4.2.1 herein.
1.17 "SHARES" shall have the meaning set forth in Section 3.1.1 herein.
1.18 "OPERATING AND SERVICES AGREEMENT" shall have the meaning set
forth in Section 7.4.4 herein.
1.19 "PARTIES" shall mean the Cumberland and the Murray Group.
1.20 "PRO RATE SHARE" shall mean a holder's prorate share of
outstanding Equity Securities which shall be a fraction calculated by dividing
(I) the number of shares of Common Stock beneficially owned by the holder as of
the applicable date, by (ii) the total number of shares of Common Stock
outstanding as of such date.
1.21 "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
1.22 "SUBSIDIARY" of Cumberland shall mean any corporation, company or
other entity more than fifty percent (50%) of whose securities having voting
rights with respect to the election of directors or other ownership interests
representing the right to make decisions for such entity are owned or
controlled, directly or indirectly, by such Party, but such corporation or other
entity shall be deemed to be a "Subsidiary" only for so long as such ownership
or control exists.
1.23 "TRANSFER" shall mean any actual or proposed sale or other
disposition of all or a portion of any Party's interest in such Party's Equity
Securities (legal or equitable) by any means, direct or indirect.
ARTICLE 2.
FORMATION OF THE FEDERAL SAVINGS BANK
2.1 FORMATION OF THE FEDERAL SAVINGS BANK. At the Closing, Cumberland
and the Murray Group shall form the FSB as a federal stock savings bank pursuant
to Section 5(c) of the Home Owners Loan Act, as amended, for the purposes set
forth below. The outstanding Equity Securities of the FSB shall be initially
owned fifty percent (50%) by Cumberland, and fifty percent (50%) by the Murray
Group.
2.2 PROPOSED NAME. The proposed name of the FSB shall be ("The Murray
Bank, FSB.")
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<PAGE> 4
2.3 RESPONSIBILITY AND COSTS OF FORMATION.
(a) Cumberland shall be responsible for preparing and filing all
regulatory applications necessary to form the FSB. All costs incurred in
connection with the formation of the FSB, including the cost of forming a
holding company, shall be paid for by the FSB. In the event the FSB, for any
reason, does not pay such costs, then such costs shall be borne equally by the
parties hereto.
(b) The Murray Group shall be responsible for preparing and filing
the offering circular and all regulatory applications necessary for the Murray
Group to become a unitary savings and loan holding company.
ARTICLE 3.
CAPITALIZATION OF THE FSB
3.1 INITIAL CAPITALIZATION OF THE FSB.
3.1.1 SUBSCRIPTIONS FOR STOCK. At the Closing, the FSB shall issue
to, and Cumberland shall subscribe for 10,000 shares of Common Stock (the
"Cumberland Shares"), and the FSB shall issue to, and the Murray Group shall
subscribe for, 10,000 shares of Common Stock (the "Murray Group Shares"). The
FSB shall deliver to each Party at the Closing a certificate or certificates
registered in the name of such Party evidencing the shares of Common Stock
subscribed for by such Party.
3.1.2 INITIAL CAPITAL CONTRIBUTIONS. In consideration for their
respective equity interests in the FSB, at the Closing, each of Cumberland and
the Murray Group shall make the following contributions to the capital of the
FSB:
(a) Cumberland shall contribute cash in an amount equal
to fifty percent (50%) of the Initial Capital; and
(b) The Murray Group shall contribute cash in an amount
equal to fifty percent (50%) of the Initial Capital.
3.2 ADDITIONAL CAPITAL. In the event that the shareholders of the FSB
agree to provide, or are required by Federal Bank Regulatory Authorities to
provide, additional capital to the FSB, Cumberland and the Murray Group each
shall be required to make capital contributions in proportion to its respective
Pro Rata Share of the outstanding Equity Securities of the FSB and, if any such
capital contribution is not made by any Party, then that Party's Pro Rata Share
shall be diluted accordingly.
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<PAGE> 5
3.3 FORMATION OF HOLDING COMPANY. At the option of either party, the
parties agree that they will apply for the formation and approval of a Holding
Company which will own one hundred. per cent (100%) of the stock of the FSB
which Holding Company shall be owned fifty per cent (50%) by the Murray Group
and fifty per cent (50%) by Cumberland.
ARTICLE 4.
MANAGEMENT OF THE FSB
4.1 SPECIAL SHAREHOLDER APPROVALS. In addition to such approval
requirements specified in the Charter or Bylaws of the FSB or under law, each of
the following actions shall require authorization by resolution of the
shareholders of the FSB which is approved by each of the Cumberland and the
Murray Group for so long as each Party beneficially owns at least fifty percent
(50%) of the outstanding Equity Securities of the FSB;
(a) The amendment of the Charter;
(b) The increase or decrease in the authorized capital stock
of the FSB;
(c) The creation by the FSB of any new classes or series of
Equity Securities or any other form of Equity Securities;
(d) The increase or decrease in the number of Directors; the
election of any additional directors required by Federal
Bank Regulatory Authorities, as contemplated under Section
4.2.1(a) below; and the election of any odd number
Director;
(e) The sale, lease, transfer or other disposition of all or
substantially all of the assets of the FSB;
(f) The merger or consolidation of the FSB with or into any
other entity or a share exchange involving the Equity
Securities of the FSB and those of another entity;
(g) The issuance by the FSB to any third party of any shares
of stock or other Equity Securities of the FSB;
(h) The dissolution or liquidation of the FSB; and
(I) The amendment of this Agreement.
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<PAGE> 6
4.2 BOARD OF DIRECTORS
4.2.1 MEMBERSHIP.
(a) The Board of Directors of the FSB shall originally
consist of a maximum of fourteen (14) Directors, a maximum of ten (10) of whom
shall be designated by the Murray Group for so long as the Murray Group
beneficially owns at least fifty percent (50%) of the outstanding Equity
Securities of the FSB (the "Murray Group Representatives"), and a maximum of
four (4) of whom shall be designated by Cumberland for so long as Cumberland
beneficially own at least fifty percent (50%) of the outstanding Equity
Securities of the FSB (the "Cumberland Representatives"). If required by Federal
Bank Regulatory Authorities, the Board shall consist of an additional number of
Directors who are not officers, directors or employees of either the Murray
Group or Cumberland with half of such outside Directors to be nominated by the
Murray Group and reasonably acceptable to Cumberland and the other half of such
outside Directors to by nominated by Cumberland and reasonably acceptable to the
Murray Group. The Murray Group will have a minimum of one representative on the
board of directors of Cumberland.
(b) Each of the Murray Group and Cumberland shall take
all actions, necessary to cause the nomination, election and/or appointment to
the Board of the Murray Group Representatives and the Cumberland
Representatives, including voting all of its shares of Equity Securities to
cause the election of the Murray Group Representatives and the Cumberland
Representatives. If a Murray Group Representative or a Cumberland Representative
shall cease to be a Director for any reason, then the Murray Group and
Cumberland shall promptly cause a successor nominated by the Murray Group or
Cumberland, as the case may be, to be elected or appointed to the Board.
(c) Should either of the Murray Group or Cumberland
cease to beneficially own at least fifty percent (50%) of the Equity Securities
of the FSB, the provisions of Section 4.2.1 above regarding the number of the
Murray Group Representatives and Cumberland Representatives on the Board of
Directors shall no longer apply, and unless the Murray Group and Cumberland
agree otherwise, each Party's representation on the Board shall be in proportion
to such Party's Pro Rata Share of Equity Securities.
ARTICLE 5.
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE MURRAY GROUP
The Murray Group hereby represents, warrants and covenants to
Cumberland as follows:
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<PAGE> 7
5.1 AUTHORITY AND BINDING AGREEMENT.
(a) The Murray Group is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization. The Murray Group has the full power and authority to execute,
deliver and, subject to receipt of all required Governmental Approvals from
Federal Bank Regulatory Authorities, perform this Agreement and to consummate
the transactions contemplated hereby. The execution, delivery and performance by
the Murray Group of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized on the part of the Murray Group by
all necessary action, organizational or otherwise.
(b) This Agreement has been duly executed and delivered by an
authorized officer of the Murray Group, and is a legal, valid and binding
obligation of the Murray Group enforceable against it in accordance with its
terms, except as enforcement thereof may be limited by general principles of
equity (regardless of whether such enforceability is considered in a preceding
at law or in equity) and the effect of applicable bankruptcy, insolvency,
moratorium and other similar laws of general application relating to or
affecting creditors' fights generally, including, without limitation, the effect
of statutory or other laws regarding fraudulent conveyances and preferential
transfers.
5.2 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby will not violate or result in a breach of any
of the terms or provisions of, or constitute a default under, or conflict with
(a) the certificate of incorporation and bylaws or similar constitutive
documents of the Murray Group, (b) any material agreement, indenture or other
instrument to which the Murray Group is a party or by which it is bound, (c) any
judgment, decree, order, writ, award or injunction of any court, governmental
body or arbitrator, or (d) any law, rule or regulation applicable to the Murray
Group, except, in the case of subclause (d), for violations, breaches, defaults
or conflicts that are not, singly or in the aggregate, material to the Murray
Group's ability to consummate the transactions contemplated hereby.
5.3 CONSENTS AND APPROVALS. Except for the Governmental Approvals
listed on Schedule 5.3, 6.3 attached hereto, no consent, approval or
authorization of or from any governmental entity or any other person not a party
to this Agreement, whether prescribed by law, rule, regulation, contract or
agreement, is required for the execution, delivery and performance of this
Agreement by the Murray Group, or the consummation by the Murray Group of the
transactions contemplated hereby.
5.4 INVESTMENT REPRESENTATIONS.
(a) The Murray Group is acquiring the Murray Group Shares from the
FSB for its own account for investment only and not with a view to the
distribution thereof within the meaning of the Securities Act or the regulations
of the OTS relating to securities offerings nor with any present intention of
distributing or selling the same. The Murray Group Shares will not be sold or
transferred by the Murray Group in violation of the securities laws of the
United States or any state thereof or other jurisdiction.
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ARTICLE 6.
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF CUMBERLAND
Cumberland hereby represents, warrants and covenants to the Murray
Group as follows:
6.1 AUTHORITY AND BINDING AGREEMENT.
(a) Cumberland is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization.
Cumberland has the full power and authority to execute, deliver and, subject to
receipt of all required Governmental Approvals from Federal Bank Regulatory
Authorities, perform this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance by Cumberland of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized on the part of Cumberland by all necessary action,
organizational or otherwise.
(b) This Agreement has been duly executed and delivered by an
authorized officer of Cumberland, and is a legal, valid and binding obligation
of Cumberland, enforceable against it in accordance with its terms, except as
enforceable against it in accordance with its terms, except as enforcement
thereof may be limited by general principles of equity (regardless of whether
such enforceability is considered in a proceeding at law or in equity) and the
effect of applicable bankruptcy, insolvency, moratorium and other similar laws
of general application relating to or affecting creditors' rights generally,
including, without limitation, the effect of statutory or other laws regarding
fraudulent conveyances and preferential transfers.
6.2 AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby will not violate or result in a breach of any
of the terms or provisions of, or constitute a default under, or conflict with
(a) the certificate of incorporation and bylaws or similar constitutive
documents of Cumberland, (b) any material agreement, indenture or other
instrument to which Cumberland is a party or by which it is bound, (c) any
judgment, decree, order, writ, award or injunction of any court, governmental
body or arbitrator, or (d) any law, rule or regulation applicable to Cumberland,
except, in the case of subclause (d), for violations, breaches, defaults or
conflicts that are not, singly or in the aggregate, material to the ability of
Cumberland to consummate the transactions contemplated hereby.
6.3 CONSENTS AND APPROVALS. Except for the Governmental Approvals
listed on Schedule 5.3, 6.3 attached hereto, no consent, approval or
authorization of or from any governmental entity or any other person not a party
to this Agreement, whether prescribed by law, rule regulation,
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contract or agreement, is required for the execution, delivery and performance
of this Agreement by Cumberland, or the consummation by Cumberland of the
transactions contemplated hereby.
6.4 INVESTMENT REPRESENTATIONS.
(a) Cumberland is acquiring the Cumberland Shares from the FSB for
its own account for investment only and not with a view to the distribution
thereof within the meaning of the Securities Act or the regulations of the OTS
relating to securities offerings nor with any present intention of distributing
or selling the same. The Cumberland Shares will not be sold or transferred by
any of the Cumberland in violation of the securities laws of the United States
or any state thereof or other jurisdiction.
ARTICLE 7.
CLOSING
7.1 THE CLOSING. Subject to the satisfaction of the conditions
specified in this Article 7, the transactions contemplated by this Agreement
shall be consummated at a Closing (the "Closing") to be held at a location to be
agreed upon by the Paries within ten (10) business days after the granting of
all Governmental Approvals necessary to consummate the transactions contemplated
hereby and the expiration of all notice periods and waiting periods with respect
thereto.
7.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF CUMBERLAND. The obligations
of Cumberland under this Agreement to be performed at the Closing are subject to
the satisfaction, on or prior to the Closing, of the following conditions,
unless waived in a writing executed and delivered by Cumberland:
7.2.1 NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES.
The representations and warranties of the Murray Group shall be true and correct
in all material respects as of the Closing and the Murray Group shall have
complied in all material respects with and performed all other obligations and
covenants hereunder required to be performed by it as of the Closing, and
Cumberland shall have received a certificate from the Murray Group to the
foregoing effect executed by a senior officer of the Murray Group and dates as
of the Closing date.
7.2.2 CONSENTS. The Murray Group shall have delivered to Cumberland
copies or other evidence of all consents, approvals or authorizations of or from
any governmental entity or other person necessary for the Murray Group to
execute, deliver and perform its obligations hereunder and consummate the
transactions contemplated hereby and, in the case of any Governmental Approval,
all notice periods and waiting periods with respect thereto shall have expired
or terminated and all conditions contained in any such approval required to be
satisfied prior to consummation of the transactions contemplated by this
Agreement shall have been satisfied and shall not be reasonably considered by
any Party to be unduly burdensome.
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7.2.3 DELIVERY OF OTHER DOCUMENTS. Cumberland shall have received
(a) a certified copy of the resolutions of the Board of Directors of the Murray
Group, authorizing and approving the execution, delivery and performance by the
Murray Group of this Agreement and the transactions contemplated hereby and in
effect as of the Closing date and (b) such additional documents evidencing or
certifying satisfaction of the conditions specified in this Article 7 as may be
reasonably requested by Cumberland.
7.2.4 GOVERNMENTAL APPROVAL. The Cumberland shall receive any
Governmental Approvals necessary to own the Cumberland Common Stock.
7.3 CONDITIONS PRECEDENT TO OBLIGATIONS OF THE MURRAY GROUP. The
obligations of The Murray Group under this Agreement to be performed at the
Closing are subject to the satisfaction, on or prior to the Closing, of the
following conditions, unless waived in a writing executed and delivered by The
Murray Group:
7.3.1 NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES.
The representations and warranties of Cumberland shall be true and correct in
all material respects as of the Closing and Cumberland shall have complied in
all material respects with and performed all other obligations and covenants
hereunder required to be performed by it as of the Closing, and the Murray Group
shall have received a certificate from Cumberland to the foregoing effect
executed by a senior officer of such corporation dated as of the Closing date.
7.3.2 CONSENTS. Cumberland shall have delivered to The Murray Group
copies or other evidence of all consents, approvals or authorizations of or rom
any governmental entity or other person necessary for Cumberland to execute,
deliver and perform its obligations hereunder and consummate the transactions
contemplated hereby and, in the case of any Governmental Approval, all notice
periods and waiting periods with respect thereto shall have expired or
terminated and all conditions contained in any such approval required to be
satisfied prior to consummation of the transactions contemplated by this
Agreement shall have been satisfied and shall not be reasonably considered by
any Party to be unduly burdensome.
7.3.3 DELIVERY OF OTHER DOCUMENTS. The Murray Group shall have
received (a) a certified copy of the resolutions of the Board of Directors of
Cumberland, authorizing and approving the execution, delivery and performance by
such Party of this Agreement and the transactions contemplated hereby and in
effect as of the Closing date and (b) such additional documents evidencing or
certifying satisfaction of the conditions specified in this Article 7 as may be
reasonably requested by the Murray Group.
7.3.4 MURRAY GROUP FORMATION AND INITIAL STOCK OFFERING. The Murray
Group shall have successfully completed its initial stock offering in the amount
of $1.7 million and received the approval of the Federal Bank Regulatory
Authorities to operate as a unitary thrift holding company and own the shares of
Common Stock.
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7.4 OTHER CONDITIONS TO OBLIGATIONS OF THE PARTIES. In addition to the
conditions set forth in Sections 7.2 and 7.3 above, the obligations of the
Parties to be performed at the Closing are subject to the satisfaction, on or
prior to the Closing, of the following conditions:
7.4.1 NO INJUNCTION. No Party shall be subject to any order, decree
or injunction of a court or agency of competent jurisdiction that enjoins or
prohibits consummation, or otherwise challenges the legality of validity, of the
transactions contemplated by this Agreement.
7.4.2 APPROVAL TO ORGANIZE FSB. The OTS shall have approved the
Parties' application for permission to organize a federal stock savings bank
pursuant to Section 5)c) of the Home Owners Loan Act, as amended, and any
conditions to such approval shall not be reasonable considered, by any Party to
be unduly burdensome, and the OTS shall have issued the Charter of the FSB.
7.4.3 GRANTING OF DEPOSIT INSURANCE. The FDIC shall have approved
the application for federal deposit insurance for the FSB pursuant to Section
5(a) of the Federal Deposit Insurance Act, as amended, and any conditions to
such approval shall not be reasonably considered by any Party to be unduly
burdensome.
7.4.4 OPERATING AND SERVICES AGREEMENT. The Cumberland and FSB
shall have executed the Operating and Services Agreement substantially in the
form attached hereto as Exhibit A (the "Operating and Services Agreement").
7.5 DELIVERIES AT THE CLOSING. At the Closing:
7.5.1 DELIVERY OF STOCK CERTIFICATES. The FSB shall deliver to each
party, as applicable, stock certificates evidencing the Common Stock subscribed
for by each Party as provided in Section 3.1.1 above.
7.5.2 MAKING OF CAPITAL CONTRIBUTIONS. Each of the Murray Group and
Cumberland shall make the contributions to the Initial Capital of the FSB set
forth in Section 3.1.2 above in immediately available funds to a designated
account of the FSB.
ARTICLE 8.
SALES OR TRANSFERS OF EQUITY SECURITIES
8.1 GENERAL RESTRICTION. No Party shall Transfer or cause or permit to
be Transferred any Equity Securities beneficially owned by such Party except for
Transfers in compliance with this Article 8, and any purported Transfer in
violation hereof shall be null and void.
8.2 TRANSFERS TO SUBSIDIARIES. Notwithstanding any other provision of
this Article 8,
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each of the Murray Group and Cumberland may Transfer Equity Securities
beneficially owned by it to a Subsidiary of such Party, provided that, as a
condition to any such Transfer, such transferee obtains any required
Governmental Approvals and agrees in writing to receive and hold such Equity
Securities subject to the provisions of this Agreement, where the transferee is
a Subsidiary, and such transferee agrees to Transfer such Equity Securities back
to the transferor Party in the event that such transferee ceases to be a
Subsidiary of such Party unless the other Party agrees in writing to allow such
transferee to continue to hold such Equity Securities. Any such transferee shall
be included within the definition of "the Murray Group" or "Cumberland," as the
case may be, for purposes of this Agreement.
8.3 RIGHTS OF FIRST OFFER AND FIRST REFUSAL. Except for Transfers under
Section 8.2 above or pursuant to any of the options granted in Article 9 or 10
herein, prior to the Transfer by either the Murray Group or Cumberland (a
"Selling Party") of any Equity Securities beneficially owned by such Selling
Party, then Cumberland, in the event that the Murray Group is the Selling Party,
or the Murray Group, in the event that Cumberland is the Selling Party (each of
Cumberland or the Murray Group being an "Offeree Party"), shall be offered the
following rights with respect to such Equity Securities:
8.3.1 OFFER NOTICE. The Selling Party shall deliver a written
notice (an "Offer Notice") to the Offeree Party (a) stating that the Selling
Party proposes or is required to Transfer certain Equity Securities, (b)
specifying the number and type of Equity Securities offered to be Transferred
and the price and other material terms of the proposed Transfer, and (c)
offering to Transfer such Equity Securities to the Offeree party.
8.3.2 AFFIRMATIVE RESPONSE. The Offeree party shall then have
twenty-one (21) days from the date of its receipt of such Offer Notice (the
"Offer Period") to respond in writing to the Selling Party as to whether it has
determined to purchase the offered Equity Securities at the price and on the
terms specified in the Offer Notice. In the event that the Offeree party
notifies the Selling Party in writing within the Offer Period of its desire to
purchase the offered Equity Securities (an "Affirmative Response"), then the
sale and purchase of such Equity Securities shall be consummated within thirty
(30) days after the date of the Selling Party's receipt of such Affirmative
Response or, if later, the date as of which the Parties have obtained all
required Governmental Approvals for such sale and purchase. However, the Murray
Group shall have no less than (four (4) months) to complete an equity offering
after its Affirmative Response. Any Affirmative Response by the Murray Group may
be conditioned upon the successful completion of such equity offering.
8.3.3 REFUSAL NOTICE. In the event that the Offeree Party notifies
the Selling Party in writing that it has determined not to purchase the offered
Equity Securities (a "Negative Response") or fails to respond to the Selling
Party by the end of the Offer Period, then, within thirty (30) days after the
earlier of the date of the Selling Party's receipt of such Negative Response or
the end of the Offer Period or an unsuccessful equity offering by the Murray
Group, the Selling Party may Transfer such Equity Securities to a third party at
a price and on terms no more favorable to such third party than the price and
terms specified in the Offer Notice to the Offeree Party, provided
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<PAGE> 13
that, at least ten (10) days prior to the consummation of such sale to and
purchase by such third party, the Selling Party shall deliver a second written
notice (a "Refusal Notice") to the Offeree Party offering the Offeree Party a
right of first refusal to purchase such Equity Securities at the same price and
on the same terms agreed to by such third party. The Refusal Notice shall be
accompanied by a certificate of the Selling Party certifying that it has
received from a third party a bona fide offer to acquire such Equity Securities
at such price and on such terms specified in the Refusal Notice and identifying
such third party.
8.3.4 EXERCISE NOTICE. The Offeree Party shall have ten (10) days
from the date of its receipt of such Refusal Notice ("Refusal Period") to respnd
in wrining to the Selling Party whether it has determined to purchase the
offered Equity Securities at the price and on the terms specified in the Refusal
Notice. In the event that the Offeree Party notifies the Selling Party in
writing within the Refusal Period of its desire to purchase the offered Equity
Securities ("Exercise Notice"), then the sale and purchase of such Equity
Securities shall be consummated within thirty (30) days after the date of the
Selling Party's receipt of such Exercise Notice or, if later, the date as of
which the Parties have obtained all required Governmental Approvals for such
sale and purchase.
8.3.5 SELLING PARTY RIGHT. In the event that the Offeree Party
notifies the Selling Party in writing that it has determined not to purchase the
offered Equity Securities or fails to respond to the Selling Party by the end of
the Refusal Period, then the Selling Party may Transfer such Equity Securities
to such third party at the price and on the terms specified in the Refusal
Notice, provided that, as a condition to the Transfer, such third party agrees
in writing to receive and hold such Equity Securities subject to the provisions
of this Agreement.
8.4 LEGENDS. All certificates evidencing shares of Common Stock or
other capital stock of the FSB shall be imprinted with a conspicuous legend in
substantially the following form:
The securities represented by this certificate have not been
registered by the Office of Thrift Supervision ("OTS") through the
filing of an offering circular declared effective by the OTS nor
have they been registered under applicable state securities laws
(the "State Acts") and such securities may not be sold or otherwise
disposed of for value by the holder hereof, except upon
registration of such sale or disposition in accordance with the
registration requirements of the securities laws of the United
States and any applicable State Acts, or pursuant to an exemption
from such registration requirements.
The securities represented by this certificate are subject to
certain restrictions on transferability contained in a Joint
Venture Agreement dated as of _________________, 1998 by and among
the Cumberland Bancorp, Inc. and BancKentucky, Inc. Copies of such
agreements are available at the principal offices of ____________,
FSB and should be reviewed carefully before any person or entity
seeks to acquire such securities.
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<PAGE> 14
ARTICLE 9.
CHANGE IN CONTROL OPTION
9.1 CHANGE IN CONTROL OF CUMBERLAND.
9.1.1 CHANGE IN CONTROL OPTION. In the event of:
(a) Any change in control transaction as a result of
which (I) the existing shareholders of Cumberland and
their respective immediate family members cease to
beneficially own as a group at least fifty percent
(50%) of the outstanding voting securities of
Cumberland, (ii) upon the consummation of a merger,
share exchange, consolidation or similar corporate
transaction involving Cumberland, the existing
shareholders and their respective immediate family
members as a group become the beneficial owner of
less than fifty percent (50%) of the outstanding
voting securities of the surviving corporation, or
(iii) a third party acquires all or substantially all
of the assets of Cumberland; or
(b) The institution by Cumberland of proceedings to be
adjudicated bankrupt or insolvent, consent by
Cumberland to the institution of bankruptcy or
insolvency proceedings against it; filing by
Cumberland of a petition seeking or consenting to
reorganization or relief under any applicable federal
or state law relating to bankruptcy; consent by
Cumberland to the appointment of a receiver,
liquidator, assignee, trustee or sequestrator (or
similar official), making by Cumberland of any
assignment for the benefit of creditors; or admission
by Cumberland in writing of its inability to pay its
debts generally as they become due;
then the Murray Group shall have the option to purchase all of the Equity
Securities of the FSB beneficially owned by Cumberland (the "Murray Group Call
Option") at a purchase price (the "Call Purchase Price") equal to the Fair
Market Value of such Equity Securities as of the date of the other Parties'
receipt of the Murray Group Exercise Notice.
9.1.2 EXERCISE OF OPTION. Within Sixty (60) days after the later of
the date of the Murray Group's receipt of notice of any of the events specified
in Section 9.1.1, 9.2.1 above or the first date on which information as to any
of such events becomes generally available to the public, the Murray Group may
deliver to the other Parties a written notice of its intention to exercise the
Murray Group Call Option (a "Murray Group Exercise Notice"). Upon exercise of
such option, the
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<PAGE> 15
Murray Group shall have no less than four (4) months to complete an equity
offering, if necessary, after its notice of exercise of said option.
9.1.3 POOLING. In the event that the exercise of this option above
creates a "pooling" issue for Cumberland, then in such event, the option shall
be extended until such time that the exercise of said option does not create a
pooling issue for Cumberland and/or its successor in interest.
9.2 CHANGE IN CONTROL OF THE MURRAY GROUP.
9.2.1 CHANGE IN CONTROL OPTION. In the event of:
(a) Any change in control transaction as a result of
which (I) the existing shareholders of the Murray
Group and their respective immediate family members
cease to beneficially own as a group at least fifty
percent (50%) of the outstanding voting securities of
the Murray Group, (ii) upon the consummation of a
merger, share exchange, consolidation or similar
corporate transaction involving the Murray Group, the
existing shareholders and their respective immediate
family members as a group become the beneficial owner
of less than fifty percent (50%) of the outstanding
voting securities of the surviving corporation, or
(iii) a third party acquires all or substantially all
of the assets of the Murray Group; or
(b) The institution by the Murray Group of proceedings to
be adjudicated bankrupt or insolvent, consent by the
Murray Group to the institution of bankruptcy or
insolvency proceedings against it; filing by the
Murray Group of a petition seeking or consenting to
reorganization or relief under any applicable federal
or state law relating to bankruptcy; consent by the
Murray Group to the appointment or a receiver,
liquidator, assignee, trustee or sequestrator (or
similar official), making by the Murray Group of any
assignment for the benefit of creditors; or admission
by the Murray Group in writing of its inability to
pay its debts generally as they become due;
then Cumberland shall have the option to purchase all of the Equity Securities
of the FSB beneficially owned by the Murray Group (the "Cumberland Call Option")
at a purchase price (the "Call Purchase Price") equal to the Fair Market Value
of such Equity Securities as of the date of the other Parties' receipt of the
Cumberland Exercise Notice.
9.2.2 EXERCISE OF OPTION. Within Sixty (60) days after the later of
the date of Cumberland's receipt of notice of any of the events specified in
Section 9.1.1, 9.2.1 above or the first date on which information as to any of
such events becomes generally available to the public,
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<PAGE> 16
Cumberland may deliver to the other Parties a written notice of its intention to
exercise the Murray Group Call Option (a "Cumberland Exercise Notice").
ARTICLE 10.
PURCHASE OPTIONS
10.1 VOLUNTARY TERMINATION OPTIONS
10.1.1 MURRAY RELATIONSHIP TERMINATING OPTION. Cumberland grants
to the Murray Group an exclusive option wherein it agrees to sell all of its
stock in the FSB to the Murray Group at any time and for any reason within the
sole discretion of the Murray Group. For purposes of this option, the purchase
price of FSB stock shall be one hundred twenty-five percent (125%) of fair
market value. In the event the Murray Group desires to end the relationship with
Cumberland in FSB, the Murray Group has the option to purchase Cumberland's
stock in the FSB for a price of one hundred twenty-five percent (125%) of the
then fair market value of the FSB stock.
10.2 CUMBERLAND "SHOTGUN" TERMINATING OPTION. Cumberland shall have the
right to initiate a buy or sale at any time by offering its FSB stock to the
Murray Group at 100% of fair market value. The Murray Group shall have thirty
(30) days from such offer to accept the offer. If such offer is not accepted by
the Murray Group, Cumberland shall have the option to purchase the Murray Group
shares at 100% of fair market value which option may be exercised by written
notice of such intent to exercise within thirty (30) days of such rejection.
Upon exercise of such option, either party shall have a reasonable period of
time to close the sale, but in no event, the Murray Group shall have no less
than four (4) months to complete an equity offering, if necessary, after its
notice of exercise of said option. In the event neither party elects to purchase
the stock of the other under this provision after such tender is made, then the
rights of first offer and first refusal as provided in Article 8 shall no longer
apply.
ARTICLE 11.
TERM AND TERMINATION
11.1 TERM. This Agreement shall remain in full force and effect unless
otherwise terminated as provided in Section 1 1.2 herein.
11.2 TERMINATION. This Agreement shall terminate automatically upon the
occurrence of any of the following events:
(a) The acquisition by any Party of all of the shares of
Common Stock and other
16
<PAGE> 17
Equity Securities of the FSB beneficially owned by the
other party, whether pursuant to the exercise of any of
the options granted in Article 9 above or otherwise; of
(b) The written consent by all Parties to such termination.
11.3 EFFECT OF TERMINATION.
(a) All rights granted to and obligations undertaken by the
Parties hereunder shall terminate immediately upon the termination of this
Agreement except for the confidentiality and nondisclosure obligations set forth
in Article 12 herein, the provisions of Sections 15.1, 15.2 and 15.4 herein, and
the provisions of Exhibit A attached hereto.
(b) Termination of this Agreement shall not affect the rights and
remedies of any Party available at law or in equity in relation to any breach or
nonperformance by any other Party of any of its obligations hereunder prior to
such termination.
11.4 DISSOLUTION OF THE FSB. The FSB shall not be dissolved unless a
plan of dissolution is approved by the shareholders of the FSB pursuant to
Section 4.1(h) above and by Federal Bank Regulatory Authorities. Each of the
Murray Group and Cumberland agrees that it will make no petition for dissolution
of the FSB under law without the consent of such other Parties.
ARTICLE 12.
CONFIDENTIALITY
12.1 CONFIDENTIALITY OBLIGATION. Each Party (the "Receiving Party")
shall keep strictly confidential any information disclosed by, as the case may
be, any other Party (the "Disclosing Party") or otherwise made available to the
Receiving Party concerning the business, operations, trade secrets or other
proprietary information of the Disclosing Party and any information made
available to the Receiving Party concerning the business, operations, trade
secrets or other proprietary information of the FSB (whether in written media or
otherwise) ("Confidential Information"), using the same degree of care that it
uses to protect its own confidential or proprietary information. "Confidential
Information" shall not include information: (I) which is or becomes generally
available to the public other than as a result of disclosure thereof by the
Receiving Party; (ii) which is lawfully received by the Receiving Party on a
nonconfidential basis from a third party that is not itself under any obligation
of confidentiality or nondisclosure to the Disclosing Party of any other party
with respect to such information; or (iii) which by written evidence can be
shown by the Receiving Party to have been independently developed by the
Receiving Party.
12.2 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. The Receiving Party
shall use Confidential Information solely for the purposes of this Agreement and
the transactions
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<PAGE> 18
contemplated hereby and shall not to disclose or disseminate any Confidential
Information to any person at any time, except for disclosure to those of its
officers and employees, and accountants, attorneys and agents, whose duties
reasonably require them to have access to such Confidential Information.
12.3 EXCEPTION. The foregoing confidentiality and nondisclosure
obligations shall not apply to information which is required to be publicly
disclosed by law or by regulation or, in the case of Cumberland, by the rules of
any securities exchange in which equity securities of Cumberland may be traded;
provided, however, that, in such event, the Receiving Party provides the
Disclosing Party with prompt notice of such disclosure to the extent permitted
by law so that the Disclosing Party has the opportunity if it so desires to seek
a protective order or other appropriate remedy.
12.4 SURVIVAL. The confidentiality and nondisclosure obligations of
this Article 12 shall survive the termination of this Agreement and remain in
effect for a period of three (3) years following the termination of this
Agreement.
ARTICLE 13.
FINDER'S FEE
Each Party represents and warrants to the other Party that neither FSB
or any Party has incurred any obligation or liability contingent or otherwise,
for any brokers or finders fees in respect to the matters provided for in this
Agreement.
ARTICLE 14.
OPTION TO PURCHASE CUMBERLAND'S COMMON STOCK
14.1 PURCHASE OF CUMBERLAND STOCK BY LOCAL ORGANIZERS. Five individuals
who have expended considerable time and efforts in organizing a new bank in
Murray, Kentucky, Story Gibson, Jones, Smith and Poston, (hereinafter "Local
Organizers") will be allowed, within 30 days of closing, to purchase $250,000.00
of Cumberland stock at a price of one and one-half times then current book value
payable immediately. The Local Organizers will receive an option from Cumberland
to purchase an additional $250,000.00 of Cumberland stock at one and one-half
times then current book value for a period of five years from the date of
receipt of charter on the following conditions:
1. In the event of announcement by Cumberland of a sale which
results in a change of ownership or control of Cumberland,
or
2. The de novo thrift bank to be established in Murray, KY has
$30,000,000.00
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<PAGE> 19
in total deposits AND a ten percent (10%) return on equity
for one fiscal year's operations.
ARTICLE 15.
MISCELLANEOUS PROVISIONS
15.1 APPLICABLE LAW. This Agreement and all actions contemplated hereby
shall be interpreted and construed in accordance with the laws of the
Commonwealth of Kentucky applicable to contracts made and to be performed
entirely within such state and without giving effect to its choice of conflict
of laws rules or principles.
15.2 CONSENT TO JURISDICTION. Each of the Parties irrevocably submits
to the exclusive jurisdiction of the state courts of the Murray, Calloway
County, Kentucky area and of any United States federal court sitting in such
state in any action or proceeding arising out of or relating to this Agreement,
and irrevocably agrees that all claims in respect of such action or proceeding
shall be heard and determined in any such state court or any such United States
federal court. Each Party further agrees that service of any process, summons,
notice or document by registered mail to the address of such Party set forth in
Section 14.4 below shall be effective service of process for any action or
proceeding brought against such Party in any such court. Each Party hereby
irrevocably and unconditionally waives any objection to the laying of venue of
any action or proceeding arising out of our relating to this Agreement in any
such court and further irrevocably and unconditionally waives and agrees not to
plead or claim in any such court that any such action or proceeding brought in
any such court has been brought in an inconvenient forum. Each Party further
agrees that a final nonappealable judgment in any such action or proceeding
shall be conclusive and may be enforced in any other jurisdictions by suit on
the judgment or in any other manner provided by law.
15.3 COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts and may be executed by facsimile. All counterparts shall
collectively constitute one and the same Agreement.
15.4 NOTICES. In any case where any notice or other communication is
required or permitted to be given to any Party hereunder, such notice or
communication shall be in writing and deemed to have been duly given and
delivered (a) if delivered in person, on the date of such delivery, (b) is sent
by confirmed facsimile transmission (with answer back received), on the date of
such facsimile transmission, or (c) if sent by overnight express or registered
or certified mail (with return receipt requested), on the date of receipt of
such mail, and shall be sent to the following address (or such other address as
such Party may designate from time to time in writing):
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<PAGE> 20
If to Cumberland:
Cumberland Bancorp, Inc.
1001 North Main Street
Carthage, TN 37030
Attention: Mr. Joel Porter
Telephone (615) 735-0256
Facsimile (615) 735-0207
Copy to:
Burch, Porter & Johnson
130 North Court Avenue
Memphis, TN 38103
Attention: Joel H. Porter
Telephone: (901) 524-5000
Facsimile: (901) 524-5024
If to the Murray Group:
BancKentucky, Inc.
-----------------------
Murray, KY 42071
Attention: Ronald D. Gibson
Telephone: (502) 753-5626
Facsimile: (502) 759-3777
Copy to:
Hurt & Jones
P.O. Box 430
Murray, KY 42071
Attention: Richard W. Jones
Telephone: (502) 753-1268
Facsimile: (502) 753-5913
15.5 FORCE MAJEURE. Should any circumstance beyond the reasonable
control of any Party occur which delays or renders impossible the performance of
any of its obligations under this Agreement, such obligation shall be postponed
for such time as such performance necessarily has had to be suspended or delayed
on account thereof, provided such Party shall notify the other Parties in
writing within fourteen (14) days after the occurrence of such force
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<PAGE> 21
majeure. In either such event, the Parties shall promptly meet to determine an
equitable solution to the effects of any such event, provided that any Party who
fails because of force majeure to perform its obligations hereunder will upon
the cessation of the force majeure take all reasonable steps within its power to
resume with the least possible delay compliance with its obligations. Events of
force majeure shall include, without limitation, war, revolution, invasion,
insurrection, riots, mob violence, sabotage or other civil disorders, acts of
God, strikes or other labor disputes, acts, laws, regulations or rules of any
government or governmental agency and any other circumstances beyond the
reasonable control of any Party, the obligations of which are affected thereby.
15.6 ASSIGNMENT; BINDING EFFECT. This Agreement shall not be assigned
by any Party, other than to a Subsidiary thereof, without the prior written
consent of the other Parties. This Agreement shall inure to the benefit of and
be binding upon each of the Parties hereto and their respective successors and
permitted assigns.
15.7 ENTIRE AGREEMENT. The terms and conditions herein contained
together with the terms and conditions of the other documents attached as
Exhibits and Schedules hereto constitute the entire agreement between and among
the Parties relating to the subject matter of this Agreement and shall supersede
all previous communications between the Parties with respect to the subject
matter of this Agreement.
15.8 EXHIBITS AND SCHEDULES. The Exhibits and Schedules attached to
this Agreement and the principles and conditions incorporated in such Exhibits
and Schedules shall be deemed integral parts of this Agreement and all
references in this Agreement to this Agreement shall encompass such Exhibits and
Schedules and the principles and conditions incorporated in such Exhibits and
Schedules.
15.9 CONFLICT. In the event of any conflict between this Agreement and
the Charter or Bylaws of the FSB, this Agreement shall control as between or
among the Parties to the extent permitted by law.
15.10 AMENDMENT. This Agreement and the Exhibits and Schedules attached
to this Agreement may be varied, amended, or extended only by the written
agreement of the Parties, executed by their duly authorized officers of
representatives, specifically referring to this Agreement.
15.11 SEVERABILITY. Any provision of this Agreement which is held
invalid, illegal, or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provision of this Agreement
invalid, illegal or unenforceable in any other jurisdiction.
15.12 HEADINGS. The descriptive headings contained in this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
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15.13 NO WAIVER OF RIGHTS. No failure or delay on the part of any Party
in the exercise of any power or right hereunder shall operate as a waiver
thereof. No single or partial exercise of any right or power hereunder shall
operate as a waiver of such right or of any other right or power. The waiver by
any Party of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach hereunder. All rights
and remedies existing under this Agreement are cumulative with, and not
exclusive of, any rights or remedies otherwise available.
15.14 RELATIONSHIP OF THE PARTIES. This Agreement shall not be deemed
to create a general partnership between or among the Parties, nor shall it
constitute any Party the agent or legal representative of any other Party.
15.15 PUBLICITY. Except as may be required by law as advised by
counsel, no Party shall issue any press release or make any public announcement
concerning this Agreement or the transactions contemplated hereby without the
prior consent of the other Parties.
15.16 EXECUTION BY THE FSB. The Parties shall cause the FSB to execute
this Agreement upon its formation and thereby be bound by the terms hereof.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first written above.
CUMBERLAND BANCORP, INC.
/s/ Joel Porter
----------------------------------------
JOEL PORTER, PRESIDENT
BANCKENTUCKY, INC.
/s/ Ronald D. Gibson
----------------------------------------
RONALD D. GIBSON, PRESIDENT
ACCEPTED AND AGREED TO:
THE MURRAY BANK, FSB
BY: /s/ Ronald D. Gibson
-----------------------------------
Name: Ronald D. Gibson
Title: President
22
<PAGE> 23
ADDENDUM TO JOINT VENTURE AGREEMENT
This ADDENDUM TO JOINT VENTURE AGREEMENT is made as of October 31, 1998
by and between CUMBERLAND BANCORP, INC., a corporation organized and existing
under the laws of the State of Tennessee, with offices at 1001 North Main
Street, Carthage, Tennessee 37030 and a registered bank holding company pursuant
to the Bank Holding Company Act of 1956, as amended ("Cumberland") and
BANCKENTUCKY, INC., a corporation organized and existing under the laws of the
Commonwealth of Kentucky, with offices at 300 Maple Street, Suite 110, Murray,
Kentucky 42071 (hereinafter referred to as the "BancKentucky").
WITNESSETH:
WHEREAS, Cumberland and BancKentucky entered into a Joint Venture
Agreement dated October 1, 1998 in order to form, own and carry out the business
of a proposed de novo federal savings bank with its main office to be located in
Murray, Calloway County, Kentucky; and
WHEREAS, a question has arisen concerning the time requirements for
consummation of the options exerciscable pursuant to the provisions of Articles
9 and 10 of said Joint Venture Agreement; and
WHEREAS, the parties desire to clarify said time requirements for
consummation of the options exercisable pursuant to the provisions of Articles 9
and 10 of the Joint Venture Agreement by entering into this Addendum to Joint
Venture Agreement.
NOW, THEREFORE, for and in consideration of the premises and the mutual
agreements and covenants contained herein and contained in the above-identified
Joint Venture Agreement and in order to clarify the time requirements for
consummation of the options granted both parties in Articles 9 and 10 of said
Joint Venture Agreement, Cumberland and BancKentucky hereby agree as follows:
1. The Joint Venture Agreement previously executed by the parties is
amended by the addition of the following paragraph:
15.17 Time Periods To Consummate Option Rights Granted Parties
in Articles 9 & 10. Any and all option rights granted to the parties in
Articles 9 & 10 herein shall be exercisable within the time frame(s)
stated in said Articles, but shall be consummated within the time
frame(s) stated in said Articles or upon receipt of all necessary
regulatory approval(s), whichever occurs last.
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2. Except as specifically amended herein by the addition of the above
paragraph, the Joint Venture Agreement previously entered into by the parties
effective October 1, 1998 shall remain in full force and effect and is otherwise
unmodified as the result of the execution of this Addendum to Joint Venture
Agreement.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first written above.
CUMBERLAND BANCORP, INC.
/s/ Joel Porter
----------------------------------------
By: JOEL PORTER
Its: PRESIDENT
BANCKENTUCKY, INC.
/s/ Ronnie D. Gibson
----------------------------------------
BY: RONNIE D. GIBSON
Its: PRESIDENT
ACCEPTED AND AGREED TO:
THE MURRAY BANK, FSB
BY: /s/ Ronald D. Gibson
-----------------------------------
Name: Ronald D. Gibson
Title: President
24
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
Cumberland Bancorp, Incorporated (Tennessee)
-Cumberland Bank (Tennessee Banking Corporation)
Cumberland Finance, Inc. (Tennessee)
Cumberland Life Insurance Company, Inc. (Tennessee)
Cumberland Mortgage Company, Inc. (Tennessee)
CBC Financial Services, Inc. (Tennessee)
InsureTennessee, Inc. (Tennessee)
-BankTennessee (Tennessee Banking Corporation)
-The Community Bank* (Tennessee Banking Corporation)
-The Murray Bank (Kentucky Federal Savings Bank)
*The Community Bank operates The Bank of Brentwood, The Bank of Green Hills and
The Bank of Franklin
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Cumberland Bancorp,
Incorporated on Form S-1 of our report dated March 19, 1999, appearing in the
Prospectus, which is part of this Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Heathcott & Mullaly, P.C.
Brentwood, Tennessee
July 28, 1999
<PAGE> 1
EXHIBIT 23.2
MAGGART & ASSOCIATES, P.C.
Certified Public Accountants
FIRST UNION TOWER
SUITE 2150
150 FOURTH AVENUE, NORTH
NASHVILLE, TENNESSEE 37219-2417
Telephone (615) 252-6100
Facsimile (615) 252-6105
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement (relating to 700,000 shares
of Common Stock) of Cumberland Bancorp, Incorporated on Form S-1 of our report
dated March 29, 1997 (which expresses a qualified opinion and includes an
explanatory paragraph relating to our inability to obtain audited financial
statements supporting the Company's investment in Cumberland Life Insurance
Company stated at $226,166 at December 31, 1996, or its equity in Cumberland
Life Insurance Company's earnings of $1,166 which is included in net earnings
for the year then ended; nor were we able to satisfy ourselves about the
carrying value of the investment or the equity in its earnings by other auditing
procedures) appearing in this Prospectus, which is a part of this Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Maggart & Associates, P.C.
Nashville, Tennessee
July 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
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