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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 1999
REGISTRATION NO. 333-84173
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
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. [ ]
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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. [ ]
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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(2)
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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.
(2) All of this fee was paid with our previous filing on July 30, 1999.
------------------------
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 SEPTEMBER 8, 1999
PROSPECTUS
700,000 SHARES
CUMBERLAND BANCORP, INCORPORATED
COMMON STOCK
-------------------------
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.
Persons interested in this 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 November , 1999, unless
extended for up to an additional thirty (30) days by our board of directors.
Shares are being offered on a first come first-served basis. We will reject any
subscription tendered after all 700,000 shares have been subscribed for. Shares
offered pursuant to this offering will be sold directly by us through the
efforts of our employees, officers and directors.
This offering is not conditioned upon the sale of all of the shares offered
under this prospectus and all subscriptions shall be irrevocable and may not be
cancelled.
While this offering is open we intend to invest the proceeds we receive in
short-term, interest-bearing securities.
There is currently no public market for the common stock. Following the
offering, our shares will be eligible for quotation, and we expect trading to be
conducted, on the Over-The-Counter Bulletin Board, although we have not
submitted application to trade on the OTC Bulletin Board at this time.
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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 $215,000,
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 September , 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......................... 11
Use of Proceeds............................................. 11
Dividend Policy............................................. 12
Capitalization.............................................. 13
Dilution.................................................... 14
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis
of Financial Condition and Results of Operations.......... 16
Business.................................................... 34
Supervision and Regulation.................................. 47
Management.................................................. 53
Transactions with Executive Officers and Directors.......... 59
Principal Shareholders...................................... 60
Market Price of and Dividends on Our Common
Equity and Related Stockholder Matters.................... 61
Description of Capital Stock................................ 62
Shares Eligible for Future Sale............................. 66
Plan of Distribution........................................ 67
Legal Matters............................................... 67
Experts..................................................... 67
Change in Independent Certified Public Accountants.......... 67
Where You Can Find More Information......................... 68
Index to Financial Statements............................... F-1
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i
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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.
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 November , 1999, unless
extended by our board of directors. We will reject any subscription tendered
after we have received subscriptions for all 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,
- 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,
- 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 June 30, 1999, our total assets were about $412 million, our deposits
were about $345 million and our stockholders' equity was about $22.2 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
$160 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 $157 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 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
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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, the acquisition of two branches in McMinnville, 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 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 nontraditional 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 to contribute capital to a
proposed new bank, Insurers Bank of Tennessee, to contribute capital to
Cumberland Bank in order to fund its acquisition of two existing McMinnville,
Warren County, Tennessee bank branches, to supplement the capital of our other
existing banks, and for general corporate purposes, including expansion of our
existing branch network.
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., in 1998 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 on 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 sales of the two largest depository institutions in
Calloway County to large regional banks provide an opportunity for a local
community bank alternative like The Murray Bank to gain significant market
presence. As a federal thrift, The Murray Bank will be regulated by the Office
of Thrift Supervision.
INSURORS BANK (PAGE )
We entered into a joint venture with InsCorp, Inc., a Tennessee
corporation, on August 26, 1999 to form and operate a new state-chartered bank
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called Insurors Bank of Tennessee. Insurors Bank is currently in organization
and must make successful application to the Tennessee Department of Financial
Institutions for charter approval. Insurors Bank must also receive the approval
of the TDFI, the Federal Reserve and the Federal Deposit Insurance Corporation
before it can transact any banking business, offer a 50% interest in its voting
common stock to InsCorp and obtain deposit insurance. InsCorp was organized by a
group of Tennessee insurance agents and executives. Insurors Bank will offer
banking and other financial services designed to meet the needs of insurance
agents and agencies across the state. We expect the principal office of Insurors
Bank to be in Nashville, Tennessee and expect to commence operations by the
spring of 2000.
THE OFFERING
Common stock offered by us(1)....... 700,000 shares
Offering price...................... $12.50 per share
Common stock to be outstanding after
the offering........................ 6,281,557(2)
Use of proceeds..................... We plan to use $1.30 million of the net
proceeds to supplement the capital of
our existing bank subsidiaries. We plan
to use $2.25 million of the net
proceeds to contribute capital into
Insurors Bank, our new bank joint
venture. We also plan to contribute
$1.5 million to the capital of
Cumberland Bank to fund its acquisition
of two existing branches in
McMinnville. We plan to use the
remaining net proceeds for general
corporate purposes including expansion
of our existing branch network. For
further details, see "Use of Proceeds."
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(1) None of our officers or directors plan to subscribe for shares in this
offering initially except for Mr. Mark McDowell, who intends to subscribe
for 5,000 shares. After the offering has commenced, our officers and
directors may subscribe for additional shares to the extent that those
purchases will assist us in attaining a fully-subscribed offering. See
"Principal Shareholders" for additional information on the current ownership
interests of our officers and directors.
(2) This information is based on the number of shares actually outstanding on
September 1, 1999, including the ten percent (10%) stock dividend effective
March 26, 1999. It excludes 418,160 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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SIX MONTHS ENDED
--------------------- FOR YEARS ENDING DECEMBER 31,
JUNE 30, JUNE 30, ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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SUMMARY OF OPERATIONS
Interest income -- tax
equivalent..................... $16,282 14,309 30,614 17,995 9,353 7,721 5,424
Interest expense................. 8,261 7,622 16,021 9,219 4,529 3,667 2,318
------- ------- ------- ------- ------- ------ ------
Net interest income.............. 8,021 6,687 14,593 8,776 4,824 4,054 3,106
Provision for loan losses........ (464) (431) (1,164) (1,368) (415) (357) (231)
Noninterest income............... 2,364 2,244 4,014 3,190 1,505 1,197 683
Noninterest expense.............. (7,309) (5,810) (12,568) (7,674) (4,562) (3,296) (2,182)
------- ------- ------- ------- ------- ------ ------
Income before income taxes....... 2,612 2,690 4,875 2,924 1,352 1,598 1,376
Income tax expense............... (962) (981) 1,857 1,081 513 615 515
------- ------- ------- ------- ------- ------ ------
Net earnings..................... 1,650 1,709 3,018 1,843 839 983 861
Basic earnings per share......... 0.30 0.31 0.55 0.48 0.35 0.41 0.36
Diluted earnings per share....... 0.29 0.31 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...... 3.98 3.68 3.95 3.34 2.68 2.36 1.95
SELECTED PERIOD-END BALANCES
Total assets..................... 411,709 338,872 373,856 298,509 102,688 89,301 71,158
Loans -- net of unearned
income......................... 344,600 269,016 296,547 245,201 83,196 67,897 55,390
Allowance for loan losses........ 3,982 3,337 3,790 3,014 1,194 1,048 753
Total deposits................... 344,926 287,066 325,444 255,699 90,596 78,088 61,182
Other borrowings................. 38,204 28,858 25,206 23,189 5,026 4,633 4,918
Stockholders' equity............. 22,239 18,231 19,660 16,565 6,566 5,672 4,695
SELECTED AVERAGE BALANCES
Total Assets..................... 385,650 319,160 340,197 194,394 97,314 79,608 66,354
Securities....................... 21,647 24,194 22,491 10,763 5,549 5,947 6,235
Loans -- net of unearned
income......................... 321,067 255,605 268,564 160,615 76,091 62,071 50,078
Allowance for loan losses........ 3,886 3,176 3,296 2,403 991 901 697
Total deposits................... 335,986 272,394 289,576 167,049 85,625 63,358 52,950
Other borrowings................. 27,286 29,496 27,612 12,922 4,701 4,813 3,860
Stockholders' equity............. 20,946 17,474 18,150 11,120 6,119 5,170 4,410
SELECTED OPERATING RATIOS
Annual % change in average
loans.......................... 39.09% 118.28% 67.21% 111.08% 22.59% 23.87% 20.46%
Annual % change in average
assets......................... 26.72% 128.36% 75.00% 99.76% 22.24% 19.97% 12.09%
Return on average equity......... 15.75% 19.56% 16.63% 16.57% 13.71% 18.82% 18.87%
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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 LARGER, 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 1% 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, WHICH MAY NOT BE INDICATIVE OF THE PRICES
THAT WILL PREVAIL IN THE MARKET THAT DEVELOPS FOR OUR STOCK.
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. Our board
considered past sales transactions of our stock, our historic and expected
growth, and general market conditions, among other factors, in determining the
offering price. The offering price bears no relationship to the amount of our
assets, book value, stockholders' equity or other typical criteria of value, and
may exceed the price at which shares may be bought or sold after the offering.
Consequently, you may lose a portion of your investment simply as a result of an
inaccurately determined offering price.
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
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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 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 or that have been restructured. 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 increased 75% in dollar amounts in the first six months
of 1999 to $4.9 million, or 1.43% of loans, at June 30, 1999. The ratio of our
allowance for loan losses to nonperforming loans has declined from 121% at
December 31, 1998 to 81% at June 30, 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
7
<PAGE> 12
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.
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, could 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 June 30, 1999
would have been $4.90, or $7.60 less than your purchase price. See "Dilution."
8
<PAGE> 13
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 or
private 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.
WE WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS RESULTING FROM THIS
OFFERING.
The net proceeds of this offering will be used to supplement the capital of
our existing banks including the contribution of capital into Cumberland Bank
for the purpose of funding the acquisition of two McMinnville, Tennessee bank
branches, to contribute capital to our proposed joint venture bank, Insurors
Bank of Tennessee, and for general corporate purposes, including expansion of
our existing branch network. 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."
9
<PAGE> 14
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.
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.
10
<PAGE> 15
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.
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
completed 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 will 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 $8.54 million after deduction of our
expenses.
The following table reflects how we expect to apply the net proceeds:
<TABLE>
<S> <C>
Contribution to the capital of Insurors Bank of
Tennessee.......................................... $2.25 million
Acquisition of American City/McMinnville bank
branches........................................... $1.50 million
Contribution to the capital of our existing banks.... $1.30 million
Branch expansion and other general corporate
purposes........................................... $3.49 million
</TABLE>
Proceeds contributed to the capital of Insurors Bank of Tennessee, our
newly proposed bank joint venture, will be combined with approximately $2.25
million from InsCorp, our joint venture partner, to provide the necessary
operating capital we expect to be required in order for bank regulatory agencies
to approve Insurors Bank's charter. See "Business -- Future Growth" for
additional information on our Insurors Bank transaction.
We plan to contribute approximately $1.50 million of the net proceeds to
the capital of Cumberland Bank for the purpose of funding its acquisition of two
existing bank branches of American City Bank located in McMinnville, Warren
County, Tennessee. Cumberland Bank recently entered into an asset purchase
agreement with American City and has received Federal Reserve approval to
proceed with the acquisition. We expect the
11
<PAGE> 16
acquisition to be consummated by September 30, 1999. See "Business -- Future
Growth" for additional information on the McMinnville branch expansion.
Proceeds that we apply to the capital of our other existing bank
subsidiaries, besides Cumberland Bank, will better allow those banks to maintain
desired internal and regulatory risk based capital and leverage ratios, and will
provide us with additional strength to withstand any economic downturn. The
$1.30 million contributed to the capital of our banks will be invested initially
in federal funds sold and other short-term interest bearing securities.
We intend to use the remaining net proceeds of the offering for general
corporate purposes, including expansion of our existing branch network. We
recently opened a new bank branch in Franklin, Tennessee, a new branch building
in Ripley, Tennessee, and The Murray Bank in Murray, Kentucky. We expect to open
bank branches in Lafayette and Cross Plains, Tennessee and a larger branch
building in Collierville, Tennessee within the next several months, and are
beginning to consider other potential branch locations for our existing banks as
well as other potential bank and bank branch acquisitions. We cannot specify
with certainty the particular uses for these remaining net proceeds at this
time. Accordingly, our management will have broad discretion in applying the net
proceeds. See "Business--Future Growth" for more information on our pending and
potential branch and bank expansion.
None of the proceeds will be used to discharge any of our indebtedness.
Pending their use, we intend to invest the net 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 branch expansion of all of our bank subsidiaries, our banks cannot pay us
dividends now, and will not likely 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.
12
<PAGE> 17
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 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
$215,000.
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.
JUNE 30, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
ADJUSTED FOR
ACTUAL OFFERING
------- ------------
<S> <C> <C>
Stockholders' Equity:
Common Stock, 20,000,000 authorized shares; 5,581,557
shares outstanding prior to the offering, and
6,281,557 shares to be outstanding after the
offering............................................ $ 2,791 $ 3,141
Additional paid-capital................................ 15,567 23,752
Retained earnings...................................... 4,022 4,022
Accumulated other comprehensive income (loss).......... (141) (141)
------- -------
Total stockholders' equity.......................... $22,239 $30,774
------- -------
Total capitalization................................ $22,239 $30,774
------- -------
</TABLE>
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<PAGE> 18
DILUTION
As of June 30, 1999, our net tangible book value was approximately $22.2
million or $3.98 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 June 30, 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 June
30, 1999, would have been $30.8 million or $4.90 per share. This represents an
immediate increase in net tangible book value of $0.92 per share to existing
shareholders and an immediate dilution of $7.60 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 June 30, 1999........ 3.98
Increase in net tangible book value per share attributable
to new investors....................................... 0.92
Pro forma net tangible book value per share after
offering.................................................. 4.90
------
Dilution per share to new investors......................... $ 7.60
======
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 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 for 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 June 30, 1999. As of July 1, 1999, there were options
outstanding to purchase a total of 418,160 shares of common stock with a
weighted average exercise price of $6.01 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.
14
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
(unaudited)
The table below provides selected consolidated financial data for our
company as of and for the six months ended June 30, 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 BankTennessee or The Community
Bank before the July 1997 merger of First Federal Bancshares, Inc. into us. The
merger was accounted for using the purchase method of accounting. In accordance
with purchase accounting, the results of operations for BankTennessee and The
Community Bank are included in the selected consolidated financial data since
the date of the merger. You should read the following selected consolidated
financial information in conjunction with our financial statements and the notes
to those statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" located elsewhere in this prospectus.
<TABLE>
<CAPTION>
FOR YEARS ENDING DECEMBER 31,
JUNE 30, JUNE 30, ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income -- tax equivalent.......... $16,282 14,309 30,614 17,995 9,353 7,721 5,424
Interest expense........................... 8,261 7,622 16,021 9,219 4,529 3,667 2,318
------- ------- ------- ------- ------- ------ ------
Net interest income........................ 8,021 6,687 14,593 8,776 4,824 4,054 3,106
Provision for loan losses.................. (464) (431) (1,164) (1,368) (415) (357) (231)
Noninterest income......................... 2,364 2,244 4,014 3,190 1,505 1,197 683
Noninterest expense........................ (7,309) (5,810) (12,568) (7,674) (4,562) (3,296) (2,182)
------- ------- ------- ------- ------- ------ ------
Income before income taxes................. 2,612 2,690 4,875 2,924 1,352 1,598 1,376
Income tax expense......................... (962) (981) 1,857 1,081 513 615 515
------- ------- ------- ------- ------- ------ ------
Net earnings............................... 1,650 1,709 3,018 1,843 839 983 861
Basic earnings per share................... 0.30 0.31 0.55 0.48 0.35 0.41 0.36
Diluted earnings per share................. 0.29 0.31 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................ 3.98 3.68 3.95 3.34 2.68 2.36 1.95
SELECTED PERIOD-END BALANCES
Total assets............................... 411,709 338,872 373,856 298,509 102,688 89,301 71,158
Loans -- net of unearned income............ 344,600 269,016 296,547 245,201 83,196 67,897 55,390
Allowance for loan losses.................. 3,982 3,337 3,790 3,014 1,194 1,048 753
Total deposits............................. 344,926 287,066 325,444 255,699 90,596 78,088 61,182
Other borrowings........................... 38,204 28,858 25,206 23,189 5,026 4,633 4,918
Stockholders' equity....................... 22,239 18,231 19,660 16,565 6,566 5,672 4,695
SELECTED AVERAGE BALANCES
Total Assets............................... 385,650 319,160 340,197 194,394 97,314 79,608 66,354
Securities................................. 21,647 24,194 22,491 10,763 5,549 5,947 6,235
Loans -- net of unearned income............ 321,067 255,605 268,564 160,615 76,091 62,071 50,078
Allowance for loan losses.................. 3,886 3,176 3,296 2,403 991 901 697
Total deposits............................. 335,986 272,394 289,576 167,049 85,625 63,358 52,950
Other borrowings........................... 27,286 29,496 27,612 12,922 4,701 4,813 3,860
Stockholders' equity....................... 20,946 17,474 18,150 11,120 6,119 5,170 4,410
SELECTED OPERATING RATIOS
Annual % change in average loans........... 39.09% 118.28% 67.21% 111.08% 22.59% 23.87% 20.46%
Annual % change in average assets.......... 26.72% 128.36% 75.00% 99.76% 22.24% 19.97% 12.09%
Return on average equity................... 15.75% 19.56% 16.63% 16.57% 13.71% 18.82% 18.87%
</TABLE>
15
<PAGE> 20
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.
SIX MONTH AND THREE MONTH PERIODS ENDED JUNE 30, 1999 COMPARED TO SIX MONTH AND
THREE MONTH PERIODS ENDED JUNE 30, 1998
FINANCIAL CONDITION. Total assets have grown $37.9 million, or
approximately 10% (annualized rate of 20%), since December 31, 1998 to a total
of $411.7 million at June 30, 1999. The growth in total assets has been funded
by a $19.5 million growth in deposits, $9.5 million increase in advances from
the Federal Home Loan Bank, $3.4 million increase in federal funds purchased,
proceeds from the sale of $1.0 million in common stock to a group of Franklin,
Tennessee investors and retained earnings.
Our subsidiary banks continue to have strong loan demand, demonstrated by
the $48.1 million increase in loans from December 31, 1998 to June 30, 1999. The
funding of loans was from the growth mentioned above and funds provided from a
combined decrease in federal funds sold and interest bearing deposits in
financial institutions of $11.9 million.
Premises and equipment have increased $1.3 million for the six months ended
June 30, 1999 due to construction-in-process related to our branch expansion.
Other assets increased $3.8 million primarily due to the $2.4 million investment
in The Murray Bank.
RESULTS OF OPERATIONS. Net income decreased $59,000, or 3%, for the first
six months of 1999 and $150,000, or 15%, for the three months ended June 30,
1999 as compared to the same periods in 1998. The decrease in net income was
primarily attributable to smaller gains on the sale of Small Business
Administration loans and operating losses of The Murray Bank. In addition,
operating expenses are up due to startup expenses associated with new branches
and overall expansion of our existing operations.
Net interest income increased $1.3 million, or 20%, for the six month
period ended June 30, 1999 and $698,000 for the three month period ended June
30, 1999 as compared to the same periods in 1998. The increase in net interest
income was due primarily to an increase in average earning assets and an
increase in the percentage of average earning assets invested in loans.
The provision for loan losses was $464,000 for the six month period ended
June 30, 1999, 8% more than one year earlier, and $252,000 for the three months
ended June 30, 1999, compared to $306,000 for the three months ended June 30,
1998. Net charge offs have amounted to $272,000 for the first half of 1999 as
compared to $108,000 for the first half of 1998. This increase in net loan
charge-offs for 1999 is primarily due to increased consumer loan losses at
Cumberland Bank and a $75,000 construction loan guaranty default at
BankTennessee. Non-performing loans increased 75% in dollar amounts in the first
six months to approximately $4.9 million at June 30, 1999, and the ratio of our
allowance for loan losses to non-performing loans declined from 121% at December
31, 1998 to 81% at June 30, 1999. If this credit quality decline continues, net
loan charge-offs and provisions for loan losses could increase, and net income
would be negatively impacted. Management believes its allowance for loan losses
of approximately $4.0 million is adequate to absorb losses inherent in the loan
portfolio.
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<PAGE> 21
Noninterest income increased $120,000, or 5%, for the six month period
ended June 30, 1999 and decreased by $126,000 for the three months ended June
30, 1999, from the same periods in 1998. Within this category, service charges
and fees have increased in both periods, however, those increases have been
offset by lower income generated by mortgage banking activities and smaller
gains on the sale of SBA loans.
Noninterest expense increased $1.5 million, or 26%, for the six month
period ended June 30, 1999 and $832,000, or 28%, for the three month period
ended June 30, 1999, from one year earlier. The largest component of noninterest
expense is salaries and benefits, which increased $844,000, or 27%, and
$447,000, or 28%, for the six month and three month periods ended June 30, 1999,
respectively, compared to the prior year. The increased personnel costs are
attributable to overall growth of our subsidiary banks and expansion of our
non-bank subsidiaries including InsureTennessee and CBC Financial Services, Inc.
We also expensed approximately $50,000 for our share of organizational costs
associated with the charter and start-up of The Murray Bank in the first half of
1999. Other increased expenses were primarily due to overall growth.
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.
17
<PAGE> 22
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 $91.0 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.
18
<PAGE> 23
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.
19
<PAGE> 24
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.
20
<PAGE> 25
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............ -- -- -- -- --
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
21
<PAGE> 26
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
of December 31, 1998 as "substandard" based upon other possible credit problems.
These loans are not included in the above amounts. These loans are performing
loans but are
22
<PAGE> 27
classified as "substandard" 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 LOANS
------- ---------- ----------- ------- ---------- -----------
(DOLLARS IN THOUSANDS)
<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>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------
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 LOANS
------- ---------- ----------- ------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate -- construction &
development.................... 239 20% 7% $ 188 18% 9%
Real estate -- 1-4 single
family......................... 60 5 37 42 4 35
Real estate -- other............. 48 4 6 31 3 7
Commercial, financial and
agriculture.................... 167 14 20 168 16 15
Consumer......................... 310 26 30 293 28 33
Other............................ 24 2 -- 21 2 1
Unallocated...................... 346 29 -- 304 29 --
------ --- --- ------ --- ---
Total........................ $1,194 100% 100% $1,047 100% 100%
====== === === ====== === ===
</TABLE>
23
<PAGE> 28
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1994
----------------------------------
PERCENT OF
LOANS IN
PERCENT OF EACH
ALLOWANCE CATEGORY TO
TO TOTAL TOTAL
AMOUNT AMOUNT LOANS
------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate -- construction & development................... $ 128 17% 13%
Real estate -- 1-4 single family............................ 23 3 35
Real estate -- other........................................ 23 3 7
Commercial, financial and agriculture....................... 98 13 12
Consumer.................................................... 241 32 32
Other....................................................... 8 1 1
Unallocated................................................. 232 31 0
------ --- ---
Total................................................... $ 753 100% 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.
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.
24
<PAGE> 29
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 1996
------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Available for sale:
U.S. Government and agencies.................... $ 7,971 $ 1,401 $2,523
Mortgage-backed................................. 2,690 1,062 393
Other debt securities........................... -- 676 --
Marketable equity securities.................... 1,140 1,011 963
------- ------- ------
Total available for sale..................... $11,801 $ 4,150 $3,879
======= ======= ======
Held to maturity:
U.S. Government and agencies.................... $ 4,169 $ 4,560 $ 207
Mortgage-backed................................. 4,763 6,128 --
Other debt securities........................... -- 204 --
------- ------- ------
Total held to maturity....................... 8,932 10,892 207
------- ------- ------
Total securities............................. $20,733 $15,042 $4,086
======= ======= ======
</TABLE>
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.
25
<PAGE> 30
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 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>
26
<PAGE> 31
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.
27
<PAGE> 32
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.
28
<PAGE> 33
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 393,710 common stock
options outstanding at December 31, 1998, adjusted to reflect the March 26, 1999
10% stock dividend. At December 31, 1998, there were 156,290 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> 34
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> 35
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.
31
<PAGE> 36
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
32
<PAGE> 37
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.
33
<PAGE> 38
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.
GROWTH OF BRANCH OFFICES
<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
34
<PAGE> 39
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."
We recently entered into a joint venture agreement to form and operate a
Tennessee state-chartered bank to be marketed to, and designed to meet the needs
of, Tennessee
35
<PAGE> 40
insurance agencies and agents, to be based in Nashville, called Insurors Bank of
Tennessee. In addition, we expect to consummate the purchase of two existing
bank branches of American City Bank, located in McMinnville, Tennessee, by
September 30, 1999. For additional information on these transactions as well as
our plans to grow internally and through additional bank and bank branch
expansion, please see "Business -- Future Growth."
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
36
<PAGE> 41
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%.
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.
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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.
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
John Boyers Gallatin office lending and administration
Dan Herron Gallatin office lending and administration
Patrick Suttle Portland office lending and supervision
Billy Jackson White House office lending and supervision
</TABLE>
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<TABLE>
<S> <C>
The Community Bank
Larry Kain bank-wide lending supervision
Mary 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
Tom Bain community board director and business development
Mickey Jacobs bank director
BankTennessee
Wright Cox, III bank-wide mortgage supervision
Martha Owen bank-wide administrative supervision
Randy Lankford bank director and business development
</TABLE>
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 carry a lower degree of risk than commercial business loans because
they are secured by improved property with a minimal loan-to-value gap based
upon the type of property serving as collateral. Commercial real estate loans
also 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. Commercial real estate loans
constituted 7.1% of our loan portfolio at June 30, 1999.
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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. Residential real estate loans are
generally a lower risk form of lending than other types of lending, including
commercial real estate loans, since they are fully secured by the underlying
property in a housing market that has historically maintained its resale value.
An overall downturn in the housing market in the areas we serve would, however,
increase risk and induce adjustment of our lending standards. 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. Residential real estate loans
constituted 38.9% of our loan portfolio at June 30, 1999.
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 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 22.2% of our loan portfolio at June 30, 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. Consumer loans often are affected by general economic
conditions, changes in market interest rates and bankruptcy protection of
delinquent debtors. Historically, losses from this type of lending have been
higher for us than from other types of lending. Consumer loans constituted 11.0%
of our loan portfolio at June 30, 1999.
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
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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. Construction
loans constituted 18.8% of our loan portfolio at June 30, 1999.
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 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.
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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 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.
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Under its current management, CBC Financial Services has grown to a business
with over $24 million in assets under administration as of June 30, 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 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 branch
building in Ripley, Tennessee and the current construction of a larger branch
building in Collierville, 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.
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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.
MCMINNVILLE BRANCHES. Cumberland Bank recently entered into an asset
purchase agreement with American City Bank, a Tennessee state-chartered bank, to
acquire two of its branches located in McMinnville, Warren County, Tennessee. At
June 30, 1999, the total deposits of the two McMinnville branches was
approximately $20 million. Under the agreement, Cumberland Bank will acquire
substantially all of the branches' loans and fixed assets, as well as branch
property leases in order to continue operations at current locations, and will
assume all of the deposits of the branches, among other liabilities. The
transaction's purchase price equals $1.6 million over and above the branches'
net loans, cash, accrued interest receivables and book value of premises and
equipment received as offset by the branches' total deposits and accrued
interest payable. In addition to the consideration received by American City
Bank for the acquisition of the McMinnville branches, Peoples State Group, Inc.,
an Alabama bank holding company and the original party to the asset purchase
agreement with American City, will receive 67,000 shares of our common stock for
its assignment of the agreement. The purchase of the branches is subject to
regulatory approval including that of the Federal Reserve, which was received
September 3, 1999. Cumberland Bank expects to consummate the purchase of the
branches by September 30, 1999.
INSURORS BANK. On August 26, 1999, we entered into a joint venture with
InsCorp, Inc., a Tennessee company, for the purpose of forming and operating a
Tennessee state chartered bank to be called Insurors Bank of Tennessee. By
virtue of the joint venture, we will own a fifty percent (50%) interest in the
voting common stock of Insurors Bank, with InsCorp to own the remaining fifty
percent (50%) interest.
Insurors Bank is currently in organization and must make successful
application to the TDFI for charter approval. Insurors Bank must also receive
the approval of the TDFI, the Federal Reserve and the FDIC before it can, among
other things, transact any banking business, offer its common stock to InsCorp
and obtain deposit insurance.
Upon receipt of required regulatory approval and fulfillment of other
required conditions under the joint venture, Insurors Bank will issue 225,000
shares of its common stock to us at $10 per share for a total consideration of
$2.25 million. Insurors Bank will also issue 225,000 shares of common stock at
$10 per share to InsCorp. Under the joint venture, the board of directors of
Insurors Bank will consist of fourteen (14) directors, of which three (3) will
be designated by us. We will also provide investment, accounting, auditing,
human resource management, and loan review services to Insurors Bank on a fee
for services basis, and will continue to do so as long as we have beneficial
ownership of at least fifty percent (50%) of the voting stock of Insurors Bank.
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InsCorp expects to fund its investment in Insurors Bank by an offering of
the common stock of InsCorp primarily to Tennessee insurance agents. We expect
to market Insurors Bank primarily to Tennessee insurance agencies and agents and
to offer financial and other banking services specifically designed to meet
their financial service needs. We expect the principal office of Insurors Bank
to be in Nashville, Tennessee, and expect to commence operations by the spring
of 2000.
We cannot assure you when or if Insurors Bank will receive the necessary
regulatory approval to commence operations. We expect that once Insurors Bank
commences operations it will experience start-up losses. We cannot assure you
that Insurors Bank will ever be profitable.
We believe that our joint ventures with BancKentucky and with InsCorp, our
planned acquisition of the McMinnville branches, 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
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.
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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 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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<PAGE> 53
- 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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<PAGE> 54
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
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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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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 September 1, 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
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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 CBC Financial 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 1959 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
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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 from July of 1997 until
July 1999 and is currently a non-voting director emeritus. Mr. Cox owns and
operates McGinnis Oil Co., a gasoline distributor in Collierville, Tennessee, a
business he has operated since 1939. Mr. Cox has also 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
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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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(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, except the
audit committee which receives $500 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 and incentive 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. At this time,
we have granted, and expect to grant, only nonqualified stock options.
The plan calls for the term and vesting period for each option granted to
be set by the plan's committee except that no option can vest prior to the first
anniversary of the grant date and no incentive stock option can be exercised
more than ten years, or for ten percent shareholders more than five years, after
the grant date. As a matter of practice, options granted under the plan
generally become exercisable at a rate of 20% per year until fully vested in
five years and then expire after an additional year. Under the plan, the
exercise price per share of options is set by the plan's committee and can not
be less than 50% of the market value of the shares at grant date. To date, the
exercise price of all options granted has been equal to the market value of the
shares at grant date, to the extent that such a value is determinable
considering the historically limited market in our stock.
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. Effective March 1, 1998, we granted employees and directors
options to purchase 393,710 shares under our plan at an exercise price of $5.45
per share. On May 22, 1999, we granted options to purchase 28,250 shares under
our plan to nine (9) employees at an exercise price of $12.90 per share.
Effective July 1, 1999, we granted options to purchase 5,000 shares under our
plan to two (2) additional employees at an exercise price of $12.50 per share.
As of September 1, 1999, 418,160 shares of common stock remain outstanding under
the plan, after forfeiture of 8,800 shares by persons no longer employed by us
or our
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banks. The number of shares granted under, and the exercise price per share of,
each option is adjusted to incorporate the March 26, 1999 10% stock dividend
authorized by our board of directors. The consummation of this offering does not
accelerate or otherwise affect the vesting of options under our plan and will
not affect the number of shares underlying the options granted.
ISSUANCE OF COMPANY OPTIONS
The following table sets forth key information with respect to the grant of
stock options under our stock option plan. No options were exercised (or
exercisable) by any officers, including those identified, for the year ended
December 31, 1998.
INDIVIDUAL OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
NUMBER OF PERCENT OF APPRECIATION FOR
SECURITIES TOTAL OPTIONS OPTION TERM
UNDERLYING GRANTED EXERCISE ($)(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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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> 64
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 1, 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 5,581,557 shares
outstanding as of September 1, 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 PERCENTAGE OF
OPTIONS CURRENTLY SHARES OUTSTANDING
NUMBER OF EXERCISABLE OR ----------------------
SHARES EXERCISABLE WITHIN BEFORE AFTER
BENEFICIALLY 60 DAYS OF THE DATE THE THE
NAME OF BENEFICIAL OWNER OWNED OF THIS PROSPECTUS OFFERING OFFERING(9)
- ------------------------ ------------ ------------------- -------- -----------
<S> <C> <C> <C> <C>
Joel Porter........................ 906,621(1) 1,650 16.2% 14.4%
John Wilder........................ 705,941(2) 1,650 12.6 11.2
Jack Everett....................... 221,086(3) 2,750 4.0 3.5
Tom Brooks......................... 195,269 2,750 3.5 3.1
Jerry Cole......................... 46,916 1,650 * *
Herman W. Cox, Jr.................. 43,964 2,750 * *
Danny Herron....................... 33,000 2,750 * *
Frank Inman........................ 157,973(4) 1,650 2.8 2.5
Tom Paschal........................ 99,066 2,750 1.8 1.6
Alex Richmond...................... 72,545(5) 1,650 1.3 1.2
Wayne Rodgers...................... 61,128(6) 2,750 1.1 1.0
John Shepherd...................... 252,331(7) 1,650 4.5 4.0
Mark McDowell...................... 65,769(8)(9) 1,100 1.2 1.1
All executive officers and
directors as a group (13
persons)......................... 2,861,609 27,500 51.3% 45.6%
</TABLE>
- -------------------------
* Less than one percent
(1) Includes 14,216 shares held by Mr. Porter as trustee for his daughter.
(2) Includes 395,996 shares held by Mr. Wilder's spouse.
(3) Includes 127,111 shares held by Mr. Everett's spouse and 39,820 shares held
in Mr. Everett's individual retirement account (IRA).
(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 and
34,590 shares held by Mr. Richmond's wife.
(6) Includes 34,344 shares held in Mr. Rodgers' IRA.
(7) Includes 9,438 shares held in Mr. Shepherd's IRA and 11,220 shares held in
trust for the benefit of Mr. Shepherd.
(8) Includes 898 shares held by the two son's of Mr. McDowell and 39,853 shares
held in Mr. McDowell's IRA; does not include the 5,000 shares Mr. McDowell
intends to purchase in this offering.
(9) None of the beneficial owners listed above plan to purchase shares in this
offering except Mr. McDowell, who intends to subscribe for 5,000 shares.
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<PAGE> 65
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 September 1, 1999).......... $14.50 $12.00
</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 September 1, 1999 we had approximately 552 record shareholders. At
that date, 5,581,557 shares were outstanding. Of the 5,581,557 shares
outstanding, 100,000 shares were subject to the resale restrictions of Rule 144.
Options to purchase 418,160 of our shares were also outstanding. In addition,
investors of our joint venture partner have the right 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.
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> 66
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
5,581,557 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 418,160 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> 67
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.
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<PAGE> 68
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.
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<PAGE> 69
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.
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<PAGE> 70
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, we had 5,581,557 shares outstanding,
2,861,609 of which are held by our "affiliates." Upon completion of this
offering, we will have 6,281,557 shares outstanding, excluding 418,160 shares
issuable upon the exercise of outstanding options. Of the shares outstanding
upon completion of this offering, a total of approximately 6,181,557 shares,
including the shares sold pursuant to the offering, will be freely tradeable
without restriction under the Securities Act. The remaining 100,000 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 62,816 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the
Over-the-Counter Bulletin Board 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 September 1, 1999, options to
purchase 418,160 shares of common stock were issued and outstanding of which
76,982 are vested as of the date of
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<PAGE> 71
this 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.
CHANGE IN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Our board of directors has selected Heathcott & Mullaly, P.C. to serve as
independent auditors for the current fiscal year. Heathcott & Mullaly, P.C. has
served as our
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<PAGE> 72
independent auditor since October 31, 1997. On October 30, 1997, we elected not
to engage Maggart & Associates, P.C. as our independent auditors. The decision
to change independent accountants was approved by our board of directors. During
the year ended December 31, 1996, there were no reportable events, as defined in
the regulations of the Securities and Exchange Commission, or disagreements with
Maggart & Associates on any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. Prior to
retaining Heathcott & Mullaly, we had not consulted with Heathcott & Mullaly
regarding accounting principles.
Maggart & Associates' report on the financial statements for the year ended
December 31, 1996 did not contain any adverse opinion and was not qualified or
modified as to uncertainty or accounting principles. The report was qualified as
to audit scope, however, because Maggart & Associates was unable to obtain
audited financial statements supporting our investment and equity interest in
Cumberland Life Insurance Company, which investment and equity interest had been
included in our net earnings for the year ended December 31, 1996. Maggart &
Associates was also not able to satisfy itself about the carrying value of the
investment or the equity in Cumberland Life's earnings by other auditing
procedures.
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
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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.
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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> 75
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> 76
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> 77
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> 78
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..................... 5,558,049 3,971,484 2,575,478
=========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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 determined by
the plans' committee, which is the Board of Directors of the Company. As a
matter of policy, the Board of Directors has issued options at an exercise price
equal to the fair market value of the Company's common stock at the date of
grant. Share and per share amounts in the accompanying text and tables have been
adjusted for stock splits and stock dividends, 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, 357,918 shares (adjusted to 393,710 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> 103
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......................... (393,710) 393,710 -- 5.45
-------- -------- -------- -----
Outstanding at December 31,
1998.......................... 156,290 393,710 -- $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...................................... 98,526 129,004 200,937
---------- --------- ---------
Weighted average shares
outstanding -- diluted....................... $5,558,049 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> 104
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> 105
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> 106
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> 107
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks.............................. $ 7,107 7,458
Interest-bearing deposits in financial
institutions....................................... 3,016 21,996
Federal funds sold................................... 19,800 12,750
Securities available for sale, at fair value......... 9,796 11,801
Securities held to maturity, fair value $7,110,000 at
June 30, 1999 and $8,950,000 at December 31,
1998............................................... 7,236 8,932
Loans................................................ 344,600 296,547
Allowance for loan losses............................ (3,982) (3,790)
-------- -------
Loans, net...................................... 340,618 292,757
-------- -------
Premises and equipment............................... 11,139 9,863
Accrued interest receivable.......................... 2,900 2,737
Federal Home Loan Bank and Federal Reserve Bank
stock -- restricted................................ 2,938 2,648
Other real estate.................................... 1,122 610
Servicing rights..................................... 1,038 1,088
Other assets......................................... 4,999 1,216
-------- -------
Total assets.................................... $411,709 373,856
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
DEPOSITS
Noninterest-bearing................................ $ 24,555 23,742
Interest-bearing................................... 320,371 301,702
-------- -------
Total deposits.................................. 344,926 325,444
-------- -------
Notes payable........................................ 7,357 7,233
Federal funds purchased.............................. 3,400 --
Advances from Federal Home Loan Bank................. 27,447 17,973
Accrued interest payable............................. 2,240 2,234
Other liabilities.................................... 4,100 1,312
-------- -------
Total liabilities............................... 389,470 354,196
-------- -------
STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value, authorized 20,000,000
shares; 5,581,557 shares issued in 1999. 4,974,252
shares issued in 1998.............................. 2,791 2,487
Additional paid-in capital........................... 15,567 8,529
Retained earnings.................................... 4,022 8,716
Accumulated other comprehensive income (loss)........ (141) (72)
-------- -------
Total stockholders' equity...................... 22,239 19,660
-------- -------
Total liabilities and stockholders' equity...... $411,709 373,856
======== =======
</TABLE>
F-34
<PAGE> 108
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees................ $ 7,912 6,743 15,005 12,873
Securities........................... 306 450 631 755
Deposits in financial institutions... 49 101 221 189
Federal funds sold................... 177 199 322 402
Federal Home Loan Bank and Federal
Reserve Bank dividends............. 49 33 103 90
---------- --------- --------- ---------
Total interest income............ 8,493 7,526 16,282 14,309
---------- --------- --------- ---------
INTEREST EXPENSE:
Time deposits of $100,000 or more.... 746 740 1,477 1,464
Other time deposits.................. 2,971 2,729 5,913 5,297
Federal funds purchased.............. 35 -- 45 5
Notes payable and advances from
Federal Home Loan Bank............. 441 455 826 856
---------- --------- --------- ---------
Total interest expense........... 4,193 3,924 8,261 7,622
---------- --------- --------- ---------
Net interest income.............. 4,300 3,602 8,021 6,687
Provision for loan losses............ 252 306 464 431
---------- --------- --------- ---------
Net interest income after provision
for loan losses.................... 4,048 3,296 7,557 6,256
---------- --------- --------- ---------
OTHER INCOME:
Service charges on deposit
accounts........................... 377 293 701 532
Other service charges, commissions
and fees........................... 249 245 796 683
Mortgage banking activities.......... 421 498 711 786
Gain on sale of SBA loans............ 70 207 156 243
---------- --------- --------- ---------
Total other income............... 1,117 1,243 2,364 2,244
---------- --------- --------- ---------
OTHER EXPENSES:
Salaries and employee benefits....... 2,038 1,591 3,942 3,098
Occupancy............................ 480 408 914 785
Other operating...................... 1,262 949 2,453 1,927
---------- --------- --------- ---------
Total other expenses............. 3,780 2,948 7,309 5,810
---------- --------- --------- ---------
Income before income taxes....... 1,385 1,591 2,612 2,690
Income tax expense................... 505 561 962 981
---------- --------- --------- ---------
Net earnings..................... $ 880 1,030 1,650 1,709
========== ========= ========= =========
Net earnings per share -- basic...... $ 0.16 0.19 0.30 0.31
Net earnings per share -- diluted.... 0.15 0.19 0.29 0.31
========== ========= ========= =========
Weighted average shares outstanding--
basic.............................. 5,581,557 5,450,311 5,545,562 5,450,289
Weighted average shares
outstanding -- diluted............. 5,715,870 5,561,869 5,671,834 5,506,068
========== ========= ========= =========
</TABLE>
F-35
<PAGE> 109
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NET EARNINGS................................................ $ 1,650 1,709
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Provision for loan losses................................... 464 431
Depreciation and amortization............................... 461 363
Mortgage loans originated for sale.......................... (22,911) (30,889)
Proceeds from sale of mortgage loans........................ 23,300 31,276
Increase in accrued interest receivable..................... (163) (320)
Increase in accrued interest payable and other
liabilities............................................... 2,794 1,660
Other, net.................................................. (1,751) (1,288)
-------- -------
Total adjustments...................................... 2,194 1,233
-------- -------
Net cash provided by operating activities.............. 3,844 2,942
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase (decrease) in interest-bearing deposits in
financial institutions.................................... 18,980 (16)
Increase in federal funds sold.............................. (7,050) (3,135)
Purchases of securities available for sale.................. (653) (13,500)
Proceeds from maturities and redemptions of securities
available for sale........................................ 2,299 2,920
Purchases of securities held to maturity.................... (600) (1,566)
Proceeds from maturities and redemptions of securities held
to maturity............................................... 2,296 --
Net increase in loans....................................... (48,325) (23,923)
(Purchase) disposal of and improvements to other real
estate.................................................... (512) 300
Purchases of premises and equipment......................... (1,737) (1,614)
Increase in advance to de novo bank......................... (2,373) --
-------- -------
Net cash used by investing activities.................. (37,675) (40,534)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.................................... 19,482 31,367
Increase (decrease) in federal funds purchased.............. 3,400 (50)
Increase (decrease) in advances from Federal Home Loan
Bank...................................................... 9,474 2,939
Proceeds from notes payable................................. 500 2,780
Repayments of notes payable................................. (376) --
Proceeds from issuance of common stock...................... 1,000 7
-------- -------
Net cash provided by financing activities.............. 33,480 37,043
-------- -------
Net increase (decrease) in cash........................ (351) (549)
Cash and cash equivalents at beginning of period............ 7,458 7,571
-------- -------
Cash and cash equivalents at end of period.................. $ 7,107 7,022
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ 7,616 7,225
Income taxes paid........................................... 602 462
======== =======
</TABLE>
F-36
<PAGE> 110
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements as of June 30, 1999 and for
the three month and six month periods ended June 30, 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 and six month
periods ending June 30, 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
in March 1999.
F-37
<PAGE> 111
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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......................... 11
Use of Proceeds............................................. 11
Dividend Policy............................................. 12
Capitalization.............................................. 13
Dilution.................................................... 14
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Business.................................................... 34
Supervision and Regulation.................................. 47
Management.................................................. 53
Transactions with Executive Officers and Directors.......... 59
Principal Shareholders...................................... 60
Market Price of and Dividends on Our Common Equity and
Related Stockholder Matters............................... 61
Description of Capital Stock................................ 62
Shares Eligible for Future Sale............................. 66
Plan of Distribution........................................ 67
Legal Matters............................................... 67
Experts..................................................... 67
Change in Independent Certified Public Accounts............. 67
Where You Can Find More Information......................... 68
Index to Financial Statements............................... F-1
</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> 112
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............................ $ 70,000
*Accounting fees and expenses............................... $ 50,000
*Legal fees and expenses.................................... $ 85,000
*Transfer Agent and Registrar fees and expenses............. $ 1,000
*Blue Sky fees and expenses................................. $ 600
*Miscellaneous expenses..................................... $ 5,950
--------
Total.................................................. $215,000
========
</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> 113
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> 114
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) List of Exhibits
<TABLE>
<S> <C> <C>
3.1 -- Amended and Restated Charter of Cumberland Bancorp,
Incorporated
3.2 -- Amended and Restated 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.
10.3 -- Joint Venture Agreement dated as of August 26, 1999 by and
between Cumberland Bancorp, Inc. and InsCorp, Inc.
16 -- Letter re: Change in Certifying Accountant
*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 six months ended June 30, 1999.
</TABLE>
- -------------------------
* Filed Previously.
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.
II-3
<PAGE> 115
(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;
(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> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Cumberland
Bancorp, Incorporated has duly caused this Amendment No. 1 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Nashville, State of Tennessee, on this 8th day of
September, 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 Amendment
No. 1 to the 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 September 8, 1999
- --------------------------------------------------- (Principal Executive Officer)
Joel Porter
/s/ JOHN WILDER Chairman September 7, 1999
- ---------------------------------------------------
John Wilder
/s/ MARK MCDOWELL Chief Administrative Officer September 8, 1999
- --------------------------------------------------- (Principal Financial and
Mark McDowell Accounting Office)
/s/ JOHN S. EVERETT Director September 8, 1999
- ---------------------------------------------------
John S. Everett
/s/ DANNY HERRON Director September 8, 1999
- ---------------------------------------------------
Danny Herron
</TABLE>
II-5
<PAGE> 117
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<S> <C> <C>
/s/ TOM E. PASCHAL Director September 8, 1999
- ---------------------------------------------------
Tom E. Paschal
/s/ WAYNE RODGERS Director September 7, 1999
- ---------------------------------------------------
Wayne Rodgers
/s/ TOM BROOKS Director September 8, 1999
- ---------------------------------------------------
Tom Brooks
/s/ JERRY COLE Director September 8, 1999
- ---------------------------------------------------
Jerry Cole
/s/ FRANK INMAN, JR. Director September 8, 1999
- ---------------------------------------------------
Frank Inman, Jr.
/s/ ALEX RICHMOND Director September 8, 1999
- ---------------------------------------------------
Alex Richmond
/s/ JOHN S. SHEPHERD Director September 8, 1999
- ---------------------------------------------------
John S. Shepherd
</TABLE>
II-6
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
3.1 -- Amended and Restated Charter of Cumberland Bancorp,
Incorporated
3.2 -- Amended and Restated 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.
10.3 -- Joint Venture Agreement dated as of August 26, 1999 by and
between Cumberland Bancorp, Inc. and InsCorp, Inc.
16 -- Letter re: Change in Certifying Accountant
*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 six months ended June 30, 1999.
</TABLE>
- -------------------------
* Filed Previously.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
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 name of the registered agent of the corporation shall be Elaine
Chaffin.
4. The address of the registered office of the corporation in the State
of Tennessee shall be 4205 Hillsboro Road, Suite 212, Nashville, Tennessee
37215.
5. The address of the principal office of the corporation in the State
of Tennessee shall be 4205 Hillsboro Road, Suite 212, Nashville, Tennessee
37215.
6. The corporation is for profit.
7. 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.
8. 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 Fifty
Cents ($.50) per share, which shares collectively shall have unlimited voting
rights and the right to receive the net assets of the corporation upon
dissolution.
9. 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.
10. 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.
11. 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.
12. (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 12 shall not eliminate or limit
the liability of a director for any act or omission occurring prior to the date
when this Article 12 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 12 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
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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.
13. The Amended and Restated Charter as set forth above, was duly
adopted by the Board of Directors of the corporation on August 27, 1999.
CUMBERLAND BANCORP, INCORPORATED
By: /s/ Mark C. McDowell
-------------------------------
Chief Administrative Officer
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EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
CUMBERLAND BANCORP, 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.48-16-206 of the Tennessee Business Corporation Act (the "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.
No certificate for shares of stock of the corporation shall be issued
in place of any certificate alleged to have been lost, destroyed or stolen
except on production of evidence, satisfactory to the Board of Directors, of
such loss, destruction or theft, and, if the Board of Directors so requires,
upon the furnishing of an indemnity bond in such amount and with such terms and
such surety as the Board of Directors may in its discretion require.
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.
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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 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
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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 confer such rights where there are two or more classes or series
of shares or upon which or upon whom the 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 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. Unless otherwise required by law or the corporation's
charter, as amended from time to time, a special meeting of shareholders shall
be held only on the call of the Board of Directors or if the holders of at least
ten percent (10%) of all the votes entitled to be cast on any issues proposed to
be considered at the proposed special meeting sign, date, and deliver to the
corporation's Secretary one or more written demands for the meeting describing
the purpose or purposes for which such special meeting is to be held, including
all statements necessary to make any statement of such purpose not incomplete,
false, or misleading, and include any other information specified in Schedule
14A, Rule 14a-3, Rule 14a-8, or Rule 14a-11 (or such successor schedules or
rules) of the Rules and Regulations of the Securities and Exchange Commission.
Only business within the purpose or purposes described in the meeting notice may
be conducted at a special meeting of the shareholders.
- 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 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 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
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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.
- 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 Act, any proxy may be revoked.
- QUORUM. A majority of the shares shall constitute a quorum.
- VOTING. Except as the 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
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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. NOTICE OF NOMINATIONS. Nominations for the election of directors may
be made by the Board of Directors or a committee appointed by the Board of
Directors authorized to make such nominations or by any shareholder entitled to
vote in the election of directors generally. Any such shareholder nomination may
be made, however, only if written notice of such nomination has been given,
either by personal delivery or the United States mail, postage prepaid, to the
Secretary of the corporation not later than (a) with respect to an election to
be held at an annual meeting of shareholders, one hundred twenty days in advance
of the anniversary date of the proxy statement for the previous year's annual
meeting, and (b) with respect to an election to be held at a special meeting of
shareholders for the election of directors called other than by written request
of a shareholder, the close of business on the tenth day following the date on
which notice of such meeting is first given to shareholders, and (c) in the case
of a special meeting of shareholders duly called upon the written request of a
shareholder to fill a vacancy or vacancies (then existing or proposed to be
created by removal at such meeting), within ten business days of such written
request. In the case of any nomination by the Board of Directors or a committee
appointed by the Board of Directors authorized to make such nominations,
compliance with the proxy rules of the Securities and Exchange Commission shall
constitute compliance with the notice provisions of the preceding sentence.
In the case of any nomination by a shareholder, each such notice shall
set forth: (a) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address, and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of the corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies with
respect to nominees for election as directors, pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (including without limitation
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director, if elected); and (b) as to the shareholder giving
the notice (i) the name and address, as they appear on the corporation's books,
of such shareholder, and (ii) the class and number of shares of the corporation
which are beneficially owned by such shareholder; and (c) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder. The presiding
officer of the meeting may refuse to acknowledge the nomination of any person
not made in compliance with the foregoing procedure.
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8. NOTICE OF NEW BUSINESS. At an annual meeting of the shareholders
only such new business shall be conducted, and only such proposals shall be
acted upon, as have been properly brought before the meeting. To be properly
brought before the annual meeting such new business must be (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (b) otherwise properly brought before the meeting by or
at the direction of the Board of Directors, or (c) otherwise properly brought
before the meeting by a shareholder. For a proposal to be properly brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the corporation and the
proposal and the shareholder must comply with Regulation 14A under the
Securities Exchange Act of 1934. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than one hundred twenty calender days in advance of the
anniversary date of the proxy statement for the previous year's annual meeting.
If the corporation did not hold an annual meeting the previous year, or if the
date of the annual meeting has been changed by more than thirty (30) calendar
days from the date of the previous year's annual meeting, then, in order to be
timely, a shareholder's notice must be received at the principal executive
offices of the corporation not later than one hundred twenty calendar days
before the date of such annual meeting or the tenth day following the date on
which public announcement of such annual meeting is first made. In no event
shall the public announcement of an adjournment of an annual meeting commence a
new time period for the giving of a shareholder's notice as described above.
A shareholder's notice to the Secretary shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (a) a brief
description of the proposal desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the corporation's books, of the shareholder proposing
such business, (c) the class and number of shares of the corporation which are
beneficially owned by the shareholder, and (d) any financial interest of the
shareholder in such proposal.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 1.8. The presiding officer of the meeting shall, if
the facts warrant, determine and declare to the meeting that new business or any
shareholder proposal was not properly brought before the meeting in accordance
with the provisions of this Section 1.8, and if he or she should so determine,
he or she shall so declare to the meeting and any such business or proposal not
properly brought before the meeting shall not be acted upon at the meeting. This
provision shall not prevent the consideration and approval or disapproval at the
annual meeting of reports of officers, directors and committees, but in
connection with such reports no new business shall be acted upon at such annual
meeting unless stated and filed as herein provided.
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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 Board of Directors shall consist of
no fewer than 3 or more than 15 members. 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.
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.
- 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.
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<PAGE> 8
- 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 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.
5. 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. 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 Act.
7. 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
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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, except
the President may not simultaneously hold the office of Secretary.
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. Any vacancy in an office for any reason may be
filled for the unexpired portion of the term by the Board of Directors.
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.
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.
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ARTICLE V
CORPORATE ACTIONS
1. CONTRACTS. Unless otherwise required by the Board of Directors, the
Chairman, the President, the Chief Executive Officer, the Chief Financial
Officer, the Chief Administrative Officer, or any Vice President shall execute
contracts or other instruments on behalf of and in the name of the corporation.
The Board of Directors may from time to time authorize any other officer,
assistant officer, or agent to enter into any contract or execute any instrument
in the name of and on behalf of the corporation as it may deem appropriate, and
such authority may be general or confined to specific instances.
2. LOANS. No loans shall be contracted on behalf of the corporation and
no evidence of indebtedness shall be issued in its name unless authorized by the
Chairman, the President, the Chief Executive Officer, or the Board of Directors.
Such authority may be general or confined to specific instances.
3. CHECKS, DRAFTS, ETC. Unless otherwise required by the Board of
Directors, all checks, drafts, bills of exchange, and other negotiable
instruments of the corporation shall be signed by either the Chairman, the
President, the Chief Executive Officer, the Chief Financial Officer, the Chief
Administrative Officer, a Vice President or such other officer, assistant
officer, or agent of the corporation as may be authorized so to do by the Board
of Directors. Such authority may be general or confined to specific business,
and, if so directed by the Board, the signatures of two or more such officers
may be required.
4. DEPOSITS. All funds of the corporation not otherwise employed shall
be deposited from time to time to the credit of the corporation in such banks or
other depositories as the Board of Directors may authorize.
5. VOTING SECURITIES HELD BY THE CORPORATION. Unless otherwise required
by the Board of Directors, the Chairman, President, Chief Executive Officer, the
Chief Financial Officer, or Chief Administrative Officer shall have full power
and authority on behalf of the corporation to attend any meeting of security
holders, or to take action on written consent as a security holder, of other
corporations in which the corporation may hold securities. In connection
therewith the Chairman, the President, the Chief Executive Officer, the Chief
Financial Officer, or the Chief Administrative Officer shall possess and may
exercise any and all rights and powers incident to the ownership of such
securities which the corporation possesses. The Board of Directors may, from
time to time, confer like powers upon any other person or persons.
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ARTICLE VI
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 VII
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be subject
to change, by the Board of Directors.
ARTICLE VIII
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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EXHIBIT 5
B A S S, B E R R Y & S I M S P L C
A PROFESSIONAL LIMITED LIABILITY COMPANY
ATTORNEYS AT LAW
2700 FIRST AMERICAN CENTER
NASHVILLE, TENNESSEE 37238-2700
(615) 742-6200
KNOXVILLE OFFICE: MEMPHIS OFFICE:
1700 RIVERVIEW TOWER 119 S. MAIN STREET, SUITE 500
KNOXVILLE, TN 37901-1509 MEMPHIS, TN 38103
(423) 521-6200 (901) 312-9100
September 8, 1999
Cumberland Bancorp, Incorporated
4205 Hillsboro Road, Suite 212
Nashville, Tennessee 37215
Re: Registration Statement on Form S-1 (File No. 333-84173)
Dear Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of a
Registration Statement on Form S-1 (the "Registration Statement") filed by you
with the Securities and Exchange Commission, covering 700,000 shares of Common
Stock, par value $.50 per share (the "Common Stock"), of Cumberland Bancorp,
Incorporated, Tennessee corporation (the "Company"), to be offered by the
Company.
In connection with this opinion, we have examined and relied upon such
records, documents and other instruments as in our judgment are necessary or
appropriate in order to express the opinions hereinafter set forth and have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, and the conformity to original documents of all
documents submitted to as certified or photostatic copies.
Based on the foregoing and such other matters as we have deemed relevant,
we are of the opinion that the shares of Common Stock to be offered by the
Company, when and as described in the Registration Statement (after the
Registration Statement is declared effective), will be validly issued, fully
paid and nonassessable.
We hereby consent to the reference to our law firm in the Registration
Statement under the caption "Legal Matters" and to the use of this opinion as an
exhibit to the Registration Statement.
Sincerely,
/s/ Bass, Berry & Sims PLC
Bass, Berry & Sims PLC
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EXHIBIT 10.1
CUMBERLAND BANCORP, INCORPORATED
1998 STOCK OPTION PLAN
SECTION 1. PURPOSE; DEFINITIONS.
The purpose of the Cumberland Bancorp, Inc. 1998 Stock Option Plan (the
"Plan") is to enable Cumberland Bancorp, Inc. (the "Corporation") to attract,
retain and reward officers, directors, and key employees of the Corporation and
its Subsidiaries and Affiliates and to strengthen the mutuality of interests
between such persons by awarding them stock options. The creation of the Plan
shall not diminish or prejudice other compensation programs approved from time
to time by the Board.
For purposes of the Plan, the following terms shall be defined as set
forth below:
A. "Affiliate" means any entity other than the Corporation and its
Subsidiaries that is designated by the Board as a participating employer under
the Plan, provided that the Corporation directly or indirectly owns at least 20%
of the combined voting power of all classes of stock of such entity or at least
20% of the ownership interests in such entity.
B. "Board" means the Board of Directors of the Corporation.
C. "Cause" has the meaning provided in Section 5 of the Plan.
D. "Change in Control" has the meaning provided in Section 6 of the
Plan.
E. "Change in Control Price" has the meaning provided in Section 6(d)
of the Plan.
F. "Common Stock" means the Corporation's Common Stock.
G. "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.
H. "Committee" means the Committee referred to in Section 2 of the
Plan.
I. "Corporation" means Cumberland Bancorp, Inc., a corporation
organized under the laws of the State of Tennessee or any successor corporation.
J. "Disability" means disability as determined under the Corporation's
group long term disability insurance program for each respective optionee.
K. "Early Retirement" means retirement, for purposes of this Plan with
the express consent of the Corporation at or before the time of such retirement,
from active employment with
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the Corporation and any Subsidiary or Affiliate prior to age 65, in accordance
with any applicable early retirement policy of the Corporation then in effect or
as may be approved by the Committee.
L. "Effective Date" has the meaning provided in Section 10 of the Plan.
M. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
N. "Fair Market Value" means with respect to the Common Stock, as of
any given date or dates, unless otherwise determined by the Committee in good
faith, the reported closing price of a share of Common Stock on the Nasdaq Stock
Market or, if no such price is available, the average of the closing bid and
asked prices quoted (by electronic bulletin board, "pink sheets" or other
recognized quotation) in the over-the-counter market for the Common Stock, or,
if no such price is available on such date, the fair market value of a share of
Common Stock as determined by the Committee in good faith.
O. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
P. "Immediate Family" means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include
adoptive relationships.
Q. "Non-Employee Director" means a member of the Board who is a
Non-Employee Director with the meaning of Rule 16b-3(b)(3) promulgated under the
Exchange Act and an outside director within the meaning of Treasury Regulation
Sec. 162-27(e)(3) promulgated under the Code.
R. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
S. "Normal Retirement" means retirement from active employment with the
Corporation and any Subsidiary or Affiliate on or after age 65.
T. "Plan" means this Cumberland Bancorp, Inc. 1998 Stock Option Plan,
as amended from time to time.
U. "Retirement" means Normal or Early Retirement.
V. "Section 162(m) Maximum" has the meaning provided in Section 3(a)
hereof.
W. "Stock Option" or "Option" means any option to purchase shares of
Common Stock granted pursuant to Section 5 below.
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X. "Subsidiary" means any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation if each of the
corporations (other than the last corporation in the unbroken chain) owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by a Committee of not less than two
Non-Employee Directors, who shall be appointed by the Board and who shall serve
at the pleasure of the Board. The functions of the Committee specified in the
Plan may be exercised by an existing Committee of the Board composed exclusively
of Non-Employee Directors. The Plan shall be initially administered by the
Board. In the event that there are not at least two Non-Employee Directors on
the Committee, the Plan shall be administered by the Board and all references
herein to the Committee shall refer to the Board.
The Committee shall have authority to recommend to the Board grants of
Stock Options, pursuant to the terms of the Plan, to officers and other key
employees. The Board shall have the authority to accept or reject the
Committee's recommendations.
In particular, the Committee shall have the authority, consistent with
the terms of the Plan and upon approval by the Board.
(a) to select the officers and key employees to whom Stock
Options may from time to time be granted hereunder;
(b) to determine whether and to what extent Incentive Stock
Options or Non-Qualified Stock Options, or any combination thereof, are
to be granted hereunder to one or more eligible persons;
(c) to determine the number of shares to be covered by each
such award granted hereunder;
(d) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including,
but not limited to, the share price and any restriction or limitation,
or any vesting acceleration or waiver of forfeiture restrictions
regarding any Stock Option and/or the shares of Common Stock relating
thereto, based in each case on such factors as the Committee shall
determine, in its sole discretion); and to amend or waive any such
terms and conditions to the extent permitted by Section 6 hereof;
(e) to determine whether and under what circumstances a Stock
Option may be settled in cash under Section 5(l), instead of Common
Stock;
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(f) to determine whether to require payment withholding
requirements in shares of Common Stock; and
(g) to impose any holding period required to satisfy Section
16 under the Exchange Act.
The Committee shall report any recommendations it makes concerning the
grant of Stock Options to the Board, who may approve, amend or reject any such
Committee recommendations; provided, that the Board shall not have the authority
to grant any Stock Option under any condition that has not been approved by the
Committee.
The Committee may adopt, alter, and repeal such rules, guidelines, and
practices governing the Plan as it shall, from time to time, deem advisable,
subject to Board approval.
The Committee shall have the authority to interpret the terms and
provisions of the Plan and any award issued under the Plan (and any agreements
relating thereto), and to otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be made subject to the review of the Board. Decisions of the Board
shall be final and binding on all persons, including the Corporation and Plan
participants. The Board may elect to delegate some or all of its authority
granted herein, except the authority given to the Board under Section 7, to the
Committee.
SECTION 3. SHARES OF COMMON STOCK SUBJECT TO PLAN.
(a) As of the Effective Date, the aggregate number of shares of Common
Stock that may be issued under the Plan shall be 550,000 shares. The shares of
Common Stock issuable under the Plan may consist, in whole or in part, of
authorized and unissued shares or treasury shares. No officer of the Corporation
or other person whose compensation may be subject to the limitations on
deductibility under Section 162(m) of the Code shall be eligible to receive
awards pursuant to this Plan relating to in excess of 10,000 shares of Common
Stock in any fiscal year (the "Section 162(m) Maximum").
(b) If any shares of Common Stock that have been optioned cease to be
subject to a Stock Option, such shares shall again be available for distribution
in connection with future awards under the Plan.
(c) In the event of any merger, reorganization, consolidation,
recapitalization, extraordinary cash dividend, stock dividend, stock split or
other change in corporate structure affecting the Common Stock, an appropriate
substitution or adjustment shall be made in the maximum number and kind of
shares that may be awarded under the Plan, in the number and option price of
shares subject to outstanding Options granted under the Plan and in the Section
162(m)
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Maximum as may be determined to be appropriate by the Committee, in its
discretion with the approval of the Board, provided that the number of shares
subject to any award shall always be a whole number.
SECTION 4. ELIGIBILITY.
Officers, directors, and other key employees of the Company and its
Subsidiaries and Affiliates who are responsible for or contribute to the
management, growth and/or profitability of the business of the Corporation
and/or its Subsidiaries and Affiliates are eligible to be granted awards under
the Plan.
SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone, in addition to, or in tandem with
cash awards made outside of the Plan. Any Stock Option granted under the Plan
shall be in such form as the Committee and the Board may from time to time
approve.
Stock Options granted under the Plan may be of two types: (i) Incentive
Stock Options and (ii) Non-Qualified Stock Options. Incentive Stock Options may
be granted only to individuals who are employees of the Company or any
Subsidiary of the Company.
The Committee, subject to Board ratification, shall have the authority
to grant to any optionee Incentive Stock Options, Non-Qualified Stock Options,
or both types of Stock Options.
Options granted to officers and key employees under the Plan shall be
subject to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of the Plan, as the
Committee, or the Board as the case may be, shall deem desirable. All decisions
made by the Committee under this Section 5 are subject to Board ratification as
described in Section 2.
(a) Option Price. The option price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee
at the time of grant but shall be not less than 100% (or, in the case
of any employee who owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Corporation or of
any of its Subsidiaries, not less than 110%) of the Fair Market Value
of the Common Stock at grant, in the case of Incentive Stock Options,
and not less than 50% of the Fair Market Value of the Common Stock at
grant, in the case of Non-Qualified Stock Options.
(b) Option Term. The term of each Stock Option shall be fixed
by the Committee, but no Incentive Stock Option shall be exercisable
more than ten years (or, in the case of an employee who owns stock
possessing more than 10% of the total combined
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voting power of all classes of stock of the Corporation or any of its
Subsidiaries or parent corporations, more than five years) after the
date the Option is granted.
(c) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be
determined by the Committee at or after grant; provided, however, that
except as provided in Section 5(g) and (h), and Section 6, unless
otherwise determined by the Committee at or after grant, no Stock
Option shall be exercisable prior to the first anniversary date of the
granting of the Option. The Committee may provide that a Stock Option
shall vest over a period of future service at a rate specified at the
time of grant, or that the Stock Option is exercisable only in
installments. If the Committee provides that any Stock Option is
exercisable only in installments, the Board may waive such installment
exercise provisions at any time at or after grant, in whole or in part,
based on such factors as the Committee shall determine in its sole
discretion.
(d) Method of Exercise. Subject to whatever installment
exercise restrictions apply under Section 5(c), Stock Options may be
exercised in whole or in part at any time during the option period, by
giving written notice of exercise to the Corporation specifying the
number of shares to be purchased. Such notice shall be accompanied by
payment in full of the purchase price, either by check, note, or such
other instrument as the Committee may accept, by submission of an
executed Subscription Agreement in a form, and as, determined by the
Committee, and by payment of all amounts the Corporation is required to
withhold under federal, state, and local law that the Committee shall
require. Unless the Committee shall decide otherwise at or after grant,
an optionee shall not have the rights to dividends or other rights of a
shareholder with respect to shares subject to the Option unless and
until the Corporation has issued certificates representing such shares
to the optionees.
(e) Transferability of Options. No Non-Qualified Stock Option
shall be transferable by the optionee without the prior written consent
of the Board other than (i) transfers by the Optionee to a member of
his or her Immediate Family or a trust for the benefit of the optionee
or a member of his or her Immediate Family, or (ii) transfers by will
or by the laws of descent and distribution. No Incentive Stock Option
shall be transferable by the optionee otherwise than by will or by the
laws of descent and distribution and all Incentive Stock Options shall
be exercisable, during the optionee's lifetime, only by the optionee.
(f) Bonus for Taxes. In the case of a Non-Qualified Stock
Option or an optionee who elects to make a disqualifying disposition
(as defined in Section 422(a)(1) of the Code) of Common Stock acquired
pursuant to the exercise of an Incentive Stock Option, the Committee
may award at the time of grant or thereafter the right to receive upon
exercise of such Stock Option a cash bonus calculated to pay part or
all of the federal and state, if any, income tax incurred by the
optionee upon such exercise.
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(g) Termination by Death. Subject to Section 5(k), if an
optionee's employment by the Corporation and any Subsidiary or (except
in the case of an Incentive Stock Option) Affiliate terminates by
reason of death, any Stock Option held by such optionee may thereafter
be exercised, to the extent such option was exercisable at the time of
death or (except in the case of an Incentive Stock Option) on such
accelerated basis as the Committee may determine at or after grant (or
except in the case of an Incentive Stock Option, as may be determined
in accordance with procedures established by the Committee) by the
legal representative of the estate or by the legatee of the optionee
under the will of the optionee, for a period of one year (or such other
period as the Committee may specify at or after grant) from the date of
such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter.
(h) Termination by Reason of Disability. Subject to Section
5(k), if an optionee's employment by the Corporation and any Subsidiary
or (except in the case of an Incentive Stock Option) Affiliate
terminates by reason of Disability, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of termination or (except in the case of an
Incentive Stock Option) on such accelerated basis as the Committee may
determine at or after grant (or, except in the case of an Incentive
Stock Option, as may be determined in accordance with procedures
established by the Committee), for a period of (i) three years (or such
other period as the Committee may specify at or after grant) from the
date of such termination of employment or until the expiration of the
stated term of such Stock Option, whichever period is the shorter, in
the case of a Non-Qualified Stock Option and (ii) one year from the
date of termination of employment or until the expiration of the stated
term of such Stock Option, whichever period is shorter, in the case of
an Incentive Stock Option; provided however, that, if the optionee dies
within the period specified in (i) above (or other such period as the
Committee shall specify at or after grant), any unexercised
Non-Qualified Stock Option held by such optionee shall thereafter be
exercisable to the extent to which it was exercisable at the time of
death for a period of twelve months from the date of such death or
until the expiration of the stated term of such Stock Option, whichever
period is shorter. In the event of termination of employment by reason
of Disability, if an Incentive Stock Option is exercised after the
expiration of the exercise period applicable to Incentive Stock
Options, but before the expiration of any period that would apply if
such Stock Option were a Non-Qualified Stock Option, such Stock Option
will thereafter be treated as a Non-Qualified Stock Option.
(i) Termination by Reason of Retirement. Subject to Section
5(k), if an optionee's employment by the Corporation and any Subsidiary
or (except in the case of an Incentive Stock Option) Affiliate
terminates by reason of Normal or Early Retirement, any Stock Option
held by such optionee may thereafter be exercised by the optionee, to
the extent it was exercisable at the time of such Retirement or (except
in the case of an Incentive Stock Option) on such accelerated basis as
the Committee may determine at or after grant (or, except in the case
of an Incentive Stock Option, as may be determined in accordance with
procedures established by the Committee), for a period of (i) three
years (or such other
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period as the Committee may specify at or after grant) from the date of
such termination of employment or the expiration of the stated term of
such Stock Option, whichever period is the shorter, in the case of a
Non-Qualified Stock Option and (ii) three months from the date of such
termination of employment or the expiration of the stated term of such
Stock Option, whichever period is the shorter, in the event of an
Incentive Stock Option; provided however, that, if the optionee dies
within the period specified in (i) above (or other such period as the
Committee shall specify at or after grant), any unexercised
Non-Qualified Stock Option held by such optionee shall thereafter be
exercisable to the extent to which it was exercisable at the time of
death for a period of twelve months from the date of such death or
until the expiration of the stated term of such Stock Option, whichever
period is shorter. In the event of termination of employment by reason
of Retirement, if an Incentive Stock Option is exercised after the
expiration of the exercise period applicable to Incentive Stock
Options, but before the expiration of the period that would apply if
such Stock Option were a Non-Qualified Stock Option, the option will
thereafter be treated as a Non-Qualified Stock Option.
(j) Other Termination. Subject to Section 5(k), unless
otherwise determined by the Committee or the Board (or pursuant to
procedures established by the Committee) at or (except in the case of
an Incentive Stock Option) after grant, if an optionee's employment by
the Corporation and any Subsidiary or (except in the case of an
Incentive Stock Option) Affiliate is involuntarily terminated for any
reason other than death, Disability or Normal or Early Retirement, the
Stock Option shall thereupon terminate, except that such Stock Option
may be exercised, to the extent otherwise then exercisable, for the
lesser of three months or the balance of such Stock Option's term if
the involuntary termination is without Cause. For purposes of this
Plan, "Cause" means (i) a felony conviction of a participant or the
failure of a participant to contest prosecution for a felony, or (ii) a
participant's willful misconduct or dishonesty, which is directly and
materially harmful to the business or reputation of the Corporation or
any Subsidiary or Affiliate. If an optionee voluntarily terminates
employment with the Corporation and any Subsidiary or (except in the
case of an Incentive Stock Option) Affiliate (except for Disability,
Normal or Early Retirement), the Stock Option shall thereupon
terminate; provided, however, that the Committee at grant or (except in
the case of an Incentive Stock Option) thereafter may extend the
exercise period in this situation for the lesser of three months or the
balance of such Stock Option's term.
(k) Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term of this Plan relating to Incentive
Stock Options shall be interpreted, amended, or altered, nor shall any
discretion or authority granted under the Plan be so exercised, so as
to disqualify the Plan under Section 422 of the Code, or, without the
consent of the optionee(s) affected, to disqualify any Incentive Stock
Option under such Section 422. No Incentive Stock Option shall be
granted to any participant under the Plan if such grant would cause the
aggregate Fair Market Value (as of the date the Incentive Stock Option
is granted) of the Common Stock with respect to which all Incentive
Stock Options are exercisable for the first time by such participant
during any calendar year (under all such
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plans of the Company and any Subsidiary) to exceed $100,000. To the
extent permitted under Section 422 of the Code or the applicable
regulations thereunder or any applicable Internal Revenue Service
pronouncement:
(i) if (x) a participant's employment is
terminated by reason of death, Disability, or Retirement and
(y) the portion of any Incentive Stock Option that is
otherwise exercisable during the post-termination period
specified under Section 5(g), (h) or (i), applied without
regard to the $100,000 limitation contained in Section 422(d)
of the Code, is greater than the portion of such Option that
is immediately exercisable as an "Incentive Stock Option"
during such post-termination period under Section 422, such
excess shall be treated as a Non-Qualified Stock Option; and
(ii) if the exercise of an Incentive Stock Option
is accelerated by reason of a Change in Control, any portion
of such Option that is not exercisable as an Incentive Stock
Option by reason of the $100,000 limitation contained in
Section 422(d) of the Code shall be treated as a Non-Qualified
Stock Option.
(l) Buyout Provisions. The Committee may at any time offer to
buy out for a payment in cash or Common Stock an Option previously
granted, based on such terms and conditions as the Board shall
establish and communicate to the optionee at the time that such offer
is made.
(m) Performance and Other Conditions. The Committee may
condition the exercise of any Option upon the attainment of specified
performance goals or other factors as the Committee may determine, in
its sole discretion. Unless specifically provided in the option
agreement, any such conditional Option shall vest immediately prior to
its expiration if the conditions to exercise have not theretofore been
satisfied.
SECTION 6. CHANGE IN CONTROL PROVISIONS.
(a) Impact of Event. In the event of:
(1) a "Change in Control" as defined in Section 6(b); or
(2) a "Potential Change in Control" as defined in
Section 6(c), but only if and to the extent so determined by
the Committee and the Board, at or after grant (subject to any
right of approval expressly reserved by the Committee or the
Board at the time of such determination),
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(i) Subject to the limitations set forth below in this
Section 6(a), any Stock Option awarded under the Plan not
previously exercisable and vested shall become fully
exercisable and vested.
(ii) Subject to the limitations set forth below in this
Section 6(a), the value of all outstanding Stock Options and
Outside Director Options, in each case to the extent vested,
shall, unless otherwise determined by the Board or the
Committee in its sole discretion prior to any Change in
Control, be cashed out on the basis of the "Change in Control
Price" as defined in Section 6(d) as of the date such Change
in Control or such Potential Change in Control is determined
to have occurred or such other date as the Board or Committee
may determine prior to the Change in Control.
(iii) The Board or the Committee may impose additional
conditions on the acceleration or valuation of any award in
the award agreement.
(b) Definition of Change in Control. For purposes of Section
6(a), a "Change in Control" means the happening of any of the
following:
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act, other than the Corporation or a
wholly-owned subsidiary thereof or any employee benefit plan of the
Corporation or any of its Subsidiaries, becomes the beneficial owner of
the Corporation's securities having 50% or more of the combined voting
power of the then outstanding securities of the Corporation that may be
cast for the election of directors of the Corporation (other than as a
result of an issuance of securities initiated by the Corporation in the
ordinary course of business); or
(ii) as the result of, or in connection with, any cash tender
or exchange offer, merger or other business combination, sales of
assets or contested election, or any combination of the foregoing
transactions, less than a majority of the combined voting power of the
then outstanding securities of the Corporation or any successor
corporation or entity entitled to vote generally in the election of the
directors of the Corporation or such other corporation or entity after
such transaction are held in the aggregate by the holders of the
Corporation's securities entitled to vote generally in the election of
directors of the Corporation immediately prior to such transaction; or
(iii) during any period of two consecutive years, individuals
who at the beginning of any such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Corporation's
shareholders, of each director of the Corporation first elected during
such period was approved by a vote of at least two-thirds of the
directors of the Corporation then still in office who were directors of
the Corporation at the beginning of any such period.
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(c) Definition of Potential Change in Control. For purposes of
Section 6(a), a "Potential Change in Control" means the happening of
any one of the following:
(i) The approval by shareholders of an agreement by the
Corporation, the consummation of which would result in a
Change in Control of the Corporation as defined in Section
6(b); or
(ii) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the
Corporation or a Subsidiary or any Corporation employee
benefit plan (including any trustee of such plan acting as
such trustee)) of securities of the Corporation representing
5% or more of the combined voting power of the Corporation's
outstanding securities and the adoption by the Board of a
resolution to the effect that a Potential Change in Control of
the Corporation has occurred for purposes of this Plan.
(d) Change in Control Price. For purposes of this Section 6,
"Change in Control Price" means the highest price per share paid in any
transaction reported on the Nasdaq stock market or such other exchange
or market as is the principal trading market for the Common Stock, or
paid or offered in any bona fide transaction related to a Potential or
actual Change in Control of the Corporation at any time during the 60
day period immediately preceding the occurrence of the Change in
Control (or, where applicable, the occurrence of the Potential Change
in Control event), in each case as determined by the Committee and the
Board except that, in the case of Incentive Stock Options such price
shall be based only on transactions reported for the date on which the
optionee exercises such Stock Options or, where applicable, the date on
which a cash out occurs under Section 6(a)(ii).
SECTION 7. AMENDMENTS AND TERMINATION.
The Board may at any time amend, alter or discontinue the Plan;
provided, however, that, without the approval of the Corporation's shareholders,
no amendment or alteration may be made which would (a) except as a result of the
provisions of Section 3(c) of the Plan, increase the maximum number of shares
that may be issued under the Plan or increase the Section 162(m) Maximum, (b)
change the provisions governing Incentive Stock Options except as required or
permitted under the provisions governing incentive stock options under the Code,
or (c) make any change for which applicable law or regulatory authority
(including the regulatory authority of the "NASDAQ" or any other market or
exchange on which the Common Stock is traded) would require shareholder approval
or for which shareholder approval would be required to secure full deductibility
of compensation received under the Plan under Section 162(m) of the Code. No
amendment, alteration, or discontinuation shall be made which would impair the
rights of an optionee or participant under a Stock Option theretofore granted,
without the participant's consent.
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The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, subject to Board
ratification, but, subject to Section 3 above, no such amendment shall impair
the rights of any holder without the holder's consent. The Committee may also
substitute new Stock Options for previously granted Stock Options (on a one for
one or other basis), including previously granted Stock Options having higher
option exercise prices. Solely for purposes of computing the Section 162(m)
Maximum, if any Stock Options previously granted to a participant are canceled
and new Stock Options having a lower exercise price or other more favorable
terms for the participant are substituted in their place, both the initial Stock
Options and the replacement Stock Options will be deemed to be outstanding
(although the canceled Stock Options will not be exercisable or deemed
outstanding for any other purpose).
SECTION 8. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Corporation, nothing contained herein shall give
any such participant or optionee any rights that are greater than those of a
general creditor of the Corporation. In its sole discretion, the Committee and
the Board may authorize the creation of trusts or other arrangements to meet the
obligations created under the Plan to deliver Common Stock or payments in lieu
of; provided, however, that, unless the Committee and the Board otherwise
determines with the consent of the affected participant, the existence of such
trusts or other arrangements is consistent with the "unfunded" status of the
Plan.
SECTION 9. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares
pursuant to a Stock Option to represent to and agree with the
Corporation in writing that the optionee or participant is acquiring
the shares without a view to distribution thereof. The certificates for
such shares may include any legend which the Committee deems
appropriate to reflect any restrictions on transfer. All certificates
for shares of Common Stock or other securities delivered under the Plan
shall be subject to such stock-transfer orders and other restrictions
as the Committee may deem advisable under the rules, regulations, and
other requirements of the Commission, any stock exchange upon which the
Common Stock is then listed, and any applicable Federal or state
securities law, and the Committee may cause a legend or legends to be
put on any such certificates to make appropriate reference to such
restrictions.
(b) Nothing contained in this Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such
arrangements may be either generally applicable or applicable only in
specific cases.
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(c) The adoption of the Plan shall not confer upon any
employee of the Corporation or any Subsidiary or Affiliate any right to
continued employment with the Corporation or a Subsidiary or Affiliate,
as the case may be, nor shall it interfere in any way with the right of
the Corporation or a Subsidiary or Affiliate to terminate the
employment of any of its employees at any time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the participant for Federal income
tax purposes with respect to any award under the Plan, the participant
shall pay to the Corporation, or make arrangements satisfactory to the
Committee regarding the payment of, any Federal, state, or local taxes
of any kind required by law to be withheld with respect to such amount.
The Committee may require withholding obligations to be settled with
Common Stock, including Common Stock that is part of the award that
gives rise to the withholding requirement. The obligations of the
Corporation under the Plan shall be conditional on such payment or
arrangements and the Corporation and its Subsidiaries or Affiliates
shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment of any kind otherwise due to the
participant.
(e) The Plan and all awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the
State of Tennessee.
(f) The members of the Committee and the Board shall not be
liable to any employee or other person with respect to any
determination made hereunder in a manner that is not inconsistent with
their legal obligations as members of the Board. In addition to such
other rights of indemnification as they may have as directors or as
members of the Committee, the members of the Committee and the Board
shall be indemnified by the Corporation against the reasonable
expenses, including attorneys' fees actually and necessarily incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be
a party by reason of any action taken or failure to act under or in
connection with the Plan or any option granted thereunder, and against
all amounts paid by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected by the
Corporation) or paid by them in satisfaction of a judgment in any such
action, suit or proceeding, except in relation to matters as to which
it shall be adjudged in such action, suit or proceeding that such
Committee or Board member is liable for negligence or misconduct in the
performance of his duties; provided that within 60 days after
institution of any such action, suit or proceeding, the Committee or
Board member shall in writing offer the Corporation the opportunity, at
its own expense, to handle and defend the same.
(g) In addition to any other restrictions on transfer that may
be applicable under the terms of this Plan or the applicable award
agreement, no Stock Option issued under this Plan is transferable by
the participant without the prior written consent of the Board, or the
Committee if so delegated, other than (i) transfers by an optionee to a
member of his or
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her Immediate Family or a trust for the benefit of the optionee or a
member of his or her Immediate Family or (ii) transfers by will or by
the laws of descent and distribution. The designation of a beneficiary
will not constitute a transfer.
(h) The Committee, subject to Board ratification, may, at or
after grant, condition the receipt of any payment in respect of any
award or the transfer of any shares subject to an award on the
satisfaction of a six-month holding period, if such holding period is
required for compliance with Section 16 under the Exchange Act.
SECTION 11. EFFECTIVE DATE OF PLAN; CONNECTION WITH PRIOR OPTIONS.
The Plan shall be effective on the date it is approved by the Board of
the Corporation and shall govern, but shall not limit any terms or provisions
under agreements for, options granted on or after March 1, 1998 under the Plan.
SECTION 12. TERM OF PLAN.
No Stock Option shall be granted pursuant to the Plan on or after the
tenth anniversary of the Effective Date of the Plan, but awards granted prior to
such tenth anniversary may be extended beyond that date.
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EXHIBIT 10.3
JOINT VENTURE AGREEMENT
This JOINT VENTURE AGREEMENT (the "Agreement") is made as of August 26,
1999 by and between CUMBERLAND BANCORP, INC., a corporation organized and
existing under the laws of the State of Tennessee, with offices at 4205
Hillsboro Road, Suite 212, Nashville, Tennessee 37215, and a registered bank
holding company pursuant to the Bank Holding Company Act of 1956, as amended
("Cumberland") and INSCORP, a corporation organized and existing under the laws
of the State of Tennessee with offices at 2500 Hillsboro Rd., Suite 200,
Tennessee 37212 (hereinafter referred to as "INSCORP").
WITNESSETH:
WHEREAS, Insurors Bank of Tennessee (In Organization) will be formed
via a branch incorporation pursuant to Tennessee banking law by Cumberland Bank,
a bank subsidiary of Cumberland Bancorp and shall be state-chartered and a
member of the Federal Reserve.
WHEREAS, Insurors Bank of Tennessee (In Organization) intends to become
Insurors Bank of Tennessee ("IBT") by successful application to the Tennessee
Commissioner of Financial Institutions for a bank charter under T.C.A. Section
45-2-614(c), but does not intend to transact any banking business unless and
until additional successful applications are made to various bank regulatory
agencies to obtain deposit insurance, Federal Reserve membership and approval to
offer 50% ownership of IBT for sale to INSCORP;
WHEREAS, INSCORP is a new Tennessee corporation formed by a group of
Tennessee residents who desire to operate INSCORP as a holding company of IBT
and to undertake an offering among other Tennessee residents of INSCORP common
stock for the purpose of purchasing 50% ownership of IBT; and
WHEREAS, Cumberland and INSCORP desire to enter into a joint venture
agreement to promote the successful formation and mutual ownership of such state
member bank with its main office to be located in Nashville, Davidson County,
Tennessee, 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 INSCORP hereby agree
as follows:
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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 INSCORP 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
Exchange Act of 1934, as amended.
1.3 "BOARD OF DIRECTORS" OR "BOARD" shall mean the Board of Directors
of IBT.
1.4 "BYLAWS" shall mean the bylaws of the IBT.
1.5 "CHARTER" shall mean the charter of the IBT.
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 IBT, no par
value.
1.8 "DIRECTOR" shall mean a member of the Board of Directors of the
IBT.
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 IBT, without
taking into 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.
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1.11 "FEDERAL BANK REGULATORY AUTHORITIES" shall mean the Federal
Deposit Insurance Corporation ("FDIC") and the Board of Governors of the Federal
Reserve System ("FRB"), as the context requires.
1.12 "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 the State Bank Regulatory Authority and the expiration of any
required stays to such approval.
1.13 "IBT" shall mean the state member bank which will be formed by
Cumberland through a branch incorporation pursuant to Tennessee state law.
1.14 "INITIAL BUSINESS PLAN" shall mean the initial three (3) year
business plan of the IBT submitted to Federal and State Bank Regulatory
Authorities.
1.15 "INITIAL CAPITAL" shall mean the initial capital of the IBT agreed
to by the Parties.
1.16 "OPERATING AND SERVICES AGREEMENT" shall have the meaning set
forth in Section 7.4.4 herein.
1.17 "PARTIES" shall mean Cumberland and INSCORP.
1.18 "PRO RATA SHARE" shall mean a holder's pro-rata 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.
1.19 "REPRESENTATIVES" shall have the meaning set forth in Section
4.2.1 herein.
1.20 "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
1.21 "SHARES" shall have the meaning set forth in Section 3.1.1 herein.
1.22 "STATE BANK REGULATORY AUTHORITY" shall mean the Tennessee
Department of Financial Institutions.
1.23 "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.
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1.24 "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 STATE MEMBER BANK
2.1 FORMATION OF THE STATE MEMBER BANK. Prior to the Closing,
Cumberland shall form IBT as a state member bank pursuant to Tenn. Code Ann.
Section 45-2-614(c) and CFR _______ of the Federal Reserve System, as amended,
for the purposes set forth below. Upon approval of IBT's charter by the
Commissioner of Financial Institutions, IBT shall be owned by Cumberland, who
shall transfer fifty percent (50%) of the ownership of IBT to INSCORP at the
Closing by issuance of Common Stock at a price of $10 per share in the manner
described in Section 3.1 below.
2.2 PROPOSED NAME. The proposed name of the IBT shall be ("Insurors
Bank of Tennessee.")
2.3 RESPONSIBILITY AND COSTS OF FORMATION.
(a) Cumberland and INSCORP shall share equally all costs incurred
with the formation of IBT. Cumberland shall be responsible for preparing and
filing all regulatory applications necessary to form the IBT. All costs incurred
in connection with the formation of INSCORP, as a holding company of the IBT,
shall be paid for by the organizers of INSCORP.
(b) INSCORP and its organizers shall be responsible for preparing
and filing the offering circular and all regulatory applications necessary for
INSCORP to become a bank holding company. Cumberland will provide personnel and
resources to assist in this endeavor at no additional cost to INSCORP.
(c) Cumberland and INSCORP have each contributed $180,000 into an
escrow account pursuant to an escrow agreement attached hereto as Exhibit A and
incorporated hereby into this Agreement. Upon execution of this Agreement, all
funds in the escrow account shall be released from the escrow account pursuant
to the escrow agreement and deposited into an organizational expense fund
checking account for the purpose of payment of all costs incurred in the
formation of IBT as set forth above and pursuant to a joint resolution of
Cumberland and the organizers of INSCORP attached hereto as Exhibit B and
incorporated hereby into this Agreement. At the Closing, contributions by
Cumberland and INSCORP to the expense fund will be converted into stock
ownership in IBT at the common price of $10 per share.
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ARTICLE 3.
CAPITALIZATION OF THE IBT
3.1 INITIAL CAPITALIZATION OF THE IBT.
3.1.1 SUBSCRIPTIONS FOR STOCK.
At the Closing, the IBT shall issue to Cumberland, and Cumberland
shall subscribe for, 225,000 shares of Common Stock at a price of $10 per share
that shall be paid for from its cash assets and from funds it initially
contributed into the escrow account described in Section 2.3 above. At the
Closing, the IBT shall issue to INSCORP, and INSCORP shall subscribe for,
225,000 shares of Common Stock at a price of $10 per share, which shall be paid
for from funds INSCORP initially contributed into the escrow account, as well as
from the proceeds of its stock offering. The IBT 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 IBT, at the Closing, each of Cumberland and
INSCORP shall make the following contributions to the capital of the IBT:
(a) Cumberland shall contribute cash in an amount equal to
fifty percent (50%) of the Initial Capital; and
(b) INSCORP 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 IBT
agree to provide, or are required by State or Federal Bank Regulatory
Authorities to provide, additional capital to the IBT, Cumberland and INSCORP
each shall be required to make capital contributions in proportion to its
respective Pro Rata Share of the outstanding Equity Securities of the IBT and,
if any such capital contribution is not made by any Party, then that Party's Pro
Rata Share shall be diluted accordingly.
ARTICLE 4.
MANAGEMENT OF THE IBT
4.1 SPECIAL SHAREHOLDER APPROVALS. In addition to such approval
requirements specified in the Charter or Bylaws of the IBT or under law, each of
the following actions shall require authorization by resolution of the
shareholders of the IBT which is approved by each of the Cumberland and INSCORP
for so long as each Party beneficially owns at least fifty percent (50%) of the
outstanding Equity Securities of the IBT:
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(a) The amendment of the Charter;
(b) The increase or decrease in the authorized capital stock of
the IBT;
(c) The creation by the IBT 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 IBT;
(f) The merger or consolidation of the IBT with or into any
other entity or a share exchange involving the Equity
Securities of the IBT and those of another entity;
(g) The issuance by the IBT to any third party of any shares of
stock or other Equity Securities of the IBT;
(h) The dissolution or liquidation of the IBT; and
(i) The amendment of this Agreement.
4.2 BOARD OF DIRECTORS
4.2.1 MEMBERSHIP.
(a) The Board of Directors of the IBT shall originally
consist of a maximum of fourteen (14) Directors, a maximum of eleven (11) of
whom shall be designated by INSCORP for so long as INSCORP beneficially owns at
least fifty percent (50%) of the outstanding Equity Securities of the IBT (the
"INSCORP Representatives"), and a maximum of three (3) of whom shall be
designated by Cumberland for so long as Cumberland beneficially owns at least
fifty percent (50%) of the outstanding Equity Securities of the IBT (the
"Cumberland Representatives"). If required by State or Federal Bank Regulatory
Authorities, the Board shall consist of an additional number of Directors who
are not officers, directors or employees of either INSCORP or Cumberland with
half of such outside Directors to be nominated by INSCORP and reasonably
acceptable to Cumberland and the other half of such outside Directors to be
nominated be Cumberland and reasonably acceptable to INSCORP. INSCORP will have
a minimum of one representative on the board of directors of Cumberland.
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(b) Each of INSCORP and Cumberland shall take all actions
necessary to cause the nomination, election and/or appointment to the Board of
the INSCORP Representatives and the Cumberland Representatives, including voting
all of its shares of Equity Securities to cause the election of the INSCORP
Representatives and the Cumberland Representatives. If an INSCORP Representative
or a Cumberland Representative shall cease to be a Director for any reason, then
INSCORP and Cumberland shall promptly cause a successor nominated by INSCORP or
Cumberland, as the case may be, to be elected or appointed to the Board.
(c) Should either of INSCORP or Cumberland cease to
beneficially own at least fifty percent (50%) of the Equity Securities of the
IBT, the provisions of Section 4.2.1 above regarding the number of the INSCORP
Representatives and Cumberland Representatives on the Board of Directors shall
no longer apply and, unless INSCORP 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 INSCORP
INSCORP hereby represents, warrants and covenants to Cumberland as follows:
5.1 AUTHORITY AND BINDING AGREEMENT.
(a) INSCORP is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization.
INSCORP has the full power and authority to execute, deliver and, subject to
receipt of any required Governmental Approvals from Federal Bank Regulatory
Authorities, perform this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance by INSCORP of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized on the part of INSCORP by all necessary action, organizational
or otherwise.
(b) This Agreement has been duly executed and delivered by an
authorized officer of INSCORP, and is a legal, valid and binding obligation of
INSCORP 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'
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
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conflict with (a) the certificate of incorporation and bylaws or similar
constitutive documents of INSCORP, (b) any material agreement, indenture or
other instrument to which INSCORP 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 INSCORP,
except, in the case of subclause (d), for violations, breaches, defaults or
conflicts that are not, singly or in the aggregate, material to INSCORP's
ability to consummate the transactions contemplated hereby.
5.3 CONSENTS AND APPROVALS. Except for the Governmental Approvals
listed on Schedule 5.3 and 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 INSCORP, or the consummation by INSCORP of the transactions
contemplated hereby.
ARTICLE 6.
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF CUMBERLAND
Cumberland hereby represents, warrants and covenants to INSCORP 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
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
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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 and 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 Cumberland, or the consummation by Cumberland of the transactions
contemplated hereby.
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 Parties 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 INSCORP shall be true and correct in all
material respects as of the Closing and INSCORP 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 INSCORP to the foregoing effect by a senior
officer of INSCORP and dated as of the Closing date.
7.2.2 CONSENTS. INSCORP 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 INSCORP 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
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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.
7.2.3 DELIVERY OF OTHER DOCUMENTS. Cumberland shall have received
(a) a certified copy of the resolutions of the Board of Directors of INSCORP,
authorizing and approving the execution, delivery and performance by INSCORP 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. Cumberland shall receive any
Governmental Approval necessary to own the Common Stock.
7.3 CONDITIONS PRECEDENT TO OBLIGATIONS OF INSCORP. The obligations of
INSCORP 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 INSCORP:
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 INSCORP shall
have received a certificate from Cumberland to the foregoing effect by a senior
officer of Cumberland and dated as of the Closing date.
.
7.3.2 CONSENTS. Cumberland shall have delivered to INSCORP copies
or other evidence of all consents, approvals or authorizations of or from 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. INSCORP 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 INSCORP.
7.3.4 INSCORP FORMATION AND INITIAL STOCK OFFERING. INSCORP shall
have successfully completed its initial stock offering in the amount of [$2.07
MILLION], and IBT shall have
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received the approval of the State and Federal Bank Regulatory Authorities to
operate as a state member bank. Cumberland and INSCORP, if necessary, shall have
received any necessary Government Approval to own the shares of Common Stock.
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 or validity, of the
transactions contemplated by this Agreement.
7.4.2 APPROVAL TO FORM IBT THROUGH A BRANCH INCORPORATION. The
Commissioner of the Tennessee Department of Financial Institutions and the
Federal Reserve Board of Governors shall have approved Cumberland's application
for permission to incorporate a bank branch and subsequently form a state
chartered Federal Reserve member bank pursuant to Tennessee banking law and
applicable sections of the Federal Reserve System, as amended, and any
conditions to such approval shall not be reasonably considered, by any Party to
be unduly burdensome, and the Department of Financial Institutions shall have
issued the Charter of the IBT.
7.4.3 GRANTING OF DEPOSIT INSURANCE. The FDIC shall have approved
the application for federal deposit insurance for the IBT 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. Cumberland and the IBT
shall have executed the Operating and Services Agreement substantially in the
form attached hereto as Exhibit C.
7.5 DELIVERIES AT THE CLOSING. At the Closing:
7.5.1 DELIVERY OF STOCK CERTIFICATES. The IBT 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 INSCORP and
Cumberland shall make the contributions to the Initial Capital of the IBT set
forth in Section 3.1.2 above in immediately available funds to a designated
account of the IBT.
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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, each of INSCORP 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 "INSCORP", 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 INSCORP, or Cumberland (a "Selling
Party") of any Equity Securities beneficially owned by such Selling Party, then
Cumberland, in the event that INSCORP is the Selling Party, or INSCORP, in the
event that Cumberland is the Selling Party (each of Cumberland or INSCORP 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
thirty (30) 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, INSCORP
shall have no less than four (4) months to complete an equity offering after its
Affirmative Response. Any Affirmative Response by INSCORP 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
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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 INSCORP, 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 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
respond in writing 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 IBT shall be imprinted with a conspicuous legend in
substantially the following form:
The securities represented by this certificate have not been
registered by the Federal Reserve System or the Department of
Financial Institution through the filing of an offering circular
declared effective by the Federal Reserve Board of Governors 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.
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The securities represented by this certificate are subject to
certain restrictions on transferability contained in a Joint
Venture Agreement dated as of August 26, 1999 by and among the
Cumberland Bancorp, Inc. and INSCORP. Copies of such agreements are
available at the principal offices of _____________, IBT and should
be reviewed carefully before any person or entity seeks to acquire
such securities.
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 INSCORP shall have the option to purchase all of the Equity Securities
of the IBT beneficially owned by Cumberland (the "INSCORP 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
INSCORP Exercise Notice.
9.1.2 EXERCISE OF OPTION. Within sixty (60) days after the later of
the date of INSCORP's receipt of notice of any of the events specified in
Section 9.1.1 above or the first date on which information as to any of such
events becomes generally available to the public, INSCORP may deliver to the
other Parties a written notice of its intention to exercise the INSCORP Call
Option (an "INSCORP Exercise Notice"). Upon exercise of such option, INSCORP
shall have no less than four (4) months to complete an equity offering, if
necessary, after its notice of exercise of said option.
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<PAGE> 15
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 INSCORP.
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 INSCORP and their respective immediate family
members cease to beneficially own as a group at least fifty percent (50%) of the
outstanding voting securities of INSCORP, (ii) upon the consummation of a
merger, share exchange, consolidation or similar corporate transaction involving
INSCORP, 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 INSCORP; or
(b) The institution by INSCORP of proceedings to be adjudicated
bankrupt or insolvent, consent by INSCORP to the institution of bankruptcy or
insolvency proceedings against it; filing by INSCORP of a petition seeking or
consenting to reorganization or relief under any applicable federal or state law
relating to bankruptcy; consent by INSCORP to the appointment of a receiver,
liquidator, assignee, trustee or sequestrator (or similar official), making by
INSCORP of any assignment for the benefit of creditors; or admission by INSCORP
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 IBT beneficially owned by INSCORP (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 9.2.1 above or the first date on which information as to any of such
events becomes generally available to the public, Cumberland may deliver to the
other Parties a written notice of its intention to exercise INSCORP Call Option
(a "Cumberland Exercise Notice").
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<PAGE> 16
ARTICLE 10.
PURCHASE OPTIONS
10.1 VOLUNTARY TERMINATION OPTIONS
10.1.1 MUTUAL "SHOTGUN" TERMINATING OPTION. Either party shall
have the right to initiate a buy or sale at any time by offering its IBT stock
to the other at 100% of fair market value. The offeree shall have thirty (30)
days from such offer to accept the offer. If such offer is not accepted by the
offeree, offeror shall have the option to purchase the offeree's 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.
10.2 80% OWNERSHIP CONSOLIDATION OPTION. It is the desire of both
parties to consider the inherent income tax advantages with a bank holding
company owning at least 80% of the outstanding stock of a subsidiary bank.
Therefore, Cumberland shall have the right to initiate a stock-for-stock
exchange of its common stock for the common stock of IBT in order to acquire at
least 80% of the stock in IBT. Cumberland shall have the right to acquire at
least 60% (and up to 100% of the common stock if tendered) held by INSCORP at
any time after IBT achieves a one percent (1%) return on average assets for a
full calendar year. This option shall not be available for a minimum of four (4)
years from the date IBT begins operation as a bank. Cumberland shall have up to
two (2) years after such achievement of profitability to exercise this option.
For purposes of this option, the exchange price or purchase price would be the
Fair Market Value.
Cumberland shall notify INSCORP in writing of its intent to exercise
this option. INSCORP would have 60 days from the date of this notice to accept
or refuse the offer. Should INSCORP refuse the offer of a stock-for-stock
exchange in writing, then INSCORP shall acquire all of the stock of IBT held by
Cumberland for the same fair market value as determined under this option.
However, INSCORP shall have no less than four (4) months to complete an equity
offering after its refusal of the offer by Cumberland.
ARTICLE 11.
TERM AND TERMINATION
11.1 TERM. This Agreement shall remain in full force and effect unless
otherwise terminated as provided in Section 11.2 herein.
11.2 TERMINATION. This Agreement shall terminate automatically upon the
occurrence of any of the following events:
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<PAGE> 17
(a) The acquisition by any Party of all of the shares of Common
Stock and other Equity Securities of the IBT beneficially
owned by the other party, whether pursuant to the exercise
of any of the options granted in Article 9 above or
otherwise; or
(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 Exhibits A, B, and C 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 IBT. The IBT shall not be dissolved unless a
plan of dissolution is approved by the shareholders of the IBT pursuant to
Section 4.1(h) above and by State and Federal Bank Regulatory Authorities. Each
of INSCORP and Cumberland agrees that it will make no petition for dissolution
of the IBT 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 IBT (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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contemplated hereby and shall not 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 IBT
nor 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 INSURORS BANK COMMON STOCK
14.1 ISSUANCE OF STOCK OPTIONS. Any stock options shall only be
granted by written mutual agreement of the two parties to this joint venture
agreement. It is anticipated that options will be granted to organizers,
directors, officers and employees of IBT under approved stock option plan or
plans. Any stock options granted under this section will be on a pro rata basis
to maintain the 50%/50% ownership relationship unless otherwise agreed to by
written mutual agreement.
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 State of
Tennessee applicable to
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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 Nashville, Davidson
County, Tennessee and of any United States federal court sitting in Nashville,
Davidson County, Tennessee 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):
If to Cumberland:
Cumberland Bancorp, Inc.
4205 Hillsboro Road, Suite 212
Nashville, TN 37215
Attention: Mr. Joel Porter
Telephone (615) 337-9395
Facsimile (615) 846-5001
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<PAGE> 20
Copy to:
Bass, Berry & Sims, PLC
2700 First American Center
Nashville, TN 37238
Attention: Bob F. Thompson
Telephone: (615) 742-6200
Facsimile: (615) 742-6293
If to INSCORP:
Insurors Bank of Tennessee
------------------------------------
Nashville, TN
Attention: --------------
Telephone:
Facsimile:
Copy to:
------------------
------------------
---------------------
Attention:
Telephone: --------------
Facsimile:
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 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
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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 IBT, 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.
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.
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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 IBT. The Parties shall cause the IBT to execute
this Agreement upon its formation and thereby be bound by the terms hereof.
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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/ Tom Paschal
-------------------------------------
TOM PASCHAL, SECRETARY
INSCORP
/s/ C. Louis Patten
-------------------------------------
, CHAIRMAN
------------
ACCEPTED AND AGREED TO:
, IBT
- -----------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
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EXHIBIT 16
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
September 8, 1999
Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Dear Ladies and Gentlemen:
We have read the "Change in Independent Certified Public Accountants" section
included in Cumberland Bancorp, Incorporated's Amendment No. 1 to Form S-1
(File No. 333-84173) filed with the Securities and Exchange Commission. We are
in agreement with the statements contained therein except for the following two
items:
(1) There were no reportable events, as defined in regulations of
the Securities and Exchange Commission, through March 29,
1997, the date of our report for the year ended December 31,
1996. We have not performed any auditing procedures subsequent
to March 29, 1997.
(2) We have no knowledge as to whether Cumberland Bancorp,
Incorporated had consulted with Heathcott and Mullaly, P.C.
regarding accounting principles prior to retaining Heathcott
and Mullaly, P.C.
Respectfully submitted,
/s/ Maggart & Associates, P.C.
------------------------------
Maggart & Associates, P.C.
cc: Mark McDowell
Chief Administrative Officer
Cumberland Bancorp, Incorporated
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Cumberland Bancorp,
Incorporated on Amendment No. 1 to 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.
------------------------------
September 8, 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
September 8, 1999
<TABLE> <S> <C>
<ARTICLE> 9
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