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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1999
Commission File Number 0-27393
CUMBERLAND BANCORP, INCORPORATED
(Exact name of registrant as specified in its charter)
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Tennessee 62 - 1297760
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4205 Hillsboro Road,
Nashville, Tennessee 37215
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code:
(615) 377-9395
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Common Stock, $.50 par value per share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on February 29, 2000, was approximately $38,188,044. The market value
calculation was determined using $12.50 per share.
Shares of common stock, $0.50 par value per share, outstanding on February 29,
2000 were 6,863,724
DOCUMENTS INCORPORATED BY REFERENCE
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Part of Form 10-K Documents from which portions are incorporated by reference
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Part III Portions of the Registrant's definitive proxy statement,
relating to the Registrant's Annual Meeting of Shareholders
to be held on April 27, 2000 are incorporated by
reference into Items 10, 11, 12 and 13.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
GENERAL
We are the largest Tennessee bank holding company headquartered in
Nashville, Tennessee. We conduct our banking business through four (4) bank
subsidiaries:
- Bank of Dyer, a Tennessee state chartered bank (which merged with us
in 1999) with two (2)offices in Gibson County, Tennessee,
- Cumberland Bank, a Tennessee state chartered bank with eight (8)
offices in Macon, Smith, Sumner and Warren Counties, Tennessee,
- BankTennessee, a Tennessee state chartered bank with five (5) offices
in Shelby and Lauderdale Counties, Tennessee 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 for business 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 Murray Bank has grown to total assets of more than $16 million at
year end. The Company has grown to more than $525 million in total assets as of
December 31, 1999.
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The following table represents our bank's growth in branch offices and
total assets from the years ended December 31, 1993 and December 31, 1996 to
December 31, 1999. Data for BankTennessee and The Community Bank for 1993 and
1996 are for their respective predecessor entities.
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12/31/93 12/31/96 12/31/99
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(Dollars in Thousands)
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BankTennessee
Branch Offices............... 2 3 5
Total Assets................. $ 72,200 $ 97,400 $188,000
Cumberland Bank
Branch Offices............... 2 4 8
Total Assets................. $ 63,500 $102,700 $194,700
The Community Bank
Branch Offices............... 1 1 3
Total Assets................. $ 11,500 $ 35,300 $ 98,031
Bank of Dyer
Branch Offices........... 1 2 2
Total Assets............. $ 18,000 $ 28,086 $ 42,498
Total
Bank Branch Offices.......... 6 10 18
Bank Subsidiaries
Total Assets................. $165,200 $263,486 $523,229
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We have six (6) bank branch offices that are less than three years old
as of December 31, 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 Portland, Tennessee. Another office operates in
Gordonsville in Smith County. Cumberland Bank opened a new office in Lafayette,
Macon County, Tennessee during the fourth quarter. It acquired two branch
offices in the third quarter of 1999, both of which are located in Warren
County, Tennessee. Cumberland Bank provides lending and other financial
services through its subsidiary, Cumberland Finance Company, which has offices
in Gallatin and Murfreesboro, Tennessee. Cumberland Bank offers investment
services and other financial services through its subsidiary CBC Financial
Services, Inc., which has offices in Carthage and Gallatin, Tennessee.
Cumberland Bank also manages and owns a fifty percent (50%) interest in a full
service, independent insurance agency, InsureTennessee, Inc. InsureTennessee
represents more than twenty (20) different companies offering automobile, home
life, health, disability and other types of insurance. InsureTennessee shares
an office location in Carthage with CBC Financial Services and a office in
Collierville, Tennessee in BankTennessee's building on New Byhalia Road.
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BankTennessee was originally organized as a federal savings
association, First Federal Savings and Loan Association in 1934 and later
changed its name to First Federal Bank of Memphis. It converted to a Tennessee
state bank in 1997. BankTennessee's senior management team has over
seventy-five (75) years of banking experience, with three former bank
presidents on staff. BankTennessee is Tennessee's largest Small Business
Administration lender according to "SBA Lenders." Also, residential
construction loans account for a substantial percentage of BankTennessee's loan
portfolio compared to other Tennessee banks. BankTennessee's growth is
evidenced by current construction of a new $3.0 million main office in
Collierville and a recently completed 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 Macon, Smith, Lauderdale, Warren 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 $80.8 million made up 18%
of our loan portfolio as of December 31, 1999.
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.
Our Banks provide a range of customary services which include
checking, NOW accounts, money market and savings accounts, certificates of
deposit, individual retirement accounts, money transfers, and safe deposit
facilities. Lending services include construction lending, commercial,
consumer, commercial and residential real estate, home equity and home
improvements. In addition, the Banks offers various uninsured, non-deposit
products including annuities and mutual funds, brokerage services, and
secondary market mortgage processing services. The Banks are not authorized to
provide trust services.
Our Banks are subject to the regulatory authority of the Department of
Financial Institutions of the State of Tennessee and the Federal Reserve Board
of Governors and the Federal Deposit Insurance Corporation (the "FDIC") which
currently insures the depositors of each member bank to a maximum of $100,000
per depositor. For this protection, each bank pays a quarterly statutory
assessment and is subject to the rules and regulations of the FDIC.
MARKET AREAS
We operate principally in six (6) market areas in Tennessee: Macon
County, Shelby County, Smith County, Sumner County, Warren County and Southern
Davidson/Williamson County. We also have a bank branch in Lauderdale County and
a finance company office in Rutherford County.
Employees
The Company had approximately 250 full-time equivalent employees as of
December 31, 1999. The Company has four (4) full-time employees who are not
employed by the Banks. All four of these persons are on the payroll of a bank
subsidiary for administrative purposes, but the bank is reimbursed monthly by
us for their salaries and benfits.
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None of our employee's or banks' employees are represented by a collective
bargining group. We consider relations with our employees to be excellent. The
Company and the banks' provide several employee benefit programs, including a
401(k) plan, group life and health insurance, an annual merit program, paid
vacations, and sick leave.
Competition
Our banks have substantial competition in attracting and retaining
deposits and in lending funds. The primary factors in competing for deposits
are the range and quality of financial services offered, the ability to offer
attractive rates and the availability of convenient office locations. Such
competition is heightened by the fact that Tennessee law permits any bank or
savings association located in Tennessee to branch in any county in Tennessee.
Additional significant competition for savings deposits comes from other
investment alternatives, such as money market funds and corporate and
government securities. Primary factors in competing for loans are the range and
quality of lending services offered, interest rates and loan origination fees.
Competition for the origination of loans normally comes from other savings and
financial institutions, commercial banks, credit unions, insurance companies
and other financial service companies.
Except in our Smith County market, our banks have small market shares
in their respective markets. Competitors of each of our banks generally possess
substantially greater financial resources than those available to our banks. In
addition, these institutions generally have higher lending limits than our
banks and may provide various services for their customers which our banks do
not offer.
We believe our strategy of relationship banking and local autonomy in
the communities we serve allows flexibility in rates and products offered in
response to local needs in a way that can enhance profitability for our banks,
particular as consolidation of the banking industry occurs and larger
institutions exit markets that are only marginally profitable for them. We
believe our emphasis on community banking, customer service and relationships
is the most effective method we have of competing with these larger regional
bank holding companies as well as smaller community banks.
LENDING PROCEDURES AND LOAN APPROVAL PROCESS
Lending Procedures. Lending procedures of our banks reflect our
philosophy of granting local control to decision making. Although the overall
lending policy of the banks is set by our board of directors and is subject to
the oversight and control of our board of directors, we depend, to a great
degree, upon the judgment of our loan officers and senior management at each
bank to assess and control lending risks.
Individual loan officers have discretionary authority to approve
certain loans at each of our banks without prior approval. The discretionary
limit at BankTennessee varies by loan officer based upon seniority. For
example, the bank's president has discretionary approval authority up to
$750,000 for certain secured loans, while executive vice presidents have
discretionary approval authority up to $250,000 for certain secured loans. At
Cumberland Bank, certain individual loan officers have discretionary approval
authority up to $100,000 on certain secured loans while the bank's president
has discretionary approval authority up to $500,000 on secured loans. At The
Community Bank, certain individual loan officers have discretionary approval
authority of up to $250,000 on certain secured loans. At Bank of Dyer, certain
loan offices have discretionary approved authority up to $100,000 on certain
secured loans.
Each of our banks utilize a loan committee to review loan requests
exceeding the discretionary limit of the loan officer or branch manager, or for
which the loan officer or branch manager chooses not to exercise his or her
discretionary authority. Each of the banks has its own officer loan committee,
reflecting our emphasis on local control and decision making.
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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. Past due loans are reviewed by an internal loan officer
committee, and a summary report of such loans is reviewed monthly by the Board
of Directors. A report of loan review findings is presented quarterly to the
Bank's Board of Directors.
ASSET/LIABILITY MANAGEMENT
Each of our banks has a committee comprised of its senior officers and
outside directors charged with managing assets and liabilities pursuant to our
asset-liability management policy. Each committee's task is to maximize and
stabilize the net interest margin, and to provide reasonable growth of assets,
earnings and return on equity capital while maintaining credit quality,
reasonable interest rate risk, adequate capital and liquidity. To meet these
objectives, each committee monitors its bank's progress and assists in
directing overall acquisition and allocation of funds. Each committee meets
monthly to review liquidity and funds position, and to review the general
economic condition and other factors affecting the availability and use of
funds of its bank. Each committee reports monthly to our and the individual
banks' boards of directors explaining variances between budget and actual
results, providing the likely reasons for such variances and reporting
management's course of action in light of any budget variances. Our asset
liability management policy is reviewed annually by each bank's board of
directors.
INVESTMENT ACTIVITIES
Our banks maintain separate investment portfolios consisting primarily
of investment grade securities, including federal agency obligations, corporate
bonds and asset-backed securities. Federal regulations limit the types and
quality of instruments in which the banks may invest.
A key objective of each of our banks' investment portfolios is to
provide a balance with the banks' loans consistent with each bank's liability
structures, and to assist in management of interest rate risk. The 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 Company. Cumberland Finance, a wholly-owned
subsidiary of Cumberland Bank, was formed in 1994 for the purpose of offering
high risk, higher yield credit to people located in Smith County, Tennessee. In
1995, Cumberland Finance expanded its operations to Murfreesboro in Rutherford
County, Tennessee. Cumberland Finance was profitable in its first year of
operations but has struggled financially since then due to problems associated
with growth and underwriting functions. We believe that recent changes in local
management should result in 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 the year
2000, based upon current trends of increased gross revenue and decreased
monthly
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losses. Under its current management, CBC Financial Services has grown to a
business with over $26 million in assets under administration as of December
31, 1999.
InsureTennessee, Inc. InsureTennessee is a fully-licensed insurance
agency, owned fifty percent (50%) by Cumberland Bank and fifty percent (50%) by
a long-time West Tennessee insurance agent. It provides insurance products to
customers in Shelby, Sumner and Smith Counties, Tennessee through its offices
in Carthage, Gallatin and most recently Memphis, Tennessee. InsureTennessee
experienced operating losses the past year as a result of costs attributable to
its growth, but expects to be profitable in the year 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, $10.00 par value issued by the
Murray Bank, we acquired 10,000 of these shares at $215 per share for a total
consideration of $2.15 million. The board of directors of The Murray Bank
consists of thirteen (13) directors, of which four (4) have been designated by
us. Under the terms of our agreement with BancKentucky, we also provide
investment, accounting, auditing, human resource management, and loan review
services to The Murray Bank on a fee for services basis, and will continue to
do so as long as we have beneficial ownership of at least fifty percent (50%)
of the voting stock of The Murray Bank.
Monetary Policies
The result of operations of the Bank and the Company are affected by
credit policies of monetary authorities, particularly the Federal Reserve
Board. The instruments of monetary policy employed by the Federal Reserve Board
include open market operations in U.S. government securities, changes in the
discount rate on bank borrowings and changes in reserve requirements against
bank deposits. In view of changing conditions in the national economy and in
the money markets, as well as the effects of actions by monetary and fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or
the effect of such matters on the business and earnings of the Company.
SUPERVISION AND REGULATION
We, along with our banks, are subject to state and federal banking
laws and regulations which impose specific requirements or restrictions and
provide for general regulatory oversight with respect to virtually all aspects
of our and our banks' operations. These laws and regulations are generally
intended to protect depositors, not shareholders. The following summaries of
statutes and regulations affecting banks and bank holding companies do not
purport to be complete. These summaries are qualified in their entirety by
reference to the statutes and regulations described.
GENERAL
As a bank holding company, we are regulated under the Bank Holding
Company Act of 1956, as amended, and are inspected, examined and supervised by
the Board of Governors of the Federal Reserve System. Under the BHCA, bank
holding companies generally may not acquire the ownership or control of
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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
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
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ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items. The ratios are minimums. The guidelines require all
federally-regulated banks to maintain a minimum risk-based total capital ratio
of 8%, of which at least 4% must be Tier I capital, as described below.
A banking organization's qualifying total capital consists of two
components: Tier I, or "core," capital and Tier 2, or "supplementary," capital.
Tier I capital is an amount equal to the sum of: (1) common shareholders'
equity, including adjustments for any surplus or deficit; (2) non-cumulative
perpetual preferred stock; and (3) the company's minority interests in the
equity accounts of consolidated subsidiaries. With limited exceptions for
goodwill arising from certain supervisory acquisitions, intangible assets
generally must be deducted from Tier I capital. Other intangible assets may be
included in an amount up to 25% of Tier I capital, so long as the asset is
capable of being separated and sold apart from the banking organization or the
bulk of its assets. Additionally, the market value of the asset must be
established on an annual basis through an identifiable stream of cash flows and
there must be a high degree of certainty that the asset will hold this market
value notwithstanding the future prospects of the banking organization.
Finally, the banking organization must demonstrate that a liquid market exists
for the asset. Intangible assets in excess of 25% of Tier I capital generally
are deducted from a banking organization's regulatory capital. At least 50% of
the banking organization's total regulatory capital must consist of Tier I
capital.
Tier 2 capital is generally considered to be an amount equal to the
sum of the following:
- the allowance for possible credit losses in an amount up to
1.25 % of risk-weighted assets;
- cumulative perpetual preferred stock with an original
maturity of 20 years or more and related surplus;
- hybrid capital instruments defined as instruments with
characteristics of both debt and equity, perpetual debt and
mandatory convertible debt securities; and
- in an amount up to 50% of Tier I capital, eligible term
subordinated debt and intermediate- term preferred stock with
an original maturity of five years or more, including related
surplus.
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
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expect that the institution would have well-diversified risk, no undue rate
risk exposure, excellent asset quality, high liquidity and good earnings. In
general, the bank would have to be considered a strong banking organization,
rated in the highest category under the bank rating system and have no
significant plans for expansion. Higher Tier I leverage capital ratios of up to
5% will generally be required if all of the above characteristics are not
exhibited, or if the institution is undertaking expansion, seeking to engage in
new activities, or otherwise faces unusual or abnormal risks.
Institutions not in compliance with these regulations are expected to
be operating in compliance with a capital plan or agreement with that
institution's regulator. If they do not do so, they are deemed to be engaging
in an unsafe and unsound practice and may be subject to enforcement action.
Failure to maintain a Tier I leverage capital ratio of at least 2% of assets
constitutes an unsafe and unsound practice and may result in enforcement action
against an institution justifying termination of that institution's FDIC
insurance.
At December 31, 1999, the Company's subsidiary bank's risk-based Tier
1 Capital and risk-based Total Capital ratios were 6.84% and 9.45%,
respectively.
LIABILITY FOR BANK SUBSIDIARIES.
Under the Federal Reserve policy, we, as a bank holding company, are
expected to act as a source of financial and managerial strength to each of our
banks and to maintain resources adequate to support each of our banks. This
support may be required at times when we may not have the resources to provide
it. Any depository institution insured by the FDIC can be held liable for any
loss incurred, or reasonably expected to be incurred, by the FDIC in connection
with the default of a commonly-controlled, FDIC-insured depository institution
like a bank subsidiary. Additionally, depository institutions insured by the
FDIC may be held liable to the FDIC for any loss incurred or reasonably
expected to be incurred in connection with any assistance provided by the FDIC
to a commonly-controlled, FDIC-insured depository institution in danger of
default. "Default" is defined generally as the appointment of a conservator or
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a "default" is likely to occur in the
absence of regulatory assistance. All of our banks are FDIC-insured depository
institutions. Also, in the event that such a default occurred with respect to
one of our banks, any capital loans from us to that bank would be subordinate
in right of payment to payment of the bank's depositors and other of the bank's
obligations.
DIVIDEND RESTRICTIONS
Federal and Tennessee law limits the payment of dividends by banks.
Under Tennessee law, the directors of a state bank, after making proper
deduction for all expenditures, expenses, taxes, losses, bad debts, and any
write-offs or other deductions required by the TDFI, may credit net profits to
the bank's undivided profits account. Thereafter, the bank may quarterly,
semi-annually, or annually declare a dividend from that account in an amount
judged expedient by the bank's board of directors. Before declaring the
dividend, the board of directors must deduct any net loss from the undivided
profits account and transfer to the bank's surplus account (1) the amount, if
any, required to raise the surplus to 50% of the capital stock and (2) the
amount required, if any, but not less than 10% of net profits, to make the
paid-in-surplus account equal the capital stock account. Thereafter, the bank
may declare a dividend if the bank is adequately reserved against deposits and
those reserves will not be impaired by the declaration of the dividend.
A state bank, with the approval of the TDFI, may transfer funds from
its surplus account to the undivided profits or retained earnings account or
any part of its paid-in-capital account. The payment of dividends by any bank
is dependent upon its earnings and financial condition and, also may be limited
by federal and state regulatory agency protections against unsafe or unsound
banking practices. The payment of dividends could, depending upon the financial
condition of a bank, constitute an unsafe or unsound banking practice. When a
bank's surplus account is less than its capital stock account, Tennessee law
9
<PAGE> 11
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 minority interest in consolidated subsidiaries. Finally,
if one of our banks has a capital surplus in excess of that required by law,
that excess may be transferred to the bank's undivided profits account and be
available for the payment of dividends so long as (1) the amount came from the
earnings of prior periods, excluding earnings transferred as a result of stock
dividends and (2) the bank's board and the Board of Governors of the Federal
Reserve approved the transfer.
In 1999, the Company declared a 10% stock dividend to its
shareholders. This stock dividend was effective as of March 26, 1999. In the
first quarter of 2000, a cash dividend was declared in the amount of $.025
cents per share payable on April 14, 2000 to shareholders of record on March 1,
2000.
DEPOSIT INSURANCE ASSESSMENTS
The deposits of each of our banks are insured up to regulatory limits
by the FDIC and we are required under the FDIC's deposit insurance assessments
to maintain the Bank Insurance Fund (BIF) and Savings Association Insurance
Fund (SAIF). The FDIC has adopted regulations establishing a permanent
risk-related deposit insurance assessment system. Each financial institution is
assigned to one of three capital groups -- well capitalized, adequately
capitalized or undercapitalized -- and further assigned to one of three
subgroups within a capital group. A bank's assignment is based on supervisory
evaluations by the institution's primary federal regulator and, if applicable,
other information relevant to the institution's financial condition and the
risk posed to the applicable insurance fund. The assessment rate applicable to
our banks in the future will depend in part upon the risk assessment
classification assigned to each bank by the FDIC and in part on the BIF
assessment schedule adopted by the FDIC. Institutions are prohibited from
disclosing the risk classification to which they have been assigned. The
Deposit Insurance Funds Act of 1996 provides for assessments to be imposed on
insured depository institutions with respect to deposits insured by the BIF and
the SAIF. Currently, the annual insurance premiums on bank deposits insured by
the BIF and SAIF vary between $0.00 to $0.27 per $100 of deposits.
EFFECTS OF GOVERNMENTAL POLICIES
The difference between interest earned by our banks on their loans and
investments and the interest paid by them on their deposits or other borrowings
affects our banks' earnings. The yields on their assets and the rates paid on
their liabilities are sensitive to changes in prevailing market rates of
interest. Thus, the general economic conditions, fiscal policies of the federal
government, and the policies of regulatory agencies, particularly the Federal
Reserve, which establishes national monetary policy, will influence our banks'
earnings and growth. The nature and impact of any future changes in fiscal or
monetary policies cannot be predicted.
Commercial banks are affected by the credit policy of various
regulatory authorities, including the Federal Reserve. An important function of
the Federal Reserve is to regulate the national supply of bank credit. Among
the instruments of monetary policy used by the Federal Reserve to implement
these objectives are open market operations in U.S. Government securities,
changes in reserve requirements on bank deposits,
10
<PAGE> 12
changes in the discount rate on bank borrowings, and limitations on interest
rates that banks may pay on time and savings deposits. The Federal Reserve uses
these means in varying combinations to influence overall growth of bank loans,
investments and deposits, and also to affect interest rates charged on loans,
received on investments or paid for deposits.
The monetary and fiscal policies of regulatory authorities, including
the Federal Reserve, also affect the banking industry. Through changes in the
reserve requirements against bank deposits, open market operations in U.S.
Government securities and changes in the discount rate on bank borrowings, the
Federal Reserve influences the cost and availability of funds obtained for
lending and investing. No prediction can be made with respect to possible
future changes in interest rates, deposit levels or loan demand or with respect
to the impact of these changes on the business and earnings of our banks.
From time to time, various federal and state laws, rules and
regulations, and amendments to existing laws, rules and regulations, are
enacted that affect banks and bank holding companies. Future legislation and
regulation could significantly change the competitive environment for banks and
bank holding companies. We cannot predict the likelihood or effect of any such
legislation or regulation.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal and executive offices are located at 4205 Hillsboro
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 in five offices located in Shelby and Lauderdale Counties,
Tennessee. Cumberland Bank currently conducts business at eight offices located
in Macon, Smith, Sumner, and Warren Counties, Tennessee. CBC Financial Services
conducts business at two offices, one in Smith County and one in Sumner County.
Cumberland Finance conducts business at two offices, one located in Sumner
County and one in Rutherford County, Tennessee. InsureTennessee conducts
business at two offices, one in Smith County and one in Shelby County that it
shares with BankTennessee.
We own all of our branch office locations expcept for seven leased
operations which include Cumberland Bank's office in Gallatin, and McMinnville,
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.
Cumberland Bank also operates off-site ATM's at leased locations in
Smith and Sumner Counties.
ITEM 3. LEGAL PROCEEDINGS
The nature of the banking business generates a certain amount of
litigation against us and our banks involving matters in the ordinary course of
business. None of the legal proceedings currently pending or threatened to
which we or our subsidiaries are a party or to which any of our properties are
subject will have, or have, in the opinion of management, a material effect on
our business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year ending December 31, 1999.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
We have no established public trading market for our shares.
Accordingly, there is no comprehensive record of trades or the prices of any
trades. The following table reflects stock prices for our shares to the extent
any information is available. We have not declared any cash dividends in the
past two
11
<PAGE> 13
fiscal years nor have we declared any cash dividends during this fiscal year,
other than the small amount incorporated due to the pooling with Bancshares of
Dyer, Inc.
CUMBERLAND BANCORP INCORPORATED COMMON STOCK(1)
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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 ................................. $12.50 $12.50
Fourth Quarter................................. $12.50 $12.50
</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 February 29, 2000 we had approximately 1,146 record
shareholders. At that date, 6,863,724 shares were outstanding.
We did not declare any dividends for the fiscal years ended December
31, 1999 or 1998. In the first quarter of 2000, a cash dividend was declared in
the amount of $.025 cents per share payable on April 14, 2000 to shareholders
of record on March 1, 2000.
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."
12
<PAGE> 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The table below provides selected consolidated financial data for our
company as of and for the five years ended December 31, 1999, 1998, 1997, 1996
and 1995. This information does not include financial data of BankTennessee or
The Community Bank before the July 1997 merger of First Federal Bancshares,
Inc. into us. The merger was accounted using the purchase method of accounting.
In accordance with purchase accounting, the results of operations for
BankTennessee and The Community Bank are included in the selected consolidated
financial data since the date of the merger. You should read the following
selected consolidated financial information in conjunction with our financial
statements and the notes to those statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" located elsewhere in
this document.
<TABLE>
<CAPTION>
For years ending December 31,
-----------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 39,193 33,290 20,479 11,475 9,429
Interest expense 19,127 17,381 10,429 5,514 4,522
Net interest income 20,066 15,909 10,050 5,961 4,907
Provision for loan losses (1,623) (1,188) (1,390) (430) (370)
Noninterest income 4,379 4,260 3,390 1,697 1,355
Noninterest expense (17,198) (16,636) (8,696) (5,497) (4,102)
Income before income taxes 5,624 5,345 3,354 1,731 1,790
Income tax expense 2,113 2,003 1,220 611 657
Net earnings 3,511 3,342 2,134 1,120 1,133
Basic earnings per share 0.56 0.56 0.49 0.39 0.39
Diluted earnings per share 0.55 0.55 0.48 0.37 0.37
Dividends per common share 0 0 0 0 0.05
Book value per common share 5.14 4.02 3.41 2.82 2.48
SELECTED PERIOD-END BALANCES
Total assets 525,559 408,706 330,335 130,774 113,271
Loans - net of unearned income 440,316 321,547 269,378 105,141 83,559
Allowance for loan losses 5,146 4,012 3,214 1,386 1,255
Total deposits 435,252 357,404 285,049 116,078 99,651
Other borrowings 49,284 25,206 23,189 5,426 5,233
Stockholders' equity 35,275 22,059 18,650 8,352 7,219
SELECTED AVERAGE BALANCES
Total assets 453,378 372,967 226,220 125,380 103,578
Securities 25,886 26,612 14,631 9,524 12,450
Loans - net of unearned income 374,716 293,665 184,792 98,036 77,526
Allowance for loan losses 4,196 3,504 2,603 1,183 1,108
Total deposits 356,075 296,553 226,220 111,107 84,921
Other borrowings 34,477 27,776 12,942 5,101 5,413
Stockholders' equity 27,200 20,607 13,543 7,905 6,717
SELECTED OPERATING RATIOS
Annual % change in average loans 36.94% 58.92% 88.00% 26.46% 23.87%
Annual % change in average assets 28.59% 64.87% 80.43% 21.05% 19.97%
Return on average equity 12.91% 16.22% 15.76% 14.07% 16.87%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
This section along with other sections in this document, contains or
incorporates by reference certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which are intended to be covered by the "safe
harbors" created thereby. Those statements include, but may not be limited to,
the discussions of the Company's expectations concerning its future
profitability, operating performance, growth strategy and its assumptions
regarding other matters. Also, when any of the words "believes", "expects",
"anticipates", "intends", "estimates", "plans", or similar terms or expressions,
are used in this document, forward-looking statements are being made.
You should be aware that, while the Company believes the expectations
reflected in those forward-looking statements are reasonable, they are
inherently subject to risks and uncertainties which could cause the Company's
future results and stockholder values to differ materially from the Company's
expectations. These factors are disclosed in this section. Because of these
factors, there can be no assurance that the forward-looking statements included
or incorporated by reference herein will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included or
incorporated by reference herein, you should not regard the inclusion of such
information as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved. In addition, the Company
does not intend to, and is not obligated to, update these forward-looking
statements after the date hereof, even if new information, future events or
other circumstances have made them incorrect or misleading as of any future
date.
You should read the following discussion in conjunction with our
financial statements and the notes to those statements appearing elsewhere in
this document.
13
<PAGE> 15
Cumberland Bancorp, Incorporated had several significant events that
occurred during 1999 which affected its financial condition and results of
operations. An initial public offering was completed in the last half of the
year which raised approximately $8.5 million in net additional capital.
Bancshares of Dyer, Inc. (a $40 million one bank holding company) was acquired
in late December, 1999. This transaction was accounted for as a pooling of
interest and prior period amounts have been restated to include the accounts
and results of operations of Dyer. Two branches totaling $20 million were
acquired from another financial institution and investments in unconsolidated
subsidiaries were made of approximately $2 million.
Financial Condition. Our total assets grew from $408.7 million at
year-end 1998 to $525.5 million at December 31, 1999, a $116.8 million increase
or 29%. The primary changes in assets was related to the $117 million increase
in net loans. In addition, cash and due from banks increased $9.2 million to
allow for possible cash needs related to uncertainties related to the Year 2000
issues. We funded these increases primarily by an increase in deposits of $78
million and by decreasing our interest-bearing deposits held in other
institutions by $16.6 million.
Our total liabilities grew from $387 million at year end 1998 to $490
million at December 31, 1999, a $104 million increase or 27%. In addition to
the deposit growth mentioned above, federal funds purchased increased $2.2
million and advances from the Federal Home Loan Bank increased $21.6 million.
Stockholders' equity increased $13.2 million to $35.3 million at
December31, 1999. The increase is related to the previously mentioned IPO, and
privately placed common stock of approximately $2 million. Retained earnings
provide the balance of the increase in equity. Our leverage capital ratio
increased from 5.45% at December 31, 1998 to 6.84% at December 31, 1999. See
note 14 to our consolidated financial statements for more information relating
to capital.
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1998
Net earnings were $3.5 million in 1999 compared to $3.3 million in
1998. Total revenues increased 16% while total expenses increased 18% during
1999 as compared to the prior year. As discussed in more detail later, our
portion of the operating loss of the investment in the denovo, The Murray Bank,
merger and acquisition expenses relating to Bancshares of Dyer, Inc. and start
up costs associated with other market expansions negatively affected earnings
in 1999.
Net interest income increased $4.2 million, or 26%, to $20.1 million
in 1999 from $17.4 million in 1998. The increase is a result of growth in
average earning assets of our Cumberland Bank subsidiary throughout the year,
and our BankTennessee and Community Bank subsidiaries for the last six months.
The Company's net interest spread and net yield on earning assets were
4.66% and 4.71% respectively, in 1999 as compared to 4.41% and 4.50% in 1998.
The increase in net interest spread and net yield on earning assets was the
result of yields on earning assets increasing faster than rates paid on
interest bearing liabilities. Net interest spread represents the difference in
the yield on earning assets and the rate paid on interest bearing liabilities.
Net yield on earning assets is net interest income divided by average earning
assets.
The provision for loan losses was $1.6 million in 1999 compared to
$1.2 million in 1998, a 37% increase. The increase in the provision was
primarily attributable to the 36.3% increase in loans.
Noninterest income increased $120,000, or 3%, to $4.4 million in 1999
from $4.3 million in 1998. Mortgage banking income declined $443,000 or 32%
from 1998 levels, primarily due to reduction in activity related to rising
interest rates.
14
<PAGE> 16
Noninterest expense increased $3.6 million, or 26%, to $17.2 million in
1999 from $13.6 million in 1998. Included in noninterest expense is
approximately $116,000 in 1999 related to losses of unconsolidated subsidiaries,
compared to $92,000 in the prior year. Also included in 1999 are expenses
related to the organization of new entities and to expenses associated with our
mergers and acquisitions of approximately $102,000 (See Note 17 to our Notes to
Consolidated Financial Statements for more information regarding these
activities). Other increases in other expenses are primarily a result of overall
growth. Salaries and benefits increased from $7.1 million in 1998 to $9.2
million in 1999 or an increase of 29%.
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.
Total assets and operating results 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 $5.9 million, or 58%, to $15.9 million
in 1998 from $10.1 million in 1997. Of this increase, $2.8 million, or 47%, is
attributable to the addition of First Federal's assets and liabilities in
mid-year 1997. The remaining $3.1 million, or 53%, 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
4.41% and 4.50% respectively, in 1998 as compared to 4.57% and 4.69% 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 $870,000, or 26%, to $4.3 million in 1998
from $3.4 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 $1.5 million, or 44%. 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 SBA loans.
Noninterest expense increased $4.9 million, or 57%, to $13.6 million
in 1998 from $8.7 million in 1997. Of the increase, $2.6 million, or 53%, is
related to the effect of BankTennessee's and The Community Bank's operations in
1998. The remaining $2.3 million increase, or 47%, is a result of our overall
growth. Salaries and benefits increased from $4.4 million in 1997 to $7.1
million in 1998 or an increase of 63%. 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 57%, to $3.3 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.
15
<PAGE> 17
LOANS
The following table presents various categories of loans contained in our
banks' loan portfolio for the periods indicated and the total amount of all
loans for such period:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
TYPE OF LOAN
- ------------
Real estate-construction and
development $ 80,789 55,220 42,819 7,573 4,852
Real estate-1 to 4 family
residential 157,820 140,138 121,928 43,143 29,709
Real estate other 49,708 12,555 26,956 5,923 11,441
Commercial, financial and
agricultural 102,385 71,070 38,977 18,762 12,292
Consumer 50,643 45,431 41,941 32,083 27,517
Other 1,744 746 208 193 397
--------- ------- ------- ------- ------
Total loans 443,089 325,160 272,829 107,677 86,208
Unearned income and
deferred
fees (2,773) (3,613) (3,451) (2,536) (2,649)
--------- ------- ------- ------- ------
Net loans $ 440,316 321,547 269,378 105,141 83,559
========= ======= ======= ======= ======
</TABLE>
Loan growth was $118 million, or 36.3%, during 1999, and $52.3 million, or
19.2%, during 1998. Of this increase, $13.5 million, or 11.4% was through
acquisition of the McMinnville branches. We believe that the remaining loan
growth reported in 1999 approximates the normal trend for our four operating
bank subsidiaries. Loans continued to grow during 1999 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, 1999, 1-4 family residential real estate loans constituted
36% 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.
The following is a presentation of an analysis of maturities of loans as of
December 31, 1999:
<TABLE>
<CAPTION>
DUE IN 1 DUE IN 1 TO DUE AFTER 5
TYPE OF LOAN YEAR OR LESS 5 YEARS YEARS TOTAL
(In thousands)
<S> <C> <C> <C> <C>
Real estate-construction & development 79,173 1,561 55 80,789
Real estate-1-4 family residential 91,536 55,237 11,047 157,820
Real estate-other 29,825 19,300 583 49,708
Commercial, financial and agricultural 47,431 52,815 2,139 102,385
Consumer 27,854 20,103 2,686 50,643
Other 1,424 320 0 1,744
Total 277,243 149,336 16,510 443,089
</TABLE>
At December 31, 1999, $155.6 million in loans due after one year had
predetermined interest rates and $10.2 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, 53.9% is secured by
residential real estate. Management believes this type of
16
<PAGE> 18
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
continue to 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 such as loan
concentrations, local economy, and the nature and volume of loans.
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,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,012 3,214 1,386 1,255 947
Allowance increases due to acquisitions 152 -- 1,229 -- --
--------- -------- -------- -------- -------
Loans charged-off:
Real estate-construction & development (65) -- -- --
Real estate-1 to 4 single family (117) (45) (23) (5)
Real estate-other (90) -- --
Commercial, financial & agricultural (123) (54) (35) (1) --
Consumer (518) (324) (721) (336) (107)
Other (24) -- -- --
--------- -------- -------- -------- -------
Total charge-offs (758) (512) (869) (342) (107)
--------- -------- -------- -------- -------
Charge-offs recovered:
Real estate - construction & development -- 21 -- -- --
Real estate - 1-4 single family 9 2 11 -- --
Real estate - other -- 0 -- -- --
Commercial 19 5 1 4 --
Consumer 89 76 66 39 45
Other -- 18 -- -- --
--------- -------- -------- -------- -------
Total recoveries 117 122 78 43 45
--------- -------- -------- -------- -------
Net loans charged-off (641) (390) (791) (299) (62)
Current year provision 1,623 1,188 1,390 430 370
--------- -------- -------- -------- -------
Balance at end of year $ 5,146 4,012 3,214 1,386 1,255
========= ======== ======== ======== =======
Loans at year end 440,316 321,547 269,378 105,141 83,559
Ratio of allowance to loans at year end 1.17% 1.25% 1.19% 1.32% 1.50%
Average loans 374,716 293,665 184,792 98,036 77,526
Ratio of net loans charged off to average loans 0.17% 0.13% 0.43% 0.31% 0.08%
</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 assets, become net charge-offs. Our policy is to charge
off loans, when, in management's opinion, the loan is deemed uncollectible,
although
17
<PAGE> 19
concerted efforts are made to maximize recovery. Our level of net charge-offs to
average loans was 0.17% in 1999 and 0% in 1998. Charge-offs were higher due to
consumer loan losses for Cumberland Bank and Cumberland Finance, its finance
company subsidiary, in 1999. During 1999, the provision for loan losses of $1.6
million was almost $400,000 more than the preceding year. Factors which gave
rise to the increased provision in 1999 were the $117 million loan growth our
institutions sustained and the $194,000 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 reversed. 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,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-
accrual basis $2,446 1,745 1,561 565 489
Accruing loans which are
contractually past due 90 days or
more as to principal and interest
payments 241 467 86 428 554
Restructured loans 693 652 443 -- --
------ ----- ----- --- -----
Total nonperforming loans (1) 3,380 2,864 2,090 993 1,043
Foreclosed properties $2,400 610 630 502 630
</TABLE>
- --------------
(1) As of December 31, 1999, all restructured loans were in compliance with
their modified terms.
Non-performing loans were 0.8% and 0.9% of loans at December 31, 1999 and
1998, respectively. The dollar increase in non-performing loans during 1999 is
due to a growing and maturing portfolio, and less attributable to conditions in
the marketplace. Additional interest income of approximately $125,000 in 1999,
$121,000 in 1998, $79,000 in 1997, $33,000 in 1996, and $26,000 in 1995 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, 1999 on loans that
have been accounted for on a non-accrual basis.
Management has internally classified approximately $4.3 million in
loans as "substandard" based upon other possible credit problems. These loans
are not included in the above amounts. These loans are performing loans but are
classified as "substandard" due to payment history, decline in the borrowers
financial position or decline in collateral value. Loans classified as
"substandard" are inadequately protected by the current sound worth and paying
capacity of the obligor or the collateral pledged, if any. Loans so
18
<PAGE> 20
classified must have a well-defined weakness or weakness that jeopardize the
liquidation of the debt. Loans classified as "doubtful" have all the weaknesses
inherent in one classified "substandard", with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, highly questionable and improbable. Loans
classified as "loss" are considered uncollectible and of such little value that
their continuance as bankable assets is not warranted.
As of December 31, 1999, there are no loans classified by our regulators or
management as loss, doubtful or substandard that have not been disclosed above
or which represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or represent material credits about which management is
aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
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,
---------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
PERCENT OF CATEGORY PERCENT OF CATEGORY PERCENT OF CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
TO TOTAL ----- TO TOTAL ----- TO TOTAL -----
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOAN
------ --------- ----- ------ --------- ----- ------ --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate -
construction &
development..... $1,029 20% 18% 802 20% 18% 643 20% 16%
Real estate-1-4
single family.... 257 5% 36% 201 5% 42% 161 5% 44%
Real estate - other 309 6% 11% 160 4% 4% 129 4% 11%
Commercial,
financial and
agriculture... 1,132 22% 23% 883 22% 23% 482 15% 14%
Consumer......... 1,647 32% 11% 1,204 30% 12% 804 25% 14%
Other............ 103 2% 1% 80 2% 1% 64 2% 1%
Unallocated...... 669 13% 682 17% 931 29%
------ --- --- ----- --- --- ----- --- ---
Total $5,146 100% 100% 4,012 100% 100% 3,214 100% 100%
====== === === ===== === === ===== === ===
</TABLE>
As of December 31, 1999, real estate mortgage loans constituted 65% of
outstanding loans. Approximately $126 million, or 44%, 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 $80.8 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 $22.9 million at year-end 1999, which is down
$3.8 million from year-end 1998. The securities portfolios comprised 4.4% of
total assets at year-end 1999. Our banks' policy guidelines are designed to
minimize credit, market and liquidity risk. Securities generally must be
"investment grade" or higher to be purchased. Over the last year, a majority of
newly-purchased securities have been designated as "Available for Sale" to
increase flexibility for asset liability management. Approximately 42% of
securities held at year-end 1999
19
<PAGE> 21
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 U.S. Government agencies.
In addition, we enter into federal funds transactions with our principal
correspondent banks, and act as a net seller of such funds. We did not hold
securities of any single issuer that exceeded ten percent of shareholders'
equity.
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,
1999 1998 1997
(Dollars in thousands)
<S> <C> <C> <C>
Available for sale:
U.S. Government and agencies $10,378 10,471 1,602
Obligations of SCM 2,727 1,844 1,397
Mortgage-backed 1,464 3,384 1,409
Other debt securities 262 -- 676
Marketable equity securities 1,382 1,571 1,445
------- ------ ------
Total available for sale 16,213 17,270 6,529
------- ------ ------
Held to maturity:
U.S. Government and agencies 2,790 4,624 5,660
Obligations of SCM 3,844 4,782 356
Mortgage-backed 43 -- 6,161
Other debt securities -- -- 204
------- ------ ------
Total held to maturity 6,677 9,406 12,381
------- ------ ------
Total securities $22,890 26,676 18,910
======= ====== ======
</TABLE>
The following table indicates, for the year ended December 31, 1999, 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 OR OVER 10
LESS 1 TO 5 YRS 5 TO 10 YRS YRS 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 $ 989 5.12% $7,522 5.74% $1,558 5.93% $ 309 7.5% $10,378
Obligations of SCM 100 5.02 966 4.35 1,661 4.96 2,727
Mortgage-backed 498 5.50 85 9.0 1,130 6.6 1,713
Marketable equity
securities(2) 1,395 6.4 1,395
Held to maturity:
U.S. Government
and agencies 2,560 5.78 2,560
Obligations of SCM 75 8.10 155 5.25 230
Mortgage-backed 44 5.54 3,800 7.65 43 5.3 3,887
----- ------ ----- ----- ------
Totals 1,064 10,724 6,564 4,538 22,890
===== ====== ===== ===== ======
</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.
(2) Marketable equity securities are included in the over 10 year category as
there is no maturity. DEPOSITS AND BORROWINGS
20
<PAGE> 22
DEPOSITS AND BORROWINGS
Deposits are our primary source of funding loans. Depending upon current
market rates, we may from time to time use FHLB borrowings to complement our
funding needs. See "--Liquidity" and "--Interest Rate Sensitivity." We believe
we have the ability to generate deposit growth within our local markets as loan
demand dictates. Our long-term strategy has been to match the competition on
popular deposit products such as money market demand accounts and certificates
of deposit. FHLB advances, while more costly than deposit funding, are typically
the lowest cost borrowed funds available to institutions such as our banks. Our
banks utilize short term borrowing from the FHLB to sustain the available for
sale loans until they are sold. The marketable time table has increased
slightly, therefore, short term borrowing have increased. Of a total $39.6
million in FHLB borrowings at year-end 1999, $27.8 million matures before
December 31, 2000.
Total deposits grew at a rate of 21.8% during 1999, resulting from the
opening of new branch locations, acquiring a new branch location and more
attractive pricing for deposits. Loan growth was greater than deposit growth in
1999, resulting in an increase in loan to deposit ratio from 90% at year end
1998 to 101% at year end 1999. To offset the loan growth, the banks purchased
federal funds of $2.3 million at year end 1999 and short term FHLB funds.
We operate retail bank branches in nine 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 certificate
of deposit customers tend to be more sensitive to interest rate levels, making
these deposits less reliable sources of funding from liquidity planning purposes
than core deposits. We have normally had to pay a small premium for these types
of deposits above current rates. However, we believe that we have long-term
customers who maintain substantial deposits with our banks based upon personal
relationships with each bank's officers and employees.
Average amount of and average rate paid for our deposits for year-end 1997,
1998, and 1999 are represented by deposit category on the table on pages 23
through 25 of this section of the documents.
The following table indicates amounts outstanding of time certificates of
deposit of $100,000 or more and respective maturities for the year ended
December 31, 1999:
<TABLE>
<CAPTION>
TIME
CERTIFICATES
OF DEPOSIT
(In thousands)
<S> <C>
3 months or less 20,714
3-6 months 24,409
6-12 months 16,272
over 12 months 21,694
------
Total 83,089
======
</TABLE>
21
<PAGE> 23
CUMBERLAND BANCORP, INC. AND SUBSIDIARIES
Consolidated Average Balance Sheets, Net Interest Revenue and
Changes in Interest Income and Interest Expense
The following table shows the consolidated average monthly balances of each
principal category of assets, liabilities and stockholders' equity of the
company, and an analysis of net interest revenue, and the change in
interest income and interest expense segregated into amounts attributable
to changes in volume and changes in rates. The table is presented on a
taxable equivalent basis.
<TABLE>
<CAPTION>
(Dollars in Thousands)
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
------- ---- ------- ------- ---- ------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net loans (2 and 3) $293,665 10.22% 29,999 184,792 10.17% 18,791 11,071 137 11,208
-------- ----- ------ ------- ----- ------ ------ ---- ------
Investment Securities:
Available for Sale 26,612 6.04% 1,607 14,631 6.40% 937 767 (97) 670
------ ---- ------
Total investment securities 26,612 6.04% 1,607 14,631 6.40% 937 767 (97) 670
-------- ----- ------ ------- ----- ------ ------ ---- ------
Federal funds sold 16,344 5.14% 840 10,444 4.88% 510 288 42 330
FHLB and FRB stock 2,541 7.20% 183 1,451 6.82% 99 74 10 84
Interest-bearing deposits in banks 14,575 4.54% 661 2,896 4.90% 142 573 (54) 519
-------- ----- ------ ------- ----- ------ ------ ---- ------
Total earning assets 353,737 9.41% 33,290 214,214 9.56% 20,479 12,773 38 12,811
===== ====== ===== ====== ====== ==== ======
Cash and due from banks 7,262 4,521
Allowance for loan losses (3,504) (2,603)
Other assets 15,472 10,088
-------- -------
Total assets $372,967 226,220
======== =======
Deposits:
NOW investments $ 24,919 2.75% 686 17,975 2.69% 483 187 16 203
Money market investments 59,580 4.90% 2,919 26,719 4.91% 1,313 1,615 (9) 1,606
Savings 13,023 3.34% 435 9,399 3.21% 302 116 17 133
Time deposits $100,000 and over 58,765 5.74% 3,373 34,665 6.15% 2,132 1,482 (241) 1,241
Other time deposits 140,266 5.88% 8,249 94,442 5.70% 5,387 2,614 248 2,862
-------- ----- ------ ------- ----- ------ ------ ---- ------
Total interest-bearing
deposits 296,553 5.28% 15,662 183,200 5.25% 9,617 6,014 31 6,045
Non interest-bearing demand deposits 23,243 -- -- 13,019 -- -- -- -- --
-------- ----- ------ ------- ----- ------ ------ ---- ------
Total deposits 319,796 4.90% 15,662 196,219 4.90% 9,617 6,014 31 6,045
Fed Funds purchased 164 5 533 7.50% 40 (28) (7) (35)
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 347,572 5.00% 17,381 209,141 4.99% 10,429 6,295 657 6,952
----- ----- ------
Other liabilities 4,788 3,536
Stockholders' equity 20,607 13,543
-------- -------
Total liabilities and
stockholders' equity $372,967 226,220
======== =======
Net interest income $15,909 $10,050 6,478 (619) 5,859
======= ======= ====== ==== ======
Net yield on earning assets 4.50% 4.69%
===== ======
</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 $1,748 in 1998 and $1,025 in
1997.
3 Nonaccrual loans are included in average loan balances and the associated
income (recognized on a cash basis) is included in interest.
22
<PAGE> 24
CUMBERLAND BANCORP, INC. AND SUBSIDIARIES
Consolidated Average Balance Sheets, Net Interest Revenue and
Changes in Interest Income and Interest Expense
The following table shows the consolidated average monthly
balances of each principal category of assets, liabilities and
stockholders' equity of the Company, and an analysis of net
interest revenue, and the change in interest income and
interest expense segregated into amounts attributable to
changes in volume and changes in rates. The table is presented
on a taxable equivalent basis.
<TABLE>
<CAPTION>
(Dollars in Thousands)
1999 1998 1999/1998 CHANGE
-------------------------- -------------------------- ------------------------
Average Interest Revenue/ Average Interest Revenue/ Due to Due to
Balance Rate Expense Balance Rate Expense Volume Rate (1) Total
-------- -------- -------- ------- -------- -------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net loans (2 and 3) $374,716 9.75% 36,528 293,665 10.22% 29,999 8,280 (1,751) 6,529
-------- ---- ------ ------- ----- ------ ----- ------ -----
Investment securities:
Available for sale 25,886 5.80% 1,502 26,612 6.04% 1,607 (44) (61) (105)
-------- ---- ------ ------- ----- ------ ----- ------ -----
Total investment securities 25,886 5.80% 1,502 26,612 6.04% 1,607 (44) (61) (105)
-------- ---- ------ ------- ----- ------ ----- ------ -----
Federal funds sold 15,046 4.72% 710 16,344 5.14% 840 (67) (63) (130)
FHLB and FRB stock 2,921 6.85% 200 2,541 7.20% 183 27 (10) 17
Interest-bearing deposits in bank 7,824 3.23% 253 14,575 4.54% 661 (306) (102) (408)
-------- ---- ------ ------- ----- ------ ----- ------ -----
Total earning assets 426,393 9.19% 39,193 353,737 9.41% 33,290 7,890 (1,987) 5,903
==== ====== ==== ====== ===== ====== =====
Cash and due from banks 8,903 7,262
Allowance for loan losses (4,196) (3,504)
Other assets 22,278 15,472
-------- --------
Total assets 453,378 372,967
======== ========
Deposits:
NOW investments 35,889 2.38% 854 24,919 2.75% 686 302 (134) 168
Money market investments 90,045 4.53% 4,082 59,580 4.90% 2,919 1,493 (330) 1,163
Savings 15,090 3.06% 462 13,023 3.34% 435 69 (42) 27
Time deposits $100,000 and 65,587 5.20% 3,411 58,765 5.74% 3,373 392 (354) 38
over
Other time deposits 149,464 5.51% 8,241 140,266 5.88% 8,249 541 (549) (8)
-------- ---- ------ ------- ----- ------ ----- ------ -----
Total interest-bearing
deposits 356,075 4.79% 17,050 296,553 5.28% 15,662 2,797 (1,409) 1,388
Non interest-bearing demand 31,866 -- -- 23,243 -- -- -- -- --
deposits
-------- ---- ------ ------- ----- ------ ----- ------ -----
Total deposits 387,941 4.39% 17,050 319,796 4.90% 15,662 2,797 (1,409) 1,388
Fed Funds purchased 2,334 5.06% 118 164 3.05% 5 66 47 113
Note payable 7,293 7.93% 578 6,590 8.00% 527 56 (5) 51
FHLB advances 24,850 5.56% 1,381 21,022 5.65% 1,187 2 192 194
-------- ------ ------- ------ ----- ------ -----
Total deposits and
borrowed funds 422,418 4.53% 19,127 347,572 5.00% 17,381 2,921 (1,175) 1,746
---- ----
Other liabilities 3,760 0 4,788
Stockholders' equity 27,200 0 20,607
------ ------
Total liabilities and
stockholders' equity 453,378 0 372,967
======= =======
Net interest income $20,066 $ 15,909 4,969 (812) 4,157
======= ======== ===== ==== =====
Net yield on earning assets 4.71% 4.50%
==== ====
</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 $2,551 in 1999 and $1,748 in
1998.
3 Nonaccrual loans are included in average loan balances and the
associated income (recognized on a cash basis) is included in
interest.
23
<PAGE> 25
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 at December 31, 1999. Our leverage capital ratio
was 6.84% in 1999 and 5.45% in 1998, with stockholders' equity of $35.3 million
at year-end 1999. For a discussion of capital requirements see "Supervision and
Regulation - Capital Requirements." We declared a 10% stock dividend in March
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.
In September 1999, we completed an Initial Public Offering (IPO) of
700,000 shares of stock at a price of $12.50 per share for $8,500,000. In
connection with the purchase of the two branches from a financial institution,
we issued 47,000 shares valued at $588,000. To purchase the minority interest
shares of Bank of Dyer we issued 7,704 shares of stock valued at approximately
$99,000.
In March 2000, we have declared a .025 cent cash dividend for
shareholders of record as of March 1, 2000 to be paid April 14, 2000.
Items that represent common stock equivalents include 425,635 shares
of common stock options outstanding at December 31, 1999. At December 31, 1999,
there were 113,540 additional common shares available for grant under the stock
option plan. We plan to continue granting stock options to selected officers,
directors, and other key employees.
RETURN ON EQUITY AND ASSETS
Returns on average consolidated assets and average consolidated equity
for the periods indicated are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1999 1998 1997
<S> <C> <C> <C>
Return on average assets 0.77% 0.89% 0.94%
Return on average equity 12.91% 16.22% 15.76%
Average equity to average assets ratio 6.00% 5.53% 5.99%
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 1998 was 99% and for 1999
24
<PAGE> 26
was 96.6%. We do not know of any trends or demands that are reasonably likely
to result in liquidity increasing or decreasing
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 1999 follows:
<TABLE>
<CAPTION>
91-365 OVER 5
1-90 DAYS DAYS 1-5 YEARS YEARS TOTAL
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net $ 173,047 104,196 146,563 16,510 440,316
Securities available for sale 798 1,625 8,025 5,765 16,213
Securities held to maturity 793 2,663 2,781 440 6,677
Federal funds sold 11,250 -- -- -- 11,250
Interest-earning deposits 4,896 500 -- -- 5,396
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $ 190,784 108,984 157,369 22,715 479,852
==================================================================================================================================
Interest bearing liabilities:
Interest bearing demand dep $ 132,917 -- -- -- 132,917
Savings deposits 13,582 -- -- -- 13,582
Time deposits 55,898 136,278 61,618 199 253,993
FHLB borrowings 10,539 16,852 2,154 10,009 39,554
Notes payable 78 975 4,290 2,112 7,455
Fed Funds purchased 2,275 -- -- -- 2,275
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 215,289 154,105 68,062 12,320 449,776
==================================================================================================================================
Rate sensitive gap $ (24,505) (45,121) 89,307 10,395 30,076
- ----------------------------------------------------------------------------------------------------------------------------------
Rate sensitive cumulative gap (24,505) (69,626) 19,681 30,076 30,076
Cumulative gap as a percentage
of earnings assets (5.11)% (14.51)% 4.10% 6.27%
==================================================================================================================================
</TABLE>
As shown in the table, we have a cumulative negative GAP of approximately 5.1%
and 14.5% 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.
25
<PAGE> 27
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary component of market risk is interest rate volatility.
Fluctuations in interest rates will ultimately impact both the level of income
and expense recorded on a large portion of our assets and liabilities, and the
market value of all interest-earning assets and interest-bearing liabilities,
other than those which possess a short term to maturity. Based upon the nature
of our operations, we do not maintain any foreign currency exchange or
commodity price risk.
The following table provides information about our financial
instruments that are sensitive to changes in interest rates as of December 31,
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,
2001 to 2003 to 2005 FAIR
(Dollars in Thousands) 2000 2002 2004 THEREAFTER TOTAL VALUE
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned
interest:(1)
Variable rate $152,639 $11,168 $ 2,703 $ 85 $166,595 $166,595
Average interest rate (%) 9.51 8.70 8.20 9.33 9.43
Fixed rate 114,020 57,202 86,465 16,034 273,721 272,768
Average interest rate (%) 8.97 9.34 9.06 8.36 9.04
Securities(2) 1,064 7,440 3,284 11,102 22,890 22,807
Average interest (%) 5.12 5.73 5.96 6.45 5.80
Federal funds sold 11,250 11,250 11,250
Average interest (%) 5.60 5.60
Interest-earning deposits 5,396 5,396 5,396
in financial institutions 5.50% 5.50%
Interest-bearing deposits 339,336 47,555 14,063 199 401,153 400,866
Average interest (%) 4.96 5.70 5.93 4.75 5.08
Other borrowings 30,719 3,618 2,826 12,121 49,284 48,009
Average interest (%) 5.91 7.17 7.19 5.84
</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.
26
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cumberland Bancorp, Incorporated
We have audited the consolidated balance sheets of Cumberland Bancorp,
Incorporated and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cumberland
Bancorp, Incorporated and Subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/ Heathcott & Mullaly, P.C.
February 24, 2000
Brentwood, Tennessee
27
<PAGE> 29
Cumberland Bancorp, Incorporated and Subsidiaries
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(Dollars in thousands except share amounts) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C> <C>
Cash and due from banks $ 18,255 8,972
Interest-bearing deposits in financial institutions 5,396 21,996
Federal funds sold 11,250 14,250
Securities available for sale, at fair value 16,213 17,270
Securities held to maturity, fair value $6,594 in 1999
and $9,440 in 1998 6,677 9,406
Loans 440,316 321,547
Allowance for loan losses (5,146) (4,012)
- -------------------------------------------------------------------------------------------------------------------
LOANS, NET 435,170 317,535
- -------------------------------------------------------------------------------------------------------------------
Premises and equipment 14,578 10,561
Accrued interest receivable 4,073 3,026
Federal Home Loan Bank and Federal Reserve Bank stock - restricted 3,415 2,648
Investment in unconsolidated subsidiaries 2,441 373
Other real estate 2,400 610
Loan servicing rights 1,021 1,087
Other intangible assets 1,523 0
Other assets 3,147 972
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 525,559 408,706
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits
Noninterest-bearing $ 34,099 26,804
Interest-bearing 401,153 330,600
- -------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 435,252 357,404
- -------------------------------------------------------------------------------------------------------------------
Notes Payable 7,455 7,233
Federal Funds Purchased 2,275 0
Advances From Federal Home Loan Bank 39,554 17,973
Accrued Interest Payable 3,072 2,571
Other Liabilities 2,676 1,466
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 490,284 386,647
- -------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock, $0.50 Par Value, Authorized 20,000,000 Shares;
Shares Issued - 6,857,620 in 1999 and 5,486,035 in 1998 3,429 2,743
Additional Paid-in Capital 25,110 9,380
Retained Earnings 7,194 10,026
Accumulated Other Comprehensive Income (Loss) (458) (90)
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 35,275 22,059
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 525,559 408,706
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands except per share data) 1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 36,528 29,999 18,791
Securities 1,502 1,607 937
Deposits in financial institutions 253 661 142
Federal funds sold 710 840 510
Federal Home Loan Bank dividends 200 183 99
---------- --------- ---------
TOTAL INTEREST INCOME 39,193 33,290 20,479
---------- --------- ---------
INTEREST EXPENSE:
Time deposits of $100,000 or more 3,411 3,373 2,132
Other time deposits 13,639 12,288 7,484
Federal funds purchased 118 5 40
Notes payable and advances from Federal Home Loan Bank 1,959 1,715 773
---------- --------- ---------
TOTAL INTEREST EXPENSE 19,127 17,381 10,429
---------- --------- ---------
NET INTEREST INCOME 20,066 15,909 10,050
PROVISION FOR LOAN LOSSES 1,623 1,188 1,390
---------- --------- ---------
NET INTEREST INCOME AFTER PROVISION --
FOR LOAN LOSSES 18,443 14,721 8,660
---------- --------- ---------
OTHER INCOME:
Service charges on deposit accounts 1,683 1,305 1,016
Other service charges, commissions and fees 1,295 1,039 747
Mortgage banking activites 937 1,380 689
Gain on sale of SBA loans 464 515 222
Gain on sale of branch 0 0 550
Real estate sales 0 21 166
---------- --------- ---------
TOTAL OTHER INCOME 4,379 4,260 3,390
---------- --------- ---------
OTHER EXPENSES:
---------
Salaries and employee benefits 9,206 7,109 4,354
---------
Occupancy 1,073 1,051 645
Cost of real estate sales 0 23 171
Deposit insurance premiums 209 205 132
Other operating 6,710 5,248 3,394
---------- --------- ---------
TOTAL OTHER EXPENSES 17,198 13,636 8,696
---------- --------- ---------
INCOME BEFORE INCOME TAXES 5,624 5,345 3,354
---------
INCOME TAX EXPENSE 2,113 2,003 1,220
---------- --------- ---------
NET EARNINGS $ 3,511 3,342 2,134
---------- --------- ---------
NET EARNINGS PER SHARE - BASIC $ 0.56 0.56 0.49
NET EARNINGS PER SHARE - DILUTED 0.55 0.55 0.48
---------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 6,248,130 5,971,306 4,354,263
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,387,636 6,098,173 4,483,267
---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 31
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
--------------------
(DOLLARS IN THOUSANDS) SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
--------- ------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 370,901 $1,113 1,637 3,854 (38) 6,566
ADJUSTMENTS FOR POOLING OF SHARES 511,783 256 852 726 (18) 1,816
--------- ------ ------- ------- ---- -------
BALANCE, DECEMBER 31, 1996, RESTATED 882,684 1,369 2,489 4,580 (56) 8,382
CONVERSION OF STOCK OPTIONS TO 39,231 SHARES
OF COMMON STOCK 39,231 118 (118) 0 0 0
INCOME TAX BENEFIT FROM EXERCISE OF
STOCK OPTIONS 0 0 77 0 0 77
THREE-FOR-ONE STOCK SPLIT 820,263 0 0 0 0 0
ISSUANCE OF 1,135,749 SHARES OF COMMON STOCK
IN CONNECTION WITH THE ACQUISTION OF FIRST
FEDERAL BANCSHARES, INC 1,135,749 1,136 5,886 0 0 7,022
PROCEEDS FROM SALE OF 111,250 SHARES OF
COMMON STOCK 111,250 111 939 0 0 1,050
CASH DIVIDENDS - DYER 0 0 0 (15) 0 (15)
COMPREHENSIVE INCOME:
NET EARNINGS, AS PREVIOUSLY REPORTED 0 0 0 2,134
OTHER COMPREHENSIVE INCOME:
CHANGE IN UNREALIZED LOSS ON
SECURITIES AVAILABLE FOR SALE ,NET OF
$4 IN INCOME TAXES 0 0 0 0 6
TOTAL COMPREHENSIVE INCOME 2,140
SUBSEQUENT TWO-FOR-ONE STOCK SPLIT 2,477,394 0 0 0 0
--------- ------ ------- ------- ---- -------
BALANCE, DECEMBER 31, 1997 5,466,571 2,734 9,273 6,699 (50) 18,656
SALE OF 19,464 SHARES OF COMMON STOCK
TO EMPLOYEES 19,464 9 107 0 -- 116
CASH DIVIDENDS - DYER 0 0 0 (15) 0 (15)
COMPREHENSIVE INCOME:
NET EARNINGS -- 0 0 3,342
OTHER COMPREHENSIVE INCOME
CHANGE IN UNREALIZED LOSS ON
SECURITIES AVAILABLE FOR SALE NET OF
$24 IN INCOME TAX BENEFITS 0 0 0 0 (40)
TOTAL COMPREHENSIVE INCOME 3,302
--------- ------ ------- ------- ---- -------
BALANCE, DECEMBER 31, 1998 5,486,035 2,743 9,380 10,026 (90) 22,059
PROCEEDS FROM SALE OF 100,000 SHARES OF
COMMON STOCK (PRIVATE PLACEMENT) 100,000 50 950 0 0 1,000
10% STOCK DIVIDEND 507,305 254 6,087 (6,341) 0 0
CASH DIVIDEND ON FRACTIONAL SHARES 0 0 0 (2) 0 (2)
PROCEEDS FROM SALE OF 666,711 SHARES OF
COMMON STOCK, NET OF OFFERING COSTS 666,711 333 7,800 0 0 8,133
COMMON STOCK ISSUED IN CONNECTION WITH
OPENING OF THE MURRAY BANK 41,665 20 230 0 0 250
EXERCISE OF STOCK OPTIONS 1,200 1 6 0 0 7
ISSUANCE OF 47,000 SHARES OF COMMON STOCK
IN CONNECTION WITH THE ACQUISITION OF
MCMINNVILLE BRANCH 47,000 24 564 0 0 588
ISSUANCE OF 7,704 SHARES OF COMMON STOCK
IN CONNECTION WITH THE ACQUISITION OF MINORITY
INTEREST SHARES OF BANK OF DYER 7,704 4 93 0 97
COMPREHENSIVE INCOME:
NET EARNINGS 0 0 0 3,511 --
OTHER COMPREHENSIVE INCOME
CHANGE IN UNREALIZED LOSS ON
SECURITIES AVAILABLE FOR SALE NET OF
$ 281 IN INCOME TAX BENEFITS 0 0 0 0 (368)
TOTAL COMPREHENSIVE INCOME 3,143
--------- ------ ------- ------- ---- -------
BALANCE, DECEMBER 31, 1999 6,857,620 $3,429 25,110 7,194 (458) 35,275
--------- ------ ------- ------- ---- -------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 32
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
NET EARNINGS $ 3,511 3,342 2,134
ADJUSTMENTS TO RECONCILE NET EARNINGS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Provision for loan losses 1,623 1,188 1,390
Depreciation and amortization 1,367 1,079 529
Gain on sale of branch 0 0 (550)
Operations of unconsolidated subsidiaries 104 86 0
Mortgage loans originated for sale (51,740) (74,813) (20,374)
Proceeds from sale of mortgage loans 52,494 76,155 20,425
Deferred income tax benefits (467) (87) (130)
Increase in accrued interest receivable (877) (276) (479)
Increase in accrued interest payable and other liabilities 1,635 526 360
Other, net (3,169) (148) (7)
--------- --------- ---------
TOTAL ADJUSTMENTS 970 3,710 1,164
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,481 7,052 3,298
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash received - acquistion of First Federal Bancshares, Inc. 0 0 14,965
Net (increase) decrease in interest-bearing deposits in financial institutions 16,600 (12,568) (4,427)
(Increase) decrease in federal funds sold 3,000 (4,175) (3,000)
Purchases of securities available for sale (3,635) (23,863) (2,238)
Proceeds from maturities and redemptions of securities available for sale 4,560 14,483 2,449
Purchases of securities held to maturity (1,350) (4,489) (5,000)
Proceeds from maturities and redemptions of securities held to maturity 4,079 6,449 2,534
Net increase in loans (109,825) (53,886) (44,701)
Purchase of and improvements to other real estate 0 (28) (384)
Cash used in sale of branch 0 0 (916)
Cash received in purchase of branch 3,746 0 0
Investment in unconsolidated subsidiaries (1,935) (613)
Purchases of premises and equipment (3,627) (2,766) (2,490)
Proceeds from sale of other real estate 1,346 46 65
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (87,041) (81,410) (43,143)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 58,375 72,368 38,801
Increase (decrease) in federal funds purchased 2,275 (1,200) 800
Increase in advances from Federal Home Loan Bank 21,581 516 2,991
Proceeds from notes payable 675 3,000 0
Repayments of notes payable (453) (298) 0
Dividends paid 0 (15) (15)
Proceeds from issuance of common stock, net 9,390 117 1,050
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 91,843 74,488 43,627
--------- --------- ---------
NET INCREASE IN CASH 9,283 130 3,782
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,972 8,842 5,060
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,255 8,972 8,842
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
--------- --------- ---------
Interest paid $ 18,626 16,880 10,365
Income taxes paid 2,660 1,988 1,333
--------- --------- ---------
NON-CASH ACTIVITIES:
Issuance of common stock - acquisition of McMinnville branch $ 588 0 0
Issuance of common stock - acquisition of minority interest of Bank of Dyer 97 0 0
10% stock dividend 6,341 0 0
Assets acquired through foreclosure 3,052
Issuance of common stock - acquisition of First Federal
Bancshares, Inc. 0 0 7,022
Issuance of common stock - conversion of stock options 0 0 118
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 33
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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, The Community Bank and
Bank of Dyer. 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., CBC Financial Services, Inc., and CBC Financial
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, The Community Bank and Bank of Dyer. The Banks
provide a variety of banking services to individuals and businesses
through their eighteen branches located across nine counties in Middle
and West Tennessee. Their primary deposit products are demand deposits,
savings deposits, and certificates of deposit, and their primary
lending products are commercial business, real estate mortgage, and
installment loans.
Cumberland Bank's subsidiaries, Cumberland Mortgage Company, Inc.,
Cumberland Life Insurance Company, Inc., CBC Financial Services, Inc.,
and Insure Tennessee, Inc. are headquartered in Carthage, Tennessee and
have 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. CBC
Financial 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.
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.
32
<PAGE> 34
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 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.
33
<PAGE> 35
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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. Depreciation has been computed on
straight-line and accelerated methods, based on the estimated useful
lives of the respective asset.
OTHER INTANGIBLE ASSETS
Other intangible assets consist of goodwill and a core deposit
intangible. Goodwilll represents the excess of cost over the fair value
of the assets acquired from Bancshares of Dyer, Inc. and is being
amortized over 15 years. The core deposit intangible represents the
value assigned to a deposit base acquired in the acquisition of another
financial institution's branch banking operations in Warren County,
Tennessee and is being amortized on the straight line basis over 15
years.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. The subsidiaries provide for income taxes on a separate-return
basis and remit to or receive from the Company amounts currently
payable or receivable. Income taxes have been provided using the
liability method in accordance with SFAS No. 109, "Accounting for
Income Taxes".
A valuation allowance is required by SFAS 109 if, based on the weight
of available evidence, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. This allowance is
evaluated periodically by management and adjusted based on current
circumstances.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires entities to disclose the estimated fair value of its financial
instrument assets and liabilities. Management is concerned that the
required disclosures under SFAS No. 107 may lack reasonable
comparability between financial institutions due to the wide range of
permitted valuation techniques and numerous estimates which must be
made given the absence of active secondary markets for many of the
financial instruments. This lack of uniform valuation methodologies
also introduces a greater degree of subjectivity to these estimated
fair values.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value. These fair values are provided for
disclosure purposes only and do not impact carrying values of financial
statement amounts.
34
<PAGE> 36
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Cash, interest bearing deposits in financial institutions and federal
funds sold -- The carrying amounts reported in the balance sheet for
cash, interest bearing deposits in financial institutions and federal
funds sold approximate those assets' fair values.
Securities (including mortgage-backed securities) -- Fair values for
securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans 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.
Loan servicing rights --The carrying amounts reported in the balance
sheet for servicing rights approximates their fair value.
Deposits with defined maturities -- The fair value for deposits with
defined maturities is calculated by discounting future cash flows to
their present value. Future cash flows, consisting of both principal
and interest payments, are discounted with the Bank's current rates for
similar instruments applicable to the remaining maturity. For purposes
of this disclosure, deposits with defined maturities include all
certificates of deposits and other time deposits.
Deposits with undefined maturities -- The fair value of deposits with
undefined maturities is equal to the carrying value. For purposes of
this disclosure, deposits with undefined maturities include
noninterest-bearing demand, interest-bearing demand and savings
accounts.
Federal funds purchased --The carrying amounts reported in the balance
sheet for federal funds purchased 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 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.
Off-Balance Sheet Financial Instruments - Fair values for off-balance
sheet lending commitments are based on fees currently charged to enter
into similar agreements taking into account the remaining terms of the
agreements and the counter parties' creditworthiness.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes amounts in the balance sheet
caption, cash and due from banks.
35
<PAGE> 37
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EARNINGS PER SHARE
Earnings per share (EPS) is calculated in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, issued in February 1997.
The statement requires the dual presentation of basic and diluted EPS
on the income statement. Basic EPS excludes dilution, and is computed
by dividing income available to common 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. EPS has been adjusted
for the 1999 10% stock dividend, 1997 three-for-one stock split, and
the 1998 two-for-one stock split as if the stock splits and dividend
occurred as of the earliest period presented. In addition, average
shares outstanding was increased by 511,783 shares to reflect the
pooling of interests with Bancshares of Dyer, Inc. in all periods
presented.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 1997, the FASB issued SFAS No. 130, "Comprehensive Income". The
statement establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. It
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is presented with the same prominence as
other financial statements. This statement requires that companies (i)
classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial
condition.
This statement is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods
provided for comprehensive purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". The statement establishes
standards for disclosure about operating segments in annual financial
statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise". This statement becomes effective for the Company's fiscal
year ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to its
requirements. The adoption of the provisions of this statement did not
have a material impact on the Company.
In October 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This Statement amends SFAS No. 65, which required that
retained securities be classified as trading securities. SFAS No. 134
allows these securities to be classified as trading, held to maturity
or available for sale based on the intent and ability of the
enterprise. This Statement is effective January 1, 1999, did not
materially impact the Company's financial position or results of
operations.
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 did not materially impact the Company's financial
position or results of operations.
36
<PAGE> 38
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-up Activities." This
Statement requires that the costs of start-up activities, including
organization costs, be expensed as incurred. When adopted, previously
capitalized start-up and organization costs should be written off and
reported as the cumulative effect of a change in accounting principle.
The Statement is effective for fiscal years beginning after December
15, 1998 and did not materially impact the Company's financial position
or results of operations.
2 INTEREST BEARING DEPOSITS
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%.
At December 31, 1999, the Company had demand deposits with the Federal
Home Loan Bank totaling $4,696,000 and certificates of deposit with a
related party institution totaling $700,000.
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, 1999 and 1998.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(Dollars in thousands) COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury and U.S.
government agencies $10,696 -- (318) 10,378
Obligations of state and
political subdivisions 2,869 -- (142) 2,727
Mortgage-backed securities 1,490 3 (29) 1,464
Marketable equity securities 1,489 -- (107) 1,382
Other debt securities 261 1 -- 262
------- ------- ------- -------
December 31, 1999 $16,805 4 (596) 16,213
------- ------- ------- -------
Held to maturity
U.S. Treasury and U.S.
government agencies $ 2,560 -- (54) 2,506
Obligations of state and
political subdivisions 230 6 -- 236
Mortgage-backed securities 3,844 20 (55) 3,809
Other debt securities 43 -- -- 43
------- ------- ------- -------
December 31, 1999 $ 6,677 26 (109) 6,594
------- ------- ------- -------
</TABLE>
37
<PAGE> 39
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
(Dollars in thousands) COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury and U.S.
government agencies $10,440 38 (7) 10,471
Obligations of state and
political subdivisions 1,800 44 -- 1,844
Mortgage-backed securities 3,392 11 (19) 3,384
Marketable equity securities 1,735 -- (164) 1,571
------- ------- ------- -------
DECEMBER 31, 1998 $17,367 93 (190) 17,270
------- ------- ------- -------
Held to maturity
U.S. Treasury and U.S.
government agencies $ 4,269 21 -- 4,290
Obligations of state and
political subdivisions 355 16 -- 371
Mortgage-backed securities 4,782 40 (43) 4,779
------- ------- ------- -------
DECEMBER 31, 1998 $ 9,406 77 (43) 9,440
------- ------- ------- -------
</TABLE>
The carrying amounts and estimated fair value of securities at December
31, 1999 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
(Dollars in thousands) COST VALUE COST VALUE
--------- ------ --------- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 1,000 988 75 75
Due after one through five years 7,799 7,623 2,560 2,505
Due after five through ten years 2,645 2,524 155 161
Due after ten years 2,121 1,970 -- --
Marketable equity securities 1,502 1,395 -- --
Mortgage-backed securities 1,490 1,464 3,844 3,810
SBA loan pool participation 248 249 43 43
------- ------ ----- -----
$16,805 16,213 6,677 6,594
------- ------ ----- -----
</TABLE>
Securities carried at approximately $9,572,000 at December 31, 1999
were pledged to secure deposits and for other purposes as required or
permitted by law. The fair value of the securities portfolio is
established by an independent pricing service as of the approximate
dates indicated.
At December 31, 1999, the Company did not hold securities of any single
issuer, other than obligations of the U.S. Treasury and other U.S.
Government agencies, whose aggregate book value exceeded ten percent of
stockholders' equity.
38
<PAGE> 40
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
4 LOANS
A summary of loans outstanding by category follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
--------- ---------
<S> <C> <C>
Real estate - construction and development $ 80,789 55,220
Real estate - 1 to 4 family residential properties 157,820 140,138
Real estate - other 49,708 12,555
Commercial, financial and agricultural 102,385 71,070
Consumer 50,643 45,431
Other 1,744 746
--------- ---------
443,089 325,160
Net deferred loan fees and discounts (639) (588)
Unearned income (2,134) (3,025)
--------- ---------
$ 440,316 321,547
--------- ---------
</TABLE>
In addition to the loans shown above, loans serviced for others totaled
$92,208,000 and $104,321,000 at December 31, 1999 and 1998,
respectively.
Certain parties (principally directors and officers of the Company or
the Banks, including their affiliates, families, and companies in which
they hold ten percent or more ownership) were customers of, and had
loans and other transactions with the Banks in the ordinary course of
business. The outstanding balances of such loans totaled $3,931,000 and
$4,126,000 as of December 31, 1999 and 1998, respectively. These loan
transactions were made on substantially the same terms as those
prevailing at the time for comparable loans to other persons. They did
not involve more than the normal risk of collectibility or present
other unfavorable features. During 1999, the Company advanced
$1,823,000 and received payments of $2,018,000 on such loans.
5 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Banks are parties to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
their customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of
those instruments reflect the extent of involvement the Banks have in
those particular financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and letters of credit is represented by the contractual or
notional amount of those instruments. The Banks use the same credit
policies in making commitments and conditional obligations as it does
for on-balance sheet instruments.
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Dollars in Thousands)
----------------------
<S> <C>
Contractual commitments to extend credit $ 76,436
Standby letters of credit $ 3,467
--------
</TABLE>
39
<PAGE> 41
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
5 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, CONTINUED
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, 1999, loans sold to the
investors with existing recourse approximated $13,156,712 (for The
Community Bank and BankTennessee only). The obligation on these loans
relates to performance by the borrower.
6 CONCENTRATIONS OF CREDIT
The Banks grant agribusiness, commercial, construction, and individual
loans to customers located primarily within the middle and western
portion of Tennessee. Concentration by type of loans are presented in
note 3.
7 ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 4,012 3,214 1,386
Allowance for loan losses of First Federal Bancshares,
Inc. at acquisition date -- -- 1,229
Increase in reserve due to acquisition of branch 152 -- --
Provisions charged to operating expense 1,623 1,188 1,390
Loans charged-off (758) (512) (869)
Recoveries on previously charged-off loans 117 122 78
------- ------- -------
Balance at end of year $ 5,146 4,012 3,214
------- ------- -------
</TABLE>
The Company had approximately $2,687,000 and $1,839,000 at December 31,
1999 and 1998, respectively, in loans which were considered impaired
under SFAS 114. Accrual of interest had been discontinued on these
loans as of those dates. The allowance for loan losses related to these
loans was approximately $537,000 and $368,000 at December 31, 1999 and
1998, respectively. If such loans had been on an accrual basis,
interest income would have been approximately $125,000, $121,000 and
$79,000 higher in 1999, 1998 and 1997, respectively.
40
<PAGE> 42
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
8 PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
------- -------
<S> <C> <C>
Land $ 3,816 3,262
Buildings and improvements 6,938 4,424
Leasehold improvements 1,354 1,110
Furniture, fixtures and equipment 5,475 4,144
Automobiles 155 121
Construction-in-progress 956 481
------- -------
18,694 13,542
Less accumulated depreciation 4,116 2,981
------- -------
Net premises and equipment $14,578 10,561
------- -------
</TABLE>
Depreciation expense related to premises and equipment amounted to
$1,114,000 in 1999, $928,000 in 1998 and $503,000 in 1997.
9 OTHER INTANGIBLE ASSETS
A summary of other intangible assets at December 31, 1999 and 1998
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
------ ------
<S> <C> <C>
Deposit premium $1,475 --
Goodwill 73 --
------ ------
Accumulated amortization 25 --
------ ------
Net intangible assets $1,523 --
------ ------
</TABLE>
Amortization expense related to intangible assets amounted to $25,000
in 1999.
10 DEPOSITS
A summary of deposits at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
-------- -------
<S> <C> <C>
Noninterest-bearing demand $ 34,099 26,804
Interest-bearing demand 130,777 111,660
Savings 16,383 13,284
Certificates of deposit of $100,000 or more 83,089 64,093
Other time 170,904 141,563
-------- -------
TOTAL DEPOSITS $435,252 357,404
-------- -------
</TABLE>
41
<PAGE> 43
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
10 DEPOSITS, CONTINUED
At December 31, 1999 scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
--------
<S> <C>
One year or less $196,399
Due after one year through three years 48,867
Due after three years 8,727
--------
$253,993
--------
</TABLE>
11 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 $2,981,000 of
such stock at December 31, 1999 to satisfy this requirement.
At December 31, 1999 and 1998, advances from the FHLB totaled
$39,554,000 and $17,973,000, respectively. The interest rates on these
advances ranged from 5.35% to 9.125%. Qualifying loans totaling
$64,601,000 were pledged as security under a blanket pledge agreement
with the FHLB at December 31, 1999.
Maturities of the advances from FHLB at December 31, 1999 are as
follows:
(Dollars in thousands)
<TABLE>
<S> <C>
2000 $27,794
2001 1,031
2002 --
2003 720
Later years 10,009
-------
$39,554
-------
</TABLE>
12 NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
------ ------
<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 $1,145 1,288
</TABLE>
42
<PAGE> 44
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
12 NOTES PAYABLE, CONTINUED
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
------ ------
<S> <C> <C>
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 31, 2002. The note is secured by 100% of the
common stock of BankTennessee and The Community Bank 735 1,045
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 1,900
$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 3,675 3,000
------ ------
$7,455 7,233
------ ------
</TABLE>
Minimum annual principal payments for future years are as follows:
(Dollars in thousands)
<TABLE>
<S> <C>
2000 $ 1,053
2001 1,053
2002 1,131
2003 1,053
2004 1,053
Later years 2,112
-------
$ 7,455
-------
</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, 1999.
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.
43
<PAGE> 45
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
13 INCOME TAXES
The provision for income taxes (benefits) consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 2,165 1,755 1,037
State 412 335 195
------- ------- -------
Total current tax 2,577 2,090 1,232
------- ------- -------
Deferred:
Federal (393) (77) (109)
State (74) (10) (21)
------- ------- -------
Total deferred (benefit) (467) (87) (130)
------- ------- -------
Tax benefits credited to stockholders' equity related
to exercise of stock options 3 -- 118
------- ------- -------
Total provision for income taxes $ 2,113 2,003 1,220
------- ------- -------
</TABLE>
Significant temporary differences between tax and financial reporting
that give rise to deferred tax assets (liabilities) included in other
assets on the consolidated balance sheet are as follows at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
------- -------
<S> <C> <C>
Allowance for loan losses $ 1,752 1,295
Unrealized loss on securities 252 46
Deferred loan fees 139 142
Other 192 187
------- -------
Total deferred tax assets 2,335 1,670
------- -------
FHLB stock (475) (410)
Premises and equipment (442) (490)
Loan servicing rights (388) (413)
------- -------
Total deferred tax liabilities (1,305) (1,313)
------- -------
Net deferred tax asset $ 1,030 357
------- -------
</TABLE>
44
<PAGE> 46
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
13 INCOME TAXES, CONTINUED
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>
(Dollars in thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Computed expected provision for income taxes $ 1,912 1,817 1,140
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit 223 215 114
Tax exempt interest (48) -- --
Other, net 26 (29) (34)
------- ------- -------
Total income tax expense $ 2,113 2,003 1,220
------- ------- -------
</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.
14 MINIMUM CAPITAL STANDARDS
The Company and its Bank subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and
its Bank subsidiaries must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the maintenance of minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk- weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1999 and 1998, that all capital adequacy
requirements to which they are subject are met.
As of December 31, 1999, the most recent notification from the Federal
Reserve Bank categorized the Company as adequately capitalized under
the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized the Company and 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 category.
45
<PAGE> 47
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
14 MINIMUM CAPITAL STANDARDS, CONTINUED
The Company and the Banks' actual capital amounts and ratios at
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
To be well
capitalized under
Required prompt corrective
(Dollars in thousands) Minimum action provisions Actual
---------------------- ------- ----------------- ------
<S> <C> <C> <C>
December 31, 1999
Cumberland Bancorp, Inc.
Amount:
Tier I to average assets - leverage $ 20,011 25,014 34,210
Tier I to risk-weighted assets 16,656 24,983 34,210
Total capital to risk-weighted assets 33,311 41,639 39,367
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 6.84%
Tier I to risk-weighted assets 4.00% 6.00% 8.22%
Total capital to risk-weighted assets 8.00% 10.00% 9.45%
Cumberland Bank
Amount:
Tier I to average assets - leverage $ 7,572 9,465 12,539
Tier I to risk-weighted assets 6,017 9,026 12,539
Total capital to risk-weighted assets 12,034 15,043 14,427
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 6.62%
Tier I to risk-weighted assets 4.00% 6.00% 8.34%
Total capital to risk-weighted assets 8.00% 10.00% 9.59%
BankTennessee
Amount:
Tier I to average assets - leverage $ 3,131 3,914 11,138
Tier I to risk-weighted assets 5,862 8,793 11,138
Total capital to risk-weighted assets 11,724 14,656 12,970
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 6.25%
Tier I to risk-weighted assets 4.00% 6.00% 7.60%
Total capital to risk-weighted assets 8.00% 10.00% 8.85%
The Community Bank
Amount:
Tier I to average assets - leverage $ 3,751 4,689 6,417
Tier I to risk-weighted assets 3,275 4,912 6,417
Total capital to risk-weighted assets 6,549 8,187 7,267
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 6.84%
Tier I to risk-weighted assets 4.00% 6.00% 7.84%
Total capital to risk-weighted assets 8.00% 10.00% 8.88%
</TABLE>
46
<PAGE> 48
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
14 MINIMUM CAPITAL STANDARDS, CONTINUED
<TABLE>
<CAPTION>
To be well
capitalized under
Required prompt corrective
(Dollars in thousands) Minimum action provisions Actual
---------------------- ------- ----------------- ------
<S> <C> <C> <C>
December 31, 1999
Bank of Dyer
Amount:
Tier I to average assets - leverage $ 1,614 2,018 2,598
Tier I to risk-weighted assets 1,086 1,629 2,598
Total capital to risk-weighted assets 2,173 2,716 2,896
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 6.44%
Tier I to risk-weighted assets 4.00% 6.00% 9.57%
Total capital to risk-weighted assets 8.00% 10.00% 10.66%
---------- ---------- --------
December 31, 1998
Cumberland Bancorp, Inc.
Amount:
Tier I to average assets - leverage $ 16,182 20,227 22,149
Tier I to risk-weighted assets 11,938 17,906 22,149
Total capital to risk-weighted assets 23,875 29,844 25,781
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 5.45%
Tier I to risk-weighted assets 4.00% 6.00% 7.38%
Total capital to risk-weighted assets 8.00% 10.00% 8.64%
Cumberland Bank
Amount:
Tier I to average assets - leverage $ 6,052 7,565 10,073
Tier I to risk-weighted assets 4,312 6,467 10,073
Total capital to risk-weighted assets 8,623 10,779 11,426
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%
</TABLE>
47
<PAGE> 49
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
14 MINIMUM CAPITAL STANDARDS, CONTINUED
<TABLE>
<CAPTION>
To be well
capitalized under
Required prompt corrective
(Dollars in thousands) Minimum action provisions Actual
---------------------- ------- ----------------- ------
<S> <C> <C> <C>
December 31, 1998
BankTennessee
Amount:
Tier I to average assets - leverage $ 5,644 7,054 9,664
Tier I to risk-weighted assets 4,250 6,375 9,664
Total capital to risk-weighted assets 8,500 10,625 10,992
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 $ 3,103 3,878 4,876
Tier I to risk-weighted assets 2,137 3,205 4,876
Total capital to risk-weighted assets 4,274 5,342 5,415
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%
Bank of Dyer
Amount:
Tier I to average assets - leverage $ 1,387 1,734 2,393
Tier I to risk-weighted assets 870 1,305 2,393
Total capital to risk-weighted assets 1,740 2,175 2,615
Ratios:
Tier I to average assets - leverage 4.00% 5.00% 6.90%
Tier I to risk-weighted assets 4.00% 6.00% 11.00%
Total capital to risk-weighted assets 8.00% 10.00% 12.00%
</TABLE>
15 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
$273,848 in 1999, $303,612 in 1998 and $138,839 in 1997, respectively.
48
<PAGE> 50
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
16 FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are
as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------ -----------------------
CARRYING FAIR Carrying Fair
(Dollars in thousands) VALUE VALUE Value Value
---------- ------ --------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 18,255 18,255 8,972 8,972
Interest-bearing deposits in
financial 5,396 5,396 21,996 21,996
institutions 11,250 11,250 14,250 14,250
Federal funds sold 16,213 16,213 17,270 17,270
Securities available for sale 6,677 6,594 9,406 9,440
Securities held to maturity 435,170 434,215 317,535 319,009
Loans, net of allowance 4,073 4,073 3,026 3,026
Accrued interest receivable 3,415 3,415 2,648 2,648
FHLB and FRB stock 1,021 1,021 1,087 1,087
Servicing rights
Financial liabilities:
Deposits with defined maturities $253,993 253,706 205,656 207,082
Deposits with undefined maturities 181,259 181,259 151,748 151,748
Notes payable 7,455 7,250 7,233 7,233
Federal funds purchased 2,275 2,275 -- --
Advances from FHLB 39,554 38,484 17,973 17,913
Accrued interest payable 3,072 3,072 2,571 2,571
</TABLE>
<TABLE>
<CAPTION>
Notional Fair Notional Fair
Amounts Value Amount Value
------- ----- ------ -----
<S> <C> <C> <C> <C>
Off-balance sheet financial instruments:
Commitments to extend credit $ 76,436 -- 59,956 --
Standby letters of credit 3,467 -- 2,152 --
Mortgage loans sold subject to
repurchase provisions 13,157 -- 16,231 --
</TABLE>
The carrying values in the preceding table are included in the
consolidated balance sheets under the applicable captions.
17 BUSINESS COMBINATIONS AND ACQUISITIONS
On December 31, 1999, Cumberland Bancorp, Incorporated (CBI) acquired
for approximately 511,783 shares of its common stock, all of the
outstanding capital stock of Bancshares of Dyer, Inc. (BDI), a bank
holding company in Dyer, Tennessee, which owned approximately 98% of
Bank of Dyer. The merger has been accounted for as a pooling of
interests and accordingly, financial information for periods prior to
the merger reflect retroactive restatement of the companies combined
financial position and operating results. No adjustments were
necessary to conform the accounting practices of the companies.
49
<PAGE> 51
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
17 BUSINESS COMBINATIONS AND ACQUISITIONS, CONTINUED
The following presents certain financial data pertaining to the
combination of CBI with BDI for the years ended 1998 and 1997.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997
--------------------------------------------- ---------- --------
<S> <C> <C>
Total revenue:*
CBI, as originally reported $ 18,606 11,966
BDI 1,563 1,474
---------- --------
CBI $ 20,169 13,440
========== ========
Net income:
CBI, as originally reported $ 3,018 1,843
BDI 324 291
---------- --------
CBI $ 3,342 2,134
========== ========
Net income per share - basic
CBI, as originally reported $ .55 .48
BDI 1.65 1.48
CBI .56 .49
Net income per share - diluted
CBI, as originally reported $ .54 .46
BDI 1.65 1.48
CBI .55 .48
</TABLE>
*Total revenue is net interest income and noninterest income
The minority interest in Bank of Dyer was acquired in a purchase
transaction for cash of approximately $10,000 and 7,704 shares of CBI
common stock valued at $12.50 per share.
Effective September 24, 1999, the Company's Cumberland Bank subsidiary
purchased certain assets and assumed certain liabilities of American
City Bank's McMinnville, Tennessee branch. As part of the transaction,
the Company issued 47,000 shares of its common stock. The liabilities
assumed exceeded the assets received in the transaction (deposit
premium) by $1,475,000. Assets purchased and liabilities assumed at
the acquisition date are summarized as follows:
<TABLE>
<CAPTION>
Assets (Dollars in thousands)
<S> <C>
Cash received in transaction $ 3,746
Loans, net 13,276
Premises and equipment 1,456
Other assets 222
Deposit premium 1,475
--------
$ 20,175
--------
Liabilities
Deposits assumed $ 19,473
Other liabilities 114
Common shares issued to complete transaction 588
--------
$ 20,175
========
</TABLE>
50
<PAGE> 52
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
17 BUSINESS COMBINATIONS AND ACQUISITIONS, CONTINUED
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
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>
<CAPTION>
Dollars in thousands except per share data
<S> <C>
Securities $ 10,509
Loans, net 119,239
Other assets 23,878
---------
Total assets $ 153,626
=========
Deposits $ 131,848
Other liabilities 16,185
Stockholders' equity 5,593
---------
Total liabilities and stockholders' equity $ 153,626
=========
</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 $ 2,134
Net earnings - pro forma 2,522
Net earnings per share - basic - as reported 0.49
Net earnings per share - basic - pro forma 0.51
Net earnings per share - diluted - as reported 0.48
Net earnings per share - diluted - pro forma 0.50
</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.
51
<PAGE> 53
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
18 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, 1999, future minimum lease
commitments are as follows:
(Dollars in thousands)
<TABLE>
<S> <C>
2000 $ 239
2001 173
2002 164
2003 167
2004 86
Thereafter 24
------
$ 853
======
</TABLE>
Rentals relating to these agreements which are included in occupancy
expense amounted to $196,000 in 1999, $212,000 in 1998 and $134,000 in
1997.
During 1999, the subsidiaries of the Company leased certain premises
from related parties. The related expense from the leases totaled
$29,000 in 1999.
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 $4.49 per
share (as adjusted for the March 1998 stock split). The agreement with
the Ripley group addresses a spin-off of the Ripley branch into a
separate entity after the branch reaches $30 million in assets and
becomes profitable. It is anticipated that the Ripley group will own
50% of the new entity and Cumberland Bancorp, Incorporated will own
50% of the new entity. However, there are several provisions in the
agreement that could alter the anticipated structure.
During 1999 and 1998, the Company invested approximately $2,300,000
representing a 50% interest in a de novo bank in Murray, Kentucky. The
Company's pro rata portion of the organization and start-up costs of
approximately $92,500 in 1998 and $60,000 in 1999, in the respective
periods have been expensed.
The Murray Bank opened in June, 1999 and it incurred an operating loss
of approximately $275,000 in 1999. This investment is being accounted
for by the equity method of accounting, whereby CBI's pro rata share
of its operations are shown as an adjustment of the original
investment and included in other operating expenses on the
consolidated statements of earnings.
The investors that bought the remaining 50% of the Murray Bank were
given the ability to buy $250,000 worth of stock based upon a price of
1.5 multiplied by the Company's book value that became exercisable
when the charter was granted to the Murray Bank by the OTS. An
additional $250,000 in stock options become exercisable at 1.5
multiplied by the Company's book value if the Murray Bank attains
certain financial objectives.
During 1999, CBI has been involved in organizing a denovo bank called
Insurors Bank of Tennessee. The Bank is anticipated being opened in
the first half of 2000, subject to regulatory approval. CBI will own
50% and the remaining 50% has been marketed to the Independent
Insurance Agents in the State of Tennessee. Approximately $24,000 has
been expensed in 1999 related to these start-up efforts. The total
commitment is expected to be approximately $2.4 million, most of which
will be funded in 2000 if the new charter is approved.
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.
52
<PAGE> 54
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
19 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 branches 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.
20 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.
In 1995, SFAS No. 123 "Accounting for Stock Based Compensation"
changed the method for recognition of cost of plans similar to those
of the Company. As is permitted, management has elected to continue
accounting for the plan under APB Opinion 25 and related
Interpretations. Accordingly, no compensation cost has been recognized
for the stock option plan. However, under SFAS No. 123, the Company is
required to make proforma disclosures as if cost had been recognized
in accordance with the pronouncement. Had compensation cost for the
Company's stock option plan been determined based on the fair value at
the grant dates for awards under the plan consistent with the method
of SFAS No. 123, the Company's net earnings and net earnings per
common share would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
As As As
Reported Proforma Reported Proforma Reported Proforma
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 3,511 $ 3,344 $ 3,342 $ 3,206 $ 2,134 $ 2,129
Basic earnings
per share $ 0.56 $ 0.54 $ 0.56 $ 0.54 $ 0.49 $ 0.49
Diluted earnings
per share 0.55 0.52 0.55 0.53 0.48 0.48
</TABLE>
The fair value of the options granted is estimated as of the date
granted using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants: dividend yield
of 6.0 percent in 1999, risk-free interest rate of 6.0 percent,
expected lives of five years, and expected volatility of 47 percent in
1999 and 53 percent in 1998.
The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 1999, 1998 and 1997
was $6.09, $3.16, and $0.38, respectively.
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).
53
<PAGE> 55
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
20 STOCK OPTIONS, CONTINUED
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.
A summary of the stock option activity for 1999, 1998 and 1997 is as
follows (after giving effect to the stock dividend and stock split):
<TABLE>
<CAPTION>
Shares Weighted
Available Shares Option Average
for Under Shares Exercise
(Dollars in thousands except per share data) Option Option Exercisable Price
--------- -------- ----------- --------
<S> <C> <C> <C>
Outstanding at beginning of year - 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
Granted (42,750) 42,750 -- $ 12.50
Exercisable -- -- 83,642 5.45
Forfeited -- (9,625) -- 5.45
Exercised -- (1,200) -- 5.45
-------- -------- -------- --------
Outstanding at December 31, 1999 113,540 425,635 83,642 $ 6.16
=== ==== ======== ======== ======== ========
</TABLE>
The following table sets forth the computation of basic net earnings
per share and diluted net earnings per share.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
For basic net earnings per share and diluted net earnings
per share, net earnings $ 3,511 3,342 2,134
---------- ---------- ----------
Weighted average shares outstanding - basic 6,248,130 5,971,306 4,354,263
Effect of dilutive securities - stock options 139,506 126,867 129,004
---------- ---------- ----------
Weighted average shares outstanding - diluted 6,387,636 6,098,173 4,483,267
========== ========= =========
Net earnings per share - basic $ .56 .56 .49
Net earnings per share - diluted .55 .55 .48
</TABLE>
54
<PAGE> 56
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
21 OTHER OPERATING EXPENSES
Other operating expenses consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Data processing $ 907 783 349
Advertising 441 375 183
Stationery, printing and supplies 494 371 165
Postage, freight and courier 221 162 149
Directors' fees 418 357 198
Other 4,229 3,200 2,350
---------- ---------- ----------
$ 6,710 5,248 3,394
========== ========== ==========
</TABLE>
55
<PAGE> 57
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
22 PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
------------------------
Assets 1999 1998
------- ------
<S> <C> <C>
Cash $ 6,239 1,391
Investment in subsidiaries 33,946 27,032
Investment in unconsolidated subsidiaries 2,441 609
Premises and equipment 45 40
Goodwill 73 0
Other assets 713 445
-------- ------
$ 43,457 29,517
======== ======
Liabilities and Stockholders' Equity
Liabilities:
Notes payable $ 7,455 7,233
Accrued interest 257 108
Other liabilities 470 117
-------- ------
Total liabilities 8,182 7,458
======== ======
Total stockholders' equity 35,275 22,059
======== ======
$ 43,457 29,517
======== ======
</TABLE>
CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
-------- ----- -----
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 800 620 359
Dividends from securities 4 2 18
Other income (46) 13 3
-------- ----- -----
758 635 380
-------- ----- -----
Expenses:
Interest expense 578 527 252
Other expense 870 428 385
-------- ----- -----
1,448 955 637
-------- ----- -----
Loss before income taxes and equity in undistributed
earnings of subsidiaries (690) (320) (257)
Income tax benefit 558 359 285
-------- ----- -----
Income (loss) before equity in undistributed earnings
of subsidiaries (132) 39 28
Equity in undistributed earnings of subsidiaries 3,643 3,303 2,106
-------- ----- -----
NET EARNINGS $ 3,511 3,342 2,134
======== ===== =====
</TABLE>
56
<PAGE> 58
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
22 PARENT COMPANY ONLY FINANCIAL INFORMATION, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,511 3,342 2,134
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Equity in undistributed earnings of subsidiaries (3,643) (3,303) (2,106)
Operations of unconsolidated subsidiaries 104 86 0
Depreciation and amortization 15 4 204
Increase in accrued interest payable 149 103 3
Other, net 55 44 110
------- ------ ------
Net cash provided by operating activities 191 276 345
======= ====== ======
Cash flows from investing activities:
Investment in commercial bank subsidiaries (3,000) (1,725) (1,450)
Investment in unconsolidated subsidiaries (1,935) (613) 0
Purchases of premises and equipment (20) (24) (3)
------- ------ ------
Net cash used by investing activities (4,955) (2,362) (1,453)
======= ====== ======
Cash flows from financing activities:
Proceeds from notes payable 675 3,000 --
Repayment of notes payable (453) (298) --
Proceeds from issuance of common stock 9,390 117 1,050
Dividends paid on common stock of previously acquired
subsidiary -- (15) (15)
------- ------ ------
Net cash provided by
financing activities 9,612 2,804 1,035
======= ====== ======
Net increase (decrease) in cash 4,848 718 (73)
Cash at beginning of year 1,391 673 746
======= ====== ======
Cash at end of year $ 6,239 1,391 673
======= ====== ======
Non-Cash Activities:
Issuance of common stock - acquisition of Bancshares of Dyer,
Inc $ 2,512 -- --
Issuance of common stock - 10% stock dividend 6,341 -- --
Issuance of common stock - acquisition of McMinnville branch 588 -- --
Issuance of common stock - acquisition of First Federal
Bancshares, Inc. -- -- 7,022
Issuance of common stock - conversion of stock options 257 -- 118
</TABLE>
57
<PAGE> 59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent
auditors on any matters of accounting principles or practices or financial
statement disclosure.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information with respect to the directors and executive officers is
incorporated herein by reference to the Proxy Statement relating to the Annual
Meeting of Shareholders to be held April 27, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated
herein by reference to the Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 27, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain
beneficial owners and management is incorporated herein by reference to the
Proxy Statement relating to the Annual Meeting of Shareholders to be held April
27, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions is incorporated herein by reference to the Proxy Statement
relating to the Annual Meeting of Shareholders to be held April 27, 2000.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. See Item 8.
(a)(2) Financial Statements Schedules. Inapplicable.
(a)(3) Exhibits. See Index to Exhibits.
(b) Reports on Form 8-K
None.
58
<PAGE> 60
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CUMBERLAND BANCORP, INCORPORATED
(REGISTRANT)
BY: /s/ Joel Porter
----------------------------------
Joel Porter, President
(Principal Executive Officer)
DATE: March 28, 2000
-------------------------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Joel Porter President (Principal Executive March 28, 2000
- ------------------------------ Officer) and Director
Joel Porter
/s/ Mark McDowell Chief Administrative Officer March 28, 2000
- ------------------------------ (Principal Financial and
Mark McDowell Accounting Officer)
/s/ John Wilder Chairman March 28, 2000
- ------------------------------
John Wilder
/s/ John S. Everett Director March 28, 2000
- ------------------------------
John S. Everett
/s/ Danny Herron Director March 28, 2000
- ------------------------------
Danny Herron
/s/ Tom E. Paschal Director March 28, 2000
- ------------------------------
Tom E. Paschal
/s/ Tom Brooks Director March 28, 2000
- ------------------------------
Tom Brooks
</TABLE>
59
<PAGE> 61
<TABLE>
<S> <C> <C>
/s/ Jerry Cole Director March 28, 2000
- ------------------------------
Jerry Cole
/s/ Ronald Gibson Director March 28, 2000
- ------------------------------
Ronald Gibson
/s/ Frank Inman, Jr. Director March 28, 2000
- ------------------------------
Frank Inman, Jr.
/s/ Alex Richmond Director March 28, 2000
- ------------------------------
Alex Richmond
/s/ Wayne Rodgers Director March 28, 2000
- ------------------------------
Wayne Rodgers
/s/ John S. Shepherd Director March 28, 2000
- ------------------------------
John S. Shepherd
/s/ William D. Smallwood Director March 28, 2000
- ------------------------------
William D. Smallwood
</TABLE>
60
<PAGE> 62
INDEX TO EXHIBITS
3.1 Amended and Restated Charter of the Company (previously filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-1 dated
September 8, 1999 (Registration No. 333-84173) and incorporated herein
by reference).
3.2 Amended and Restated Bylaws of the Company (previously filed as Exhibit
3.2 to the Company's Registration Statement on Form S-1 dated September
8, 1999 (Registration No. 333-84173) and incorporated herein by
reference).
10.1 Cumberland Bancorp, Incorporated 1998 Stock Option Plan (incorporated
herein by reference to the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders held April 27, 2000).
10.2 Joint Venture Agreement dated as of October 1, 1998 by and between
Cumberland Bancorp, Inc. and BancKentucky and Addendum to Joint Venture
Agreement dated as of October 31, 1998 (previously filed as Exhibit
10.2 to the Company's Registration Statement on Form S-1 dated
September 8, 1999 (Registration No. 333-84173) and incorporated herein
by reference).
10.3 Joint Venture Agreement dated as of August 26, 1999 by and between
Cumberland Bancorp, Inc. and InsCorp, Inc. (previously filed as Exhibit
10.3 to the Company's Registration Statement on Form S-1 dated
September 8, 1999 (Registration No. 333-84173) and incorporated herein
by reference).
21 Subsidiaries of the Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule for the fiscal year ended December 31, 1999
(for SEC use only).
61
<PAGE> 1
EXHIBIT 21
CUMBERLAND BANCORP, INC.
LIST OF SUBSIDIARIES
AS OF 12-31-99
Wholly-Owned Bank Subsidiaries
Bank of Dyer - Dyer, Tennessee
BankTennessee - Collierville, Tennessee
Cumberland Bank - Carthage, Tennessee
The Community Bank - Nashville, Tennessee
Wholly-Owned Non-Bank Subsidiaries
Cumberland Finance, Inc.
Cumberland Mortgage, Inc.
CBC Financial Services, Inc.
Cumberland Life Insurance, Inc.
InsureTennessee
TitleTennessee, LLC
62
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8, No. 333-93933) pertaining to the Cumberland Bancorp,
Incorporated 1999 Stock Option Plan of our report dated February 24, 2000, with
respect to the consolidated financial statements of Cumberland Bancorp,
Incorporated included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ HEATHCOTT & MULLALY PC
-----------------------------------------------
HEATHCOTT & MULLALY PC
Brentwood, Tennessee
March 29, 2000
63
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CUMBERLAND BANCORP, INC. FOR THE YEAR ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,255
<INT-BEARING-DEPOSITS> 5,396
<FED-FUNDS-SOLD> 11,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,213
<INVESTMENTS-CARRYING> 6,677
<INVESTMENTS-MARKET> 6,594
<LOANS> 440,316
<ALLOWANCE> 5,146
<TOTAL-ASSETS> 525,559
<DEPOSITS> 435,252
<SHORT-TERM> 31,122
<LIABILITIES-OTHER> 5,748
<LONG-TERM> 18,162
0
0
<COMMON> 3,429
<OTHER-SE> 28,846
<TOTAL-LIABILITIES-AND-EQUITY> 525,559
<INTEREST-LOAN> 36,528
<INTEREST-INVEST> 1,502
<INTEREST-OTHER> 1,163
<INTEREST-TOTAL> 39,193
<INTEREST-DEPOSIT> 17,050
<INTEREST-EXPENSE> 19,127
<INTEREST-INCOME-NET> 20,066
<LOAN-LOSSES> 1,623
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17,198
<INCOME-PRETAX> 5,624
<INCOME-PRE-EXTRAORDINARY> 3,511
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,511
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.55
<YIELD-ACTUAL> 4.71
<LOANS-NON> 2,446
<LOANS-PAST> 241
<LOANS-TROUBLED> 693
<LOANS-PROBLEM> 4,300
<ALLOWANCE-OPEN> 4,012
<CHARGE-OFFS> 758
<RECOVERIES> 117
<ALLOWANCE-CLOSE> 5,146
<ALLOWANCE-DOMESTIC> 4,477
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 669
</TABLE>
