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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
Commission File Number 0-27393
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CUMBERLAND BANCORP, INCORPORATED
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(Exact Name of Registrant As Specified in Its Charter)
Tennessee 62-1297760
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(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
5120 Maryland Way, Brentwood, Tennessee 37027
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(Address of Principal Executive Offices and Zip Code)
(615) 377-9395
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(Registrant's Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common stock outstanding: 13,800,636 shares at July 31, 2001.
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CUMBERLAND BANCORP, INCORPORATED
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2001 (unaudited) 3
and December 31, 2000 (audited)
Consolidated Statements of Earnings - For the three months and
six months 4
ended June 30, 2001 and 2000 (unaudited).
Consolidated Statements of Changes in Shareholders' Equity - For the 5
six months ended June 30, 2001 (unaudited).
Consolidated Statements of Cash Flows - For the six months 6 ended
June 30, 2001 and 2000 (unaudited). 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 8-13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings. 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities. 15
Item 4. Submission of Matters to a Vote of Security Holders. 15
Item 5. Other Information. 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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ITEM 1. FINANCIAL STATEMENTS
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
June 30, December 31,
(Dollars in thousands, except share amounts) 2001 2000
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Assets:
Cash and due from banks $ 17,754 22,280
Interest-bearing deposits in financial institutions 51,755 14,988
Federal funds sold 21,789 33,025
Securities available for sale, at fair value 18,500 15,566
Securities held to maturity, fair value $12,513 at June 30, 2001
and $8,405 at December 31, 2000 12,490 8,425
Loans 516,637 507,217
Allowance for loan losses (6,189) (6,137)
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Loans, net 510,448 501,080
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Premises and equipment 24,495 23,467
Accrued interest receivable 5,353 5,644
Restricted equity securities 4,590 4,226
Investment in unconsolidated affiliates 5,121 4,983
Other real estate 4,671 3,142
Loan servicing rights 428 985
Other intangible assets 1,654 1,577
Other assets 4,138 4,069
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Total assets $ 683,186 643,457
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Liabilities and Shareholders' Equity:
Deposits
Noninterest-bearing 50,816 46,629
Interest-bearing 510,379 477,513
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Total deposits 561,195 524,142
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Notes payable 7,802 8,749
Federal funds purchased 3,860 9,575
Advances from Federal Home Loan Bank 53,288 46,211
Accrued interest payable 5,993 4,694
Other liabilities 2,185 2,610
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Total liabilities 634,323 595,981
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Trust preferred securities 8,000 8,000
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Shareholders' equity:
Common stock, $0.50 par value, authorized 20,000,000 shares;
shares issued -13,800,636 in 2001 and 6,893,628 in 2000 6,900 3,447
Additional paid-in capital 22,272 25,526
Retained earnings 11,765 10,682
Accumulated other comprehensive income (loss) (74) (179)
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Total shareholders' equity 40,863 39,476
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Total liabilities and
shareholders' equity $ 683,186 643,457
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CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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(Dollars in thousands except per share data) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------ ---------------------------
Interest income:
Loans, including fees $ 12,469 11,768 25,391 22,817
Securities 303 334 673 674
Deposits in financial institutions 542 79 946 150
Federal funds sold 116 208 635 439
Federal Home Loan Bank dividends 112 70 197 125
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Total interest income 13,542 12,459 27,842 24,205
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Interest expense:
Time deposits of $100,000 or more 1,864 1,366 3,748 2,613
Other time deposits 4,873 4,293 9,831 8,278
Federal funds purchased 63 90 177 136
Notes payable, advances from Federal Home Loan Bank, and trust
preferred securities 827 660 2,003 1,306
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Total interest expense 7,627 6,409 15,759 12,333
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Net interest income 5,915 6,050 12,083 11,872
Provision for loan losses 790 843 1,052 1,274
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Net interest income after provision
for loan losses 5,125 5,207 11,031 10,598
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Other income:
Service charges on deposit accounts 902 630 1,705 1,148
Other service charges, commissions and fees 383 508 783 711
Mortgage banking activities 225 184 461 446
Gain on sale of SBA loans 238 247 238 312
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Total other income 1,748 1,569 3,187 2,617
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Other expenses:
Salaries and employee benefits 3,065 2,663 6,121 5,377
Occupancy 888 632 1,651 1,250
Other operating 2,083 1,853 4,122 3,467
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Total other expenses 6,036 5,148 11,894 10,094
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Income before income taxes 837 1,628 2,324 3,121
Income tax expense 294 606 825 1,151
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Net earnings 543 1,022 1,499 1,970
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Net earnings per share - basic 0.04 0.15 0.11 0.15
Net earnings per share - diluted 0.04 0.15 0.11 0.14
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Weighted average shares outstanding - basic 13,799,901 13,767,634 13,820,425 13,749,158
Weighted average shares outstanding - diluted 14,029,124 14,033,272 14,055,110 14,024,428
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CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2001
UNAUDITED
Accumulated
Common Stock Additional Other Total
------------------- Paid-in Retained Comprehensive Shareholders'
(Dollars in thousands) Shares Amount Capital Earnings Income (Loss) Equity
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Balance, December 31, 2000 6,893,628 $ 3,447 25,526 10,682 (179) 39,476
Purchase and retirement of common stock (47,000) (24) (259) (283)
Issuance of common stock in connection
with the acquisition of minority interest
of Bank of Mason 53,250 27 453 480
Two for one stock split 6,899,878 3,450 (3,450)
Exercise of stock options 880 2 2
Dividends $0.03 per share (416) (416)
Comprehensive Income:
1,499
Other Comprehensive Income
Change in unrealized loss on
securities available for sale net of
$ 64 in income taxes 105
Total Comprehensive Income 1,604
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Balance, June 30, 2001 13,800,636 $ 6,900 22,272 11,765 (74) 40,863
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CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
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(Dollars in thousands) 2001 2000
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Net earnings $ 1,499 1,970
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Provision for loan losses 1,052 1,274
Depreciation and amortization 1,043 593
Operations of unconsolidated affiliates 297 167
Mortgage loans originated for sale (18,231) (16,800)
Proceeds from sale of mortgage loans 15,860 16,200
(Increase) decrease in accrued interest receivable 291 (739)
Increase in accrued interest payable and other liabilities 874 53
Other, net (3,783) (804)
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Total adjustments (2,597) (56)
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Net cash provided by operating activities (1,098) 1,914
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Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in financial institutions (36,767) 1,020
(Increase) decrease in federal funds sold 11,236 (3,700)
Purchases of securities available for sale (8,772) (360)
Purchases of securities held to maturity (7,641) 0
Proceeds from maturities and redemptions of securities available for sale 5,943 33
Proceeds from maturities and redemptions of securities held to maturity 3,576 570
Net increase in loans (8,049) (36,116)
Investment in unconsolidated affiliates (435) (490)
Purchases of premises and equipment (1,918) (3,996)
Proceeds from sale of other real estate 2,422 (416)
- --------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (40,405) (43,455)
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Cash flows from financing activities:
Net increase in deposits 37,053 40,382
Decrease in federal funds purchased (5,715) (316)
Increase (decrease) in advances from Federal Home Loan Bank 7,077 (219)
Proceeds from notes payable 0 2,264
Repayments of notes payable (947) (2,656)
Dividends paid (208) (172)
Purchase and retirement of common stock (283) 340
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Net cash provided by financing activities 36,977 39,623
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Net decrease in cash (4,526) (1,918)
Cash and due from banks at beginning of year 22,280 18,255
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Cash and due from banks at end of period $ 17,754 16,337
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Supplemental disclosure of cash flow information:
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Interest paid $ 6,328 11,652
Income taxes paid 1,522 1,588
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CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements as of June 30, 2001 and for the
six month periods ended June 30, 2001 and 2000 were prepared on the same basis
as the audited financial statements and, in the opinion of management, include
all adjustments, consisting of normal recurring adjustments, to present fairly
the information. They do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
Operating results for the three month and six month periods ended June 30, 2001
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. For further information, refer to the 2000
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K.
In January 2001, the Company acquired the remaining shares outstanding of common
stock in the Bank of Mason for cash of approximately $90,000 and issuance of
53,250 shares of the Company's common stock.
The Company's board of directors approved a 2 for 1 stock split for shareholders
of record as of March 22, 2001, payable April 22, 2001. Per share amounts have
been adjusted to reflect the stock split.
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CUMBERLAND BANCORP, INCORPORATED
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The purpose of this discussion is to provide insight into the financial
condition and results of operations of the Company and its subsidiaries. This
discussion should be read in conjunction with the consolidated financial
statements. Reference should also be made to the Company's Annual Report on Form
10-K, for a more complete discussion of factors that impact liquidity, capital
and the results of operations.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
The words "anticipate," "could," "expects," and "believes," and similar
expressions are intended to identify such forward-looking statements, but other
statements not based on historical information may also be considered
forward-looking. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release any modifications or revisions to
these forward-looking statements to reflect events or circumstances occurring
after the date hereof or to reflect the occurrence of unanticipated events.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions investors that future
financial and operating results may differ materially from those projected in
forward-looking statements made by, or on behalf of, the Company. Such
forward-looking statements involve known and unknown risks and uncertainties,
including, but not limited to, increased competition with other financial
institutions, lack of sustained growth in the Company's market areas, sudden
adverse interest rate changes, inadequate allowance for loan losses, significant
downturns in the businesses of one or more large customers, changes in the
regulatory or legislative environment and loss of key personnel. These risks and
uncertainties may cause the actual results or performance of the Company to be
materially different from any future results or performance expressed or implied
by such forward-looking statements. The Company's future operating results
depend on a number of factors which were derived utilizing numerous assumptions
and other important factors that could cause actual results to differ materially
from those projected in forward-looking statements.
OVERVIEW
The Company continues to experience growth due to recent entries in new markets,
acquisitions and aggressive marketing techniques.
Although we have continued to experience growth in total assets, net earnings
decreased in the second quarter of 2001 as compared to 2000, primarily due to
operating expenses associated with expansion activities and shrinking interest
margins.
The Company completed the acquisition of the minority interest in Bank of Mason,
a bank with total assets of approximately $10 million, effective January 31,
2001. This acquisition was accounted for as a purchase and resulted in goodwill
of $287,000.
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RESULTS OF OPERATIONS
Net earnings decreased 23.91% to $1,499,000 for the first six months of 2001 and
46.87% to $543,000 for the three months ended June 30, 2001 as compared to the
same periods in 2000.
NET INTEREST INCOME
Net interest income represents the amount by which interest earned on various
earning assets exceeds interest paid on deposits and other interest-bearing
liabilities and is the most significant component of the Company's earnings. The
Company's total interest income, excluding tax equivalent adjustments, increased
$3,637,000 or 15.03% during the six months ended June 30, 2001 and increased
$1,083,000 or 8.69% for the three months ended June 30, 2001 as compared to the
same periods in 2000. The increase in total interest income was primarily
attributable to an increase in average earning assets, particularly the 8.9%
increase in average loans outstanding in the first half of 2001 as compared to
2000 and the 531% increase in interest earned on deposits in financial
institutions.
Interest expense increased $3,426,000 or 27.78% for the six months ended June
30, 2001 and $1,218,000 or 19.0% in the three months ended June 30, 2001
compared to 2000. The overall increase in total interest expense for the first
six months of 2001 as compared to 2000 was attributable to an increase in
average interest-bearing liabilities. The foregoing resulted in an increase in
net interest income, before the provision for loan losses, of $211,000 or 1.78%
for the six months ended June 30, 2001 and a decrease of $135,000 or 2.23% for
the three months ended June 30, 2001 as compared to the same periods in 2000.
The Company believes that in the short-term its assets are more interest rate
sensitive than its liabilities. Therefore, declining interest rates in the first
half of 2001 have resulted in lower net interest margins.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses was $1,052,000 for the six months ended
June 30, 2001 and $790,000 for the three months ended June 30, 2001 compared to
$1,274,000 and $843,000, respectively, in 2000. The provision for loan losses is
based on past loan experience and other factors, which in management's judgment,
deserve current recognition in estimating possible loan losses. Such factors
include past loan loss experience, growth and composition of the loan portfolio,
review of specific problem loans, the relationship of the allowance for loan
losses to outstanding loans, and current economic conditions that may affect the
borrower's ability to repay. Management has in place a system designed for
monitoring its loan portfolio in an effort to identify potential problem loans.
The provision for possible loan losses raised the allowance for possible loan
losses to $6,189,000, an increase of .85% from $6,137,000 at December 31, 2000.
The allowance for loan losses as a percentage of total outstanding loans was
approximately 1.2% at June 30, 2001 and December 31, 2000, respectively.
The level of the allowance and the amount of the provision involve evaluation of
uncertainties and matters of judgment. Although management believes the
allowance for loan losses at June 30, 2001 to be adequate further deterioration
in problem credits and other real estate could require increases in the
provision for possible loan losses and could result in future charges to
earnings which would have a significant negative impact on net earnings.
Furthermore, management believes that continued deterioration in the economy in
both the Company's primary market area and nationally could have a significant
impact on loans not currently identified as problems as well as those that are
identified. See "Financial Condition -- Balance Sheet Summary."
NONINTEREST INCOME
The components of the Company's noninterest income include service charges on
deposit accounts, other fees and commissions, mortgage banking activities, gain
on sale of SBA loans, gain on sale of fixed assets and gain on sale of other
real estate. Total noninterest income increased by 21.78% to $3,187,000 and
increased by 11.41% to $1,748,000 for the six month and three month periods
ended June 30, 2001, respectively, compared to the same
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periods in 2000. The overall increase was due primarily to increased revenue
generated on deposit accounts. Service charges on deposit accounts increased
$557,000 or 48.5% during the six months ended June 30, 2001 and 43% to $902,000
for the three months ended June 30, 2001 compared to the same periods in 2000.
Management has increased the overall fee structure on deposit accounts in an
effort to generate more noninterest income. Revenue from mortgage banking
activities increased $15,000 or 3% during the six months ended June 30, 2001 and
$41,000 or 22% for the three months ended June 30, 2001 compared to the same
period last year. Gains on sales of SBA loans during the six months ended June
30, 2001 were $238,000 compared to $312,000 in the same period in 2000. Other
service charges, fees and commissions totaled $783,000 and $711,000 during the
six months ended June 30, 2001 and 2000, respectively, an increase of $72,000 or
10% and $383,000 and $508,000 during the three months ended June 30, 2001 and
2000, respectively, a decrease of $125,000 or 25%.
NONINTEREST EXPENSE
Noninterest expense consists primarily of salaries and employee benefits,
occupancy expenses, furniture and equipment expenses, data processing expenses
and other operating expenses, including minority interest in net earnings of
unconsolidated affiliates. Total noninterest expense increased $1,800,000 or 18%
during the six months ended June 30, 2001 and $888,000 or 17% during the three
months ended June 30, 2001 compared to the same periods in 2000. The increases
in noninterest expense are primarily attributable to increases in salaries and
employee benefits, and other costs necessary to support the Company's expanded
operations. The number of employees increased to 300 at June 30, 2001, from 254
at June 30, 2000.
INCOME TAXES
The Company's income tax expense was $825,000 for the six months ended June 30,
2001 and $294,000 for the three months ended June 30, 2001. This reflects a
decrease of $326,000 for the six month period and $312,000 for the three month
period from 2000 and is directly related to the decline in pretax income.
EARNINGS PER SHARE
Basic earnings per common share for the three months ended June 30, 2001 were
$0.04 as compared to $0.15 per share for the same period in 2000. Diluted
earnings per common share for the three months ended June 30, 2001 were $0.04 as
compared to $0.15 for the same period in 2000. Basic earnings per common share
for the six months ended June 30, 2001 were $0.11 as compared to $0.15 for the
same period in 2000. Diluted earnings per common share for the six months ended
June 30, 2001 were $0.11 as compared to $0.14 for the same period in 2000.
The computation of basic earnings per share is based on the weighted average
number of common shares outstanding during the period. The computation of
diluted earnings per share for the Company begins with the basic earnings per
share plus the effect of common shares contingently issuable from stock options.
For the three months ended June 30, 2001 and June 30, 2000, the Company's
weighted average number of shares outstanding, without giving effect to the
dilutive effect of stock options, was 13,799,901 and 13,767,634, respectively.
For the three months ended June 30, 2001 and June 30, 2000, the Company's
weighted average number of shares outstanding, including the dilutive effect of
stock options, was 14,029,124 and 14,033,272, respectively.
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For the six months ended June 30, 2001 and June 30, 2000, the Company's weighted
average number of shares outstanding, without giving effect to the dilutive
effect of stock options, was 13,820,425 and 13,749,158, respectively. For the
six months ended June 30, 2001 and June 30, 2000, the Company's weighted average
number of shares outstanding, including the dilutive effect of stock options,
was 14,055,110 and 14,024,428, respectively.
FINANCIAL CONDITION
BALANCE SHEET SUMMARY
The Company's total assets increased 6% to $683,000,000 at June 30, 2001 from
$643,000,000 at December 31, 2000. This increase in total assets was funded
primarily from the $37,000,000, or 7%, increase in deposits. The $37,000,000
increase in deposits has been invested in interest-bearing deposits in financial
institutions due to slowing loan demand. Loans, net of allowance for possible
loan losses, totaled $510,448,000 at June 30, 2001 or a 1.9% increase compared
to $501,080,000 at December 31, 2000. The allowance for loan losses is virtually
unchanged at $6,100,000 at June 30, 2001 compared to the preceding year end
balance. Securities increased $6,999,000, or 29.2% to $30,990,000 at June 30,
2001 from $23,991,000 at December 31, 2000. Federal funds sold decreased
$11,236,000, or 34.0% to $21,789,000 at June 30, 2001 from $33,025,000 at
December 31, 2000.
Total liabilities increased by 6.4% to $634,323,000 at June 30, 2001 compared to
$595,981,000 at December 31, 2000. This increase was composed primarily of a
$37,053,000, or 7.1% increase in total deposits. Federal Home Loan Bank advances
increased to $53,288,000 at June 30, 2001 compared to $46,211,000 at December
31, 2000.
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". These pronouncements apply to impaired loans
except for large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment including credit card, residential
mortgage, and consumer installment loans.
A loan is impaired when it is probable that the Company will be unable to
collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Impaired loans are measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, the Company shall
recognize an impairment by creating a valuation allowance with a corresponding
charge to the provision for loan losses or by adjusting an existing valuation
allowance for the impaired loan with a corresponding charge or credit to the
provision for loan losses.
The Company's first mortgage single family residential and consumer loans are
divided into various groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment and thus are not subject to the provisions
of SFAS Nos. 114 and 118. Substantially all other loans of the Company are
evaluated for impairment under the provisions of SFAS Nos. 114 and 118.
The Company considers all loans subject to the provisions of SFAS 114 and 118
that are on nonaccrual status to be impaired. Loans are placed on nonaccrual
status when doubt as to timely collection of principal or interest exists, or
when principal or interest is past due 90 days or more unless such loans are
well-secured and in the process of collection. Delays or shortfalls in loan
payments are evaluated with various other factors to determine if a loan is
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impaired. The decision to place a loan on nonaccrual status is also based on an
evaluation of the borrower's financial condition, collateral, liquidation value,
and other factors that affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all interest
accrued on the loan in the current fiscal year is reversed from income, and all
interest accrued and uncollected from the prior year is charged off against the
allowance for loan losses. Thereafter, interest on nonaccrual loans is
recognized as interest income only to the extent that cash is received and
future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A nonaccrual loan may be restored to accruing status
when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt.
Other loans may be classified as impaired when the current net worth and
financial capacity of the borrower or of the collateral pledged, if any, is
viewed as inadequate. In those cases, such loans have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt, and if such deficiencies
are not corrected, there is a probability that the Company will sustain some
loss. In such cases, interest income continues to accrue as long as the loan
does not meet the Company's criteria for nonaccrual status.
The Company's charge-off policy for impaired loans is similar to its charge-off
policy for all loans in that loans are charged-off in the month when they are
considered uncollectible.
Net charge-offs were $1,000,000 and $825,000 for the six month periods ended
June 30, 2001 and 2000, respectively. Total non-performing loans at June 30,
2001 were $9,300,000 or 1.81% of total loans as compared to $6,000,000 or 1.2%
of total loans at December 31, 2000. Other real estate owned by the Company was
$4,700,000 at June 30, 2001, an increase from the $3,100,000 level at December
31, 2000. Non-performing loans have increased substantially over the last 18
months and management believes that future increases in non-performing loans
could require increases in the provision for possible loan losses and could
result in future charges to earnings which would have a significant negative
impact on net earnings. The ratio of the allowance for loan losses to total
non-performing loans at June 30, 2001 was 66.5% as compared to 102.3% at
December 31, 2000.
LIQUIDITY AND ASSET MANAGEMENT
The Company's management seeks to maximize net interest income by managing the
Company's assets and liabilities within appropriate constraints on capital,
liquidity and interest rate risk. Liquidity is the ability to maintain
sufficient cash levels necessary to fund operations, meet the requirements of
depositors and borrowers and fund attractive investment opportunities. Higher
levels of liquidity bear corresponding costs, measured in terms of lower yields
on short-term, more liquid earning assets and higher interest expense involved
in extending liability maturities.
Liquid assets including cash, due from banks and federal funds sold totaled
$91,000,000 at June 30, 2001. In addition, the Company has $19,000,000 in
securities classified as available for sale that could be sold for liquidity
needs.
The Company's primary source of liquidity is a stable core deposit base. In
addition, loan payments provide a secondary source. Borrowing lines with
correspondent banks, Federal Home Loan Bank and the Federal Reserve augment
these traditional sources.
Interest rate risk (sensitivity) focuses on the earnings risk associated with
changing interest rates. Management seeks to maintain profitability in both
immediate and long-term earnings through funds management/interest rate risk
management. The Company's rate sensitivity position has an important impact on
earnings. Senior management of the banks meet monthly to analyze the rate
sensitivity position of the subsidiary banks. These meetings focus on the spread
between the banks' cost of funds and interest yields generated primarily through
loans and investments.
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The Company's securities portfolio consists of earning assets that provide
interest income. For those securities classified as held-to-maturity the Company
has the ability and intent to hold these securities to maturity or on a
long-term basis. Securities classified as available-for-sale include securities
intended to be used as part of the Company's asset/liability strategy and/or
securities that may be sold in response to changes in interest rate, prepayment
risk, the need or desire to increase capital and similar economic factors.
Securities totaling approximately $4,000,000 mature or will be subject to rate
adjustments within the next twelve months.
A secondary source of liquidity is the Company's loan portfolio. At June 30,
2001, loans of approximately $300,000,000 either will become due or will be
subject to rate adjustments within twelve months from the respective date.
Continued emphasis will be placed on structuring adjustable rate loans.
As for liabilities, certificates of deposits of approximately $289,000,000 will
become due during the next twelve months. Historically, there has been no
significant reduction in immediately withdrawable accounts such as negotiable
order of withdrawal accounts, money market demand accounts, demand deposit and
regular savings. Management anticipates that there will be no significant
withdrawals from these accounts in the future. However, future decreases in
rates could have a negative effect on total deposits.
Management believes that with current liquid assets, present maturities,
borrowing sources and the efforts of management in its asset/liability
management program, liquidity will not pose a problem in the near term future.
At the present time there are no known trends or any known commitments, demands,
events or uncertainties that will result in or that are reasonably likely to
result in the Company's liquidity changing in a materially adverse way.
CAPITAL POSITION AND DIVIDENDS
Effective April 22, 2001, the Company declared a 2 for 1 stock split. All per
share amounts in the financial statements have been adjusted to reflect the
stock split.
At June 30, 2001, total shareholders' equity was $40.8 million or 6.0% of total
assets. The increase in shareholders' equity during the six months ended June
30, 2001 results from the Company's net income of $1,499,000 and issuance of
54,130 shares of common stock. The increase was somewhat offset by the purchase
and retirement of 47,000 shares of common stock and $0.03 per share cash
dividend.
The Company's principal regulators have established minimum risk-based capital
requirements and leverage capital requirements for the Company and its
subsidiary banks. These guidelines classify capital into two categories of Tier
I and total risk-based capital. Total risk-based capital consists of Tier I (or
core) capital (essentially common equity less intangible assets) and Tier II
capital (essentially qualifying long-term debt, of which the Company and
subsidiary banks have none, and a part of the allowance for possible loan
losses). In determining risk-based capital requirements, assets are assigned
risk-weights of 0% to 100%, depending on regulatory assigned levels of credit
risk associated with such assets. The risk-based capital guidelines require the
subsidiary banks and the Company to have a total risk-based capital ratio of
8.0% and a Tier I risk-based capital ratio of 4.0%. Trust preferred securities
are allowed to be counted in Tier I capital, subject to certain limitations. The
Company has also reached an agreement with the Federal Reserve Bank of Atlanta
to maintain its bank subsidiaries as well capitalized for a period of two years
beginning October, 2000 and for the Company to maintain a total capital to risk
weighted assets ratio of at least 10%. At June 30, 2001, the Company's total
risk-based capital ratio was 10.53% and its Tier I risk-based capital ratio was
approximately 9.32% compared to ratios of 10.79% and 9.52%, respectively at
December 31, 2000. The required Tier I leverage capital ratio (Tier I capital to
average assets for the most recent quarter) for
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the Company is 4.0%. At June 30, 2001, the Company had a leverage ratio of 7.1%,
compared to 7.4% at December 31, 2000.
Subsequent to June 30, 2001, the Company issued $4,000,000 in trust preferred
securities, which amount may be included in future regulatory capital
computations.
IMPACT OF INFLATION
Although interest rates are significantly affected by inflation, the inflation
rate is immaterial when reviewing the Company's results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary component of market risk is interest rate volatility.
Fluctuations in interest rates will ultimately impact both the level of income
and expense recorded on a large portion of the Company's assets and liabilities,
and the market value of all interest-earning assets and interest-bearing
liabilities, other than those which possess a short term to maturity. Based upon
the nature of the Company's operations, the Company does not maintain any
foreign currency exchange or commodity price risk.
Interest rate risk (sensitivity) management focuses on the earnings risk
associated with changing interest rates. Management seeks to maintain
profitability in both immediate and long-term earnings through funds
management/interest rate risk management. The Company's rate sensitivity
position has an important impact on earnings. Senior management of the
subsidiary banks meet monthly to analyze the rate sensitivity position. These
meetings focus on the spread between the cost of funds and interest yields
generated primarily through loans and investments.
Declining interest rates, such as those incurred during the six months ended
June 30, 2001, tend to have a negative impact on the Company's net interest
income and, therefore, net earnings in the short term. Further declines in
interest rates could result in lower net interest margins and lower net
earnings.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 28, 2001, Houston Keith Boggs and William R. Boggs filed suit in the
Circuit Court for Madison County, Tennessee against the Company's wholly owned
subsidiary, the Bank of Dyer, and William Smallwood, the President of the Bank
of Dyer. Mr. Smallwood is also a director of the Company. The lawsuit alleges,
among other things, that Mr. Smallwood, individually, or in his position as
President of Bank of Dyer (i) breached a fiduciary duty owed to the plaintiffs
who purchased an interest Mr. Smallwood held in a business in Humboldt,
Tennessee; (ii) fraudulently induced plaintiffs into purchasing his interest in
the business; (iii) failed to disclose information indicating that the business
was overdrawn on accounts with the Bank of Dyer; (iv) improperly represented to
plaintiffs that loans made by the Bank of Dyer to plaintiffs were overdue; (v)
theatened advanced foreclosure on these loans; and (vi) acted in violation of
federal regulations. The plaintiffs seek to have the agreement transferring Mr.
Smallwood's interest in the business to the plaintiffs rescinded and to have the
court award them compensatory and punitive damages, as well as lost profits and
lost income. On June 28, 2001, the plaintiffs filed a motion for injunction
seeking an injunction or restraining order preventing Mr. Smallwood and the Bank
of Dyer from executing foreclosure or otherwise seizing any property secured by
any loans of the plaintiffs. No decision has been made on this motion as of the
date hereof.
The Bank of Dyer intends to vigorously defend this lawsuit and has notified its
insurance carrier who has agreed to represent the Bank of Dyer with respect to
this matter. The Company believes that the plaintiff's allegations are without
merit as to Bank of Dyer and that it is unlikely that the outcome will have a
material adverse effect on its results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the shareholders was held on April 28, 2000.
(b) At the Company's annual meeting the entire board of directors
was elected.
(c) (1) Each director was elected by the following tabulation:
Number
of Shares Broker
voting For Against Abstain Non-Votes
------ --- ------- ------- ---------
Tom Brooks 4,931,353 4,931,353 0 0 0
Jerry Cole 4,931,353 4,931,353 0 0 0
Jack Everett 4,931,353 4,931,353 0 0 0
Ronnie Gibson 4,931,353 4,931,353 0 0 0
Danny Herron 4,931,353 4,930,390 0 963,000 0
Frank Inman, Jr. 4,931,353 4,931,353 0 0 0
Tom E. Paschal 4,931,353 4,930,390 0 963,000 0
Joel Porter 4,931,353 4,931,353 0 0 0
Alex Richmond 4,931,353 4,931,353 0 0 0
Wayne Rodgers 4,931,353 4,930,553 0 800,000 0
Jim Rout 4,931,353 4,931,353 0 0 0
John Shepherd 4,931,353 4,931,353 0 0 0
Bill Smallwood 4,931,353 4,931,353 0 0 0
John S. Wilder, Sr. 4,931,353 4,931,353 0 0 0
(2) The ratification of the appointment of Heathcott & Mullaly PC
as the Company's independent auditor was approved as follows:
Number
of Shares Broker
voting For Against Abstain Non-Votes
------ --- ------- ------- ---------
4,931,353 4,884,411 25,534 21,408 0
ITEM 5. OTHER INFORMATION
Subsequent to June 30, 2001, the Company issued an additional $4,000,000 in
trust preferred securities. Proceeds for the issuance are currently used in
temporary investments and general purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits attached.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUMBERLAND BANCORP, INCORPORATED
(Registrant)
DATE: 8/14/01 /s/ Joel Porter
------------------ -------------------------------------------
Joel Porter, President (Principal Executive
Officer)
DATE: 8/14/01 /s/ Mark C. McDowell
------------------ -------------------------------------------
Mark C. McDowell
Chief Administrative Officer (Principal
Financial and Accounting Officer)
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