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 SEPTEMBER 30, 2001
Commission File Number 0-27393
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CUMBERLAND BANCORP, INCORPORATED
--------------------------------
(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: 13,808,236 shares at October 31, 2001.
CUMBERLAND BANCORP, INCORPORATED
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2001 (unaudited)
and December 31, 2000 (audited) 3
Consolidated Statements of Operations - For the three months and
nine months ended September 30, 2001 and 2000 (unaudited). 4
Consolidated Statements of Changes in Shareholders' Equity - For the
nine months ended September 30, 2001 (unaudited). 5
Consolidated Statements of Cash Flows - For the nine months ended
September 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. 14
Item 2. Changes in Securities and Use of Proceeds 14
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
ITEM 1. FINANCIAL STATEMENTS
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
September 30, December 31,
(Dollars in thousands, except share amounts) 2001 2000
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Assets:
Cash and due from banks $ 20,658 22,280
Interest-bearing deposits in financial institutions 2,802 14,988
Federal funds sold 42,506 33,025
Securities available for sale, at fair value 41,869 15,566
Securities held to maturity, fair value $12,542 at September 30, 2001
and $8,405 at December 31, 2000 12,259 8,425
Loans 524,498 507,217
Allowance for loan losses (7,606) (6,137)
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Loans, net 516,892 501,080
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Premises and equipment 24,276 23,467
Accrued interest receivable 5,443 5,644
Restricted equity securities 4,665 4,226
Investment in unconsolidated affiliates 5,105 4,983
Other real estate 3,889 3,142
Loan servicing rights 364 985
Other intangible assets 1,625 1,577
Other assets 4,590 4,069
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Total assets $ 686,943 643,457
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Liabilities and Shareholders' Equity:
Deposits
Noninterest-bearing $ 50,938 46,629
Interest-bearing 509,052 477,513
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Total deposits 559,990 524,142
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Notes payable 7,659 8,749
Federal funds purchased 7,120 9,575
Advances from Federal Home Loan Bank 52,852 46,211
Accrued interest payable 5,814 4,694
Other liabilities 1,445 2,610
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Total liabilities 634,880 595,981
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Trust preferred securities 12,000 8,000
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Shareholders' equity:
Common stock, $0.50 par value, authorized 20,000,000 shares;
shares issued - 13,808,236 in 2001 and 6,893,628 in 2000 6,904 3,447
Additional paid-in capital 22,289 25,526
Retained earnings 10,603 10,682
Accumulated other comprehensive income (loss) 267 (179)
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Total shareholders' equity 40,063 39,476
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Total liabilities and shareholders'
equity $ 686,943 643,457
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3
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ----------------------------
(Dollars in thousands except per share data) 2001 2000 2001 2000
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Interest income:
Loans, including fees $ 12,041 12,779 37,432 35,568
Securities 529 483 1,202 1,157
Deposits in financial institutions 326 65 1,272 215
Federal funds sold 211 304 846 743
Restricted equity securities dividends 104 48 301 173
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Total interest income 13,211 13,679 41,053 37,856
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Interest expense:
Time deposits of $100,000 or more 1,673 1,604 5,421 4,217
Other time deposits 4,498 4,825 14,329 13,103
Federal funds purchased 39 78 216 214
Notes payable, advances from Federal
Home Loan Bank, and trust preferred securities 1,050 747 3,053 2,053
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Total interest expense 7,260 7,254 23,019 19,587
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Net interest income 5,951 6,425 18,034 18,269
Provision for loan losses 3,333 547 4,385 1,821
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Net interest income after
provision for loan losses 2,618 5,878 13,649 16,448
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Other income:
Service charges on deposit accounts 902 773 2,607 1,921
Other service charges, commissions and fees 626 424 1,409 1,163
Mortgage banking activities 141 257 602 703
Gain (loss) on sale of SBA loans (2) 299 236 611
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Total other income 1,667 1,753 4,854 4,398
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Other expenses:
Salaries and employee benefits 3,108 2,963 9,229 8,340
Occupancy 826 707 2,477 1,957
Other operating 2,259 1,938 6,381 5,405
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Total other expenses 6,193 5,608 18,087 15,702
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Income (loss) before income
taxes (benefits) (1,908) 2,023 416 5,144
Income tax expense (benefit) (746) 750 79 1,901
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Net earnings (loss) $ (1,162) 1,273 337 3,243
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Net earnings (loss) per share - basic $ (0.08) 0.09 0.02 0.24
Net earnings (loss) per share - diluted (0.08) 0.09 0.02 0.23
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Weighted average shares outstanding - basic 13,806,997 13,783,676 13,815,619 13,760,664
Weighted average shares outstanding - diluted 14,005,067 14,026,524 14,038,005 14,025,126
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4
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Accumulated
Common Stock Additional Other Total
------------------------ Paid-in Retained Comprehensive Shareholders'
(Dollars in thousands) Shares Amount Capital Earnings Income (Loss) Equity
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 6,893,628 $ 3,447 25,526 10,682 (179) 39,476
Purchase and retirement of common stock (47,000) (24) (259) (283)
Issuance of common stock in connection
with the acquisition of minority
interest of Bank of Mason 53,250 27 453 480
Two for one stock split 6,899,878 3,450 (3,450)
Exercise of stock options 8,480 4 19 23
Dividends $0.03 per share (416) (416)
Comprehensive Income:
337
Other Comprehensive Income
Change in unrealized loss on
securities available for sale
net of $273 in income taxes 446
Total Comprehensive Income 783
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Balance, September 30, 2001 13,808,236 $ 6,904 22,289 10,603 267 40,063
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5
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
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(Dollars in thousands) 2001 2000
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Net earnings $ 337 3,243
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Provision for loan losses 4,385 1,821
Depreciation and amortization 1,731 1,149
Operations of unconsolidated affiliates 408 (281)
Mortgage loans originated for sale (25,028) (26,800)
Proceeds from sale of mortgage loans 22,529 24,000
(Increase) decrease in accrued interest receivable 201 (888)
Increase (decrease) in accrued interest payable and other liabilities (45) 2,037
Other, net (5,470) (1,223)
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Total adjustments (1,289) (185)
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Net cash provided (used) by operating activities (952) 3,058
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Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in financial institutions 12,186 (2,255)
Increase in federal funds sold (9,481) (9,150)
Purchases of securities available for sale (36,078) (109)
Purchases of securities held to maturity (9,277) (2,340)
Proceeds from sales of securities available for sale 1,672 0
Proceeds from maturities and redemptions of securities available for sale 8,932 33
Proceeds from maturities and redemptions of securities held to maturity 5,791 570
Net increase in loans (17,698) (53,477)
Investment in unconsolidated affiliates (300) 365
Purchases of premises and equipment (2,190) (7,839)
Purchases and improvements to other real estate 0 (1,009)
Proceeds from sale of other real estate 3,505 0
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Net cash used by investing activities (42,938) (75,211)
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Cash flows from financing activities:
Net increase in deposits 35,848 69,424
Decrease in federal funds purchased (2,455) (991)
Increase (decrease) in advances from Federal Home Loan Bank 6,641 (3,258)
Proceeds from notes payable 0 4,264
Repayments of notes payable (1,090) (2,862)
Proceeds from issuance of trust preferred securities 4,000 0
Dividends paid (416) (344)
Proceeds from issuance of common stock 23 438
Purchase and retirement of common stock (283) 0
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Net cash provided by financing activities 42,268 66,671
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Net decrease in cash (1,622) (5,482)
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 $ 20,658 12,773
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Supplemental disclosure of cash flow information:
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Interest paid $ 21,899 18,637
Income taxes paid 1,434 2,263
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6
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements as of September 30,
2001 and for the three month and nine month periods ended September 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 nine month periods ending September 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.
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.
Certain reclassifications have been made to prior year amounts to
conform to the 2001 presentation.
7
CUMBERLAND BANCORP, INCORPORATED
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The purpose of this discussion is to provide insight into the financial
condition and results of operations of the Company and its subsidiaries. This
discussion should be read in conjunction with the consolidated financial
statements. Reference should also be made to the Company's Annual Report on Form
10-K, for a more complete discussion of factors that impact liquidity, capital
and the results of operations.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements regarding,
among other things, the anticipated financial and operating results of the
Company. The words "anticipate," "could," "expects," and "believes" and similar
expressions are intended to identify such forward looking statements but other
statements not based on historical information may also be considered
forward-looking. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release any modifications or revisions to
these forward-looking statements to reflect events or circumstances occurring
after the date hereof or to reflect the occurrence of unanticipated events.
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions investors that
future financial and operating results may differ materially from those
projected in forward-looking statements made by, or on behalf of, the Company.
Such forward-looking statements involve known and unknown risks and
uncertainties, including, but not limited to, increased competition with other
financial institutions, lack of sustained growth in the Company's market areas,
sudden downturns in the business of one or more large customers, sudden adverse
interest rate changes, inadequate allowance for loan losses and loss of key
personnel. These risks and uncertainties may cause the actual results or
performance of the Company to be materially different from any future results or
performance expressed or implied by such forward-looking statements. The
Company's future operating results depend on a number of factors which were
derived utilizing numerous assumptions and other important factors that could
cause actual results to differ materially from those projected in
forward-looking statements.
OVERVIEW
The Company experienced a loss for the third quarter of 2001 primarily
as a result of additional provisions for loan losses. Contributing factors
include operating expenses associated with expansion activities and shrinking
interest margins.
The increase in the provision of loan losses was necessary in order to
increase the balance in the allowance for loan losses to an appropriate level
considering the decline in credit quality of the Company's loan portfolio. The
Company's loan portfolio has been adversely impacted by the current economic
conditions. Management has implemented an aggressive program to address these
issues, including the addition of personnel and enhancing its system for
identifying problem loans. These matters are discussed further below.
8
RESULTS OF OPERATIONS
Net earnings decreased 89.61% to $337,000 for the first nine months of
2001 as compared to the same period in 2000. The Company had a net loss of
$1,162,000 in the third quarter of 2001, compared to net earnings of $1,273,000
in the third quarter of 2000. As previously mentioned, the decline in earnings
is primarily attributable to the increase in provisions for loan losses and the
shrinking net interest margin.
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. Net interest income was adversely affected by the Federal
Reserve's actions taken to reduce interest rates during the first nine months
of 2001. Earning assets repriced sooner than interest bearing liabilities,
which resulted in a significant contraction in the net interest margin (net
interest income divided by average earning assets). The net interest margin was
approximately 3.9% for the nine month period ended September 30, 2001, as
compared to approximately 4.6% for the same period one year earlier. The
Company believes that as interest rates stabilize or increase the negative
impact on the net interest margin should reverse. The Company believes that
other contributing factors to the declining net interest margin were lost
interest on non-performing loans and the issuance of trust preferred
securities. The Company's total interest income, excluding tax
equivalent adjustments, increased $3,197,000 or 8.45% during the nine months
ended September 30, 2001 and decreased $468,000 or 3.42% for the three months
ended September 30, 2001 as compared to the same periods in 2000. The increase
in total interest income for the nine months ended September 30, 2001 was
primarily attributable to an increase in average earning assets. This includes a
17.8% increase in average loans outstanding and a 666% increase in the average
interest bearing deposits in financial institutions in the first nine months of
2001 as compared to 2000. The decrease for the three month period ended
September 30, 2001 was the result of shrinking interest margins associated with
declining interest rates, issuance of additional trust preferred securities and
the increase in non-performing assets.
Interest expense increased $3,432,000 or 17.52% for the nine months
ended September 30, 2001 and $6,000 or 0.08% in the three months ended September
30, 2001 compared to the comparable periods in 2000. The overall increase in
total interest expense for the first nine months of 2001 as compared to 2000 was
attributable to an increase in average interest-bearing liabilities. The
foregoing resulted in a decrease in net interest income, before the provision
for loan losses, of $235,000 or 1.29% for the nine months ended September 30,
2001 and a decrease of $474,000 or 7.38% for the three months ending September
30, 2001 as compared to the same periods in 2000. The Company's believes that
its current interest rate sensitivity position results in lower net interest
margins in a declining interest rate environment in the short-term. The Company
is more interest rate sensitive on the asset side of the balance sheet than the
liability side in the short-term horizon. Therefore, declining interest rates in
the first nine months of 2001 have resulted in lower net interest margins.
PROVISION FOR LOAN LOSSES
The significant increase in the provision for loan losses for both
periods in 2001 as compared to 2000 was necessary due to increased charge offs
and an overall decline in asset quality, including a significant increase in
total non-performing loans, as discussed under "Balance Sheet Summary" below.
The provision for loan losses was $4,385,000 for the nine months ended September
30, 2001 and $3,333,000 for the three months ended September 30, 2001 compared
to $1,821,000 and $547,000, respectively, during the same periods 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 level of the allowance and the amount of the provision involve
evaluation of uncertainties and matters of judgment. Management believes the
allowance for loan losses at September 30, 2001 to be adequate based on facts
and circumstances available at that date.
9
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 and gain on sale of other real estate.
Total noninterest income increased by 10.37% to $4,854,000 and decreased by
4.91% to $1,667,000 for the nine month and three month periods ending September
30, 2001, respectively, compared to the same periods in 2000. The overall
increase for the nine months ended September 30, 2001 was due primarily to
increased revenue generated from service charges on deposit accounts. Service
charges on deposit accounts increased $686,000 or 35.7% during the nine months
ended September 30, 2001 and 17% or $129,000 for the three months ended
September 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 decreased
$101,000 or 14.37% during the nine months ended September 30, 2001 and $116,000
or 45.14% for the three months ended September 30, 2001 compared to the same
period last year. Gains on sales of SBA loans during the nine months ended
September 30, 2001 were $236,000 compared to $611,000 in the same period in
2000. Other service charges, fees and commissions totaled $1,409,000 and
$1,163,000 during the nine months ended September 30, 2001 and 2000,
respectively, an increase of $246,000 or 21.15% and $626,000 and $424,000 during
the three months ended September 30, 2001 and 2000, respectively, an increase of
$202,000 or 47.64%.
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
$2,385,000 or 15.19% during the first nine months ended September 30, 2001 and
$585,000 or 10.43% during the three months ended September 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 278 at September 30, 2001, from 257 at September 30, 2000.
INCOME TAXES
The Company had income tax expense of $79,000 for the nine months ended
September 30, 2001 and an income tax benefit of $746,000 for the three months
ended September 30, 2001. This reflects a decrease in tax expense of $1,822,000
for the nine month period ended September 30, 2001 and $1,496,000 for the three
month period ended September 30, 2001 from the comparable periods in 2000 and is
directly related to the decline in pretax income.
FINANCIAL CONDITION
BALANCE SHEET SUMMARY
The Company's total assets increased 6.76% to $687 million at September
30, 2001 from $643 million at December 31, 2000. This increase in total assets
was funded primarily from the 7% increase in deposits of $36 million. The
deposits have been invested primarily in securities, which increased $30 million
during the same period, due to slowing loan demand. Overall loan growth was
$17.3 million or approximately 3.41% during the first nine months of 2001.
Net charge-offs were $2,916,000 and $1,157,000 for the nine month
periods ended September 30, 2001 and 2000, respectively. Total non-performing
loans at September 30, 2001 were $12.6 million or 2.43% of total loans
10
as compared to $6.2 million or 1.3% of total loans at December 31, 2000. Other
real estate was $3.9 million at September 30, 2001, an increase from the $3.1
million level at December 31, 2000.
The allowance for loan losses has increased 23.94% to $7.6 million at
September 30, 2001 compared to $6.1 million on December 31, 2000. The allowance
for loan losses as a percentage of total outstanding loans was approximately
1.45% at September 30, 2001 and 1.21% at December 31, 2000. The allowance for
loan losses as a percentage of total non-performing loans declined to 60% at
September 30, 2001 compared to 102% at December 31, 2000.
The Company has experienced a significant decline in credit quality
during 2001 as compared to the prior year. As a result, net charge offs have
increased significantly over the prior year and total non-performing loans is at
the highest level it has been in recent years. The majority of problem loans are
the result of lending activities in the western portion of the State of
Tennessee. Management has enhanced its credit review process, added personnel
and focused its efforts on improving overall credit administration. Furthermore,
the Company's borrowers in the western portion of the State of Tennessee have
had higher frequencies of bankruptcies and suffered more from weaker overall
economic conditions than borrowers in other geographic regions in which the
Company does business. Should credit quality decline due to worsening economic
conditions or other reasons, additional provisions for loan losses will likely
be required to maintain an adequate allowance for loan losses.
In response to the issues discussed above, management has implemented
several policies to adjust lending authorities, realign management personnel,
restructure credit underwriting policies and procedures, create a special assets
department to deal with identified problem credits and enhance collection
procedures. The Company's net charge-offs and loan loss premiums are to a
significant degree impacted by economic conditions in the Company's markets,
particularly in real estate, and the recent downturn in such conditions could
continue to adversely impact net charge-offs and loan loss provisions.
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
11
if a loan is impaired. The decision to place a loan on nonaccrual status is also
based on an evaluation of the borrower's financial condition, collateral,
liquidation value, and other factors that affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all
interest accrued on the loan in the current fiscal year is reversed from income,
and all interest accrued and uncollected from the prior year is charged off
against the 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.
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 $66 million. In addition, the Company has $42 million in securities
classified as available for sale that could be sold for liquidity needs.
The Company believes its primary source of liquidity is a stable core
deposit base. In addition, loan payments provide a secondary source. Borrowing
lines with correspondent banks, the Federal Home Loan Bank and Federal Reserve
augment these traditional sources.
Interest rate risk (sensitivity) focuses on the earnings risk
associated with changing interest rates. Management seeks to maintain
profitability in both immediate and long-term earnings through funds
management/interest rate risk management. The Company's rate sensitivity
position has an important impact on earnings. Senior management of the banks
meet monthly to analyze the rate sensitivity position of the subsidiary banks.
These meetings focus on the spread between the banks' cost of funds and interest
yields generated primarily through loans and investments.
12
The Company's securities portfolio consists of earning assets that
provide interest income. For those securities classified as held-to-maturity the
Company has the ability and intent to hold these securities to maturity or on a
long-term basis. Securities classified as available-for-sale include securities
intended to be used as part of the Company's asset/liability strategy and/or
securities that may be sold in response to changes in interest rate, prepayment
risk, the need or desire to increase capital and similar economic factors.
Securities totaling approximately $5 million mature or will be subject to rate
adjustments within the next twelve months.
A secondary source of liquidity is the Company's loan portfolio. At
September 30, 2001, loans of approximately $296 million either will become due
or will be subject to rate adjustments within twelve months from the respective
date. Continued emphasis will be placed on structuring adjustable rate loans.
As for liabilities, certificates of deposits of approximately $280
million will become due during the next twelve months. Historically, there has
been no significant reduction in immediately withdrawable accounts such as
negotiable order of withdrawal accounts, money market demand accounts, demand
deposit and regular savings. Management anticipates that there will be no
significant withdrawals from these accounts in the future. However, future
decreases in rates could have a negative effect on total deposits.
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 September 30, 2001, total shareholders' equity was $40.06 million or
6.0% of total assets. The increase in shareholders' equity during the nine
months ended September 30, 2001 results from the Company's net income of
$337,000 and issuance of 61,730 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. At
September 30, 2001, the Company's total risk-based capital ratio was 11.58% and
its Tier I risk-based capital ratio was approximately 10.06% 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 the Company is 4.0%. At September 30, 2001, the Company had a
leverage ratio of 7.3%, compared to 7.4% at December 31, 2000.
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IMPACT OF INFLATION
Although interest rates are significantly affected by inflation, the
inflation rate is immaterial when reviewing the Company's results of operations.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 addresses financial accounting and reporting for business combinations
initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets for fiscal years beginning after
December 15, 2001. The impact of the adoption of SFAS No. 141 and 142 on the
financial position and results of operations of the Company has not been
determined, but is not expected to have a material impact.
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 nine months
ended September 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 29, 2001, a lawsuit was filed against a subsidiary bank of the
Company and one of its officers. The suit seeks recovery of losses and punitive
damages of over $3 million. The subsidiary bank has filed a motion to dismiss
the lawsuit for improper venue. A hearing has been set on such motion for
November 2001. The Company continues to believe that the plaintiff's allegations
are without merit as to its subsidiary bank and that it is unlikely that the
outcome will have a material adverse effect on the Company's results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The Company signed a non-binding letter of intent in October 2001 to
acquire South Central Bancshares, Inc. of Russellville, Kentucky. The combined
bank holding company would have total assets of approximately $1 billion with
ownership interests in ten banks located within Tennessee and Kentucky. It would
have 38 financial offices operating in 15 different counties. South Central
Bancshares, Inc. is a Kentucky-based bank holding company with total assets of
$314 million as of June 2001. The transaction contemplated by the non-binding
letter of intent is subject to the negotiation and execution of a definitive
agreement, which will have various closing conditions, including receipt of the
necessary regulatory approval and the necessary shareholder approval.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits
(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: November 14, 2001 /s/ Joel Porter
-----------------------------------
Joel Porter, President
(Principal Executive Officer)
DATE: November 14, 2001 /s/ Andy LoCascio
-----------------------------------
Andy LoCascio
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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