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, 2002
Commission File Number 0-27393
CUMBERLAND BANCORP, INCORPORATED
(Exact Name of Registrant As Specified in Its Charter)
Tennessee 62-1297760
------------------------------- -----------------------------
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
4205 Hillsboro Pike, Suite 204, Nashville, Tennessee 37215
----------------------------------------------------------
(Address of Principal Executive Offices and Zip Code)
(615) 383-4758
--------------
(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: 14,039,916 shares at October 31, 2002.
1
CUMBERLAND BANCORP, INCORPORATED
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2002 (unaudited) 3
and December 31, 2001 (audited)
Consolidated Statements of Earnings - For the three months and 4
nine months ended September 30, 2002 and 2001 (unaudited).
Consolidated Statements of Changes in Shareholders' Equity - For the 5
nine months ended September 30, 2002 and 2001(unaudited).
Consolidated Statements of Cash Flows - For the nine months 6
ended September 30, 2002 and 2001 (unaudited).
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 13
Item 4. Controls and Procedures 13
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. 14
Item 4. Submission of Matters to a Vote of Security Holders. 14
Item 5. Other Information. 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures
2
ITEM 1. FINANCIAL STATEMENTS
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
September 30, December 31,
(Dollars in thousands, except share amounts) 2002 2001
------------- ------------
Assets:
Cash and due from banks $ 34,978 20,868
Interest-bearing deposits in financial institutions 5,235 4,563
Federal funds sold 28,624 19,531
Securities available for sale, at fair value 55,832 42,814
Securities held to maturity, fair value $9,683 at September 30, 2002
and $12,814 at December 31, 2001 9,237 12,735
Loans 524,870 522,245
Allowance for loan losses (9,233) (9,023)
--------- --------
Loans, net 515,637 513,222
--------- --------
Premises and equipment 23,326 23,871
Accrued interest receivable 3,860 4,693
Restricted equity securities 4,979 4,719
Investment in unconsolidated affiliates 5,837 5,195
Other real estate 6,963 7,330
Loan servicing rights 242 327
Other intangible assets 1,597 1,597
Other assets 4,960 6,046
--------- --------
Total assets $ 701,307 667,511
========= ========
Liabilities and Shareholders' Equity:
Deposits
Noninterest-bearing $ 58,728 52,395
Interest-bearing 529,307 497,029
--------- --------
Total deposits 588,035 549,424
--------- --------
Notes payable 5,550 7,659
Federal funds purchased 0 1,675
Advances from Federal Home Loan Bank 50,852 50,852
Trust preferred securities 12,000 12,000
Accrued interest payable 3,269 3,994
Other liabilities 1,591 2,594
--------- --------
Total liabilities 661,297 628,198
--------- --------
Shareholders' equity:
Common stock, $0.50 par value, authorized 20,000,000 shares;
shares issued - 14,034,416 in 2002 and 13,808,236 in 2001 7,017 6,904
Additional paid-in capital 22,792 22,289
Retained earnings 9,641 10,061
Accumulated other comprehensive income 560 59
--------- --------
Total shareholders' equity 40,010 39,313
--------- --------
Total liabilities and shareholders'
equity $ 701,307 667,511
========= ========
3
CUMBERLAND BANCORP, INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ --------------------------
(Dollars in thousands except per share data) 2002 2001 2002 2001
----------- ----------- ---------- ----------
Interest income:
Loans, including fees $ 9,612 12,041 29,626 37,432
Securities 681 529 2,094 1,202
Deposits in financial institutions 62 326 110 1,272
Federal funds sold 165 211 531 846
Restricted equity securities dividends 53 104 178 301
----------- ----------- ---------- ----------
Total interest income 10,573 13,211 32,539 41,053
----------- ----------- ---------- ----------
Interest expense:
Time deposits of $100,000 or more 1,174 1,673 3,323 5,421
Other time deposits 2,563 4,498 8,184 14,329
Federal funds purchased 12 39 54 216
Notes payable, advances from Federal Home Loan Bank, and trust
preferred securities 906 1,050 2,778 3,053
----------- ----------- ---------- ----------
Total interest expense 4,655 7,260 14,339 23,019
----------- ----------- ---------- ----------
Net interest income 5,918 5,951 18,200 18,034
Provision for loan losses 494 3,333 5,113 4,385
----------- ----------- ---------- ----------
Net interest income after provision
for loan losses 5,424 2,618 13,087 13,649
----------- ----------- ---------- ----------
Other income:
Service charges on deposit accounts 1,005 902 2,808 2,607
Other service charges, commissions and fees 1,037 626 1,796 1,409
Mortgage banking activities 351 141 1,128 602
Gain on sale of securities 223 -- 223 --
Gain (loss) on sale of SBA loans -- (2) 37 236
----------- ----------- ---------- ----------
Total other income 2,616 1,667 5,992 4,854
----------- ----------- ---------- ----------
Other expenses:
Salaries and employee benefits 2,974 3,108 9,338 9,229
Occupancy 838 826 2,575 2,477
Other operating 2,538 2,259 6,888 6,381
----------- ----------- ---------- ----------
Total other expenses 6,350 6,193 18,801 18,087
----------- ----------- ---------- ----------
Income (loss) before income taxes (benefits) 1,690 (1,908) 278 416
Income tax expense (benefit) 657 (746) 76 79
----------- ----------- ---------- ----------
Net earnings (loss) $ 1,033 (1,162) 202 337
Other comprehensive income (loss) 163 857 501 105
Total comprehensive income (loss) 1,196 (305) 703 442
=========== =========== ========== ==========
Net earnings (loss) per share - basic $ 0.07 (0.08) 0.01 0.02
Net earnings (loss) per share - diluted 0.07 (0.08) 0.01 0.02
=========== =========== ========== ==========
Weighted average shares outstanding - basic 13,967,307 13,806,997 13,871,184 13,815,619
Weighted average shares outstanding - diluted 14,117,074 14,005,067 14,019,048 14,038,005
=========== =========== ========== ==========
4
CUMBERLAND BANCORP, INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002
UNAUDITED
Accumulated
Other
Compre- Total
Common Stock Additional hensive Share-
--------------------------- Paid-in Retained Income holders'
(Dollars in thousands) Shares Amount Capital Earnings (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:
Net earnings -- -- -- 337 --
Other Comprehensive Income:
Change in unrealized loss on
securities available for sale net of
$273 in income taxes -- -- -- -- 446
Total Comprehensive Income 783
----------- ------- ------- ------- ---- -------
Balance, September 30, 2001 13,808,236 6,904 22,289 10,603 267 40,063
=========== ======= ======= ======= ==== =======
Balance, December 31, 2001 13,808,236 $ 6,904 22,289 10,061 59 39,313
Exercise of stock options 226,180 113 503 -- -- 616
Dividends $0.045 per share -- -- -- (622) -- (622)
Comprehensive Income:
Net earnings -- -- -- 202 -- --
Other Comprehensive Income:
Change in unrealized gain on
securities available for sale net of
$307 in income taxes -- -- -- -- 501 --
Total Comprehensive Income 703
----------- ------- ------- ------- ---- -------
Balance, September 30, 2002 14,034,416 $ 7,017 22,792 9,641 560 40,010
=========== ======= ======= ======= ==== =======
5
CUMBERLAND BANCORP, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
UNAUDITED
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
(Dollars in thousands) 2002 2001
-------- -------
Net earnings $ 202 337
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Provision for loan losses 5,113 4,385
Depreciation and amortization 1,326 1,731
Operations of unconsolidated affiliates 202 408
Mortgage loans originated for sale (30,676) (25,028)
Proceeds from sale of mortgage loans 39,362 22,529
Decrease in accrued interest receivable 833 201
Decrease in accrued interest payable and other liabilities (1,728) (45)
Other, net 1,068 (5,470)
-------- -------
Total adjustments 15,500 (1,289)
-------- -------
Net cash provided (used) by operating activities 15,702 (952)
-------- -------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits in financial institutions (672) 12,186
Increase in federal funds sold (9,093) (9,481)
Purchases of securities available for sale (46,975) (36,078)
Purchases of securities held to maturity (3,775) (9,277)
Proceeds from sales of securities 15,060 --
Proceeds from maturities and redemptions of securities available for sale 12,681 10,604
Proceeds from maturities and redemptions of securities held to maturity 4,393 5,791
Net increase in loans (7,528) (17,698)
Investment in unconsolidated affiliates (844) (300)
Purchases of premises and equipment (781) (2,190)
Proceeds from sale of other real estate 912 3,505
-------- -------
Net cash used by investing activities (36,622) (42,938)
-------- -------
Cash flows from financing activities:
Net increase in deposits 38,611 35,848
Decrease in federal funds purchased (1,675) (2,455)
Increase (decrease) in advances from Federal Home Loan Bank 0 6,641
Repayments of notes payable (2,109) (1,090)
Proceeds from issuance of trust preferred securities 0 4,000
Dividends paid (413) (416)
Proceeds from issuance of common stock 616 23
Purchase and retirement of common stock 0 (283)
-------- -------
Net cash provided by financing activities 35,030 42,268
-------- -------
Net increase (decrease) in cash 14,110 (1,622)
Cash and due from banks at beginning of year 20,868 22,280
-------- -------
Cash and due from banks at end of period $ 34,978 20,658
======== =======
Supplemental disclosure of cash flow information:
Interest paid $ 15,064 21,899
Income taxes paid 349 1,434
======== =======
6
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements as of September 30, 2002 and for
the three and nine month periods ended September 30, 2002 and 2001 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 accounting principles generally accepted in the United
States of America for complete financial statements. Operating results for the
three month and nine month periods ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. For further information, refer to the 2001 consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K.
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 within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 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, sudden adverse interest rate changes, unexpected
deterioration in the financial condition or liquidity of borrowers, inadequate
allowance for loan losses, legal and regulatory changes 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
Cumberland Bancorp continued to experience asset growth throughout the first
nine months of 2002 primarily as a result of increased deposit growth as its
subsidiary banks attracted new customers and increased deposits from existing
customers. Loan receivables increased slightly from both the previous year end
and the June 30, 2002 totals. Management remains focused on monitoring and
correcting deterioration in asset quality. Although the provision for loan
losses in the third quarter was at more normal levels, the substantial second
quarter provision, combined with lost interest income related to non-performing
assets, caused net income in the nine month period ended September 30, 2002 to
be minimal.
Interest income remains adversely impacted from the reduction in market interest
rates experienced in 2001. Although interest expense associated with the
Company's high level of time deposits benefited from these same rate reductions,
deposit growth continues to outpace loan growth resulting in a lower earning
asset yield stemming from the investment of these excess deposits.
8
RESULTS OF OPERATIONS
Cumberland Bancorp's results of operations depend primarily upon the level of
net interest income, noninterest income and its noninterest expenses. For the
three and nine months ended September 30, 2002 the company had net earnings of
$1,033,000 and $202,000, respectively. This compares to a loss of $1,162,000 and
net earnings of $337,000 for the same periods in 2001. Provision for loan losses
continues to negatively impact earnings and totaled $5.1 million and $494,000
for the nine and three month periods of 2002, respectively. Net loan charge offs
for the same time periods equaled $4.9 million and $1.5 million.
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, decreased
$8.5 million or 20.7% during the nine months ended September 30, 2002 and $2.6
million or 20.0% for the three months ended September 30, 2002 as compared to
the same periods in 2001. The decrease in total interest income was primarily
attributable to the ongoing repricing of assets to the 475 basis point reduction
in market interest rates throughout 2001, which has not been offset by
significant loan growth. Also restricting interest income is the level of
nonperforming loans, which has increased $5.4 million since December 31, 2001 to
$19.4 million. Had such loans been performing in the nine month period ended
September 30, 2002, interest income would have increased by $814,000.
Prepayments on loans and called securities have increased the level of
low-earning Federal funds sold as a result of lower loan demand. Excess cash
from deposit growth has been invested in securities. Interest income from the
securities portfolio increased 74.2% for the nine months ended September 30,
2002 compared to the same period in 2001.
Interest expense decreased $8.7 million or 37.7% for the nine months ended
September 30, 2002 and $2.6 million or 35.9% in the three months ended September
30, 2002 compared to those periods in 2001. The overall decrease in total
interest expense for the first nine months of 2002 as compared to 2001 was
attributable to the lower interest rate environment. Renewals of maturing time
deposits as well as new deposit growth are bearing considerably lower interest
rates than those paid in 2001. Additionally, relatively high interest cost
borrowed money was reduced $3.8 million since December 31, 2001. The foregoing
resulted in an increase in net interest income, before the provision for loan
losses, of $166,000 or 0.9% for the nine months ended September 30, 2002 and a
decrease of $33,000 or 0.55% for the three months ended September 30, 2002 as
compared to the same periods in 2001. The decrease in net interest income for
the three months ended September 30, 2002 is primarily a result of the increase
in deposit growth invested in lower earning assets.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $5.1 million for the nine months ended
September 30, 2002 and $494,000 for the three months ended September 30, 2002
compared to $4.4 million and $3.3 million, respectively, for the same periods in
2001. Net loan charge-offs of $4.9 million over the nine month period ended
September 30, 2002 warranted the additional provision. Deteriorating economic
conditions have placed stress on some of our commercial and consumer borrowers
causing weaknesses and inability of such borrowers to pay their loan obligations
as scheduled. Our west Tennessee banks in particular have experienced a higher
than normal amount of bankruptcies among borrowers which account for a large
portion of charge offs. 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, internal
9
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 monitors its loan portfolio in an effort
to identify potential problem loans. The provision for loan losses raised the
allowance for loan losses to $9.2 million at September 30, 2002, an increase of
2.3% from $9.0 million at December 31, 2001. The allowance for loan losses as a
percentage of total outstanding loans was approximately 1.8% at September 30,
2002 compared to 1.7% at December 31, 2001.
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 September 30, 2002 to be adequate, further
deterioration in problem credits or the impact of deteriorating economic
conditions on other businesses, could require increases in the provision for
loan losses and could result in future charges to earnings which could 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.
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 23.4% to $6.0 million and 56.9%
to $2.6 million for the nine month and three month periods ending September 30,
2002, respectively, compared to the same periods in 2001. The largest component
of noninterest income is revenue generated on deposit accounts. Service charges
on deposit accounts increased $201,000 or 7.7% during the nine months ended
September 30, 2002 and 11.4% to $1.0 million for the three months ended
September 30, 2002 compared to the same periods in 2001. Management has assessed
the overall fee structure on deposit accounts in an effort to generate more
noninterest income and emphasized the collection of such fees. Other service
charges, fees and commissions totaled $1.8 million and $1.4 million during the
nine months ended September 30, 2002 and 2001, respectively, an increase of
$387,000 or 27.5%. This line item was $1.0 million and $626,000 during the three
months ended September 30, 2002 and 2001, respectively, an increase of $411,000
or 65.7%. This increase includes proceeds from an insurance claim of $161,000
and gain on sale of other real estate owned of $120,000. Revenue from mortgage
banking activities increased $526,000 or 87.4% during the nine months ended
September 30, 2002 and $210,000 or 148.9% for the three months ended September
30, 2002 compared to the same period last year. Mortgage loan activity increased
during 2002 stemming from the favorable interest rates environment. There were
no sales of SBA loans during the three months ended September 30, 2002. Total
gains on sale of SBA loans for the nine months of 2002 were $37,000 compared to
$236,000 in the same period in 2001.
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 $714,000 or 3.9%
during the first nine months ended September 30, 2002 and $157,000 or 2.5%
during the three months ended September 30, 2002 compared to the same periods in
2001. The increases in noninterest expense are primarily attributable to
expenses associated with other real estate owned totaling $548,000 and increases
in salaries and employee benefits and other costs necessary to support the
Company's expanded operations. The Company is in the process of centralizing
certain backroom operations. The impact of this centralization has not been
quantified as to the efficiencies to be gained or its affect on profitability.
10
NEW ACCOUNTING PRONOUNCEMENT
On October 1, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 147, "Acquisitions of
Certain Financial Institutions." SFAS No. 147 is effective October 1, 2002.
Under SFAS No. 147, the excess of the fair value of liabilities assumed over the
fair value of tangible and identifiable intangible assets acquired in a
financial institution business combination represents goodwill that should be
accounted for under SFAS No. 142, "Goodwill and Other Intangible Assets." If
certain criteria are met, the amount of the unidentifiable intangible asset
resulting from prior financial institutions acquisitions is to be reclassified
to goodwill upon adoption of this Statement. Financial institutions meeting
conditions outlined in SFAS No. 147 are required to restate previously issued
financial statements. The objective of the restatement is to present the balance
sheet and income statement as if the amount accounted for under SFAS No. 72 as
an unidentifiable intangible asset had been reclassified to goodwill as of the
date the Company adopted SFAS No. 142. The Company adopted SFAS No. 147
effective September 30, 2002. As a result, no amortization expense is reflected
in the 2002 statements of operations. Without the adoption of SFAS No. 147,
amortization expense would have been the same as it was in 2001 which amounted
to $86,000 and $29,000 for the nine month and three month periods ended
September 30, 2001.
INCOME TAXES
The Company recorded an income tax expense of $76,000 for the nine months ended
September 30, 2002 and $657,000 for the three months ended September 30, 2002.
This reflects a decrease of $3,000 for the nine month period and an increase of
$1.4 million for the three month period from 2001 and is directly related to the
changes in pretax income over the time periods.
FINANCIAL CONDITION
BALANCE SHEET SUMMARY
The Company's total assets increased 5.1% to $701.3 million at September 30,
2002 from $667.5 million at December 31, 2001. This increase in total assets was
funded primarily from the 7.0% increase in deposits of $38.6 million. Loans, net
of allowance for loan losses, totaled $515.6 million at September 30, 2002 or a
0.5% increase compared to $513.2 million at December 31, 2001. Significant
management resources were required for oversight of asset quality related
issues, which limited management's ability to focus on marketing and on overall
loan growth. The allowance for loan losses increased 2.3% to $9.2 million at
September 30, 2002 compared to the preceding year end balance of $9.0 million.
Securities increased $9.5 million or 17.1% to $65.1 million at September 30,
2002 from $55.5 million at December 31, 2001. Federal Funds sold increased $9.1
million or 46.5% to $28.6 million at September 30, 2002 from $19.5 million at
December 31, 2001.
Total liabilities increased by 5.4% to $661.3 million at September 30, 2002
compared to $628.2 million at December 31, 2001. This increase was composed
primarily of a $38.6 million or 7.0% increase in total deposits. Notes payable
decreased $2.1 million or 27.5% since the previous year end to $5.5 million.
There was no change in the $50.9 million in outstanding Federal Home Loan Bank
advances.
Net charge-offs were $4.9 million and $1.5 million for the nine month periods
ending September 30, 2002 and 2001, respectively. Total non-performing loans at
September 30, 2002 were $19.4 million or 3.7% of total loans as compared to $14
million or 2.7% of total loans at December 31, 2001. In addition, management has
internally classified approximately $15 million in loans as substandard based
upon other possible credit problems. These loans are not included in
non-performing loans. These loans are performing loans, but are classified as
substandard due to payment history, decline in borrowers' financial condition or
decline in collateral value. Other real estate was $7.0 million at September 30,
2002, as compared to $7.3 million at December 31, 2001.
11
A loan is impaired when the Company believes it is probable that it 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 considers all loans 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 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.
CAPITAL POSITION AND DIVIDENDS
At September 30, 2002, total shareholders' equity was $40.0 million or 5.7% of
total assets. The increase of $697,000 in shareholders' equity during the nine
months ended September 30, 2002 results from the Company's net earnings of
$202,000 and the exercise of vested stock options by certain members of the
Company's directorate. Effective as of November 14, 2002, the Company entered
into subscription agreements for a private placement of 1,342,710 shares of its
common stock for an aggregate purchase price of $5.4 million. The Company
anticipates that these subscriptions will be called and the corresponding shares
issued in early December 2002. The proceeds of this private placement will be
utilized to maintain capital at the Company's subsidiary banks and for general
working capital purposes.
The Company's principal regulators have established minimum risk-based capital
requirements and leverage capital requirements. 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 loan losses). In determining risk-based capital
requirements, assets are assigned risk-weights of 0% to
12
100%, depending on regulatory assigned levels of credit risk associated with
such assets. Trust preferred securities are allowed to be counted in Tier I
capital, subject to certain limitations. At September 30, 2002, the Company's
total risk-based capital ratio was 11.17% and its Tier I risk-based capital
ratio was approximately 9.91% compared to ratios of 11.28% and 10.04%,
respectively at December 31, 2001. At September 30, 2002, the Company had a
leverage ratio of 7.23%, compared to 7.47% at December 31, 2001.
The Company and certain of its bank subsidiaries have informally agreed with or
committed to bank regulatory officials to reduce the level of criticized or
non-performing loans, to improve loan underwriting, problem loan resolution and
collection, and strategic and capital planning, to obtain prior regulatory
approval before incurring additional holding company indebtedness, repurchasing
shares, or paying dividends from certain subsidiary banks to the holding company
or from the holding company to shareholders, and to maintain certain capital
levels at subsidiary banks in excess of those required for well capitalized
status. The most restrictive of these provisions would require the Company to
maintain a Tier 1 leverage ratio of at least 7.0% at BankTennessee, Bank of Dyer
and Cumberland Bank at December 31, 2002. The Company and its subsidiaries
intend to comply with these informal understandings, and the Company received
approval to pay dividends in the fourth quarter of 2002. The Company believes
that the proceeds of its recent Common Stock private placement, earnings from
operations and available funds will be sufficient to allow the Company to meet
all these commitments and the requirements for well capitalized status through
the end of 2003.
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
$68.8 million. In addition, the Company has $55.8 million 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, FHLB 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 meets 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.
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 $34.6 million mature or will be subject to
rate adjustments within the next twelve months.
13
A secondary source of liquidity is the Company's loan portfolio. At September
30, 2002, loans of approximately $333.0 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 amortizing adjustable rate
loans.
At September 30, 2002, we had unfunded loan commitments outstanding of $74.0
million and outstanding letters of credit of approximately $3.0 million. Because
these commitments generally have fixed expiration dates and many will expire
without being drawn upon, the total commitment level does not necessarily
represent future cash requirements. If needed to fund these outstanding
commitments, the Company's bank subsidiaries have the ability to liquidate
Federal funds sold or securities available-for-sale or on a short-term basis to
borrow and purchase Federal funds from other financial institutions.
Additionally, the Company's bank subsidiaries could sell participations in these
or other loans to correspondent banks. As mentioned above, the Company's bank
subsidiaries have been able to fund their ongoing liquidity needs through their
stable core deposit base, loan payments and short-term borrowings.
Approximately $256.5 million in certificates of deposits 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.
The Company's bank borrowings and trust preferred securities have
certain interest payment requirements and the Company has certain operating
expenses, which require dividends or management fees from the Company's bank
subsidiaries in order to be funded. As discussed above, the Company's recent
asset quality problems have resulted in regulatory restrictions (approval) on
its subsidiaries ability to make dividends to the Company. The Company
anticipates that it will be able to meet required payments on its outstanding
debt and trust preferred securities for the next four quarters through available
cash resources and the additional capital raised in the private placement of its
common stock described above.
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.
14
The Company's net interest income immediately benefits from an increase in
market interest rates due to the asset sensitive bias of its balance sheet. This
posture does expose net interest income to falling interest rates in the near
term until interest rates stabilize.
There have been no material changes in reported market risks during the nine
months ended September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, as defined in Rule
13a-14 promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"), that are designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms and that such
information is accumulated and communicated to its management, including its
principal executive officer and its principal financial officer, as appropriate,
to allow timely decisions regarding required disclosure. Within the 90 days
prior to the date of this report, the Company carried out an evaluation, under
the supervision and with the participation of its management, including its
principal executive officer and its principal financial officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures. Based on the evaluation of these disclosure controls and procedures,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures were effective.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the internal controls subsequent to the
date of such evaluation.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Charter of Cumberland Bancorp, Incorporated, as
amended (Amended and Restated for SEC electronic
filing purposes only)
99.1 Certification of the Principal Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.2 Certification of the Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
16
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)
/s/ Joel Porter
DATE: November 14, 2002 -------------------------------------
----------------- Joel Porter, President (Principal
Executive Officer)
/s/ Andy LoCascio
DATE: November 14, 2002 -------------------------------------
----------------- Andy LoCascio
Chief Financial Officer
17
CERTIFICATIONS
I, Joel Porter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cumberland
Bancorp, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Joel Porter
- ------------------------------------------
Joel Porter
President and Principal Executive Officer
I, Andy J. LoCascio, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cumberland
Bancorp, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Andy J. LoCascio
- ---------------------------------
Andy J. LoCascio
Chief Financial Officer