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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD
FROM _____________ TO _____________
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)
4205 Hillsboro Road, Suite 212, Nashville, Tennessee 37215
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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 [ ] NO [X]
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: 6,370,222 shares at November 15, 1999.
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CUMBERLAND BANCORP, INCORPORATED
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999 (unaudited) 3
and December 31, 1998 (audited).
Consolidated Statements of Earnings - For the three months and nine
months ended September 30, 1999 and 1998 (unaudited). 4
Consolidated Statements of Changes in Stockholders' Equity - For the 5
nine months ended September 30, 1999 (unaudited).
Consolidated Statements of Cash Flows - For the nine months ended 6
September 30, 1999 and 1998 (unaudited).
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 8-15
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 5. Other Information. 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
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(Unaudited)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
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Cash and due from banks $ 9,444 7,458
Interest-bearing deposits in financial institutions 7,180 21,996
Federal funds sold 10,150 12,750
Securities available for sale, at fair value 9,826 11,565
Securities held to maturity, fair value $6,355,000 at September 30, 1999
and $8,950,000 at December 31, 1998 6,425 8,932
Loans 383,534 296,547
Allowance for loan losses (4,452) (3,790)
LOANS, NET 379,082 292,757
Premises and equipment 12,922 9,863
Accrued interest receivable 3,581 2,737
Federal Home Loan Bank and Federal Reserve Bank stock - restricted 3,144 2,648
Investment in affiliates 2,349 236
Other real estate 955 610
Goodwill 1,437 --
Servicing rights 1,059 1,088
Other assets 2,750 1,216
TOTAL ASSETS $ 450,304 373,856
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
DEPOSITS
Noninterest-bearing $ 31,126 23,742
Interest-bearing 347,269 301,702
TOTAL DEPOSITS 378,395 325,444
Notes payable 7,455 7,233
Federal funds purchased 2,700 0
Advances from Federal Home Loan Bank 28,093 17,973
Accrued interest payable 2,273 2,234
Other liabilities 3,147 1,312
TOTAL LIABILITIES 422,063 354,196
STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value, authorized 20,000,000 shares;
6,016,087 shares issued in 1999. 4,974,252 shares issued in 1998. 3,008 2,487
Additional paid-in capital 20,465 8,529
Retained earnings 4,925 8,716
Accumulated other comprehensive income (loss) (157) (72)
TOTAL STOCKHOLDERS' EQUITY 28,241 19,660
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 450,304 373,856
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CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(dollars in thousands, except
per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1999 1998 1999 1998
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INTEREST INCOME:
Loans, including fees $ 8,687 6,850 23,692 19,723
Securities 191 371 822 1,126
Deposits in financial institutions 13 153 234 342
Federal funds sold 203 165 525 567
Federal Home Loan Bank and Federal Reserve Bank dividends 93 82 196 172
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TOTAL INTEREST INCOME 9,187 7,621 25,469 21,930
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INTEREST EXPENSE:
Time deposits of $100,000 or more 791 789 2,268 2,253
Other time deposits 3,130 2,910 9,043 8,207
Federal funds purchased 23 0 68 5
Notes payable and advances from Federal Home Loan Bank 532 427 1,358 1,283
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TOTAL INTEREST EXPENSE 4,476 4,126 12,737 11,748
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NET INTEREST INCOME 4,711 3,495 12,732 10,182
PROVISION FOR LOAN LOSSES 424 301 888 732
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,287 3,194 11,844 9,450
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OTHER INCOME:
Service charges on deposit accounts 387 312 1,088 844
Other service charges, commissions and fees 363 292 1,159 975
Mortgage banking activities 448 338 1,159 1,124
Gain on sale of SBA loans 131 153 287 396
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TOTAL OTHER INCOME 1,329 1,095 3,693 3,339
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OTHER EXPENSES:
Salaries and employee benefits 2,210 1,654 6,152 4,752
Occupancy 530 423 1,444 1,208
Other operating 1,409 1,273 3,862 3,200
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TOTAL OTHER EXPENSES 4,149 3,350 11,458 9,160
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INCOME BEFORE INCOME TAXES 1,467 939 4,079 3,629
INCOME TAX EXPENSE 565 410 1,527 1,391
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NET EARNINGS $ 902 529 2,552 2,238
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NET EARNINGS PER SHARE - BASIC $ 0.16 0.10 0.46 0.41
NET EARNINGS PER SHARE - DILUTED 0.16 0.09 0.45 0.40
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WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 5,609,153 5,465,521 5,566,759 5,455,366
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 5,771,715 5,612,076 5,705,122 5,541,404
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CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(Dollars in Thousands)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
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BALANCE, DECEMBER 31, 1998 4,974 $ 2,487 8,529 8,716 (72) 19,660
Sale of 100,000 shares for $10 per share 100 50 950 0 0 1,000
10% stock dividend @ $12.50 per share 507 254 6,088 (6,343) 0 (1)
Sale of common stock in connection with IPO 346 173 4,105 4,278
net of $46,000 in offering costs
Exercise of stock warrants at $6 per share
related to Murray Bank 42 21 229 250
Issuance of common stock in connection with
acquisition of McMinnville Branch 47 23 564 587
Comprehensive Income:
Net earnings 0 0 0 2,552 0
Other Comprehensive Income:
Change in unrealized loss on
securities available for sale, net of tax 0 0 0 0 (85)
Total Comprehensive Income 2,467
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BALANCE, SEPTEMBER 30, 1999 6,016 $ 3,008 20,465 4,925 (157) 28,241
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CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
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1999 1998
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NET EARNINGS $ 2,552 2,238
ADJUSTMENTS TO RECONCILE NET EARNINGS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Provision for loan losses 888 732
Depreciation and amortization 771 614
Mortgage loans originated for sale (38,066) (60,935)
Proceeds from sale of mortgage loans 37,800 60,384
Increase in accrued interest receivable (844) (604)
Increase in accrued interest payable and other liabilities 1,874 1,695
Other, net (1,303) (861)
TOTAL ADJUSTMENTS 1,120 1,025
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,672 3,263
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase (decrease) in interest-bearing deposits in financial institutions 14,816 (7,875)
Increase in federal funds sold 2,600 (6,850)
Purchases of securities available for sale (1,403) (16,500)
Proceeds from maturities and redemptions of securities available for sale 2,561 8,444
Purchases of securities held to maturity (600) (3,566)
Proceeds from maturities and redemptions of securities held to maturity 3,107 3,866
Net increase in loans (86,947) (34,625)
(Purchase) disposal of and improvements to other real estate (345) 61
Additions to premises and equipment (3,830) (2,159)
Excess purchase price over net assets acquired (goodwill) (793) --
Investment in affiliates (2,373) 0
NET CASH USED BY INVESTING ACTIVITIES (73,207) (59,204)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 52,951 52,057
Increase (decrease) in federal funds purchased 2,700 (1,200)
Increase in advances from Federal Home Loan Bank 10,120 2,216
Proceeds from notes payable 600 2,780
Repayments of notes payable (378) (78)
Proceeds from issuance of common stock 5,528 129
NET CASH PROVIDED BY FINANCING ACTIVITIES 71,521 55,904
NET DECREASE IN CASH 1,986 (37)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,458 7,571
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,444 7,534
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 11,714 11,247
Income taxes paid 1,261 1,072
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NON CASH DISCLOSURES:
Common stock issued in connection with branch acquisition $ 587 --
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CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements as of September 30, 1999 and
for the three month and nine month periods ended September 30, 1999 and 1998
were prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting of normal recurring
adjustments, to present fairly the information. They do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Operating results for the three month and
nine month periods ending September 30, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999. For
further information, refer to the 1998 consolidated financial statements and
footnotes thereto included in the Company's Registration Statement on Form S-1,
as amended.
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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 registration
statement on Form S-1, as amended, 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.
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, inadequate
allowance for loan losses, loss of key personnel and interruptions in
operations caused by the Year 2000 problem. 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 is a Tennessee bank holding company headquartered in Nashville,
Tennessee which operates the following three (3) Tennessee bank subsidiaries:
(i) Cumberland Bank, a Tennessee state chartered bank with five (5) offices in
Middle Tennessee; (ii) Bank Tennessee, a Tennessee state chartered bank with
five (5) offices in West Tennessee; and (iii) The Community Bank, a Tennessee
state chartered bank with three (3) offices in the Nashville metropolitan area.
The Company also owns a fifty percent (50%) interest in The Murray Bank, a
federal savings bank in Murray, Kentucky. The Company's operations principally
involve commercial and residential real estate lending, commercial business
lending, consumer lending, construction lending and other financial services,
including credit card services and brokerage services.
The Company, through its bank subsidiaries, operates principally in four (4)
market areas in Tennessee: Shelby County, Smith County, Sumner County, and
Southern Davidson/Northern Williamson County. The Company's bank subsidiaries
seek to provide a range of retail and commercial banking services designated to
meet the borrowing needs of small and medium size businesses and consumers in
the communities serviced by them. Each of the Company's bank subsidiaries
competes with other larger, regional and mutli-regional financial institutions
in attracting and retaining deposits and in lending funds. In order to
successfully compete with such institutions,
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the Company's bank subsidiaries focus on building strong relationships with
residents of the communities they serve. The Company believes that by granting
each of its bank subsidiaries and their respective branch managers and loan
officers the freedom to make decisions at the local level, it will create the
superior relationship management that each of its banks needs to effectively
compete with the larger financial institutions that serve the same areas its
banks serve. While the Company focuses on local decision making and increased
personalized service, like other community banks, it also provides the
diversified range of financial services often associated with regional and
super-regional financial institutions.
The Company's objective is to become a leading provider of financial services
throughout Tennessee and parts of Kentucky through expansion of its existing
banks and non-depository businesses. To this end, the Company anticipates
continuing its current trend of branch expansion and acquisitions of other
banks and bank holding companies.
RESULTS OF OPERATIONS
Net earnings increased 14% to $2,552,000 for the nine months ended September
30, 1999 from $2,238,000 in the first nine months of 1998. Net earnings were
$902,000 for the quarter ended September 30, 1999, an increase of $373,000 or
71% from $529,000 for the three months ended September 30, 1998 and an increase
of $22,000 or 3% over the quarter ended June 30, 1999. The increase in net
earnings during the nine months ended September 30, 1999 was primarily due to
growth in earning assets and overall growth of the banks as demonstrated by a
25% increase in net interest income and an 11% increase in non-interest income
which was partially offset by a 25% increase in non-interest expenses.
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 $3,539,000 or 16% during the nine months ended September 30, 1999 as
compared to the same period in 1998. The increase in total interest income was
$1,566,000 or 21% for the quarter ended September 30, 1999 as compared to the
quarter ended September 30, 1998 and $694,000 or 8% over the second quarter of
1999. The increase in 1999 was primarily attributable to an increase in average
earning assets.
Interest expense increased $989,000 or 8% for the nine months ended September
30, 1999 as compared to the same period in 1998. The increase was $350,000 or
8% for the three months ended September 30, 1999 as compared to the same period
in 1998. Interest expense increased $283,000 or 7% for the quarter ended
September 30, 1999 over the second quarter of 1999. The overall increase in
total interest expense for the first nine months of 1999 was primarily
attributable to an increase in average interest-bearing liabilities and other
borrowed funds.
The foregoing resulted in an increase in net interest income, before the
provision for loan losses, of $2,550,000 or 25% for the first nine months of
1999 as compared to the same period in 1998. The increase was $1,216,000 or 35%
for the quarter ended September 30, 1999 compared to the quarter ended
September 30, 1998 and an increase of $411,000 or 10% when compared to the
second quarter of 1999.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses was $888,000 and $732,000 for the first
nine months of 1999 and 1998, respectively. The provision for possible loan
losses during the three month periods ended September 30, 1999 and
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1998 was $424,000 and $301,000, respectively. The provision for possible 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 $4,452,000, an increase of 17% from
$3,790,000 at December 31, 1998. The allowance for possible loan losses as a
percentage of total outstanding loans was 1.2% and 1.3% at September 30, 1999
and December 31, 1998, respectively.
The level of the allowance and the amount of the provision involve evaluation
of uncertainties and matters of judgment. Management believes the allowance for
possible loan losses at September 30, 1999 to be adequate. During the third
quarter, $152,000 was added to the allowance for loan losses in connection with
the acquisition of the McMinnville branches discussed under Part II.
NONINTEREST INCOME
The components of the Company's noninterest income include service charges on
deposit accounts, other fees and commissions, gain on sale of loans, gain on
sale of fixed assets and gain on sale of other real estate. Total noninterest
income for the nine months ended September 30, 1999 increased by 11% to
$3,693,000 from $3,339,000 for the same period in 1998. The increase was
$234,000 or 21% during the quarter ended September 30, 1999 compared to the
third quarter in 1998 and was $212,000 or 19% over the quarter ended June 30,
1999. The increases were due primarily to increases in service charges on
deposit accounts and other fees and commissions related to overall growth.
Service charges on deposit accounts increased $244,000 or 29% during the nine
months ended September 30, 1999 and $75,000 or 24% during the quarter ended
September 30, 1999 compared to the same periods in 1998. Other fees and
commissions totaled $1,159,000 and $975,000 during the nine months ended
September 30, 1999 and 1998, respectively, an increase of $184,000 or 19%.
NONINTEREST EXPENSE
Noninterest expense consists primarily of salaries and employee benefits,
occupancy expenses, furniture and equipment expenses, data processing expenses
and other operating expenses and minority interest in net earnings of
subsidiaries. Total noninterest expense increased $2,298,000 or 25% during the
first nine months of 1999 compared to the same period in 1998. The increase for
the quarter ended September 30, 1999 was $799,000 or 24% as compared to the
comparable quarter in 1998 and $369,000 or 10% as compared to the second
quarter of 1999. The increases in noninterest expense are attributable
primarily to increases in salaries and employee benefits associated with an
increase in the number of employees necessary to support the Company's expanded
operations, which includes the addition of new subsidiary bank branch offices
in Franklin, Tennessee and Murray, Kentucky during the second quarter of 1999.
The number of employees increased to 220 at September 30, 1999, an increase
from 161 at September 30, 1998. The increase in occupancy expenses was also due
to the Company's expanded operations. Other operating expenses for the nine
months ended September 30, 1999 increased to $3,862,000 from $3,200,000 for the
comparable period in 1998. Other operating expenses increased $136,000 or 11%
during the quarter ended September 30, 1999 as compared to the same period in
1998 and $147,000 or 12% as compared to the second quarter of 1999. These
expenses include Federal deposit insurance premiums, supplies and general
operating costs which increased as a result of continued growth of the Company.
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INCOME TAXES
The Company's income tax expense was $1,527,000 for the nine months ended
September 30, 1999, an increase of $136,000 over the comparable period in 1998.
Income tax expense was $565,000 for the quarter ended September 30, 1999, an
increase of $155,000 over the same period in 1998. The percentage of income tax
expense to net income before taxes was 37% and 38% for the nine months ended
September 30, 1999 and 1998, respectively.
FINANCIAL CONDITION
BALANCE SHEET SUMMARY
The Company's total assets increased 20% (annualized rate of 27%) to
$450,304,000 during the nine months ended September 30, 1999 from $373,856,000
at December 31, 1998. Loans, net of allowance for possible loan losses, totaled
$379,082,000 at September 30, 1999, or a 29% (annualized rate of 38.7%)
increase compared to $292,757,000 at December 31, 1998. These increases were
primarily due to internal growth and acquisition of the McMinnville branches
and the Company's ability to increase its market share of such loans in
Tennessee while maintaining its loan underwriting standards. Securities
decreased $4,246,000 or 21% to $16,251,000 at September 30, 1999 from
$20,497,000 at December 31, 1998. Securities decreased $781,000 or 5% during
the three months ended September 30, 1999. Federal funds sold decreased
$2,600,000 to $10,150,000 at September 30, 1999 from $12,750,000 at December
31, 1998.
Total liabilities increased by 19% to $422,063,000 at September 30, 1999
compared to $354,196,000 at December 31, 1998. These increases were composed
primarily of a $52,951,000 or 16% increase in total deposits and an increase of
$10,120,000 or 56% in FHLB advances during the nine months ended September 30,
1999.
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, consumer and credit
card loans which total approximately $112,938,000, $41,066,000 and $1,038,000,
respectively at September 30, 1999, 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
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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.
Net charge-offs were $378,000 and $258,000 for the nine month periods ending
September 30, 1999 and 1998, respectively. Total non-performing loans at
September 30, 1999 were $2.7 million or 0.8% of total loans as compared to $2.8
million or 0.9% of total loans at December 31, 1998. Although these amounts
have not changed significantly as compared to December 31, 1998, there is a
substantial improvement from the $4.9 million in total non-performing loans at
June 30, 1999.
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 include cash and cash equivalents and securities and money market
instruments that will mature within one year. At September 30, 1999, the
Company's liquid assets totaled $24,247,000.
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 subsidiary banks meet monthly to analyze the
rate sensitivity position of the subsidiary banks. These meetings
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focus on the spread between each bank's 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 $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, 1999 loans of approximately $244 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 deposit of $100,000 or greater of
approximately $51 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.
Management believes that with present maturities, the anticipated growth in
deposit base, 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
At September 30, 1999, total stockholders' equity was $28,241,000 or 6% of
total assets, which compares favorably with $19,660,000 or 5% of total assets
at December 31, 1998. The dollar increase in stockholders' equity during the
nine months ended September 30, 1999 results from the Company's net income of
$2,552,000, and issuance of 534,530 shares of common stock during the nine
months ended September 30, 1999 for $6.7 million. Through September 30, 1999,
345,865 shares have been sold in connection with an initial public offering
that started September 21, 1999. This offering has been conducted without the
benefit of an underwriter. As of November 12, 1999, all 700,000 shares had been
subscribed for. The Company also sold 100,000 shares of common stock during
March 1999 to new investors in the Williamson County market. Another 89,000
shares have been issued in connection with (i) exercise of warrants held by
shareholders of The Murray Bank; and (ii) the McMinnville branch acquisition.
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%. At September 30, 1999 the
Company's total risk-based capital ratio was 8.7% and its Tier I risk-based
capital ratio was approximately 7.4% compared to ratios of 8.4% and 7.1%,
respectively at December 31, 1998. The required Tier I leverage capital ratio
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(Tier I capital to average assets for the most recent quarter) for the Company
is 4.0%. At September 30, 1999 the Company had a leverage ratio of 6.3%,
compared to 5.3% at December 31, 1998.
IMPACT OF INFLATION
Although interest rates are significantly affected by inflation, the inflation
rate is immaterial when reviewing the Company's results of operations.
YEAR 2000
Many existing computer systems and software products use only a two digit field
to identify the year. These programs were designed without considering the
impact once the calendar rolls over to "00". If not corrected, computer
applications could fail or create inaccurate results by or at the Year 2000. As
a result, computer systems and software may need to be upgraded to comply with
Year 2000 requirements or risk system failure or miscalculations causing
disruptions of normal business activities. The Federal Reserve and the FDIC
have required that we and our banks accomplish specific Year 2000 actions by
specific dates.
In the fall of 1997, the Company began to make preliminary assessments of the
Year 2000 readiness of all of its information technology systems, including the
computer hardware and software that support its financial and administrative
systems, as well as its non-information technology systems. The Company's plan
for addressing Year 2000 has five phases as prescribed by federal banking
authorities:
- AWARENESS of the Year 2000 issues;
- ASSESSMENT of which hardware and software were mission critical and what
hardware and software were in need of upgrade or replacement;
- RENOVATION, repair or replacement of non-compliant hardware and
software;
- TESTING of existing software and hardware and remedial action taken; and
- IMPLEMENTATION and verification of the effectiveness of contingency
plans.
The Company has completed the testing phase for both information technology and
non-information technology systems and is currently in the final phase of its
Y2K plan.
The Company does not have internally developed software. Consequently, the
Company has reviewed the software obtained from third parties incorporated into
its products, and has sought assurances from vendors that this licensed
software is Year 2000 compliant. In particular, the Company's outside service
bureau, FIDATA, and its primary software vendor, Information Technology, Inc.,
have provided assurances that their programs are Year 2000 compliant.
Additionally, the Company has tested each of these programs to validate
FIDATA's and ITI's representations. Finally, the Company has identified and
found its internal non-information technology systems to be Year 2000
compliant.
Since September 1997, the Company has expensed more than $100,000 in actual
costs in connection with identifying, evaluating or addressing Year 2000
compliance issues. The majority of this cost has been to replace or upgrade
non-compliant systems such as older PCs and certain banking equipment. Most of
the Company's other expenses have related to, and are expected to continue to
relate to, the operating costs associated with time spent
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by employees implementing its contingency plans. The Company does not possess
information necessary to determine the loss of productivity or reduction in
earnings due to meeting these compliance requirements.
The Company believes that its most reasonably possible worst-case scenario
would occur if it incurred a complete loss of FIDATA and ITI's services, and
each of their back-up contingency plans failed to work properly. This could
potentially affect the Company's ability to handle daily banking business for
its customers in the first quarter or second quarter of 2000 depending on the
nature of the affected systems. If the Company determines that FIDATA or ITI
are unable to meet processing requirements on a timely basis, it would utilize
alternative back-up processing systems which would cause it to incur additional
costs. However, there can be no assurances that the back-up contingency systems
will function properly and in the manner intended. The Company will continue to
monitor this and any other areas of exposure and develop contingency plans
accordingly.
The Company is not currently aware of any Year 2000 compliance problems
relating to its systems' operation that would harm its business, results of
operations and financial conditions, other than previously discussed. The
Company cannot assure you that it will not discover Year 2000 compliance issues
in its hardware or purchased software that will require substantial revision.
In addition, the Company cannot assure you that third-party software, hardware
or services incorporated into its operations will not need to be revised or
replaced, all of which could be time consuming and expensive.
The failure to modify or replace the Company's third-party software, hardware,
or services on a timely basis could result in lost revenues, increased
operating costs, the loss of customers, or other business interruptions, any of
which could adversely affect results of operations and financial condition.
Moreover, the failure to adequately address Year 2000 compliance issues in the
Company's operations could result in claims of mismanagement, misrepresentation
or breach of contract and related litigation, which could be costly and
time-consuming to defend.
In addition, there can be no assurances that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside the Company's control will be Year 2000 compliant. The failure by such
entities to be Year 2000 compliant could result in a systemic failure beyond
the Company's control, such as prolonged financial system, telecommunications
or electrical failure. This could prevent the Company's customers from
accessing the Company's banks' systems, which could adversely affect its
results of operations and financial condition. If these systems were to fail,
the Company would provide services to its clients on a manual basis until its
Year 2000 issues could be corrected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 meets monthly to analyze the rate sensitivity position. These
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meetings focus on the spread between the cost of funds and interest yields
generated primarily through loans and investments.
There have been no material changes in reported markets risks during
the nine months ended September 30, 1999.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Initial Public Offering
On September 21, 1999, the Company's Registration Statement on Form S-1 (File
No. 333-84173) was declared effective by the SEC. Pursuant to the Registration
Statement, the Company registered 700,000 shares of Common Stock at a price of
$12.50 per share. The aggregate price of the amount offered was $8,750,000. As
of November 12, 1999, all 700,000 shares offered under the Registration
Statement had been fully-subscribed for.
The Company estimates that the total expenses it has sustained for the issuance
and distribution of the securities registered are $225,000 of which $46,000 has
been deducted from the gross offering proceeds as of September 30, 1999. The
remaining balance will be deducted from the remaining gross proceeds during
November 1999 upon the expiration of the offering.
From the effective date of the Registration Statement through September 30,
1999, the Company did not use the net offering proceeds to fund general
operating expenses.
Sale of Unregistered Securities
In September 1999, 42,000 shares of the Company's common stock were issued in a
private placement under Section 4(2) of the Securities Act of 1933, as amended.
These shares were issued to investors in the Company's joint venture
arrangement with BancKentucky with respect to The Murray Bank. The shares were
issued upon the exercise of warrants held by investors in the joint venture at
$6.00 per share for an aggregate consideration of $252,000.
As of September 30, 1999, the Company issued 47,000 shares of Company common
stock in a private placement under Section 4(2) of the Securities Act of 1933,
as amended. These shares were issued to a Tennessee investor in connection with
brokering services performed by the investor in connection with the Company's
acquisition of the McMinville, Tennessee branch. These shares were valued at
$12.50 per share upon issuance for an aggregate consideration of $587,500.
ITEM 5. OTHER INFORMATION
The Company continues to experience growth due to recent entries in new
markets, acquisitions and aggressive marketing techniques. An initial public
offering was undertaken to sell 700,000 shares during the third quarter of 1999
without the benefit of an underwriter. The offering began on September 21,
1999, and all 700,000 shares were fully subscribed for as of November 12, 1999.
Approximately one-half of these shares were sold and proceeds collected during
the quarter ended September 30, 1999.
The Company consummated the purchase of a branch of an existing banking
institution with approximately $20 million in deposits, located in McMinnville,
Tennessee during the third quarter of 1999. Subsequent to the third quarter,
the Company entered into a preliminary agreement to acquire Bank of Dyer, a
bank with total assets of approximately $37 million and offices in Dyer and
Humboldt, Tennessee. A definitive agreement has not yet been reached.
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Other opportunities for future acquisitions and expansions are currently being
evaluated in connection with the overall growth strategy.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule (for SEC use only) - This
schedule contains summary financial information extracted from the consolidated
financial statements of the Company at September 30, 1999 (unaudited) and is
qualified in its entirety by reference to such financial statements as set
forth in the Company's quarterly report on Form 10-Q for the period ending
September 30, 1999.
(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 15, 1999 /s/ Joel Porter
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Joel Porter, President (Principal Executive Officer)
DATE: November 15, 1999 /s/ Mark C. McDowell
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Mark C. McDowell
Chief Administrative Officer
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