UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2000
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE ACT
From the transition period from to ______________
Commission File Number 0-22287
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Tennessee 31-1499488
(State of Incorporation) (IRS Employer Identification No.)
1431 Cumberland Avenue, Middlesboro, Kentucky 40965
(Address of principal executive offices)
(606) 248-4584
(Telephone number)
Check mark whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [
]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of October 31, 2000, there were 680,558 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
CUMBERLAND MOUNTAIN BANCSHARES, INC.
FORM 10-QSB - September 30, 2000
INDEX
Page
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Part I - Financial Information
---------------------
Item 1. Financial Statements
Consolidated Statement of Financial Condition
September 30, 2000 and June 30, 2000 2
Consolidated Statements of Income
Three Months Ended September 30, 2000 and 1999 3-4
Consolidated Statements of Stockholders' Equity
Three Months Ended September 30, 2000 5
Consolidated Statements of Cash Flows
Three Months Ended September 30, 2000 and 1999 6-7
Notes to the Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Part II - Other Information 16
-----------------
Signatures 17
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
September 30, 2000 and June 30, 2000
ASSETS
-------
September 30, June 30,
2000 2000
------------ ---------
(Audited)
Cash and cash equivalents $ 2,302 $ 1,581
Investment securities, held-to-maturity -- --
Investment securities available-for-sale, at market value 3,626 3,607
Other investments, held-to-maturity (market value $180,000 at
September 30, 2000 and June 30, 2000) 180 180
Mortgage-backed securities available-for-sale, at market value 2,256 2,626
Loans, net of allowance for loan losses of $1,379,000 at
September 30, 2000 and $1,032,000 at June 30, 2000 107,462 109,610
Accrued interest receivable 859 809
Real estate held for investment 1,638 1,669
Repossessed property 1,192 1,523
Federal Home Loan Bank (FHLB) stock, at cost 946 929
Premises and equipment, net 4,178 4,263
Prepaid expenses and other assets 1,359 1,372
--------- ---------
TOTAL ASSETS $ 125,998 $ 128,169
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits 104,802 106,078
Advances from FHLB 9,500 10,500
Notes payable 1,454 1,485
Accrued interest payable 895 192
Other liabilities 795 799
--------- ---------
Total liabilities 117,446 119,054
--------- ---------
Common stock, $0.01 per value, 8,000,000 shares authorized, 680,159
shares issued and outstanding 7 7
Additional paid-in capital 5,555 5,560
Retained earnings 4,341 4,939
Unearned ESOP shares (803) (822)
Unearned Stock Option shares (329) (329)
Unearned MRP shares (90) (90)
Net unrealized loss on investment securities available-for-sale, net of deferred tax (129) (150)
--------- ---------
Total stockholders' equity 8,552 9,115
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 125,998 $ 128,169
========= =========
The accompanying notes are an integral part of these financial statements.
2
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro , Kentucky
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Amounts in thousands, except per share data)
Three Months
Ended September 30,
----------------------
2000 1999
---- ----
INTEREST INCOME
Investment securities $ 62 $ 60
Mortgage-backed securities 36 50
Loans 2,363 2,310
FHLB Stock 17 33
------ ------
Total interest income 2,478 2,453
INTEREST EXPENSE
Deposits 1,341 1,255
FHLB advances 144 160
Other borrowed money 36 36
------ ------
Total interest expense 1,521 1,451
NET INTEREST INCOME 957 1,002
PROVISION FOR LOAN LOSSES 778 62
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 179 940
------ ------
NON-INTEREST INCOME
Loan fees and service charges 186 201
Losses on sales of repossessed assets (68) (10)
Gains on sales of real estate held for investment -- 16
Other 14 1
------ ------
Total non-interest income 132 208
------ ------
NET INTEREST AND NON-INTEREST INCOME 311 1,148
------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 399 373
Data processing fees 60 54
SAIF deposit insurance premiums 13 24
Occupancy and equipment expense 139 146
Franchise and other taxes 26 32
Marketing and other professional services 36 33
ESOP expense 13 13
Other 499 224
------ ------
Total non-interest expense 1,185 899
------ ------
INCOME BEFORE INCOME TAX EXPENSE (874) 249
INCOME TAX EXPENSE (BENEFIT) (276) 83
------ ------
NET INCOME (LOSS) $ (598) $ 166
------ ------
3
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro , Kentucky
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Amounts in thousands, except per share data)
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ (598) $ 166
Unrealized gain (loss) on securities, net of tax effect (129) (98)
-------- -------
OTHER COMPREHENSIVE INCOME (LOSS) $ (727) $ 68
======== =======
PER SHARE OF COMMON STOCK:
Earnings (basic) $(1.0626) $0.2897
======== =======
Earnings (diluted) $(0.9589) $0.2645
======== =======
Dividends $ -- $ --
======== =======
The accompanying notes are an integral part of these financial statements.
4
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDTATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Unrealized
Loss on
Investment
Additional Securities
Common Paid-In Retained Available-
Stock Capital Earnings for-Sale
------- ---------- -------- ----------
Balance at June 30, 2000 $ 7 $ 5,560 $4,939 $ (150)
Net income for the three month period ended
September 30, 2000 -- -- (598) --
Common stock issued -- -- -- --
ESOP shares transferred -- -- -- --
ESOP shares earned -- (5) -- --
Stock Option shares transferred -- -- -- --
MRP shares acquired -- -- -- --
Decrease in unrealized loss on investment
securities available-for-sale for the period
ended September 30, 2000, net of deferred tax -- -- -- 21
--- ------- ------ ------
Balance at September 30, 2000 $ 7 $ 5,555 $4,341 $ (129)
=== ======= ====== ======
Unearned
Unearned Stock Unearned
ESOP Option MRP Treasury
Shares Shares Shares Stock Total
-------- -------- --------- --------- -----
Balance at June 30, 2000 $ (822) $ (329) $ (90) $ -- $ 9,115
Net income for the three month period ended
September 30, 2000 -- -- -- -- (598)
Common stock issued -- -- -- -- -
ESOP shares transferred -- -- -- -- -
ESOP shares earned 19 -- -- -- 14
Stock Option shares transferred -- -- -- -- -
MRP shares acquired -- -- -- -- -
Decrease in unrealized loss on investment
securities available-for-sale for the period
ended September 30, 2000, net of deferred tax -- -- -- -- 21
------ ------ ----- ---- -------
Balance at September 30, 2000 $ (803) $ (329) $ (90) $ -- $ 8,552
====== ====== ===== ==== =======
The accompanying notes are an integral part of these financial statements.
5
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Three Months Ended September 30,
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (598) $ 166
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation 108 100
Amortization and accretion 2 4
FHLB stock dividend (17) (33)
Provision for loan losses 778 62
Losses on sales of other repossessed assets 68 10
(Gains) losses on sales of property held for investment -- (16)
Changes in assets and liabilities:
Accrued interest receivable (50) 68
Prepaid expenses and other assets 13 (70)
Accrued interest payable 703 547
Other liabilities (4) 103
------ -----
Net cash provided by operating activities 1,003 941
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on investment securities available-for-sale 3 --
Proceeds on maturities of mortgage-backed securities 215 --
Principal collected on mortgage-backed securities 166 262
Net decrease in real estate held for investment 31 41
Net decrease in loans 1,356 705
Net (increase) decrease in repossessed property 263 (218)
Purchases of premises and equipment (23) (20)
------ -----
Net cash provided by investing activities 2,011 770
------ -----
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (1,276) (169)
Net increase (decrease) in advances from FHLB (1,000) 500
Net decrease in other borrowings (31) (29)
ESOP shares earned, net of tax 14 19
Purchase of shares for MRP -- (69)
------ -----
Net cash provided by (used in) financing activities (2,293) 252
The accompanying notes are an integral part of these financial statements.
6
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Three Months Ended September 30,
2000 1999
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 721 1,963
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,581 1,317
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,302 $3,280
======= ======
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 818 $ 289
======= ======
Income taxes $ -- $ --
======= ======
Loans transferred to repossessed property during the period $ 53 $ 147
======= ======
Total increase (decrease) in unrealized gain (loss) on
securities available for sale $ 21 $ (25)
======= ======
The accompanying notes are an integral part of these financial statements.
7
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and, therefore, do not include
all information and notes necessary for a complete presentation of financial
position, results of operations, changes in stockholders' equity, and cash flows
in conformity with generally accepted accounting principles. However, all
adjustments (consisting only of normal recurring accruals) which, in the opinion
of management, are necessary for a fair presentation of the unaudited
consolidated financial statements have been included in the results of
operations for the three months ended September 30, 2000 and 1999.
Operating results for the three month period ended September 30, 2000 is
not necessarily indicative of the results that may be expected for the year
ending June 30, 2001.
Prior to March 31, 1997, the Cumberland Mountain Bancshares, Inc. (the
"Company") did not have any material assets or liabilities and did not engage in
any material business operations. On March 31, 1997, the Company acquired all of
the outstanding stock of Middlesboro Federal Bank, Federal Savings Bank (the
"Bank") pursuant to the Plan of Conversion of Cumberland Mountain Bancshares,
M.H.C., the Bank's former mutual holding company, and the Agreement and Plan of
Reorganization between the Company and the Bank. In connection with the
Conversion and Reorganization, the Company sold 439,731 shares of Common Stock
in an initial public offering and issued 1.333 shares of Common Stock in
exchange for each share of the Bank's common stock then outstanding. The
Company's financial statements for the periods prior to March 31, 1997 consist
of the financial statements of the Bank.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows (amounts
in thousands):
September 30,
2000
-------------
Balance, beginning of year $ 1,032
Provision for loan losses 778
Charge-offs, net of recoveries (431)
-------
Balance, September 30, 2000 $ 1,379
=======
8
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(UNAUDITED)
NOTE 3 - NONACCRUAL LOANS
Nonaccrual loans are as follows (amounts in thousands):
September 30, June 30,
2000 2000
------------ --------
Construction Mortgage Loans $ -- $ --
Permanent Mortgage Loans, Secured by:
1-4 Dwelling Units 128 493
5 or More Dwelling Units -- --
Nonresidential Property (Except Land) 73 73
Land -- --
Nonmortgage Loans and Leases, Closed End:
Commercial 144 194
Auto 1 14
Mobile Home 12 --
Other Consumer 11 17
Nonmortgage Loans and Leases, Open End:
Revolving Loans Secured by
1-4 Dwelling Units 20 --
----- -----
$ 389 $ 791
===== =====
9
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The principal business of Cumberland Mountain Bancshares, Inc. (the
"Company") is that of Middlesboro Federal Bank, FSB (the "Savings Bank" or
"Middlesboro Federal"). The principal business of the Savings Bank consists of
accepting deposits from the general public and investing these funds in loans
secured by one-to-four family owner-occupied residential properties in the
Savings Bank's primary market area. The Savings Bank also maintains an
investment portfolio which includes Federal Home Loan Bank ("FHLB") stock,
Government Agency-issued bonds and mortgage-backed securities, and other
investments.
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and the
Company's actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Company's market area generally. Some
of the forward-looking statements included herein are the statements regarding
management's determination of the amount and adequacy of the allowance for loan
losses on loans, the effect of certain recent accounting pronouncements.
FINANCIAL CONDITION
Total assets of the Company decreased $2.2 million, or 1.69%, from
$128,169,000 at June 30, 2000 to $125,998,000 at September 30, 2000. This
decrease in assets resulted primarily from the decrease in net loans of $2.1
million, or 1.96% to $107,462,000 at September 30, 2000 from $109,610,000 at
June 30, 2000. The decline in net loans is primarily due to net charge-offs of
$431,000 and an increase in loan loss provision of $778,000 during the quarter.
During the quarter ended September 30, 2000, the Savings Bank recognized
charge-offs on two large commercial borrowers. Management does not believe these
charge-offs reflect a continuing deterioration of the loan portfolio. One of
these loans has been tied up in bankruptcy court for four years, and a full
recovery is expected. The other is a $218,000 write-down in connection with
certain loans purchased from an unaffiliated mortgage broker. The broker has
filed for bankruptcy as a result of the discovery of certain fraudulent
activity. The Savings Bank is attempting to recover a portion of such amounts
from its fidelity bond carrier. (See "Item 1. Legal Proceedings in Part II Other
Information"). These charge-offs resulted in a severe reduction in the Savings
Bank's allowance for loan losses for the quarter ended September 30, 2000.
Pursuant to recommendations by the Classified Assets Committee of the Savings
Bank an additional provision for loan losses of $703,000, above the budgeted
$75,000 per quarter, was made. The Committee determined this was the amount
needed to adequately provide for future potential losses and to reflect the
aforementioned mortgage loan broker situation as well as the downgrade of two
commercial borrowers, one of which is an intra-company loan to the Company's
subsidiary, Home Mortgage Loan Corporation ("HMLC") and the other loans a used
car dealership.
10
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION (CONTINUED)
The Company has experienced a decline in deposits during the three
months ended September 30, 2000 of $1,276,000, or 1.2%. This decline is
primarily the result of higher interest rates and increased competition in the
Savings Bank's market area for deposits. FHLB Advances decreased $1,000,000 from
$10,500,000 at June 30, 2000 to $9,500,000 at September 30, 2000. This decrease
was primarily funded with money received from the repayment of loans. Total
stockholders' equity declined by $563,000, or 6.18%, principally due to the net
loss realized during the quarter.
RESULTS OF OPERATIONS
Net Income. The Company realized a net loss of $598,000 for the three-month
----------
period ended September 30, 2000. This compares to net income of $166,000 for the
three-month period ended September 30, 1999. This net loss was primarily the
result of an increase in the provision for loan losses of $716,000 from $62,000
for the three-month period ended September 30, 1999 to $778,000 for the
three-month period ended September 30, 2000. The increase in provision for loan
losses is the result of management's efforts to increase the amount of
allowances for loan losses to levels sufficient to absorb any losses suffered in
future quarters. Management is continuing their efforts to strengthen the
portfolio by tightening underwriting standards and collection efforts.
Interest Income. Total interest income for the three-month period ended
----------------
September 30, 2000 amounted to $2,478,000, an increase of 1.02% from the
Company's total interest income of $2,453,000 for the three-month period ended
September 30, 1999. During the three-month period ended September 30, 2000 as
compared to the three-month period ended September 30, 1999, the Company's
interest income on its loan portfolio increased 2.29% from $2,310,000 to
$2,363,000; its interest income from its mortgage-backed securities portfolio
decreased 28% from $50,000 to $36,000; interest income from its investment
securities portfolio increased 3.33% from $60,000 to $62,000; and interest
income from FHLB stock decreased 48.48% from $33,000 to $17,000. The increase in
interest income on the Company's loan portfolio has occurred primarily due to
the reduction in nonaccrual loans, an increase in the Company's offering rates,
and the upward adjustment of the Company's adjustable rate mortgage loans.
Interest Expense. Interest expense increased from $1,451,000 for the
-----------------
three-month period ended September 30, 1999, to $1,521,000 for the three-month
period ended September 30, 2000. During the three-month period ended September
30, 2000 as compared to the three-month period ended September 30, 1999, the
Company's interest expense on deposits increased 6.85% from $1,255,000 to
$1,341,000. This increase in interest expense on deposits is due primarily to an
increase in the interest rate paid on time deposits resulting from an overall
increase in interest rates from last year and increased competition within the
Company's market area.
Net Interest Income. During the three months ended September 30, 2000, net
-------------------
interest income decreased 4.49% to $957,000 from $1,002,000 for the three months
ended September 30, 1999. This decrease was due primarily to the reduction in
loan growth by the Savings Bank as well as higher deposit rates.
11
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Provision for Loan Losses. Provisions for loan losses are charged to
--------------------------
earnings to bring the total allowance to a level considered adequate by
management to provide for loan losses based on the prior loss experience, volume
and type of lending conducted by Middlesboro Federal, industry standards and
past due loans in the Savings Bank's portfolio. Management also considers
general economic conditions and other factors related to the collectibility of
the Savings Bank's portfolio.
For the three-month period ended September 30, 2000, the Savings Bank
provided $778,000 for loan losses compared to $62,000 during the three-month
period ended September 30, 1999. The provision for loan loss amounts represent
management's effort to maintain an adequate reserve against losses. In
determining the appropriate provision, management considers a number of factors,
including specific loans in the Savings Bank's portfolio, real estate market
trends in the Company's market area, economic conditions, interest rates, and
other conditions that may affect the borrower's ability to comply with repayment
terms. At September 30, 2000, the Company's allowance for loan losses
represented 354% of total non-accrual loans and 1.27% of the outstanding balance
of total loans.
Non-Interest Income. Non-interest income for the three-month period ended
-------------------
September 30, 2000 consisted primarily of loan fees and service charges. The
Savings Bank's loan fees and service charges fluctuate as loan demand in the
market area changes. The Company's non-interest income for the three-month
period ended September 30, 2000 was $132,000, a decrease of 36.54% from $208,000
for the three-month period ended September 30, 1999. Included in non-interest
income for the three-month period ended September 30, 2000 is a $68,000 loss on
the sale of repossessed assets.
Loan fees and service charges for the three-month period ended
September 30, 2000 decreased $15,000, or 7.46%, to $186,000 from $201,000 for
the three-month period ended September 30, 1999. This increase was attributable
to a decrease in loan fees charged to new loan customers during the quarter due
to a reduction in origination volume.
Non-Interest Expense. For the three-month period ended September 30, 2000,
--------------------
as compared to the three-month period ended September 30, 1999, total
non-interest expense increased $286,000 from $899,000 to $1,185,000 or 31.81%.
Total salaries and employee benefits were $399,000 for the three-month period
ended September 30, 2000, up $26,000 over the three-month period ended September
30, 1999 level of $373,000. This increase was primarily the result of employee
salary increases and higher educational and training costs.
Partially offsetting these increases was a reduction in SAIF deposit
insurance premiums of $11,000, or 45.83%, to $13,000 for the three-month period
ended September 30, 2000, compared to $24,000 for the three-month period ended
September 30, 1999. This decrease is due mainly to the cost savings realized
from the rate reduction by the FDIC in the Financing Corporation (FICO)
quarterly multiplier that took place January 1, 2000. This reduction set the
FICO assessment to the same rate for both BIF and SAIF insured deposits.
12
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Other expenses of $499,000 increased $275,000 over the three-month period
ended September 30, 1999 amount of $224,000. The increase in other expenses for
the three-month period ending September 30, 1999, is primarily due to increases
in deposit account expenses, legal fees, consulting fees and other real estate
owned expenses. Deposit account expenses were $12,000 higher than last year due
to a one-time expense for supplies related to the conversion of the Savings
Bank's checking services to check imaging. Legal fees were $19,000 higher for
the three-month period ending September 30, 2000 as compared to last year due to
fees incurred in relation to the collection of amounts owed the Savings Bank by
the unaffiliated loan broker and a company that had originally been contracted
to perform check imaging servicing for the Savings Bank. Consulting fees
increased $40,000 for the three-month period ended September 30, 2000 as
compared to the three-month period ended September 30, 1999. During the quarter
ended September 30, 2000, an additional expense of $24,000 was recognized to
adjust for amounts due to several consulting firms and individuals for
assistance in implementing the Company's strategic plan, performing loan review
analysis, conducting internal audit and compliance reviews, and managing real
estate development projects.
Expenses related to other real estate owned was $197,000 higher for the
quarter ended September 30, 2000 as compared to the quarter ended September 30,
1999. During the quarter ended September 30, 2000, the Savings Bank expensed
$9,000 for insurance on properties acquired through foreclosure, $8,000 for the
completion of an unfinished duplex acquired by the Savings Bank, and the value
of foreclosed properties held by the Savings Bank were written down an
additional $177,000 to reflect current market values. Of the $177,000
write-down, $143,000 directly related to properties located in Kingsport,
Tennessee where the Savings Bank no longer solicits business.
Income Taxes. The Company recognized an income tax credit for the
-------------
three-month period ended September 30, 2000 of $276,000 compared to an income
tax expense of $83,000 for the three-month period ended September 30, 1999. The
changes in income tax expense are a result of changes in net taxable income
during the periods and the change in accounting for tax estimates for the
Company individually.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no business other than that of the Savings Bank
and does not currently have any material funding commitments. The Company's
principal sources of liquidity are cash on hand, payments received on its loan
to the Company's ESOP and dividends received from the Savings Bank. The Savings
Bank is subject to various regulatory restrictions on the payment of dividends.
The Savings Bank is required by the Office of Thrift Supervision
regulations to maintain minimum levels of specified liquid assets. On November
24, 1997, the OTS lowered this liquidity requirement from 5 to 4 percent of the
Savings Bank's liquidity base. Additionally, the OTS streamlined the
calculations used to measure compliance with liquidity requirements, expanded
the types of investments considered to be liquid assets, and reduced the
liquidity base by modifying the definition of net withdrawable account to
exclude accounts with maturities exceeding one year. The Savings Bank's
liquidity ratio for the quarter ended September 30, 2000 was 6.33% and its
liquidity ratio was 6.87% at September 30, 1999.
13
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Savings Bank's principal sources of funds for investments and
operations are net income, deposits from its primary market area, principal and
interest payments on loans and mortgage-backed securities and proceeds from
maturing investment securities. Its principal funding commitments are for the
origination or purchase of loans and the payment of maturing deposits. Deposits
are considered a primary source of funds supporting the Savings Banks lending
and investment activities. Deposits were $104,802,000 and $106,078,000 at
September 30, 2000 and June 30, 2000, respectively.
The Savings Bank's most liquid assets are cash and cash equivalents,
which are cash on hand, amounts due from financial institutions, federal funds
sold, certificates of deposit with other financial institutions that have an
original maturity of three months or less and money market mutual funds. The
levels of such assets are dependent on the Savings Bank's operating, financing
and investment activities at any given time. The Savings Bank's cash and cash
equivalents totaled $2,302,000 at September 30, 2000 and $1,581,000 at June 30,
2000. Of these amounts, $860,000 and $604,000 were deposits held in
interest-bearing accounts at September 30, 2000 and June 30, 1999, respectively.
The variations in levels of cash and cash equivalents are influenced by deposit
flows and anticipated future deposit flows.
At September 30, 2000, the Savings Bank had $224,000 in commitments to
originate loans. At September 30, 2000, the Savings Bank had $57,965,000 in
certificates of deposit which were scheduled to mature in one year or less. It
is anticipated that the majority of these certificates will be renewed in the
normal course of operations.
Middlesboro Federal is not aware of any trends or uncertainties that
will have or are reasonably expected to have a material effect on the Savings
Bank's liquidity or capital resources. The Savings Bank has no current plans for
material capital improvements or other capital expenditures that would require
more funds than are currently on hand.
14
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most companies, the assets and liabilities of a financial
institution are primarily monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Savings Bank's
assets and liabilities are critical to the maintenance of acceptable performance
levels.
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time between 1987 and 1994 the Savings Bank has purchased
whole loans and loan participations from an unaffiliated mortgage broker based
in Lexington, Kentucky. The mortgage broker had been servicing such loans for
the Savings Bank remitting payments on a monthly basis. During the three months
ended September 30, 1999, the Savings Bank became aware that certain such loans
might have been refinanced although the mortgage broker failed to remit the
payoffs on such loans to the Savings Bank. At March 31, 2000, the aggregate
principal balance of such loans amounted to $668,000. The Savings Bank has begun
to service all such loans directly and is pursuing a claim for the unpaid
principal balance with its fidelity insurance carrier. Although the Savings Bank
believes it has a claim under its fidelity bond or through other insurance
policies, there can be no assurance that full or partial recovery of these loans
will be obtained or that loss in connection with these loans will be incurred.
Item 5. Other Information
-----------------
Effective December 13, 1999, the Savings Bank entered into an Agreement
with the Office of Thrift Supervision. The Agreement requires that the Savings
Bank establish the position of Compliance Officer and develop and adopt a
written compliance program designed to ensure the Savings Bank is operating in
compliance with all applicable consumer protection and other laws and
regulations. The Savings Bank is also required to ensure its compliance with its
written loan and collection policies. The Agreement limits the size of any new
commercial loans to $100,000 and any unsecured consumer loans to $25,000. The
Savings Bank was also required to modify its existing strategic plan and budget
to reflect these requirements and was required to make certain filings with the
OTS in accordance with deadlines established in the Agreement. The Savings Bank
does not believe that the terms of this Agreement will have a material adverse
effect on the Savings Bank.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K. During the quarter ended September 30,
--------------------
2000, the registrant did not file any reports on Form 8-K.
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
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 Mountain Bancshares, Inc.
By: /s/ James J. Shoffner
---------------------------------
James J. Shoffner
President
Date: November 20, 2000
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