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 December 31, 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 January 31, 2001, there were 679,620 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
CUMBERLAND MOUNTAIN BANCSHARES, INC.
FORM 10-QSB - December 31, 2000
INDEX
Page
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Part I - Financial Information
---------------------
Item 1. Financial Statements
Consolidated Statement of Financial Condition
December 31, 2000 and June 30, 2000 2
Consolidated Statements of Income
Three and Six Months Ended December 31, 2000 and 1999 3-4
Consolidated Statements of Stockholders' Equity
Six Months Ended December 31, 2000 5
Consolidated Statements of Cash Flows
Six Months Ended December 31, 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 10-16
Part II - Other Information 17
-----------------
Signatures 18
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
December 31, 2000 and June 30, 2000
ASSETS
------
December 31, June 30,
2000 2000
----------- --------
Cash and cash equivalents $ 5,038 $ 1,581
Investment securities, held-to-maturity -- --
Investment securities available-for-sale, at market value 4,177 3,607
Other investments, held-to-maturity (market value $180,000 at
December 30, 2000 and June 30, 2000) 180 180
Mortgage-backed securities available-for-sale, at market value 1,904 2,626
Loans, net of allowance for loan losses of $1,010,000 at
December 31, 2000 and $1,032,000 at June 30, 2000 105,804 109,610
Accrued interest receivable 858 809
Real estate held for investment 1,558 1,669
Repossessed property 1,093 1,523
Federal Home Loan Bank (FHLB) stock, at cost 964 929
Premises and equipment, net 4,086 4,263
Prepaid expenses and other assets 1,422 1,372
--------- ---------
TOTAL ASSETS $ 127,084 $ 128,169
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits 104,159 106,078
Advances from FHLB 10,500 10,500
Notes payable 2,978 1,485
Accrued interest payable 63 192
Other liabilities 932 799
--------- ---------
Total liabilities 118,632 119,054
--------- ---------
Common stock, $0.01 per value, 8,000,000 shares authorized, 679,620
shares issued and outstanding 7 7
Additional paid-in capital 5,549 5,560
Retained earnings 4,177 4,939
Unearned ESOP shares (785) (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 (77) (150)
--------- ---------
Total stockholders' equity 8,452 9,115
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 127,084 $ 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 AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Amounts in thousands, except per share data)
Three Months Six Months
Ended December 31, Ended December 31,
-------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME
Investment securities $ 68 $ 56 $ 130 $ 116
Mortgage-backed securities 33 48 69 98
Loans 2,280 2,295 4,643 4,605
FHLB Stock 18 32 35 65
------- ------- ------- -------
Total interest income 2,399 2,431 4,877 4,884
INTEREST EXPENSE
Deposits 1,329 1,264 2,670 2,519
FHLB advances 153 167 297 327
Other borrowed money 38 35 74 71
------- ------- ------- -------
Total interest expense 1,520 1,466 3,041 2,917
NET INTEREST INCOME 879 965 1,836 1,967
PROVISION FOR LOAN LOSSES 225 98 1,003 160
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 654 867 833 1,807
------- ------- ------- -------
NON-INTEREST INCOME
Loan fees and service charges 169 204 355 405
Gains (losses) on sales of investment securities -- (1) -- (1)
Gains (losses) on sales of repossessed assets 6 (13) (62) (23)
Gains (losses) on sales of real estate held for investment 9 (5) 9 11
Other 15 9 29 10
------- ------- ------- -------
Total non-interest income 199 194 331 402
------- ------- ------- -------
NET INTEREST AND NON-INTEREST INCOME 853 1,061 1,164 2,209
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 384 374 783 747
Data processing fees 60 60 120 114
SAIF deposit insurance premiums 13 24 26 48
Occupancy and equipment expense 136 144 275 290
Franchise and other taxes 32 34 58 66
Marketing and other professional services 38 47 74 80
ESOP expense 13 13 26 26
Other 436 209 935 433
------- ------- ------- -------
Total non-interest expense 1,112 905 2,297 1,804
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE (259) 156 (1,133) 405
INCOME TAX EXPENSE (95) 48 (371) 131
------- ------- ------- -------
NET INCOME (LOSS) $ (164) $ 108 $ (762) $ 274
------- ------- ------- -------
3
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro , Kentucky
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(Amounts in thousands, except per share data)
Three Months Six Months
Ended December 31, Ended December 31,
------------------- --------------------
2000 1999 2000 1999
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ (164) $ 108 $ (762) $ 274
Unrealized gain (loss) on securities, net of tax effect (77) (129) (77) (129)
-------- ------- -------- -------
OTHER COMPREHENSIVE INCOME (LOSS) $ (241) $ (21) $ (839) $ 145
======== ======= ======== =======
PER SHARE OF COMMON STOCK:
Earnings (basic) $(0.2917) $0.1895 $(1.3552) $0.4792
======== ======= ======== =======
Earnings (diluted) $(0.2625) $0.1727 $(1.2221) $0.4372
======== ======= ======== =======
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 six month period ended
December 31, 2000 - - (762) -
Common stock issued - - - -
ESOP shares transferred - - - -
ESOP shares earned - (11) - -
Stock Option shares transferred - - - -
MRP shares acquired - - - -
Decrease in unrealized loss on investment
securities available-for-sale for the period
ended December 31, 2000, net of deferred tax - - - 73
--- ------- ------ -----
Balance at December 31, 2000 $ 7 $ 5,549 $4,177 $ (77)
=== ======= ====== =====
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 six month period ended
December 31, 2000 - - - - (762)
Common stock issued - - - - -
ESOP shares transferred - - - - -
ESOP shares earned 37 - - - 26
Stock Option shares transferred - - - - -
MRP shares acquired - - - - -
Decrease in unrealized loss on investment
securities available-for-sale for the period
ended December 31, 2000, net of deferred tax - - - - 73
------ ------ ----- --- -------
Balance at December 31, 2000 $ (785) $ (329) $ (90) $ - $ 8,452
====== ====== ===== === =======
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)
Six Months Ended December 31,
2000 1999
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (762) $ 274
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation 216 203
Amortization and accretion 5 6
FHLB stock dividend (35) (66)
Provision for loan losses 1,003 160
(Gains) losses on sales of investment securities -- 1
(Gains) losses on sales of other repossessed assets 62 23
(Gains) losses on sales of property held for investment (9) (11)
Changes in assets and liabilities:
Accrued interest receivable (49) 125
Prepaid expenses and other assets (50) (1,280)
Accrued interest payable (129) 24
Other liabilities 133 513
------ -------
Net cash provided by (used in) operating activities 385 (28)
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (500) (1,000)
Proceeds on maturities of investment securities available-for-sale -- 500
Principal collected on investment securities available-for-sale 13 140
Proceeds on sales of other investments -- 15
Proceeds on maturities of mortgage-backed securities 391 --
Principal collected on mortgage-backed securities 357 471
Net (increase) decrease in real estate held for investment 120 (300)
Net (increase) decrease in loans 2,760 1,719
Net (increase) decrease in repossessed property 368 (352)
Purchases of premises and equipment (39) (55)
------ -------
Net cash provided by (used in) investing activities 3,470 1,138
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (1,919) 1,690
Net increase (decrease) in advances from FHLB -- 500
Net increase (decrease) in other borrowings 1,493 (59)
ESOP shares earned, net of tax 28 38
Purchase of shares for MRP -- (103)
------ -------
Net cash provided by (used in) financing activities (398) 2,066
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)
Six Months Ended December 31,
2000 1999
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,457 3,176
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,581 1,317
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,038 $ 4,493
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 1,650 $ 631
======= =======
Income taxes $ -- $ --
======= =======
Loans transferred to repossessed property during the period $ 93 $ 322
======= =======
Total increase (decrease) in unrealized gain (loss) on
securities available for sale $ 73 $ 9
======= =======
The accompanying notes are an integral part of these financial statements.
7
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 six months ended December 31, 2000 and 1999.
Operating results for the six month period ended December 31, 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):
December 31,
2000
------------
Balance, beginning of year $ 1,032
Provision for loan losses 1,003
Charge-offs, net of recoveries (1,025)
-------
Balance, December 31, 2000 $ 1,010
=======
8
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(UNAUDITED)
NOTE 3 - NONACCRUAL LOANS
Nonaccrual loans are as follows (amounts in thousands):
December 31, June 30,
2000 2000
----------- --------
Construction Mortgage Loans $ -- $ --
Permanent Mortgage Loans, Secured by:
1-4 Dwelling Units 202 493
5 or More Dwelling Units -- --
Nonresidential Property (Except Land) 275 73
Land 47 --
Nonmortgage Loans and Leases, Closed End:
Commercial 55 194
Auto 20 14
Mobile Home -- --
Other Consumer 16 17
Nonmortgage Loans and Leases, Open End:
Revolving Loans Secured by
1-4 Dwelling Units -- --
----- ----
$ 615 $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 have decreased 0.85% from $128,169,000 at June
30, 2000 to $127,084,000 at December 31, 2000. This decrease in assets has
resulted primarily from the decrease in net loans of $3.8 million, or 3.47% to
$105,804,000 at December 31, 2000 from $109,610,000 at June 30, 2000. The
decline in net loans is primarily due to lower loan volume and net charge-offs
of $1,025,000 during the six-month period ended December 31, 2000. This decline
in loans was partially offset by an increase in cash and cash equivalents of
$3.5 million.
During the six months ended December 31, 2000, the Savings Bank recognized
charge-offs on several large commercial borrowers. These charge-offs resulted in
a severe reduction in the Savings Bank's allowance for loan losses for the six
months ended December 31, 2000. Pursuant to recommendations by the Classified
Assets Committee of the Savings Bank, a provision for loan losses of $1,003,000
was made during the six months ended December 31, 2000. The Committee determined
this was the amount needed to adequately provide for future potential losses
based upon the level of classified assets.
The Company has experienced a decline in deposits during the six months
ended December 31, 2000 of $1,919,000, or 1.81%. This decline is primarily the
result of higher interest rates and increased competition in the Savings Bank's
market area for deposits. Notes Payable increased $1,493,000 from $1,485,000 at
June 30, 2000 to $2,978,000 at December 31, 2000. This increase was due to the
refinancing of an intra-company debt with an outside creditor. During the
quarter ended December 31, 2000, the Company borrowed $1.6 million from an
outside lender which was contributed to the Company's subsidiary, Home Mortgage
Loan Corporation ("HMLC"). HMLC used such funds to repay an intercompany loan.
The loan from the outside lender is secured by all of the issued and outstanding
shares of the Savings Bank. Total stockholders' equity declined by $663,000, or
7.27%, principally due to the net loss realized during the period.
10
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net Income The Company realized a net loss of $164,000 for the three-month
----------
period ended December 31, 2000. This compared to net income of $108,000 for the
three-month period ended December 31, 1999. This net loss was primarily the
result of an increase in the provision for loan losses of $127,000 from $98,000
for the three-month period ended December 31, 1999 to $225,000 for the
three-month period ended December 31, 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. In
addition to the increase in the provision for loan losses, the Company incurred
other non-interest expenses related to the write-down of foreclosed property of
$45,000 and a previously undiscovered reconciling item related to the Savings
Bank's data processing conversion of which the Savings Bank has provided a loss
provision of $125,000 during the three-month period ended December 31, 2000.
For the six-month period ended December 31, 2000, the Company realized a
net loss of $762,000, compared to net income of $274,000 for the six-month
period ended December 31, 1999. This change in net income was primarily the
result of an increase in provision for loan losses of $843,000, an increase in
provision for losses on foreclosed real estate of $222,000 and a loss provision
of $125,000 for reconciling items. Management believes that these loss
provisions are non-recurring items and will benefit the profitability of the
Company in the long term.
Interest Income Total interest income for the three-month period ended
----------------
December 31, 2000 amounted to $2,399,000, a decrease of 1.32% from the Company's
total interest income of $2,431,000 for the three-month period ended December
31, 1999. During the three-month period ended December 31, 2000 as compared to
the three-month period ended December 31, 1999, the Company's interest income on
its loan portfolio decreased 0.65% from $2,295,000 to $2,280,000; its interest
income from its mortgage-backed securities portfolio decreased 31.25% from
$48,000 to $33,000; interest income from its investment securities portfolio
increased 21.43% from $56,000 to $68,000; and interest income from FHLB stock
decreased 43.75% from $32,000 to $18,000. The decline in interest income on the
Company's loan portfolio has occurred primarily due to the overall decline in
outstanding loan balances. This decline is primarily the result of a slow down
in origination volume combined with tighter underwriting controls.
Interest income decreased from $4,884,000 for the six months ended December
31, 1999 to $4,877,000 for the six months ended December 31, 2000, a decrease of
$7,000 or 0.14%. This decrease resulted primarily from the decrease in interest
income on mortgage-backed securities and FHLB Stock. Management has attempted to
increase the interest income of the Bank by taking the repayments from
mortgage-backed securities and redeeming excess FHLB stock and reinvesting the
funds in higher yielding mortgage, consumer and commercial loans. Interest
income on loans increased $38,000, or 0.83% during the six-month period ended
December 31, 2000 as compared to the six-month period ended December 31, 1999.
Management was able to increase the interest income on loans during the
six-month period primarily by reducing the amount of non-accrual loans.
Interest Expense Interest expense increased from $1,466,000 for the
-----------------
three-month period ended December 31, 1999, to $1,520,000 for the three-month
period ended December 31, 2000. During the three-month period ended December 31,
2000 as compared to the three-month period ended December 31, 1999, the
Company's interest expense on deposits increased 5.14% from $1,264,000 to
$1,329,000. 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 as well as increased competition
within the Company's market area.
11
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Interest expense increased $124,000, or 4.25%, from $2,917,000 for the
six-month period ended December 31, 1999 to $3,041,000 for the six-month period
ended December 31, 2000. Interest expense on deposits increased 5.99%, or
$151,000 while interest expense on FHLB advances decreased 9.17%, or $30,000 for
the six-month period ended December 31, 2000. Due to a decrease in loans being
originated during the period, additional borrowings were not necessary to fund
the loan demand being experienced.
Net Interest Income During the three months ended December 31, 2000, net
--------------------
interest income decreased 8.91% to $879,000 from $965,000 for the three months
ended December 31, 1999. For the six-month period ended December 31, 2000, net
interest decreased 6.66% to $1,836,000 from $1,967,000 for the six-month period
ended December 31, 1999. This decrease was due primarily to the reduction in
loan growth by the Savings Bank as well as higher deposit rates.
Provisions 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 December 31, 2000, the Savings Bank
provided $225,000 for loan losses compared to $98,000 during the three-month
period ended December 31, 1999. The provision for loan losses increased from
$160,000 for the six months ended December 31, 1999 to $1,003,000 for the six
months ended December 31, 2000. The provision for loan loss amount represents
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 Savings Bank's market area, economic conditions, interest rates,
and other conditions that may affect the borrower's ability to comply with
repayment terms. At December 31, 2000, the Company's allowance for loan losses
represented 164% of total non-accrual loans and 0.95% of the outstanding balance
of total loans.
Non-Interest Income Non-interest income for the three-month period ended
--------------------
December 31, 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 December 31, 2000 was $199,000, an increase of 2.58% from $194,000
for the three-month period ended December 31, 1999. Non-interest income
decreased from $402,000 for the six months ended December 31, 1999 to $331,000,
a 17.66% decline, for the six months ended December 31, 2000. Included in
non-interest income for the six-month period ended December 31, 2000 is a
$62,000 loss on the sale of repossessed assets.
Loan fees and service charges for the three-month period ended December 31,
2000 decreased $35,000, or 17.16%, to $169,000 from $204,000 for the three-month
period ended December 31, 1999 and $50,000, or 12.35% for the six-month period
ended December 31, 2000 as compared to the six-month period ended December 31,
1999. This decrease was attributable to a decrease in loan fees charged to new
loan customers during the quarter due to a reduction in origination volume.
12
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Non-Interest Expense For the three-month period ended December 31, 2000, as
--------------------
compared to the three-month period ended December 31, 1999, total non-interest
expense increased $207,000 from $905,000 to $1,112,000 or 22.87%. Non-interest
expense increased from $1,804,000 for the six months ended December 31, 1999 to
$2,297,000 for the six months ended December 31, 2000, an increase of $493,000
or 27.33%.
Total salaries and employee benefits were $384,000 for the three-month
period ended December 31, 2000, up $10,000 over the three-month period ended
December 31, 1999 level of $374,000. For the six-month period ended December 31,
2000, salaries and employee benefits increased $36,000 or 4.82% as compared to
the six-month period ended December 31, 1999. This increase was primarily the
result of employee salary increases. Offsetting this increase was a reduction in
SAIF deposit insurance premiums of $11,000, or 45.83%, to $13,000 for the
three-month period ended December 31, 2000, compared to $24,000 for the
three-month period ended December 31, 1999. This decrease was $22,000 for the
six-month period ended December 31, 2000 as compared to the six-month period
ended December 31, 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.
Other expenses of $436,000 increased $227,000 over the three-month period
ended December 31, 1999 amount of $209,000. The increase in other expenses for
the three-month period ending December 31, 2000, is primarily due to increases
in legal fees, loan expenses, other real estate owned expenses, and loss
provisions. Legal fees were $9,000 higher for the three-month period ending
December 31, 2000 as compared to last year due to fees incurred in relation to
the collection of amounts owed the Savings Bank by Blair Mortgage Company and
Professional Banking Solutions. Loan expenses were $15,000 higher for the
three-month period ended December 31, 2000 primarily due to expenses related to
the collection of delinquent borrowers. A loss provision of $125,000 was
incurred in the three-month period ended December 31, 2000 to recognize a
potential loss from an outstanding reconciliation item as mentioned earlier.
For the six-month period ended December 31, 2000, other non-interest
expenses increased $502,000 as compared to the six-month period ended December
31, 1999. This increase in other non-interest expenses is primarily due to
increases in deposit account expenses, legal fees, consulting fees, loan
expenses, other real estate owned expenses and loss provisions. Deposit account
expenses were $17,000 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 $28,000 higher for the six-month period ending
December 31, 2000 as compared to last year due to fees incurred in relation to
the collection of amounts owed the Savings Bank by Blair Mortgage Company and
Professional Banking Solutions. Consulting fees increased $39,000 for the
six-month period ended December 31, 2000 as compared to the three-month period
ended December 31, 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.
13
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Expenses related to other real estate owned was $58,000 higher for the
quarter ended December 31, 2000 as compared to the quarter ended December 30,
1999 and $255,000 higher for the six-month period ended December 31, 2000 as
compared to the six-month period ended December 31, 1999. During the six-month
period ended December 31, 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 $222,000 to
reflect current market values. Of the $222,000 write-down, $188,000 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 December 31, 2000 of $95,000 compared to an income tax
expense of $48,000 for the three-month period ended December 31, 1999. For the
six months ended December 31, 2000, an income tax credit of $371,000 was
recognized compared to an income tax expense of $131,000 for the six months
ended December 31, 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.
AGREEMENT AND PLAN OF SHARE EXCHANGE
On February 8, 2001 the Company entered into an Agreement and Plan of Share
Exchange with Commercial Bancgroup, Inc. which provides for Commercial to
acquire all of the issued and outstanding shares of the Company's common stock
for total consideration of $9.52 million (including amounts to be paid to
certain optionholders). The Share Exchange, which is subject to receipt of the
approval of the Company's stockholders and all requisite regulatory approvals,
is expected to be consummated in the summer of 2001.
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 December 31, 2000 was 6.55% and its
liquidity ratio was 7.29% at December 31, 1999.
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 $104,159,000 and $106,078,000 at
December 31, 2000 and June 30, 2000, respectively.
14
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 $5,038,000 at December 31, 2000 and $1,581,000 at June 30,
2000. Of these amounts, $2,340,000 and $1,069,000 were deposits held in
interest-bearing accounts at December 31, 2000 and June 30, 2000, respectively.
The variations in levels of cash and cash equivalents are influenced by deposit
flows and anticipated future deposit flows.
At December 31, 2000, the Savings Bank had $209,000 in commitments to
originate loans. At December 31, 2000, the Savings Bank had $58,665,000 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.
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.
NEW ACCOUNTING PRONOUNCEMENTS
Disclosures About Fair Value of Financial Instruments In December 1991, the
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FASB issued Statement of Financial Accounting Standards No. 107 (SFAS No. 107)
"Disclosure About Fair Value of Financial Instruments." SFAS No. 107 requires
all entities to disclose the fair value of financial instruments (both assets
and liabilities recognized and not recognized in the financial statements) for
which it is practicable to estimate fair value, except those financial
instruments specifically excluded. The disclosure shall be either in the body of
the financial statements or in the accompanying notes and shall also include the
methods and significant assumptions used to estimate the fair value of financial
instruments. Additional information is required to be disclosed if it is not
practicable for an entity to estimate the fair value of a financial instrument
or a class of financial instruments as well as the reasons why it is not
practicable to estimate fair value. SFAS No. 107 is effective for entities with
less than $150 million in total assets in the current statement of financial
condition for financial statements issued for the fiscal year beginning July 1,
1995.
15
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Accounting By Creditors For Impairment of a Loan During May 1993, the FASB
-------------------------------------------------
issued SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" that
requires impaired loans be measured based upon the present value of expected
future cash flows discounted at the loan's effective interest rate or at the
loan's market price or fair value of collateral, if the loan is collateral
dependent. Adoption of SFAS No. 114, as amended by SFAS No. 118, occurred on
June 30, 1996, and is did not have a material impact on the financial
statements.
Earnings Per Share In February 1997, the FASB issued SFAS No. 128 which
--------------------
requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share are computed without including
potential common shares, i.e. no dilutive effect. Diluted earnings per share is
computed taking into consideration common shares outstanding and dilutive
potential common shares, including options, warrants, convertible securities,
and contingent stock agreements. SFAS No. 128 is effective for periods ending
after December 15, 1997.
Comprehensive Income In June, 1997, the FASB issued SFAS No. 130,
---------------------
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
This statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal years beginning after
December 15, 1997.
Disclosures about Segments of an Enterprise and Related Information In
-----------------------------------------------------------------------
June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement is effective for financial statements for periods beginning after
December 15, 1997. The Company does not believe that the adoption of this
accounting statement will have a material impact on its financial statements.
16
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
---------------------------------------------------
On October 18, 2000, the Registrant held its Annual Meeting of Stockholders
of the purpose of electing directors. All matters were approved. The results of
the voting at the Annual Meeting were as follows:
PROPOSAL I - ELECTION OF DIRECTORS
NOMINEE VOTES FOR VOTES WITHHELD
J. Roy Shoffner 537,904 13,257
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) Exhibits. None
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(b) Reports on Form 8-K. During the quarter ended December 31,
-------------------
2000, the registrant did not file any reports on Form 8-K.
17
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: February 13, 2001