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 March 31, 1998
[ ] 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: No. 0-22287
CUMBERLAND MOUNTAIN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Tennessee 31-1499488
(State of Incorporation) (I.R.S. Employer
Identification Number)
1431 Cumberland Avenue, Middlesboro, Kentucky 40965
(Address of principal executive office)
(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 April 30, 1998, there were 677,358 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
Page 2
CUMBERLAND MOUNTAIN BANCSHARES, INC.
FORM 10-QSB - March 31, 1998
INDEX
Page
----
Part I - Financial Information
----------------------
Item 1. Financial Statements
Consolidated Statement of Financial Condition
March 31, 1998 and June 30, 1997 2
Consolidated Statements of Income
Three and Nine Months Ended March 31, 1998
and 1997 3
Consolidated Statements of Stockholders' Equity
Nine Months Ended March 31, 1998 4
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1998 and 1997 5
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Part II - Other Information 15
-----------------
Signatures 16
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
March 31, 1998 and June 30, 1997
ASSETS
------
March 31, June 30,
1998 1997
------------ ------------
Cash and cash equivalents $ 2,564 $ 699
Investment securities, held-to-maturity 7 10
Investment securities available-for-sale, at
market value 3,516 4,174
Other investments, at market value 15 103
Mortgage-backed securities available-for-sale,
at market value 6,014 6,353
Loans, net of allowance for loan losses of
$708,000 at March 31, 1998 and
$306,000 at June 30, 1997 121,078 99,623
Accrued interest receivable 951 738
Real estate held for investment 345 -
Repossessed real estate 31 13
Federal Home Loan Bank (FHLB) stock, at cost 1,860 724
Premises and equipment, net 2,957 2,024
Prepaid expenses and other assets 577 194
--------- ---------
TOTAL ASSETS $ 139,915 $ 114,655
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $ 98,129 $ 91,596
Escrows 59 -
Advances from FHLB 30,500 13,000
Notes payable 730 715
Accrued interest payable 834 241
Other liabilities 531 589
--------- ---------
Total liabilities 130,783 106,141
--------- ---------
Common stock, $0.01 per value, 8,000,000 shares
authorized, 677,358 shares issued and
outstanding 7 7
Additional paid-in capital 5,542 5,542
Retained earnings 4,642 4,093
Unearned ESOP shares (986) (986)
Net unrealized loss on investment securities
available-for-sale, net of deferred tax (73) (142)
--------- ---------
Total stockholders' equity 9,132 8,514
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 139,915 $ 114,655
========= =========
The accompanying notes are an integral part of these financial
statements.
2
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Three Months Nine Months
Ended March 31 Ended March 31,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
INTEREST INCOME
Investment securities $ 52 $ 62 $ 162 $ 170
Mortgage-backed securities 88 102 270 335
Mortgage loans 1,868 1,289 5,350 3,605
Commercial and consumer loans 757 388 2,106 953
------- ------- ------- -------
Total interest income 2,765 1,841 7,888 5,063
INTEREST EXPENSE
Deposits 1,161 945 3,442 2,707
FHLB advances 465 182 1,176 365
Other borrowed money 17 -- 67 --
------- ------- ------- -------
1,643 1,127 4,685 3,072
------- ------- ------- -------
NET INTEREST INCOME 1,122 714 3,203 1,991
PROVISION FOR LOAN LOSSES 605 66 890 124
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 517 648 2,313 1,867
------- ------- ------- -------
NON-INTEREST INCOME
Loan fees and service charges 240 172 763 459
Gains (losses) on sales of investment
securities 42 -- 42 50
Gains (losses) on sales of repossessed assets (1) -- 19 (1)
Gains (losses) on sales of real estate held
for investment 40 -- 40 --
------- ------- ------- -------
Total non-interest income 321 172 864 508
------- ------- ------- -------
NET INTEREST AND NON-INTEREST INCOME 838 820 3,177 2,375
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 377 271 1,021 920
Occupancy and equipment expense 88 48 254 121
Marketing and other professional services 84 51 203 142
Other 268 157 771 922
------- ------- ------- -------
Total non-interest expense 817 527 2,249 2,105
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 21 293 928 270
INCOME TAX EXPENSE 38 114 379 130
------- ------- ------- -------
NET INCOME $ (17) $ 179 $ 549 $ 140
======= ======= ======= =======
PER SHARE OF COMMON STOCK:
Earnings (basic) $(0.029) $ 0.304 $ 0.931 $ 0.275
======= ======= ======= =======
Earnings (dilutive) $(0.029) $ 0.304 $ 0.931 $ 0.275
======= ======= ======= =======
Dividends $ 0.000 $ 0.000 $ 0.000 $ 0.000
======= ======= ======= =======
The accompanying notes are an integral part of these financial
statements.
3
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Unrealized
Loss on
Investment
Additional Securities Unearned
Common Paid-In Retained Available ESOP
Stock Capital Earnings for-Sale Shares Total
------- --------- -------- ----------- -------- -------
Balance at June 30, 1997 $ 7 $ 5,542 $ 4,093 $ (142) $ (986) $ 8,514
Net income for the nine month
period ended March 31, 1998 -- -- 549 -- -- 549
Common stock issued -- -- -- -- -- --
Common stock exchanged -- -- -- -- -- --
ESOP shares purchased -- -- -- -- -- --
Decrease in unrealized loss on
investment securities available-
for-sale for the period ended
March 31, 1998, net of
deferred tax -- -- -- 69 -- 69
------- ------- ------- ------- ------- -------
Balance at March 31, 1998 $ 7 $ 5,542 $ 4,642 $ (73) $ (986) $ 9,132
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial
statements
4
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Nine Months Ended March 31,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 549 $ 140
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation 118 60
Amortization and accretion 15 9
FHLB stock dividend (77) (30)
Provision for loan losses 890 124
(Gains) losses on sales of investment securities (42) (52)
(Gains) losses on sales of other real estate (19) (2)
(Gains) losses on sales of real estate held
for investment (40) -
Changes in assets and liabilities:
Accrued interest receivable (213) (258)
Prepaid expenses and other assets (383) (621)
Accrued interest payable 593 502
Other liabilities (58) 604
-------- --------
Net cash provided by (used in) operating
activities 1,333 476
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of FHLB stock (1,059) (246)
Principal collected on investment securities
held to maturity 3 --
Purchases of investment securities available-
for-sale (999) (498)
Proceeds on maturities of investment securities
available-for-sale 1,571 245
Purchases of other investments (356) --
Proceeds on sales of other investments 486 --
Principal collected on mortgage-backed securities 901 531
Proceeds on sales of mortgage-backed securities
available-for-sale -- 855
Purchase of mortgage-backed securities available-
for-sale (510) --
Purchase of real estate held for investment (619) --
Proceeds from sales of real estate held for
investment 321 --
Proceeds from the sale of loans 2,776 --
Net (increase) decrease in purchased loans 261 4,638
Net (increase) decrease in loans exclusive
of loans purchased (25,233) (27,826)
Purchases of premises and equipment (1,059) (846)
-------- --------
Net cash provided by (used in) investing
activities (23,516) (23,147)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 6,533 11,080
Net increase in advances from FHLB 17,500 11,500
Net increase in other borrowings 15 --
Proceeds from the issuance of common stock -- 4,125
Contribution of cash and investment in subsidiary -- 337
Stock issuance and conversion costs -- (391)
-------- --------
Net cash provided by (used in)
financing activities 24,048 26,651
-------- --------
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)
Nine Months Ended March 31,
1998 1997
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,865 3,980
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 699 874
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,564 $ 4,854
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 1,386 $ 540
======= =======
Income taxes $ 396 $ 63
======= =======
Loans transferred to other real estate during
the period $ 343 $ 306
======= =======
Total increase (decrease) in unrealized gain
(loss) on securities available for sale $ (69) $ (82)
======= =======
The accompanying notes are an integral part of these financial
statements.
6
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(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 nine months ended March 31,
1998 and 1997.
Operating results for the nine months ended March 31, 1998
are not necessarily indicative of the results that may be
expected for the year ending June 30, 1998.
Prior to March 31, 1997, 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 "Savings Bank" or "Middlesboro Federal") 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):
March 31,
1998
------------
Balance, June 30, 1997 $ 306
Provision for loan losses 890
Charge-offs, net of recoveries (488)
-------
Balance, March 31, 1998 $ 708
=======
7
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(UNAUDITED)
NOTE 3 - NONACCRUAL LOANS
----------------
Nonaccrual loans are as follows (amounts in thousands):
March 31, June 30,
1998 1997
---------- ----------
Construction Mortgage Loans $ -- $ --
Permanent Mortgage Loans, Secured by
1-4 Dwelling Units 678 601
5 or More Dwelling Units -- --
Nonresidential Property (Except Land) 113 --
Land -- --
Nonmortgage Loans and Leases, Open End:
Credit Cards and Related Plans -- 11
------- -------
$ 791 $ 612
======= =======
8
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The principal business of the Company is that of the
Savings Bank. 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 Bank also maintains an investment
portfolio which includes Federal Home Loan Bank stock,
Government Agency-issued bonds and mortgage-backed securities,
and other investments.
YEAR 2000 PLANNING
Like most financial institutions, the Company's principal
subsidiary relies extensively on computers in conducting its
business. It has been widely reported that many computer
programs currently in use were designed without adequately
considering the impact of the upcoming change in century on
their date codes. If these design flaws are not corrected,
these computer applications may malfunction in the year 2000.
The Savings Bank generally relies on outside vendors for its
most critical data processing services. These vendors have
advised the Savings Bank that they are actively addressing the
year 2000 issue and do not expect that any required solutions
will require material additional investments by the Savings
Bank.
FINANCIAL CONDITION
Total assets of the Company have increased 22.04% from
$114,655,000 at June 30, 1997 to $139,915,000 at March 31, 1998.
This has resulted largely from the increase in loans of 21.54%
to $121,078,000 at March 31, 1998 from $99,623,000 at June 30,
1997. Over the past few years, the size of the Company's loan
portfolio has grown as a result of increased loan demand in the
Savings Bank's primary market area. Management has attempted to
grow the loan portfolio while at the same time limiting the
credit risk and improving the rate sensitivity of the Savings
Bank's interest-earning assets. While the Savings Bank's
primary emphasis continues to be the origination of one to four
family adjustable rate mortgage loans secured by properties in
its primary market area, the Savings Bank has also invested
excess funds in investment securities and mortgage-backed
securities with adjustable rates or terms to maturity of seven
years or less.
The Company's asset growth during the nine months ended
March 31, 1998 was financed primarily by an increase in advances
from the Federal Home Loan Bank ("FHLB"). FHLB advances rose by
$17,500,000 from $13,000,000 at June 30, 1997 to $30,500,000 at
March 31, 1998. Total stockholders' equity rose by $618,000, or
7.26%, principally due to net income earned during the nine-
month period ended March 31, 1998.
RESULTS OF OPERATIONS
Net Income. The Company realized a net loss of $17,000
for the three-month period ended March 31, 1998, a decrease of
$196,000 as compared to the three-month period ended March 31,
1997. This decrease was primarily the result of an increase in
provision for loan losses of $539,000 during the quarter ended
March 31, 1998. Management's decision to provide for the large
increase in the allowance for loan losses was based on the rapid
growth and change in mix of the loan portfolio over the past
year. In addition, management desires to ensure adequate
protection for possible future loan losses and to approximate
peer group levels of loan loss allowances as compared to loans
outstanding.
9
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
The Company's net earnings increased from $140,000 for the
nine months ended March 31, 1997 to $549,000 for the nine months
ended March 31, 1998, an increase of $409,000. During the nine-
month period ended March 31, 1997, the Savings Bank recognized
an expense related to a special assessment of $388,300 on SAIF-
assessable deposits to capitalize the SAIF mandated by the
Deposit Insurance Funds Act of 1996. In addition, the Bank
expensed $152,000 to record the funding of a retirement plan for
the directors of the Savings Bank. Excluding the one-time
expenses for the SAIF assessment and directors retirement, net
income for the nine-month period ended March 31, 1997, would
have been approximately $529,000. The Company, therefore,
realized an increase of $20,000, or 3.78%, in net income for the
nine-month period ended March 31, 1998 compared to adjusted net
income for the nine-month period ended March 31, 1997.
Interest Income. Total interest income for the three-
month period ended March 31, 1998 amounted to $2,765,000, an
increase of 50.19% from the Company's total interest income of
$1,841,000 for the three-month period ended March 31, 1997.
During the three-month period ended March 31, 1998 as compared
to the three-month period ended March 31, 1997, the Company's
interest income on its loan portfolio increased 56.53% from
$1,677,000 to $2,625,000; its interest income from its mortgage-
backed securities portfolio decreased 13.73% from $102,000 to
$88,000; and interest income from its investment securities
portfolio decreased 16.13% from $62,000 to $52,000.
Interest income increased from $5,063,000 for the nine
months ended March 31, 1997 to $7,888,000 for the nine months
ended December 31, 1997, an increase of $2,825,000 or 55.80%.
The Company's change in interest income was due to several
factors. The Savings Bank has been decreasing its investment
securities and mortgage-backed securities, thereby reducing the
Savings Bank's interest income from those investments. Further,
the Savings Bank's average yield on its mortgage loan portfolio
has remained relatively stable. The Savings Bank is increasing
their overall interest income by originating additional mortgage
loans and consumer loans while also decreasing their investment
in investment securities and mortgage-backed securities.
Interest Expense. The Savings Bank's interest expense is
the interest paid on its deposits and borrowings. As the
Savings Bank has been attracting more deposit funds, interest
expense has increased. The high demand for mortgage and
consumer lending has also caused the Savings Bank to secure
advances from the Federal Home Loan Bank to fund these loans.
Total interest expense increased from $1,127,000 for the three-
month period ended March 31, 1997, to $1,643,000 for the three-
month period ended March 31, 1998. Interest expense increased
$1,613,000, or 52.51%, from $3,072,000 for the nine-month period
ended March 31, 1997 to $4,685,000 for the nine-month period
ended March 31, 1998. Approximately half of the increase, or
$811,000, is attributable to an increase in the Savings Bank's
expense on Federal Home Loan Bank advances. The increase in
interest expense on FHLB advances is due to the increase in the
balance of this account, which has primarily been used to fund
mortgage and consumer loan demand.
10
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Net Interest Income. During the three months ended March
31, 1998, net interest income increased 57.15% to $1,122,000
from $714,000 for the three months ended March 31, 1997. Net
interest income increased from $1,991,000 for the nine months
ended March 31, 1997 to $3,203,000 for the nine months period
ended March 31, 1998, an increase of $1,212,000 or 60.88%. This
increase was due primarily to the continued high loan demand
experienced by the Savings Bank that has resulted in overall
increase in the loan portfolio and thus an increase in interest
income.
Provision for Loan Losses. Provision 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 March 31, 1998, the
Savings Bank provided $605,000 for loan losses compared to
$66,000 during the three-month period ended March 31, 1997. The
provision for losses on loans increased from $124,000 for the
nine months ended March 31, 1997 to $890,000 for the nine months
ended March 31, 1998. The increase in provision for loan losses
for these periods represented management's effort to maintain an
adequate reserve against losses given the rapid growth of the
overall loan portfolio. 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 March 31,
1998, the Company's allowance for loan losses represented 43.01%
of total non-performing loans and .59% of the outstanding
balance of total loans.
Non-Interest Income. Non-interest income for the three-
month period ended March 31, 1998 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 March 31, 1998 was $240,000, an increase of 39.54%
from $172,000 for the three-month period ended March 31, 1997.
Non-interest income increased from $459,000 for the nine months
ended March 31, 1997 to $763,000 for the nine months ended March
31, 1998. Non-interest income primarily reflects the demand for
loans in the Savings Bank's market area.
Non-Interest Expense. For the three-month period ended
March 31, 1998, as compared to the three-month period ended
March 31, 1997, total non-interest expense increased $290,000
from $527,000 to $817,000 or 55.03%. Non-interest expense
increased from $2,105,000 for the nine months ended March 31,
1997 to $2,249,000 for the nine months ended March 31, 1998, an
increase of $144,000 or 6.84%.
Total salaries and employee benefits were $377,000 for the
three-month period ended March 31, 1998, up $106,000 over the
three-month period ended March 31, 1997 level of $271,000.
Salaries and employee benefits increased $101,000 from $920,000
for the nine months ended March 31, 1997 to $1,021,000 for the
nine months ended March 31, 1998. The increase for the three-
month period ended March 31, 1998 primarily reflects higher
salary levels due to the increased number of personnel. In
addition, deferred compensation of $52,000 for the Chairman of
11
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
the Company was recognized in March of 1998. The relatively
small increase in salaries and employee benefits expense for the
nine-month period ended March 31, 1998, as compared to the nine-
month period ended March 31, 1997, primarily reflects a one time
charge of $152,000 to record the funding of a retirement plan
for the directors of the Savings Bank during the three-month
period ended September 30, 1996.
Occupancy and equipment expense was $88,000 for the three-
month period ended March 31, 1998, up $40,000 from the three-
month period ended March 31, 1997. For the nine months ended
March 31, 1998, occupancy and equipment expenses increased
$133,000 as compared to the nine months ended March 31, 1997.
These increases were primarily due to increased depreciation,
repairs and maintenance costs associated with the expansion of
the existing main office building and the opening of a new
branch office.
Other expenses of $268,000 increased $111,000, or 70.70%,
over the three-month period ended March 31, 1997 amount of
$157,000. The increase in other expenses is primarily due to
the increased operating costs associated with expansion of the
Savings Bank over the past year. In addition, legal expenses
increased from $1,000 for the three-month period ended March 31,
1997 to $43,000 for the three-month period ended March 31, 1998
and data processing expenses increased $24,000 during this same
time period. The increase in legal fees was primarily due to
the Savings Bank's negotiations with National City Bank for the
purchase of their Harlan, Kentucky branch office. The increase
in data processing fees is the direct result of the expiration
of the Savings Bank's contract with their existing processor and
subsequent increase in processing fees prior to the expected
conversion to a new data processing system in July of 1998.
For the nine-month period ended March 31, 1998, other
expenses decreased $151,000 as compared to the nine-month
period ended March 31, 1997. This decrease was primarily
attributable to the one time special assessment to recapitalize
the SAIF of $388,300 expensed in the period ended September 30,
1996.
Income Taxes. Income tax expense for the three-month
period ended March 31, 1998 and 1997 was $38,000 and $114,000,
respectively. For the nine months ended March 31, 1998 and
1997, income tax expense increased $249,000 to $379,000 from
$130,000. The changes in income tax expense are a result of
changes in net taxable income during the periods.
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 Employee Stock Ownership Plan 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
12
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 month ended March 31, 1998 was 6.41% and its
liquidity ratio was 12.03% at March 31, 1997.
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 Bank's lending and investment
activities. Deposits were $98,129,000 and $91,596,000 at March
31, 1998 and June 30, 1997, 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 $2,564,000 at
March 31, 1998 and $699,000 at June 30, 1997. The variations in
levels of cash and cash equivalents are influenced by deposit
flows and anticipated future deposit flows.
At March 31, 1998, the Savings Bank had $1,700,000 in
commitments to originate loans. At March 31, 1998, the Savings
Bank had $54,471,000 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.
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
NEW ACCOUNTING PRONOUNCEMENTS
Disclosures About Fair Value of Financial Instruments In
December 1991, the 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.
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. The Company will adopt
the provisions of this statement on July 1, 1998 and does not
anticipate it will have a material impact on its financial
statements.
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.
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
PART II. OTHER INFORMATION
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
March 31, 1998, 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
(Duly authorized representative)
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