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, 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 October 31, 1998, there were 678,800 shares of common
stock outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
CUMBERLAND MOUNTAIN BANCSHARES, INC.
FORM 10-QSB - September 30, 1998
INDEX
Page
----
Part I - Financial Information
----------------------
Item 1. Financial Statements
Consolidated Statement of Financial Condition
September 30, 1998 and June 30, 1998 2
Consolidated Statements of Income
Three Months Ended September 30, 1998
and 1997 3
Consolidated Statements of Stockholders' Equity
Three Months Ended September 30, 1998 4
Consolidated Statements of Cash Flows
Three Months Ended September 30, 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
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
September 30, 1998 and June 30, 1998
ASSETS
------
September 30, June 30,
1998 1998
------------ ------------
Cash and cash equivalents $ 626 $ 1,664
Investment securities, held-to-maturity 7 7
Investment securities available-for-sale, at
market value 3,389 3,398
Other investments, at market value 195 303
Mortgage-backed securities available-for-sale,
at market value 5,116 5,578
Loans, net of allowance for loan losses of
$787,000 at September 30, 1998 and
$798,000 at June 30, 1997 117,804 118,061
Accrued interest receivable 955 985
Real estate held for investment 775 620
Repossessed real estate 257 100
Federal Home Loan Bank (FHLB) stock, at cost 1,719 1,688
Premises and equipment, net 4,278 3,215
Prepaid expenses and other assets 500 287
--------- ---------
TOTAL ASSETS $ 135,621 $ 135,906
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $ 97,544 $ 97,719
Advances from FHLB 24,500 26,000
Notes payable 2,753 1,748
Accrued interest payable 884 283
Other liabilities 848 1,395
--------- ---------
Total liabilities 126,529 127,145
--------- ---------
Common stock, $0.01 per value, 8,000,000 shares
authorized, 678,800 shares issued and
outstanding 7 7
Additional paid-in capital 5,555 5,542
Retained earnings 4,940 4,845
Unearned ESOP shares (948) (1,553)
Unearned Stock Option shares (413) --
Accumulated other comprehensive income, net (49) (80)
--------- ---------
Total stockholders' equity 9,092 8,761
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 135,621 $ 135,906
========= =========
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
Ended September 30,
-------------------
1998 1997
------- -------
INTEREST INCOME
Investment securities $ 44 $ 57
Mortgage-backed securities 77 94
Loans 2,534 2,272
FHLB Stock 31 17
------- -------
Total interest income 2,686 2,440
INTEREST EXPENSE
Deposits 1,258 1,154
FHLB advances 370 271
Other borrowed money 46 17
------- -------
Total interest expense 1,674 1,442
NET INTEREST INCOME 1,012 998
PROVISION FOR LOAN LOSSES 138 149
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 874 849
------- -------
NON-INTEREST INCOME
Loan fees and service charges 172 283
Gains (losses) on sales of investment
securities 24 --
Gains (losses) on sales of repossessed assets (10) 20
Gains (losses) on sales of real estate held
for investment -- --
Other -- --
------- -------
Total non-interest income 186 303
------- -------
NET INTEREST AND NON-INTEREST INCOME 1,060 1,152
------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 350 306
Data processing fees 72 40
SAIF deposit insurance premiums 22 19
Occupancy and equipment expense 105 81
Franchise and other taxes 36 23
Marketing and other professional services 40 60
ESOP expense 52 --
Other 202 185
------- -------
Total non-interest expense 879 714
------- -------
INCOME BEFORE INCOME TAX EXPENSE 181 438
INCOME TAX EXPENSE 86 147
------- -------
NET INCOME $ 95 $ 291
======= =======
PER SHARE OF COMMON STOCK:
Earnings (basic) $0.1400 $0.4290
======= =======
Earnings (dilutive) $0.1379 $0.4290
======= =======
Dividends $ -- $ --
======= =======
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
classified as available for sale 31 32
------- -------
Comprehensive income $ 31 $ 32
======= =======
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)
Accumulated Unearned
Additional Other Unearned Stock
Common Paid-In Retained Comprehensive ESOP Option
Stock Capital Earnings Income Shares Shares Total
------- --------- -------- ----------- -------- -------- -----
Balance at June 30, 1998 $ 7 $ 5,542 $ 4,845 $ (80) $(1,553) $ -- $ 8,761
Net income for the three month
period ended September 30, 1998 -- -- 95 -- -- -- 95
Common stock issued -- -- -- -- -- -- --
ESOP shares transferred -- -- -- -- 605 -- 605
ESOP shares earned -- 13 -- -- -- -- 13
Stock Option shares transferred -- -- -- -- -- (413) (413)
Decrease in unrealized loss on
investment securities available-
for-sale for the period ended
September 30, 1998, net of
deferred tax -- -- -- 31 -- -- 31
------- ------- ------- ------- ------- ------- ------
Balance at September 30, 1998 $ 7 $ 5,555 $ 4,940 $ (49) $ (948) $ (413) $9,092
======= ======= ======= ======= ======= ======= ======
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)
Three Months Ended September 30,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 95 $ 291
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 44 33
Amortization and accretion 5 4
FHLB stock dividend (31) (17)
Provision for loan losses 138 149
(Gains) losses on sales of investment securities (24) --
(Gains) losses on sales of other real estate 10 (20)
(Gains) losses on sales of real estate held
for investment -- --
Changes in assets and liabilities:
Accrued interest receivable 30 (81)
Prepaid expenses and other assets (213) (1,471)
Accrued interest payable 601 590
Other liabilities (547) 832
-------- --------
Net cash provided by (used in) operating
activities 108 310
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of FHLB stock -- (576)
Purchases of investment securities available-
for-sale (1,000) --
Proceeds on maturities of investment securities
available-for-sale 1,000 --
Purchases of other investments -- --
Proceeds on sales of other investments 304 --
Principal collected on mortgage-backed securities 478 246
Proceeds on sales of mortgage-backed securities
available-for-sale -- --
Purchase of mortgage-backed securities available-
for-sale -- --
Purchase of real estate held for investment (155) (301)
Proceeds from sales of real estate held for
investment -- --
Proceeds from the sale of loans 900 --
Net (increase) decrease in purchased loans 81 32
Net (increase) decrease in loans exclusive
of loans purchased (3,191) (11,613)
Purchases of premises and equipment 1,107 (68)
-------- --------
Net cash provided by (used in) investing
activities (476) (12,280)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (175) (651)
Net increase (decrease) in advances from FHLB (1,500) 13,000
Net increase in other borrowings 1,005 --
-------- --------
Net cash provided by (used in)
financing activities (670) 12,349
-------- --------
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,
1998 1997
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,038) 379
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,664 699
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 626 $ 1,078
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 307 $ 255
======= =======
Income taxes $ -- $ 139
======= =======
Loans transferred to other real estate during
the period $ 271 $ --
======= =======
Total increase (decrease) in unrealized gain
(loss) on securities available for sale $ (31) $ (32)
======= =======
The accompanying notes are an integral part of these financial
statements.
6
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 three months ended September 30, 1998 and
1997.
Operating results for the three month period ended September
30, 1998 is not necessarily indicative of the results that may
be expected for the year ending June 30, 1999.
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,
1998
------------
Balance, beginning of year $ 798
Provision for loan losses 138
Charge-offs, net of recoveries (149)
-------
Balance, September 30, 1998 $ 787
=======
7
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(UNAUDITED)
NOTE 3 - NONACCRUAL LOANS
Nonaccrual loans are as follows (amounts in thousands):
September 30, June 30,
1998 1998
------------ ----------
Construction Mortgage Loans $ -- $ --
Permanent Mortgage Loans, Secured by:
1-4 Dwelling Units 563 1,031
5 or More Dwelling Units -- --
Nonresidential Property (Except Land) 48 572
Land -- 126
Nonmortgage Loans and Leases, Closed End:
Commercial 780 --
Auto 123 --
Other Consumer 289 --
------- -------
$ 1,803 $ 1,729
======= =======
8
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The principal business of Cumberland Mountain Bancshares,
Inc. (the "Company") is that of Middlesboro Federal Bank, FSB
(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.
Subsequent to fiscal year end, the Company converted its
mission-critical processing systems to a new system which is
Year 2000 compliant and is fully tested and fully certified.
The Company expects to complete testing of systems provided by
third party providers by December 31, 1998. It estimates that
the additional costs associated with resolving all Year 2000
problems (other than the costs associated with the new
processing system) will not exceed $100,000. Since the decision
to convert to a new processing system was not related to Year
2000 compliance, the costs of such system (approximately
$325,000) will be capitalized. The Company is in the process of
developing a contingency plan to address the potential failure
of the Company's efforts (or the efforts of third parties on
whom the Company relies) to fully address the Year 2000 problem
and anticipates that such plan will be in place by the end of
December 1998. The Company has also identified certain non-
technological systems, such as its HVAC and alarm systems, which
have embedded technology that could by affected by the Year 2000
problem and has begun the process of testing and/or determining
what efforts are required to make such systems Year 2000
compliant.
FINANCIAL CONDITION
Total assets of the Company have decreased 0.21% from
$135,906,000 at June 30, 1998 to $135,621,000 at September 30,
1998. This small change in assets has resulted largely from the
decrease in cash and cash equivalents of $1.0 million, or
62.38% to $626,000 at September 30, 1998 from $1,664,000 at June
30, 1998. This decrease was primarily offset by an increase of
$1.1 million, or 33.07%, in premises and equipment. The
increase in premises and equipment represented the substantial
completion of the Savings Bank's new branch location in Fountain
City, Tennessee.
Management is continually attempting 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 stagnant asset growth during the three
months ended September 30, 1998 has allowed for a reduction in
borrowings with the repayment of advances from the Federal Home
Loan Bank ("FHLB"). FHLB advances declined by $1,500,000 from
$26,000,000 at June 30, 1998 to $24,500,000 at September 30,
1998. Total stockholders' equity rose by $331,000, or 3.78%,
principally due to net income earned during the three-month
period ended September 30, 1998 and the reclassification of
Unearned ESOP and Stock Option shares.
9
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
Net Income The Company realized net income of $95,000 for
the three-month period ended September 30, 1998, a decrease of
$196,000 as compared to the three-month period ended September
30, 1997. This decrease was primarily the result of a decrease
in loan fees and service charges of $117,000 coupled with an
increase in non-interest expense of $165,000 during the quarter
ended September 30, 1998. The Savings Bank's loan growth slowed
during the quarter ended September 30, 1998, resulting in
substantially less origination fee income. This reduction in
loan growth was primarily due to management's efforts to
strengthen the portfolio by tightening underwriting standards
and collection efforts. The increase in non-interest expense
resulted primarily from the effect of additional personnel costs
and occupancy expenses associated with the new branch office,
higher data processing fees as a result of the Savings Bank's
recent data processing conversion and expenses associated with
the Company's Employee Stock Ownership Plan.
Interest Income Total interest income for the three-month
period ended September 30, 1998 amounted to $2,686,000, an
increase of 10.09% from the Company's total interest income of
$2,440,000 for the three-month period ended September 30, 1997.
During the three-month period ended September 30, 1998 as
compared to the three-month period ended September 30, 1997, the
Company's interest income on its loan portfolio increased 11.54%
from $2,272,000 to $2,534,000; its interest income from its
mortgage-backed securities portfolio decreased 18.09% from
$94,000 to $77,000; interest income from its investment
securities portfolio decreased 22.81% from $57,000 to $44,000;
and interest income from FHLB stock increased 82.36% from
$17,000 to $31,000.
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. 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 been 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.
Such expense increased from $1,442,000 for the three-month
period ended September 30, 1997, to $1,674,000 for the three-
month period ended September 30, 1998. Nearly half of the
increase, or $99,000, 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.
Net Interest Income During the three months ended
September 30, 1998, net interest income increased 1.41% to
$1,012,000 from $998,000 for the three months ended September
30, 1997. This increase was due primarily to the loan demand
experienced by the Savings Bank over the past twelve months that
has resulted in an 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 the Savings Bank, 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.
10
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (CONTINUED)
For the three-month period ended September 30, 1998, the
Savings Bank provided $138,000 for loan losses compared to
$149,000 during the three-month period ended September 30, 1997.
The 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 September 30, 1998, the
Company's allowance for loan losses represented 43.65% of total
non-performing loans and .67% of the outstanding balance of
total loans.
Non-Interest Income Non-interest income for the three-
month period ended September 30, 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 September 30, 1998 was $186,000, a decrease of
38.62% from $303,000 for the three-month period ended September
30, 1997. Non-interest income primarily reflects the demand for
loans in the Savings Bank's market area as well as the
aggressiveness of management in obtaining these loans.
Non-Interest Expense For the three-month period ended
September 30, 1998, as compared to the three-month period ended
September 30, 1997, total non-interest expense increased
$165,000 from $714,000 to $879,000 or 23.11%.
Total salaries and employee benefits were $350,000 for the
three-month period ended September 30, 1998, up $44,000 over the
three-month period ended September 30, 1997 level of $306,000.
The increase for the three-month period ended September 30, 1998
primarily reflects higher salary levels due to the increased
number of personnel that has resulted from the overall growth of
the Savings Bank and the recently opened Fountain City branch
office.
Data processing fees increased $32,000, or 80.00%,
to$72,000 for the three-month period ended September 30, 1998
compared to $40,000 for the three-month period ended September
30, 1997. This increase was the result of the higher fees
assessed by the Savings Bank's data processor in conjunction
with the conversion by the Savings Bank from the current data
processing system to a new data processing system. Management
believes the new system will allow the Bank to compete more
profitably in this new computer era by providing superior
customer service to the Savings Bank's customers.
Occupancy and equipment expense was $105,000 for the
three-month period ended September 30, 1998, up $24,000 from the
three-month period ended September 30, 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.
Franchise and other taxes increased $13,000, or 56.53%, to
$36,000 for the three-month period ended September 30, 1998
compared to $23,000 for the three-month period ended September
30, 1997. This increase is due mainly to the increase in
deposits over the past twelve months, which have resulted in a
higher assessment level for state taxes.
11
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (CONTINUED)
The Company recognized a $52,000 expense for the three-
month period ended September 30, 1998 as a result of the release
of shares for allocation of the Company's Employee Stock
Ownership Plan ("ESOP"). The Company makes annual contributions
to the ESOP equal to the ESOP's debt service less dividends
received by the ESOP. As the debt is repaid, shares are
released from collateral and allocated to active employees,
based on the proportion of debt service paid during the year.
As shares are released from collateral, the Company reports
compensation expense equal to the current market price of shares
and the shares become outstanding.
Other expenses of $202,000 increased $17,000, or 9.19%,
over the three-month period ended September 30, 1997 amount of
$185,000. 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, the Savings
Bank's recently completed data processing conversion has
resulted in a slight increase in other expenses. Management
expects a decline in future data processing expenses will
offset the increase in other expenses related to the data
processing needs of the Savings Bank.
Income Taxes Income tax expense for the three-month
period ended September 30, 1998 and 1997 was $86,000 and
$147,000, respectively. 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
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 September 30, 1998 was 4.58% and its
liquidity ratio was 5.60% at September 30, 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 $97,544,000 and $97,719,000 at
September 30, 1998 and June 30, 1998, respectively.
12
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 $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 September 30, 1998, the Savings Bank had $777,000 in
commitments to originate loans. At September 30, 1998, the
Savings Bank had $37,925,000 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.
The Savings Bank 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.
13
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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.
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.
14
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 (EDGAR only)
(b) Reports on Form 8-K. During the quarter ended
September 30, 1998, the registrant did not file any reports on
Form 8-K.
15
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.
Date: November 16, 1998 By: /s/ James J. Shoffner
-------------------------------
James J. Shoffner
President
(Duly authorized representative)
16