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, 1999
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE ACT
From the transition period from ____________
to __________________
Commission File Number 0-22287
-------
CUMBERLAND MOUNTAIN BANCSHARES, INC.
(Exact name of small business issuer as specified in its
charter)
Tennessee 31-1499488
(State of Incorporation) (IRS Employer Identification No.)
1431 Cumberland Avenue, Middlesboro, Kentucky 40965
(Address of principal executive offices)
(606) 248-4584
(Telephone number)
Check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of October 31, 1999, 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 September 30, 1999
INDEX
Page
----
Part I - Financial Information
---------------------
Item 1. Financial Statements
Consolidated Statement of Financial Condition
September 30, 1999 and June 30, 1999 2
Consolidated Statements of Income
Three Months Ended September 30, 1999 and 1998 3
Consolidated Statements of Stockholders' Equity
Three Months Ended September 30, 1999 4
Consolidated Statements of Cash Flows
Three Months Ended September 30, 1999 and 1998 5-6
Notes to the Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
Part II - Other Information 17
-----------------
Signatures 18
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
September 30, 1999 and June 30, 1999
ASSETS
------
September 30, June 30,
1999 1999
------------ ------------
Cash and cash equivalents $ 3,321 $ 1,317
Investment securities, held-to-maturity - -
Investment securities available-for-sale,
at market value 3,328 3,302
Other investments, held to maturity, (market
value $195,000 at September 30, 1999 and
June 30, 1999) 195 195
Mortgage-backed securities available-for-sale,
at market value 3,323 3,579
Loans, net of allowance for loan losses of
$1,454,000 at September 30, 1999
and $1,576,000 at June 30, 1999 110,788 111,612
Accrued interest receivable 866 934
Real estate held for investment 1,211 1,236
Repossessed property 947 739
Federal Home Loan Bank (FHLB) stock, at cost 1,843 1,810
Premises and equipment, net 4,507 4,587
Prepaid expenses and other assets 353 283
-------- --------
TOTAL ASSETS $130,682 $129,594
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits 106,736 106,905
Advances from FHLB 12,500 12,000
Notes payable 1,645 1,674
Accrued interest payable 684 137
Other liabilities 273 170
-------- --------
Total liabilities 121,838 120,886
-------- --------
Common stock, $0.01 per value, 8,000,000 shares
authorized, 679,620 shares issued and
outstanding 7 7
Treasury stock, 5,200 shares outstanding, at cost (88) (88)
Additional paid-in capital 5,555 5,560
Retained earnings 4,656 4,490
Unearned ESOP shares (878) (897)
Unearned Stock Option shares (241) (241)
Undistributed MRP shares (69) --
Net unrealized loss on investment securities
available-for-sale, net of deferred tax (98) (123)
-------- --------
Total stockholders' equity 8,844 8,708
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $130,682 $129,594
======== ========
The accompanying notes are an integral part of these financial
statements.
2
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro , Kentucky
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Amounts in thousands, except per share data)
Three Months
Ended September 30,
-------------------
1999 1998
---- ----
INTEREST INCOME
Investment securities $ 60 $ 44
Mortgage-backed securities 50 77
Loans 2,310 2,534
FHLB Stock 33 31
------- -------
Total interest income 2,453 2,686
INTEREST EXPENSE
Deposits 1,255 1,258
FHLB advances 160 370
Other borrowed money 36 46
------- -------
Total interest expense 1,451 1,674
NET INTEREST INCOME 1,002 1,012
PROVISION FOR LOAN LOSSES 62 138
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 940 874
------- -------
NON-INTEREST INCOME
Loan fees and service charges 201 172
Gains (losses) on sales of investment securities -- 24
Gains (losses) on sales of repossessed assets (10) (10)
Gains (losses) on sales of real estate held for
investment 16 --
Other 1 --
------- -------
Total non-interest income 208 186
------- -------
NET INTEREST AND NON-INTEREST INCOME 1,148 1,060
------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 373 350
Data processing fees 54 72
SAIF deposit insurance premiums 24 22
Occupancy and equipment expense 146 105
Franchise and other taxes 32 36
Marketing and other professional services 33 40
ESOP expense 13 52
Other 224 202
------- -------
Total non-interest expense 899 879
------- -------
INCOME BEFORE INCOME TAX EXPENSE 249 181
INCOME TAX EXPENSE 83 86
------- -------
NET INCOME $ 166 $ 95
------- -------
PER SHARE OF COMMON STOCK:
Earnings (basic) $0.2897 $0.1665
Earnings (dilutive) $0.2645 $0.1655
Dividends $ - $ -
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
------- --------- -------- ----------- --------
Balance at June 30, 1999 $ 7 $ 5,560 $ 4,490 $ (123) $ (897)
Net income for the three month
period ended September 30, 1999 -- -- 166 -- --
Common stock issued -- -- -- -- --
ESOP shares transferred -- -- -- -- --
ESOP shares earned -- (5) -- -- 19
Stock Option shares transferred -- -- -- -- --
MRP shares acquired -- -- -- -- --
Decrease in unrealized loss on
investment securities available-
for-sale for the period ended
September 30, 1999, net of
deferred tax -- -- -- 25 --
------- ------- ------- ------- -------
Balance at September 30, 1999 $ 7 $ 5,555 $ 4,656 $ (98) $ (878)
======= ======= ======= ======= =======
Unearned
Stock Unearned
Option MRP Treasury
Shares Shares Stock Total
------- --------- -------- -------
Balance at June 30, 1999 $ (241) $ -- $ (88) $ 8,708
Net income for the three month
period ended September 30, 1999 -- -- -- 166
Common stock issued -- -- -- --
ESOP shares transferred -- -- -- --
ESOP shares earned -- -- -- 14
Stock Option shares transferred -- -- -- --
MRP shares acquired -- (69) -- (69)
Decrease in unrealized loss on
investment securities available-
for-sale for the period ended
September 30, 1999, net of
deferred tax -- -- -- 25
------- ------- ------- -------
Balance at September 30, 1999 $ (241) $ (69) $ (88) $ 8,844
======= ======= ======= =======
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,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 166 $ 95
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 100 44
Amortization and accretion 4 5
FHLB stock dividend (33) (31)
Provision for loan losses 62 138
(Gains) losses on sales of investment securities -- (24)
(Gains) losses on sales of other repossessed
assets 10 10
(Gains) losses on sales of property held for
investment (16) --
Changes in assets and liabilities:
Accrued interest receivable 68 30
Prepaid expenses and other assets (70) (213)
Accrued interest payable 547 601
Other liabilities 103 (547)
-------- --------
Net cash provided by (used in) operating
activities 941 108
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of FHLB stock -- --
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 262 478
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 (142) (155)
Proceeds from sales of property held for
investment 183 --
Proceeds from the sale of loans -- 900
Net (increase) decrease in purchased loans 41 81
Net (increase) decrease in loans exclusive
of loans purchased 705 (3,191)
Net (increase) decrease in repossessed property (218) --
Purchases of premises and equipment (20) 1,107
-------- --------
Net cash provided by (used in) investing
activities 811 (476)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (169) (175)
Net increase (decrease) in advances from FHLB 500 (1,500)
Net increase (decrease) in other borrowings (29) 1,005
ESOP shares earned, net of tax 19 --
Purchase of shares for MRP (69) --
-------- --------
Net cash provided by (used in)
financing activities 252 (670)
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,
1999 1998
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,004 (1,038)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,317 1,664
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,321 $ 626
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 289 $ 307
======= =======
Income taxes $ -- $ --
======= =======
Loans transferred to other real estate during
the period $ 147 $ 271
======= =======
Total increase (decrease) in unrealized gain
(loss) on securities available for sale $ (25) $ (31)
======= =======
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, 1999
(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, 1999 and
1998.
Operating results for the three month period ended September
30, 1999 is not necessarily indicative of the results that may
be expected for the year ending June 30, 2000.
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,
1999
------------
Balance, beginning of year $ 1,576
Provision for loan losses 62
Charge-offs, net of recoveries (184)
--------
$ 1,454
========
7
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(UNAUDITED)
NOTE 3 - NONACCRUAL LOANS
Nonaccrual loans are as follows (amounts in thousands):
September 30, June 30,
1999 1999
------------ --------
Construction Mortgage Loans $ 164 $ --
Permanent Mortgage Loans, Secured by:
1-4 Dwelling Units 1,339 872
5 or More Dwellng Units -- --
Nonresidential Property (Except Land) 265 265
Land 15 --
Nonmortgage Loans and Leases, Closed End:
Commercial 390 258
Auto 16 71
Other Consumer 43 62
------ ------
$2,232 $1,528
====== ======
8
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 losses on loans, the effect of certain recent
accounting pronouncements and the Company's projected effects
related to the year 2000 compliance issue.
YEAR 2000 READINESS DISCLOSURE
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 has completed testing of systems provided by third
party providers. It estimates that 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 $450,000) has been capitalized. The
Company has developed 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. The contingency plan if mission critical
systems fail on January 1, 2000 is to revert to a manual
processing system until which time that systems can be modified
or new systems put in place. Staff will be trained in December
1999 on the manual backup procedures and written procedures and
required forms will be available in the appropriate work areas.
The Company has also identified certain non-technological
systems, such as its HVAC and alarm systems, which have embedded
technology that could be affected by the Year 2000 problem and
has completed the process of testing and/or determining what
efforts were required to make such systems Year 2000 compliant.
The Year 2000 project team has identified and contacted all
vendors of such equipment and have been assured within a
reasonable comfort level that such systems will continue to
function beyond the Year 2000.
9
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
Total assets of the Company have increased 0.84% from
$129,594,000 at June 30, 1999 to $130,682,000 at September 30,
1999. This increase in assets has resulted primarily from the
increase in cash and cash equivalents of $2 million, or 152.17%
to $3,321,000 at September 30, 1999 from $1,317,000 at June 30,
1999. This increase in cash and cash equivalents was primarily
the result of management's liquidity planning process for
potential cash needs by the Savings Bank's deposit customers
related to the Year 2000.
Unusual market responses to the century date change could
lead to a perceived need for extra liquidity by the Savings
Bank's customers during the century date change period. In an
effort to be prepared for this possible situation, management in
proactively managing the liquidity needs of the Savings Bank to
ensure that no interruption in service to its customers is
realized. Management believes it is essential to maintain the
highest degree of confidence in the Savings Bank and the Savings
Bank's ability to meet its customer's demands.
The Company's increase in liquidity during the three
months ended September 30, 1999 has created a slight increase in
borrowings of advances from the FHLB. FHLB advances increased
by $500,000 from $12,000,000 at June 30, 1999 to $12,500,000 at
September 30, 1999. Total stockholders' equity rose by
$136,000, or 1.57%, principally due to net income realized
during the quarter.
RESULTS OF OPERATIONS
Net Income The Company realized net income of $166,000
----------
for the three-month period ended September 30, 1999. This
compared to a net income of $95,000 for the three-month period
ended September 30, 1998. This increase in net income was
primarily the result of a decrease in the provision for loan
losses of $76,000 from $138,000 for the three-month period ended
September 30, 1998 to $62,000 for the three-month period ended
September 30, 1999. The decrease in provision for loan losses
is the result of management's efforts in prior quarters to
increase the amount of allowances for loan losses to levels
sufficient to absorb any losses suffered in future quarters.
Management is continuing their efforts to strengthen the
portfolio by tightening underwriting standards and collection
efforts.
Interest Income Total interest income for the three-month
---------------
period ended September 30, 1999 amounted to $2,453,000, a
decrease of 8.68% from the Company's total interest income of
$2,686,000 for the three-month period ended September 30, 1998.
During the three-month period ended September 30, 1999 as
compared to the three-month period ended September 30, 1998, the
Company's interest income on its loan portfolio decreased 8.84%
from $2,534,000 to $2,310,000; its interest income from its
mortgage-backed securities portfolio decreased 35.07% from
$77,000 to $50,000; interest income from its investment
securities portfolio increased 36.37% from $44,000 to $60,000;
and interest income from FHLB stock increased 6.46% from $31,000
to $33,000. The reduction in interest income on the Company's
loan portfolio has occured primarily due to the shrinkage of the
loan portfolio combined with a $704,000 increase in non-accrual
loans. The Savings Bank is attempting to increase the overall
interest income of the Company by originating additional
mortgage loans and consumer loans while also maintaining its
investment in investment securities and mortgage-backed
securities.
10
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Interest Expense Interest expense decreased from
----------------
$1,674,000 for the three-month period ended September 30, 1998,
to $1,451,000 for the three-month period ended September 30,
1999. During the three-month period ended September 30, 1999 as
compared to the three-month period ended September 30, 1998, the
Company's interest expense on FHLB advances decreased 56.76%
from $370,000 to $160,000. This decrease in interest expense on
FHLB advances is due to the decrease in the average balance of
this account during the quarter, which had primarily been used
to fund mortgage and consumer loan demand.
Net Interest Income During the three months ended
-------------------
September 30, 1999, net interest income decreased 0.99% to
$1,002,000 from $1,012,000 for the three months ended September
30, 1998. This decrease was due primarily to the reduction in
loan growth by the Savings Bank.
Provision for Loan Losses Provisions for loan losses are
-------------------------
charged to earnings to bring the total allowance to a level
considered adequate by management to provide for loan losses
based on the prior loss experience, volume and type of lending
conducted by Middlesboro Federal, industry standards and past
due loans in the Savings Bank's portfolio. Management also
considers general economic conditions and other factors related
to the collectibility of the Savings Bank's portfolio.
For the three-month period ended September 30, 1999, the
Savings Bank provided $62,000 for loan losses compared to
$138,000 during the three-month period ended September 30, 1998.
The provision for loan loss amounts represent management's
effort to maintain an adequate reserve against losses. In
determining the appropriate provision, management considers a
number of factors, including specific loans in the Savings
Bank's portfolio, real estate market trends in the Company's
market area, economic conditions, interest rates, and other
conditions that may affect the borrower's ability to comply with
repayment terms. At September 30, 1999, the Company's allowance
for loan losses represented 64.25% of total non-accrual loans
and 1.28% of the outstanding balance of total loans.
Non-Interest Income Non-interest income for the three-
-------------------
month period ended September 30, 1999 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, 1999 was $208,000, an increase of
11.83% from $186,000 for the three-month period ended September
30, 1998. Included in non-interest income for the three-month
period ended September 30, 1999 is a $16,000 gain on the sale of
real estate held for development.
Loan fees and service charges for the three-month period
ended September 30, 1999 increased $29,000, or 16.86%, to
$201,000 from $172,000 for the three-month period ended
September 30, 1998. This increase was attributable to an
increase in loan fees charged to new loan customers, in deposit
fees primarily related to the increase in the level of deposits,
and an increase in the collection of late charge fees resulting
from improved collection efforts.
11
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Non-Interest Expense For the three-month period ended
--------------------
September 30, 1999, as compared to the three-month period ended
September 30, 1998, total non-interest expense increased $20,000
from $879,000 to $899,000 or 2.28%. Total salaries and employee
benefits were $373,000 for the three-month period ended
September 30, 1999, up $23,000 over the three-month period ended
September 30, 1998 level of $350,000. Occupancy and equipment
expense was $146,000 for the three-month period ended September
30, 1999, up $41,000 from the three-month period ended September
30, 1998. This increase was primarily due to increased
depreciation and maintenance costs associated with the October
1998 opening of a new branch office in Fountain City, Tennessee.
Partially offsetting these increases was a reduction in
data processing fees of $18,000, or 25%, to $54,000 for the
three-month period ended September 30, 1999, compared to $72,000
for the three-month period ended September 30, 1998. This
decrease is due mainly to the cost savings realized from the
conversion of the Savings Bank's data processing system in
August of 1998.
The Company recognized a $13,000 expense for the three-
month period ended September 30, 1999, compared to a $52,000
expense for the three-month period ended September 30, 1998.
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 $224,000 increased $22,000 over the
three-month period ended September 30, 1998 amount of $202,000.
The increase in other expenses for the three-month period ending
September 30, 1999, is primarily due to increases in consulting
fees and loan expenses. Consulting fees increased $7,000 for
the three-month period ended September 30, 1999 as compared to
the three-month period ended September 30, 1998. This increase
was primarily due to the fees resulting from the employment of a
former Savings Bank officer and director to oversee the real
estate development activities of the Company's subsidiary. An
increase in loan expenses has resulted from management's efforts
to strengthen collection efforts in order to reduce non-
performing loans.
Income Taxes Income tax expense for the three-month
------------
period ended September 30, 1999 was $83,000 compared to $86,000
for the three-month period ended September 30, 1998. The
changes in income tax expense are a result of changes in net
taxable income during the periods and the change in accounting
for tax estimates for the Company individually.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no business other than that of
the Savings Bank and does not currently have any material
funding commitments. The Company's principal sources of
liquidity are cash on hand, payments received on its loan to the
Company's ESOP and dividends received from the Savings Bank.
The Savings Bank is subject to various regulatory restrictions
on the payment of dividends.
12
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Savings Bank is required by the Office of Thrift
Supervision regulations to maintain minimum levels of specified
liquid assets. On November 24, 1997, the OTS lowered this
liquidity requirement from 5 to 4 percent of the Savings Bank's
liquidity base. Additionally, the OTS streamlined the
calculations used to measure compliance with liquidity
requirements, expanded the types of investments considered to be
liquid assets, and reduced the liquidity base by modifying the
definition of net withdrawable account to exclude accounts with
maturities exceeding one year. The Savings Bank's liquidity
ratio for the quarter ended September 30, 1999 was 6.87% and its
liquidity ratio was 4.58% at September 30, 1998.
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 $106,736,000 and $106,905,000 at
September 30, 1999 and June 30, 1999, 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 $3,321,000 at
September 30, 1999 and $1,317,000 at June 30, 1999. Of these
amounts, $879,000 and $12,000 were deposits held in interest-
bearing accounts at September 30, 1999 and June 30, 1999,
respectively. The variations in levels of cash and cash
equivalents are influenced by deposit flows and anticipated
future deposit flows.
At September 30, 1999, the Savings Bank had $874,000 in
commitments to originate loans. At September 30, 1999, the
Savings Bank had $58,320,000 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.
13
FINANCIAL MODERNIZATION
On November 12, 1999, President Clinton signed into law
legislation which could have a far-reaching impact on the financial
services industry. The Gramm-Leach-Bliley ("G-L-B") Act authorizes
affiliations between banking, securities and insurance firms and
authorizes bank holding companies and national banks to engage in
a variety of new financial activities. Among the new activities
that will be permitted to bank holding companies and national bank
subsidiaries are securities and insurance brokerage, securities
underwriting and certain forms of insurance underwriting. Bank
holding companies will have broader insurance underwriting powers
than national banks and may engage in merchant banking activities
after the adoption of implementing regulations. Merchant banking
activities may also become available to national bank subsidiaries
after five years. The Federal Reserve Board, in consultation with
the Department of Treasury, may approve additional financial
activities. The G-L-B Act, however, prohibits future affiliations
between existing unitary savings and loan holding companies, like
the Company, and firms which are engaged in commercial activities
and prohibits the formation of new unitary holding companies.
The G-L-B Act imposes new requirements on financial
institutions with respect to customer privacy. The G-L-B Act
generally prohibits disclosure of customer information to non-
affiliated third parties unless the customer has been given the
opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their
privacy policies to customers annually. Financial institutions,
however, will be required to comply with state law if it is more
protective of customer privacy than the G-L-B Act. The G-L-B Act
directs the federal banking agencies, the National Credit Union
Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after
consultation with the National Association of Insurance
Commissioners, to promulgate implementing regulations within six
months of enactment. The privacy provisions will become effective
six months thereafter.
The G-L-B Act contains significant revisions to the Federal
Home Loan Bank System. The G-L-B Act imposes new capital
requirements on the Federal Home Loan Banks and authorizes them to
issue two classes of stock with differing dividend rates and
redemption requirements. The G-L-B Act deletes the current
requirement that the Federal Home Loan Banks annually contribute
$300 million to pay interest on certain government obligations in
favor of a 20% of net earnings formula. The G-L-B Act expands the
permissible uses of Federal Home Loan Bank advances by community
financial institutions (under $500 million in assets) to include
funding loans to small businesses, small farms and small agri-
businesses. The G-L-B Act makes membership in the Federal Home
Loan Bank voluntary for federal savings associations.
The G-L-B Act contains a variety of other provisions
including a prohibition against ATM surcharges unless the customer
has first been provided notice of the imposition and amount of the
fee. The G-L-B Act reduces the frequency of Community Reinvestment
Act examinations for smaller institutions and imposes certain
reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the
Community Reinvestment Act. The G-L-B Act eliminates the SAIF
special reserve and authorizes a federal savings association that
converts to a national or state bank charter to continue to use the
term "federal" in its name and to retain any interstate branches.
The Company is unable to predict the impact of the G-L-B Act
on its operations at this time. Although the G-L-B Act reduces the
range of companies with which the Company may affiliate, it may
facilitate affiliations with companies in the financial services
industry.
14
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein
have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial
position and operating results in terms of historical dollars,
without considering changes in the relative purchasing power of
money over time due to inflation.
Unlike most companies, the assets and liabilities of a
financial institution are primarily monetary in nature. As a
result, interest rates have a more significant impact on a
financial institution's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in
the same direction or in the same magnitude as the price of
goods and services, since such prices are affected by inflation.
In the current interest rate environment, liquidity and the
maturity structure of the Savings Bank's assets and liabilities
are critical to the maintenance of acceptable performance
levels.
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.
15
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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 the Savings Bank has purchased whole loans and
loan participations from an unaffiliated mortgage broker based in
Lexington, Kentucky. At September 30, 1999, the aggregate
remaining principal balance of such loans was $2.8 million. 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 of such loans may have been refinanced although the
mortgage broker failed to remit the payoffs on such loans to the
Savings Bank. At September 30, 1999, the aggregate principal
balance of such loans amounted to $758,000. 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.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K. During the quarter ended
-------------------
September 30, 1999, 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: November 12, 1999
18