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, 1997
--------------
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE ACT
From the transition period from__________to___________
Commission File Number 0-22287
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Tennessee 31-1499488
(State of Incorporation) (IRS Employer Identification No.)
1431 Cumberland Avenue, Middlesboro, Kentucky 40965
(Address of principal executive offices)
(606) 248-4584
(Telephone number)
Check mark whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of April 30, 1997, there were 679,700 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
CUMBERLAND MOUNTAIN BANCSHARES, INC.
FORM 10-QSB - March 31, 1997
INDEX
Page
----
Part I - Financial Information
---------------------
Item 1. Financial Statements
Statement of Financial Condition
March 31, 1997 and June 30, 1996 2
Statements of Income
Three and Nine Months Ended March 31, 1997 and 1996 3
Statements of Stockholders' Equity
Nine Months Ended March 31, 1997 4
Statements of Cash Flows
Nine Months Ended March 31, 1997 and 1996 5-6
Notes to the Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Part II - Other Information 14
-----------------
Signatures 15
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
March 31, 1997 and June 30, 1996
ASSETS
------
March 31, June 30,
1997 1996
------------ ------------
Cash and cash equivalents $ 4,854 $ 874
Investment securities, held-to-maturity 25 639
Investment securities available-for-sale, at market value 4,150 3,680
Mortgage-backed securities available-for-sale, at market value 6,555 7,779
Loans, net of allowance for loan losses of $256,000 at March 31, 1997 and
$180,000 at June 30, 1996 83,239 59,931
Accrued interest receivable 570 312
Repossessed real estate 306 -
Federal Home Loan Bank (FHLB) stock, at cost 712 436
Premises and equipment, net 1,741 895
Prepaid expenses and other assets 469 152
------------ ------------
TOTAL ASSETS $ 102,621 $ 74,698
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
Deposits $ 80,056 $ 68,976
Escrows 44 -
Advances from FHLB 12,500 1,000
Accrued interest payable 609 107
Other liabilities 624 20
------------ ------------
Total liabilities 93,833 70,103
------------ ------------
Common stock, $0.01 per value, 8,000,000 shares authorized, 679,700
shares issued and outstanding 7 510
Additional paid-in capital 5,432 1,023
Retained earnings 3,844 3,367
Unearned ESOP shares (272) -
Net unrealized loss on investment securities available-for-sale, net of deferred
tax (223) (305)
------------ ------------
Total stockholders' equity 8,788 4,595
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 102,621 $ 74,698
============ ============
The accompanying notes are an integral part of these financial statements.
Page 2
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
Three Months Nine Months
Ended March 31, Ended March 31,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
INTEREST INCOME
Investment securities $ 62 $ 131 $ 170 $ 313
Mortgage-backed securities 102 133 335 521
Mortgage loans 1,289 868 3,605 2,480
Commercial and consumer loans 388 212 953 674
------- ------- ------- -------
Total interest income 1,841 1,344 5,063 3,988
INTEREST EXPENSE
Deposits 945 836 2,707 2,458
FHLB advances 182 - 365 6
------- ------- ------- -------
1,127 836 3,072 2,464
------- ------- ------- -------
NET INTEREST INCOME 714 508 1,991 1,524
PROVISION FOR LOAN LOSSES 66 5 124 13
------- ------- ------- -------
NET INCOME AFTER PROVISION
FOR LOAN LOSSES 648 503 1,867 1,511
------- ------- ------- -------
NON-INTEREST INCOME
Loan fees and service charges 172 62 459 184
Gains (losses) on sales of investment securities - - 50 (2)
Gains (losses) on sales of repossessed assets - - (1) -
------- ------- ------- -------
Total non-interest income 172 62 508 182
------- ------- ------- -------
NET INTEREST AND NON-INTEREST INCOME 820 565 2,375 1,693
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 271 225 920 678
Occupancy and equipment expense 48 31 121 88
Marketing and other professional services 51 21 142 76
Other 157 142 922 448
------- ------- ------- -------
Total non-interest expense 527 419 2,105 1,290
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 293 146 270 403
INCOME TAX EXPENSE 114 52 130 140
------- ------- ------- -------
NET INCOME $ 179 $ 94 $ 140 $ 263
======= ======= ======= =======
PER SHARE OF COMMON STOCK:
Earnings $ 0.351 $ 0.184 $ 0.275 $ 0.516
======= ======= ======= =======
Dividends $ 0.000 $ 0.000 $ 0.000 $ 0.000
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
Page 3
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Additional
Common Paid In Retained
Stock Capital Earnings
-------- ------------ ----------
Balance at June 30, 1996 $ 510 $ 1,023 $ 3,367
Net income for the nine month period ended
March 31, 1997 - - 140
Common stock issued 7 4,409 -
Common stock exchanged (510) - -
ESOP shares purchased - - -
Consolidation of service corporation pursuant
to the plan of reorganization - - 337
Decrease in unrealized loss on investment
securities available-for-sale for the period
ended March 31, 1997, net of deferred tax - - -
------- ----------- ---------
Balance at March 31, 1997 $ 7 $ 5,432 $ 3,844
======= =========== =========
Unrealized
Loss on
Investment
Securities Unearned
Available- ESOP
for-Sale Shares Total
------------ ----------- ----------
Balance at June 30, 1996 $ (305) $ - $ 4,595
Net income for the nine month period ended
March 31, 1997 - - 140
Common stock issued - - 4,416
Common stock exchanged - - (510)
ESOP shares purchased - (272) (272)
Consolidation of service corporation pursuant
to the plan of reorganization - - 337
Decrease in unrealized loss on investment
securities available-for-sale for the period
ended March 31, 1997, net of deferred tax 82 - 82
------------ ----------- ----------
Balance at March 31, 1997 $ (223) $ (272) $ 8,788
============ =========== ==========
The accompanying notes are an integral part of these financial statements.
Page 4
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Nine Months Ended March 31,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 140 $ 263
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation 60 51
Amortization and accretion 9 6
FHLB stock dividend (30) (22)
Provision for loan losses 124 12
(Gains) losses on sales of investment securities (52) 2
(Gains) losses on sales of other real estate (2) -
Changes in assets and liabilities:
Accrued interest receivable (258) (42)
Prepaid expenses and other assets (621) (72)
Accrued interest payable 502 423
Other liabilities 604 (5)
------------ ------------
Net cash provided by (used in) operating activities 476 616
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of FHLB stock (246) -
Purchases of investment securities available-for-sale (498) -
Proceeds on maturities of investment securities 245 905
Principal collected on mortgage-backed securities 531 1,038
Proceeds on sales of mortgage-backed securities available-for-sale 855 5,685
Purchase of mortgage-backed securities available-for-sale - (3,468)
Net (increase) decrease in purchased loans 4,638 763
Net (increase) decrease in loans exclusive of loans purchased (27,826) (9,543)
Purchase of premises and equipment (846) (245)
------------ ------------
Net cash provided by (used in) investing activities (23,147) (4,865)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 11,080 4,966
Net increase in advances from FHLB 11,500 -
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 26,651 4,966
------------ ------------
The accompanying notes are an integral part of these financial statements.
Page 5
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Nine Months Ended March 31,
1997 1996
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,980 717
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 874 1,796
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,854 $ 2,513
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 540 $ 1,767
======== ========
Income taxes $ 63 $ 121
======== ========
Loans transferred to other real estate during the period $ 306 $ -
======== ========
Total increase (decrease) in unrealized gain (loss) on
securities available for sale $ (82) $ 123
======== ========
The accompanying notes are an integral part of these financial statements.
Page 6
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
March 31, 1997
(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 and nine months ended March 31, 1997 and 1996.
Operating results for the three and nine month periods ended March 31,
1997 are not necessarily indicative of the results that may be expected for
the year ending June 30, 1997.
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):
March 31,
1997
---------
Balance, beginning of year $ 180
Provision for loan losses 124
Charge-offs, net of recoveries (48)
---------
Balance, March 31, 1997 $ 256
=========
Page 7
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE FINANCIAL STATEMENTS
March 31, 1997
(UNAUDITED)
NOTE 3 - NONACCRUAL LOANS
----------------
Nonaccrual loans is as follows (amounts in thousands):
March 31, June 30,
1997 1996
------------- -------------
Permanent Mortgage Loans, Secured by:
1-4 Dwelling Units $ 497 $ 176
5 or More Dwelling Units - -
Nonresidential Property (Except Land) 591 173
Land - -
------------ ------------
$ 1,088 $ 349
============ ============
Page 8
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
Total assets of the Savings Bank have increased 37.39% from
$74,698,000 at June 30, 1996 to $102,621,000 at March 31, 1997. This has
resulted largely from the increase in loans of 38.90% to $83,239,000 at March
31, 1997 from $59,931,000 at June 30, 1996. Cash and cash equivalents also
increased $3,980,000 from $874,000 at June 30, 1996 to $4,854,000 at March 31,
1997. This increase resulted primarily from the proceeds received from the
issuance of common stock as part of the second step conversion of the Savings
Bank's mutual holding company. It is anticipated that these funds will be used
to repay borrowings incurred by the Savings Bank and to provide additional
funding support for the lending demand experienced by the Savings Bank. Over the
past few years, the size of the Savings Bank'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 Bank's asset growth during the nine months ended March 31, 1997
was financed almost entirely by an increase in interest-bearing liabilities.
Total deposits rose $11,080,000, or 16.06%, from $68,976,000 at June 30, 1996 to
$80,056,000 at March 31, 1997, with the growth attributable to increased
marketing efforts. FHLB advances rose by $11,500,000 from $1,000,000 at June 30,
1996 to $12,500,000 at March 31, 1997. Total stockholders' equity rose by
$4,193,000, or 91.26%, principally due to the Company's sale of its common stock
in connection with its acquisition of the Savings Bank as part of the second
step conversion of the Savings Bank's mutual holding company.
RESULTS OF OPERATIONS
Net Income The Savings Bank realized net income of $179,000 for the
----------
three-month period ended March 31, 1997, an increase of $85,000 or 90.43% as
compared to the three-month period ended March 31, 1996. This increase was the
result of an improved net interest margin and higher non-interest income
resulting primarily from loan fee income from the continued high loan demand the
Bank has been experiencing. This increase in net interest income and
non-interest income more the offset the increase in non-interest expenses.
For the nine-month period ended March 31, 1997, Middlesboro Federal
had net income of $140,000 compared to net income of $263,000 for the nine-month
period ended March 31, 1996. The decline in net income resulted primarily from a
one time charge of $152,000 to record the funding of a retirement plan for the
directors of the Savings Bank and the special assessment on SAIF-assessable
deposits to capitalize the Savings Association Insurance Fund mandated by the
Deposit Insurance Funds Act of 1996. The Savings Bank accrued $388,300 for this
assessment on September 30, 1996.
Interest Income Total interest income for the three-month period
---------------
ended March 31, 1997 amounted to $1,841,000, an increase of 36.98% from the
Savings Bank's total interest income of $1,344,000 for the nine-month period
ended March 31, 1996. During the three-month period ended March 31, 1997 as
compared to the three-month period ended March 31, 1996, the Savings Bank's
interest income on its loan portfolio increased 55.28% from $1,080,000 to
$1,677,000; its interest income from its mortgage-backed securities portfolio
decreased 23.31% from $133,000 to $102,000; and the Savings Bank's interest
income from its investment securities portfolio decreased 52.68% from $131,000
to $62,000.
Page 9
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Total interest income for the nine-month period ended March 31, 1997
amounted to $5,063,000, an increase of 26.96% from the Savings Bank's total
interest income of $3,988,000 for the nine-month period ended March 31, 1996.
During the nine-month period ended March 31, 1997 as compared to the nine-month
period ended March 31, 1996, the Savings Bank's interest income on its loan
portfolio increased 44.52% from $3,154,000 to $4,558,000. Interest income from
mortgage-backed securities decreased 35.70% from $521,000 to $335,000 during
this same period. Interest income from investment securities decreased 45.69%
from $313,000 to $170,000 for the nine-month period ended March 31, 1997 as
compared to the nine-month period ended March 31, 1996.
The Savings Bank's changes in interest income for the periods
discussed above were 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,
Middlesboro Federal'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 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 $836,000 for the three-month period ended March 31, 1996, to
$1,127,000 for the three-month period ended March 31, 1997. Interest expense
also increased 24.68% to $3,072,000 from $2,464,000 for the nine-month period
ended March 31, 1997 as compared to the nine-month period ended March 31, 1996
for the above discussed reasons.
Net Interest Income During the quarter ended March 31, 1997, net
-------------------
interest income increased 40.56% to $714,000 from $508,000 for the quarter ended
March 31, 1996. For the nine-month period ended March 31, 1997, net interest
income increased 30.65% to $1,991,000 from $1,524,000 for the nine-month period
ended March 31, 1996. This increase was due primarily to the continued high loan
demand experienced by the Savings Bank which has resulted in overall increase in
the loan portfolio.
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, 1997, the Savings Bank
provided $66,000 for loan losses compared to $5,000 during the quarter ended
March 31, 1996. For the nine-month period ended March 31, 1997, Middlesboro
Federal provided $124,000 for loan losses compared to $13,000 for the nine-month
period ended March 31, 1996. 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. At March 31, 1997,
the Savings Bank's allowance for loan losses represented 22.32% of total
non-performing loans and .31% of quarter-end loans.
Page 10
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Non-Interest Income Non-interest income for the three-month period
-------------------
ended March 31, 1996 consisted primarily of loan fees and service charges.
Middlesboro Federal's loan fees and service charges fluctuate as loan demand in
the market area changes. Middlesboro Federal's loan fees and service charges for
the three-month period ended March 31, 1997 were $172,000, an increase of
177.42% from such fees and charges of $62,000 for the three-month period ended
March 31, 1996. Such fees primarily reflect the demand for loans in the Savings
Bank's market area.
Non-interest income for the nine-month period ended March 31, 1997
increased 179.12% to $508,000 from $182,000 for the nine-month period ended
March 31, 1996. This increase resulted primarily from the loan fees and service
charges recognized from the continued high loan demand during this period as
well as a gain resulting from the merger of Financial Institutions Insurance
Group, Ltd. in which the Savings Bank held capital stock.
Non-Interest Expense For the three-month period ended March 31, 1997,
--------------------
as compared to the three-month period ended March 31, 1996, total non-interest
expense increased $108,000 from $419,000 to $527,000 or 25.78%. For the
nine-month period ended March 31, 1997, non-interest expense increased 63.18% to
$2,105,000 from $1,290,000 for the nine-month period ended March 31, 1996.
Total salaries and employee benefits were $271,000 for the
three-month period ended March 31, 1997, up $46,000 over the three-month period
ended March 31, 1996 level of $225,000. The increase in the three-month period
ended March 31, 1997, primarily reflects higher salary levels due to the
increased number of personnel. Total salaries and employee benefits were
$920,000 for the nine-month period ended March 31, 1997, up $242,000 over the
nine-month period ended March 31, 1996 level of $678,000. The increase in
salaries and employee benefits expense over 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 and higher staffing
levels as described above.
Occupancy and equipment expense was $48,000 for the three-month
period ended March 31, 1997, up $17,000 from the three-month period ended March
31, 1996. This represented a 54.84% increase. For the nine-month period ended
March 31, 1997, occupancy and equipment expense was up $33,000 to $121,000 from
$88,000 for the nine-month period ended March 31, 1996. The increases were
primarily due to increased repairs and maintenance costs.
Page 11
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Other expenses of $157,000 were up $15,000, or 10.57%, over the
three-month period ended March 31, 1996 amount of $142,000. The increase was
primarily due to increased operating expenses related to the high growth rate of
the Savings Bank. For the nine-month period ended March 31, 1997, other expenses
increased $474,000 or 105.81% to $922,000 from $448,000 for the nine-month
period ended March 31, 1996. This increase was primarily attributable to the one
time special assessment to capitalize the Savings Association Insurance Fund of
$388,300.
Income Taxes Income tax expense for the three-month period ended
------------
March 31, 1997 and 1996 was $114,000 and $52,000, respectively. For the
nine-month period ended March 31, 1997 and 1996, income tax expense was $130,000
and $140,000, 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 OTS regulations to maintain minimum
levels of specified liquid assets which are currently equal to 5% of deposits
and short-term borrowings. Middlesboro Federal's liquidity ratio for the month
ended March 31, 1997 was 12.03% and its liquidity ratio was 24.29% at March 31,
1996.
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 $80,056,000 and $68,976,000 at March
31, 1997 and June 30, 1996, 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 $4,854,000 at March 31, 1997 and $874,000 at June 30, 1996.
The variations in levels of cash and cash equivalents are influenced by deposit
flows and anticipated future deposit flows.
At March 31, 1997, Middlesboro Federal had $1,835,000 in commitments
to originate loans. At March 31, 1997, the Savings Bank had $51,306,000 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.
Page 12
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Savings Bank opened a new branch office in late February in a
local grocery store in the nearby town of Pineville. Capital expenditures for
this new branch office did not materially increase the non-earning assets of the
Savings Bank. Management expects to raise additional funds through deposit
products to help fund the loan demand Middlesboro Federal is currently
experiencing due to the recent acquisition of the only Savings Bank located in
this community.
Middlesboro Federal is not aware of any trends or uncertainties that
will have or are reasonably expected to have a material effect on the Savings
Bank's liquidity or capital resources. The Savings Bank has no current plans for
material capital improvements or other capital expenditures that would require
more funds than are currently on hand.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most companies, the assets and liabilities of a financial
institution are primarily monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Savings Bank's
assets and liabilities are critical to the maintenance of acceptable performance
levels.
NEW ACCOUNTING PRONOUNCEMENTS
Disclosures About Fair Value of Financial Instruments In December
-----------------------------------------------------
1991, the 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.
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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, 1997,
-------------------
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
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