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, 2001
--------------
[ ] 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, 2001, there were 679,620 shares of common stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
CUMBERLAND MOUNTAIN BANCSHARES, INC.
FORM 10-QSB - March 31, 2001
INDEX
Page
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Part I - Financial Information
---------------------
Item 1. Financial Statements
Consolidated Statement of Financial Condition
March 31, 2001 and June 30, 2000 2
Consolidated Statements of Income
Three and Nine Months Ended March 31, 2001 and 2000 3-4
Consolidated Statements of Stockholders' Equity
Nine Months Ended March 31, 2001 5
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2001 and 2000 6-7
Notes to the Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Part II - Other Information 17
-----------------
Signatures 18
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
March 31, 2001 and June 30, 2000
ASSETS
------
March 31, June 30,
2001 2000
-------- --------
Cash and cash equivalents $ 6,849 $ 1,581
Investment securities, held-to-maturity - -
Investment securities available-for-sale, at market value 2,663 3,607
Other investments, held-to-maturity (market value $180,000 at
March 31, 2001 and June 30, 2000) 180 180
Mortgage-backed securities available-for-sale, at market value 1,350 2,626
Loans, net of allowance for loan losses of $1,039,000 at
March 31, 2001 and $1,032,000 at June 30, 2000 103,261 109,610
Accrued interest receivable 799 809
Real estate held for investment 1,549 1,669
Repossessed property 843 1,523
Federal Home Loan Bank (FHLB) stock, at cost 981 929
Premises and equipment, net 3,916 4,263
Prepaid expenses and other assets 1,525 1,372
-------- --------
TOTAL ASSETS $123,916 $128,169
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits 105,694 106,078
Advances from FHLB 5,000 10,500
Notes payable 2,965 1,485
Accrued interest payable 968 192
Other liabilities 719 799
-------- --------
Total liabilities 115,346 119,054
-------- --------
Common stock, $0.01 per value, 8,000,000 shares authorized, 679,620
shares issued and outstanding 7 7
Additional paid-in capital 5,543 5,560
Retained earnings 4,257 4,939
Unearned ESOP shares (766) (822)
Unearned Stock Option shares (329) (329)
Unearned MRP shares (90) (90)
Net unrealized loss on investment securities available-for-sale, net of deferred tax (52) (150)
-------- --------
Total stockholders' equity 8,570 9,115
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $123,916 $128,169
======== ========
The accompanying notes are an integral part of these financial statements.
2
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro , Kentucky
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(Amounts in thousands, except per share data)
Three Months Nine Months
Ended March 31, Ended March 31,
-----------------------------------------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME
Investment securities $ 86 $ 68 $ 216 $ 184
Mortgage-backed securities 27 43 96 141
Loans 2,247 2,331 6,890 6,936
FHLB Stock 17 33 52 98
------- ------- ------- -------
Total interest income 2,377 2,475 7,254 7,359
INTEREST EXPENSE
Deposits 1,350 1,248 4,020 3,767
FHLB advances 98 169 395 496
Other borrowed money 63 36 137 107
------- ------- ------- -------
Total interest expense 1,511 1,453 4,552 4,370
NET INTEREST INCOME 866 1,022 2,702 2,989
PROVISION FOR LOAN LOSSES 75 34 1,078 194
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 791 988 1,624 2,795
------- ------- ------- -------
NON-INTEREST INCOME
Loan fees and service charges 164 175 519 580
Gains (losses) on sales of investment securities -- -- -- (1)
Gains (losses) on sales of repossessed assets 12 (28) (50) (51)
Gains (losses) on sales of real estate held for investment (4) -- 5 11
Other 32 14 61 24
------- ------- ------- -------
Total non-interest income 204 161 535 563
------- ------- ------- -------
NET INTEREST AND NON-INTEREST INCOME 995 1,149 2,159 3,358
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 388 415 1,171 1,162
Data processing fees 59 59 179 173
SAIF deposit insurance premiums 13 14 39 62
Occupancy and equipment expense 172 147 447 437
Franchise and other taxes 27 24 85 90
Marketing and other professional services 21 33 95 113
ESOP expense 13 13 39 39
Other 185 242 1,120 675
------- ------- ------- -------
Total non-interest expense 878 947 3,175 2,751
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 117 202 (1,016) 607
INCOME TAX EXPENSE 37 68 (334) 199
------- ------- ------- -------
NET INCOME (LOSS) $ 80 $ 134 $ (682) $ 408
------- ------- ------- -------
3
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro , Kentucky
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Amounts in thousands, except per share data)
COMPREHENSIVE INCOME (LOSS)
Net income (loss) ..................................... $ 80 $ 134 $ (682) $ 408
Unrealized gain (loss) on securities, net of
tax effect........................................... (52) (152) (52) (152)
------- ------- -------- -------
OTHER COMPREHENSIVE INCOME (LOSS) ................ $ 28 $ (18) $ (734) $ 256
======= ======= ======== =======
PER SHARE OF COMMON STOCK:
Earnings (basic) ...................................... $0.1423 $0.2381 $(1.2120) $0.7173
======= ======= ======== =======
Earnings (diluted) .................................... $0.1277 $0.2160 $(1.0937) $0.6532
======= ======= ======== =======
Dividends ............................................. $ -- $ -- $ -- $ --
======= ======= ======== =======
The accompanying notes are an intergral part of these financial statements.
4
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDTATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Unrealized
Loss on
Investment Unearned
Additional Securities Unearned Stock
Common Paid-In Retained Available- ESOP Option
Stock Capital Earnings for-Sale Shares Shares
------ ------- -------- ---------- -------- --------
Balance at June 30, 2000 $ 7 $ 5,560 $4,939 $(150) $ (822) $ (329)
Net income for the nine month period ended
March 31, 2001 - - (682) - - -
Common stock issued - - - - - -
ESOP shares transferred - - - - - -
ESOP shares earned - (17) - - 56 -
Stock Option shares transferred - - - - - -
MRP shares acquired - - - - - -
Decrease in unrealized loss on investment
securities available-for-sale for the period
ended March 31, 2001, net of deferred tax - - - 98 - -
--- ------- ------ ----- ------ ------
Balance at March 31, 2001 $ 7 $ 5,543 $4,257 $ (52) $ (766) $ (329)
=== ======= ====== ===== ====== ======
Unearned
MRP Treasury
Shares Stock Total
------- --------- --------
Balance at June 30, 2000 $ (90) $ - $ 9,115
Net income for the nine month period ended
March 31, 2001 - - (682)
Common stock issued - - -
ESOP shares transferred - - -
ESOP shares earned - - 39
Stock Option shares transferred - - -
MRP shares acquired - - -
Decrease in unrealized loss on investment
securities available-for-sale for the period
ended March 31, 2001, net of deferred tax - - 98
----- ---- -------
Balance at March 31, 2001 $ (90) $ - $ 8,570
===== ==== =======
The accompanying notes are an intergral part of these financial statements.
5
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Nine Months Ended March 31,
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (682) $ 408
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation 323 301
Amortization and accretion 7 7
FHLB stock dividend (52) (99)
Provision for loan losses 1,078 194
(Gains) losses on sales of investment securities - 1
(Gains) losses on sales of other repossessed assets 50 51
(Gains) losses on sales of property held for investment (5) (11)
Changes in assets and liabilities:
Accrued interest receivable 10 131
Prepaid expenses and other assets (153) (205)
Accrued interest payable 776 692
Other liabilities (80) 329
------- -------
Net cash provided by (used in) operating activities 1,272 1,799
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available-for-sale (500) (1,000)
Proceeds on maturities and calls of investment securities
available-for-sale 1,500 500
Principal collected on investment securities available-for-sale 57 142
Proceeds on sales of other investments - 15
Proceeds on maturities of mortgage-backed securities 707 -
Principal collected on mortgage-backed securities 600 801
Net (increase) decrease in real estate held for investment 125 (477)
Net (increase) decrease in loans 5,215 484
Net (increase) decrease in repossessed property 630 (677)
Purchases of premises and equipment 24 (64)
------- -------
Net cash provided by (used in) investing activities 8,358 (276)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (384) (1,750)
Net increase (decrease) in advances from FHLB (5,500) 1,000
Net increase (decrease) in other borrowings 1,480 (96)
ESOP shares earned, net of tax 42 57
Purchase of shares for MRP - (103)
------- -------
Net cash provided by (used in) financing activities (4,362) (892)
The accompanying notes are an intergral part of these financial statements.
6
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Nine Months Ended March 31,
2001 2000
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,268 631
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,581 1,317
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,849 $ 1,948
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 3,776 $ 1,756
======= =======
Income taxes $ - $ -
======= =======
Loans transferred to repossessed property during the period $ 93 $ 760
======= =======
Total increase (decrease) in unrealized gain (loss) on
securities available for sale $ 98 $ 43
======= =======
The accompanying notes are an intergral part of these financial statements.
7
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and, therefore, do
not include all information and notes necessary for a complete presentation
of financial position, results of operations, changes in stockholders'
equity, and cash flows in conformity with generally accepted accounting
principles. However, all adjustments (consisting only of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
presentation of the unaudited consolidated financial statements have been
included in the results of operations for the nine months ended March 31,
2001 and 2000.
Operating results for the nine month period ended March 31, 2001 is
not necessarily indicative of the results that may be expected for the year
ending June 30, 2001.
Prior to March 31, 1997, the Cumberland Mountain Bancshares, Inc. (the
"Company") did not have any material assets or liabilities and did not
engage in any material business operations. On March 31, 1997, the Company
acquired all of the outstanding stock of Middlesboro Federal Bank, Federal
Savings Bank (the "Bank") pursuant to the Plan of Conversion of Cumberland
Mountain Bancshares, M.H.C., the Bank's former mutual holding company, and
the Agreement and Plan of Reorganization between the Company and the Bank.
In connection with the Conversion and Reorganization, the Company sold
439,731 shares of Common Stock in an initial public offering and issued
1.333 shares of Common Stock in exchange for each share of the Bank's
common stock then outstanding. The Company's financial statements for the
periods prior to March 31, 1997 consist of the financial statements of the
Bank.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows
(amounts in thousands):
March 31,
2001
---------
Balance, beginning of year $ 1,032
Provision for loan losses 1,078
Charge-offs, net of recoveries (1,071)
-------
Balance, March 31, 2001 $ 1,039
=======
8
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(UNAUDITED)
NOTE 3 - NONACCRUAL LOANS
Nonaccrual loans are as follows (amounts in thousands):
March 31, June 30,
2001 2000
--------- --------
Construction Mortgage Loans $ - $ -
Permanent Mortgage Loans, Secured by:
1-4 Dwelling Units 98 493
5 or More Dwelling Units - -
Nonresidential Property (Except Land) 241 73
Land 47 -
Nonmortgage Loans and Leases, Closed End:
Commercial - 194
Auto - 14
Mobile Home - -
Other Consumer - 17
Nonmortgage Loans and Leases, Open End:
Revolving Loans Secured by
1-4 Dwelling Units 20 -
----- -----
$ 406 $ 791
===== =====
9
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The principal business of Cumberland Mountain Bancshares, Inc. (the
"Company") is that of Middlesboro Federal Bank, FSB (the "Savings Bank" or
"Middlesboro Federal"). The principal business of the Savings Bank consists of
accepting deposits from the general public and investing these funds in loans
secured by one-to-four family owner-occupied residential properties in the
Savings Bank's primary market area. The Savings Bank also maintains an
investment portfolio which includes Federal Home Loan Bank ("FHLB") stock,
Government Agency-issued bonds and mortgage-backed securities, and other
investments.
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and the
Company's actual results could differ significantly from those discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the economy
and interest rates in the nation and the Company's market area generally. Some
of the forward-looking statements included herein are the statements regarding
management's determination of the amount and adequacy of the allowance for loan
losses on loans, the effect of certain recent accounting pronouncements.
FINANCIAL CONDITION
Total assets of the Company have decreased 3.32% from $128,169,000 at
June 30, 2000 to $123,916,000 at March 31, 2001. This decrease in assets has
resulted primarily from the decrease in net loans of $6.3 million, or 5.79% to
$103,261,000 at March 31, 2001 from $109,610,000 at June 30, 2000. The decline
in net loans is primarily due to lower loan volume, net charge-offs of
$1,071,000, and an increase in loan loss provision of $1,078,000 during the
nine-month period ended March 31, 2001. This decline in loans was partially
offset by an increase in cash and cash equivalents of $5.3 million.
During the nine months ended March 31, 2001, the Savings Bank
recognized charge-offs on several large commercial borrowers. These charge-offs
resulted in a severe reduction in the Savings Bank's allowance for loan losses
for the nine months ended March 31, 2001. Pursuant to recommendations by the
Classified Assets Committee of the Savings Bank an additional provision for loan
losses of $1,078,000 was made. The Classified Assets Committee determined this
was the amount needed to adequately provide for future losses based upon the
current level of classified assets. Prepaid expenses at March 31, 2001 amounted
to $1,525,000 and included approximately $150,000 in expenses resulting from the
negotiation of the merger agreement with Commercial Bancorp and related matters.
The Company has experienced a decline in deposits during the nine
months ended March 31, 2001 of $384,000, or 0.36%. This decline is primarily the
result of higher interest rates and increased competition in the Savings Bank's
market area for deposits. Notes Payable increased $1,480,000 from $1,485,000 at
June 30, 2000 to $2,965,000 at March 31, 2001. This increase was due to the
refinancing of an intra-company debt with an outside creditor. During the
quarter ended December 31, 2000, the Company borrowed $1.6 million from an
outside lender which was contributed to the Company's subsidiary, Home Mortgage
Loan Corporation ("HMLC"). HMLC used such funds to repay an intercompany loan.
The loan from the outside lender is secured by all the issued and outstanding
shares of the Savings Bank. Advances from the FHLB declined by $5.5 million from
$10.5 million at June 30, 2000 to $5.0 million at March 31, 2001. This decline
was the result of the repayment of short-term advances with funds received
primarily from the repayment of loans. Total stockholders' equity declined by
$545,000, or 5.98%, principally due to the net loss realized during the nine
months ended March 31, 2001.
10
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net Income The Company realized net income of $80,000 for the
-----------
three-month period ended March 31, 2001. This compared to net income of $134,000
for the three-month period ended March 31, 2000. This decrease in net income was
primarily the result of a decrease in net interest income of $156,000 from
$1,022,000 for the three-month period ended March 31, 2000 to $866,000 for the
three-month period ended March 31, 2001. The decrease in net interest income was
the primarily the result of a decline in outstanding loans coupled with an
increase in the cost of funds of the Savings Bank associated with the increasing
rate environment of 2000.
For the nine-month period ended March 31, 2001, the Company realized a
net loss of $682,000, compared to net income of $408,000 for the nine-month
period ended March 31, 2000. This change in net income was primarily the result
of an increase in provision for loan losses of $884,000 and an increase in
provision for losses on foreclosed real estate of $222,000. In addition, the
Company realized a decline in net interest income for the nine months ended
March 31, 2001 of $287,000 resulting primarily from an increase in interest
expense of $182,000. This increase in interest expense is primarily due to an
increase in the cost of funds of the Savings Bank resulting from increased
competition within the Savings Bank's market area and the overall rate
environment.
Interest Income Total interest income for the three-month period ended
---------------
March 31, 2001 amounted to $2,377,000, a decrease of 3.96% from the Company's
total interest income of $2,475,000 for the three-month period ended March 31,
2000. During the three-month period ended March 31, 2001 as compared to the
three-month period ended March 31, 2000, the Company's interest income on its
loan portfolio decreased 3.60% from $2,331,000 to $2,247,000; its interest
income from its mortgage-backed securities portfolio decreased 37.21% from
$43,000 to $27,000; interest income from its investment securities portfolio
increased 26.47% from $68,000 to $86,000; and interest income from FHLB stock
decreased 48.49% from $33,000 to $17,000. The reduction in interest income on
the Company's loan portfolio has occurred primarily due to the overall decline
in outstanding loan balances. The decline is primarily the result of a slow down
in origination volume combined with tighter underwriting controls.
Interest income decreased from $7,359,000 for the nine-months ended
---------------
March 31, 2000 to $7,254,000 for the nine-months ended March 31, 2001, a
decrease of $105,000 or 1.43%. This decrease resulted primarily from the
decrease in interest income on loans, mortgage-backed securities and FHLB stock.
Management has attempted to increase the interest income of the Savings Bank by
taking repayments from mortgage-backed securities and redeeming excess FHLB
stock and reinvesting the funds in higher yielding mortgage, consumer and
commercial loans. Management has undertaken efforts to strengthen the quality of
the loan portfolio and increase collection efforts thereby resulting in the
origination of fewer loans over the past nine-month period.
Interest Expense Interest expense increased from $1,453,000 for the
----------------
three-month period ended March 31, 2000, to $1,511,000 for the three-month
period ended March 31, 2001. During the three-month period ended March 31, 2001
as compared to the three-month period ended March 31, 1999, the Company's
interest expense on deposits increased 8.17% from $1,248,000 to $1,350,000. This
increase in interest expense on deposits is due primarily to an increase in the
interest rate paid on time deposits resulting from an overall increase in
interest rates from last year as well as increased competition within the
Company's market area.
11
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Interest expense increased $182,000, or 4.17%, from $4,370,000 for the
nine-month period ended March 31, 2000 to $4,552,000 for the nine-month period
ended March 31, 2001. Interest expense on deposits increased 6.72%, or $253,000
while interest expense on FHLB advances decreased 20.36%, or $101,000 for the
nine-month period ended March 31, 2001. Due to a decrease in loans being
originated during the period, FHLB advances were repaid with funds received from
loan payments.
Net Interest Income During the three months ended March 31, 2001, net
--------------------
interest income decreased 25.15% to $866,000 from $1,022,000 for the three
months ended March 31, 2000. For the nine-month period ended March 31, 2001, net
interest income decreased 9.60% to $2,702,000 from $2,989,000 for the nine-month
period ended March 31, 2000. This decrease was due primarily to the reduction in
loan growth by the Savings Bank as well as higher deposit rates.
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 March 31, 2001, the Savings Bank
provided $75,000 for loan losses compared to $34,000 during the three-month
period ended March 31, 2000. The provision for losses on loans increased from
$194,000 for the nine months ended March 31, 2000 to $1,078,000 for the nine
months ended March 31, 2001. The increase in provision for loan losses for these
periods represent management's effort to maintain an adequate reserve against
losses and also takes into account net charge-offs from the period. For the nine
months ended March 31, 2001, net charge-offs amounted to $1,071,000. In
determining the appropriate provision, management considers a number of factors,
including specific loans in the Savings Bank's portfolio, real estate market
trends in the Company's market area, economic conditions, interest rates, and
other conditions that may affect the borrower's ability to comply with repayment
terms. At March 31, 2001, the Company's allowance for loan losses represented
255.91% of total non-accrual loans and 1.00% of the outstanding balance of total
loans.
Non-Interest Income Non-interest income for the three-month period
--------------------
ended March 31, 2001 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 and as the fee structure is adjusted by management in
relation to market demand. The Company's non-interest income for the three-month
period ended March 31, 2001 was $204,000, an increase of 26.71% from $161,000
for the three-month period ended March 31, 2000. Non-interest income decreased
from $563,000 for the nine months ended March 31, 2000 to $535,000, a 4.97%
decrease, for the nine months ended March 31, 2001.
Loan fees and service charges for the three-month period ended March
31, 2001 decreased $11,000, or 6.29%, to $164,000 from $175,000 for the
three-month period ended March 31, 2000 and decreased $61,000, or 10.52% for the
nine-month period ended March 31, 2001 as compared to the nine-month period
ended March 31, 2000. These changes were attributable to a decrease in the
number of loan fees charged to new loan customers during the quarter. Included
in non-interest income for the nine-month period ended March 31, 2001 was a
one-time recovery of $18,000 from the successful settlement with a check imaging
vendor over the non-implementation of the vendors software.
12
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Non-Interest Expense For the three-month period ended March 31, 2001,
------------
as compared to the three-month period ended March 31, 2000, total non-interest
expense decreased $69,000 from $947,000 to $878,000 or 7.29%. Non-interest
expense increased from $2,751,000 for the nine months ended March 31, 2000 to
$3,175,000 for the nine months ended March 31, 20010, an increase of $424,000 or
15.41%.
Salaries and employee benefits decreased $27,000, or 6.51%, from
$415,000 for the three months ended March 31, 2000, to $388,000 for the three
months ended March 31, 2001. For the nine-month period ended March 31, 2001,
salaries and employee benefits have increased $9,000, or 0.78% as compared to
the nine-month period ended March 31, 2000. The decline for the three months
ended March 31, 2001 is primarily due to management's ability to limit salary
increases for the 2001 calendar year.
SAIF deposit insurance premiums declined $1,000 for the three-month
period ended March 31, 2001 as compared to the three-month period ended March
31, 2000 and $23,000, or 37.10% from $62,000 for the nine-month period ended
March 31, 2000 as compared to $39,000 for the nine-month period ended March 31,
2001. This decrease is due mainly to the cost savings realized from the rate
reduction by the FDIC in the Financing Corporation (FICO) quarterly multiplier
that took place January 1, 2000. This reduction set the FICO assessment to the
same rate for both BIF and SAIF insured deposits.
Occupancy and equipment expense increased $25,000, or 17.10% from
$147,000 for the three months ended March 31, 2000 to $172,000 for the three
months ended March 31, 2001. For the nine months ended March 31, 2001, occupancy
and equipment expense increased $10,000, or 2.29% as compared to the nine months
ended March 31, 2000. This increase for the quarter ended March 31, 2000
resulted primarily from an increase in property taxes of $36,000 resulting from
the nonpayment of Knoxville city taxes for the Fountain City Park Bank branch
office building for the years 1999 and 2000.
Marketing and other professional services declined $12,000, or 36.36%
for the three-month period ended March 31, 2001 as compared to the three-month
period ended March 31, 2000 and $18,000, or 15.93% for the nine-month period
ended March 31, 2001 as compared to the nine-month period ended March 31, 2000.
This decrease was primarily the result of a reduction by management in
advertising spending.
Other expenses of $185,000 declined $57,000 over the three-month
period ended March 31, 2000 amount of $242,000. This decrease in other expenses
for the three-month period ended March 31, 2001, is primarily due to a decrease
in consulting fees ($34,000), office supply expenses ($12,000), and
correspondent fees ($8,000). For the nine-month period ended March 31, 2001,
other expenses increased $445,000 as compared to the nine-month period ended
March 31, 2000. The increase in other expenses for the nine-month period ended
March 31, 2001, is primarily due to increases in deposit account expenses, legal
fees, loan expenses, repossessed asset expenses, and loss provisions. Deposit
account expenses were $19,000 higher than last year due to a one-time expense
for supplies related to the conversion of the Savings Bank's checking services
to check imaging. Legal fees were $24,000 higher for the nine-month period
ending March 31, 2001 as compared to last year due to fees incurred in relation
to the collection of amounts owed the Savings Bank by Blair Mortgage Corporation
and Professional Banking Solutions. Loan expenses were $14,000 higher for the
nine-month period ended March 31, 2001 primarily due to expenses related to the
collection of delinquent loan accounts.
13
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Also included in other expenses are items related to repossessed and
foreclosed assets. These expenses were $10,000 higher for the quarter ended
March 31, 2001 as compared to the quarter ended March 31, 2000 and $265,000
higher for the nine-month period ended March 31, 2001 as compared to the
nine-month period ended March 31, 2000. During the nine-month period ended March
31, 2001, the Savings Bank wrote-down the value of foreclosed properties an
additional $222,000 to reflect current market values. Of the $222,000
write-down, $188,000 directly related to properties located in Kingsport,
Tennessee.
Income Taxes Income tax expense for the three-month period ended March
------------
31, 2001 was $37,000 compared to $68,000 for the three-month period ended March
31, 2000. For the nine months ended March 31, 2001, an income tax credit of
$334,000 was recognized compared to an income tax expense of $199,000 for the
nine-month period ended March 31, 2000. The changes in income tax expense are a
result of changes in net taxable income during the periods and the change in
accounting for tax estimates for the Company individually.
AGREEMENT AND PLAN OF SHARE EXCHANGE
On February 8, 2001 the Company entered into an Agreement and Plan of
Share Exchange with Commercial Bancgroup, Inc. which provides for Commercial to
acquire all the issued and outstanding shares of the Company's common stock for
total consideration of $9.52 million (including amounts to be paid to certain
optionholders). The Share Exchange, which is subject to receipt of the approval
of the Company's stockholders and all requisite regulatory approvals, is
expected to be consummated in the summer of 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no business other than that of the Savings
Bank and does not currently have any material funding commitments. The Company's
principal sources of liquidity are cash on hand, payments received on its loan
to the Company's ESOP and dividends received from the Savings Bank. The Savings
Bank is subject to various regulatory restrictions on the payment of dividends.
The Savings Bank is required by the Office of Thrift Supervision
regulations to maintain minimum levels of specified liquid assets. On November
24, 1997, the OTS lowered this liquidity requirement from 5 to 4 percent of the
Savings Bank's liquidity base. Additionally, the OTS streamlined the
calculations used to measure compliance with liquidity requirements, expanded
the types of investments considered to be liquid assets, and reduced the
liquidity base by modifying the definition of net withdrawable account to
exclude accounts with maturities exceeding one year. The Savings Bank's
liquidity ratio for the quarter ended March 31, 2001 was 7.91% and its liquidity
ratio was 6.97% at March 31, 2000.
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 $105,694,000 and $106,078,000 at March
31, 2001 and June 30, 2000, respectively.
14
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Savings Bank's most liquid assets are cash and cash equivalents,
which are cash on hand, amounts due from financial institutions, federal funds
sold, certificates of deposit with other financial institutions that have an
original maturity of three months or less and money market mutual funds. The
levels of such assets are dependent on the Savings Bank's operating, financing
and investment activities at any given time. The Savings Bank's cash and cash
equivalents totaled $6,849,000 at March 31, 2001 and $1,581,000 at June 30,
2000. Of these amounts, $4,361,000 and $1,069,000 were deposits held in
interest-bearing accounts at March 31, 2001 and June 30, 2000, respectively. The
variations in levels of cash and cash equivalents are influenced by deposit
flows and anticipated future deposit flows.
At March 31, 2001, the Savings Bank had $161,000 in commitments to
originate loans. At March 31, 2001, the Savings Bank had $52,154,000 in
certificates of deposit which were scheduled to mature in one year or less. It
is anticipated that the majority of these certificates will be renewed in the
normal course of operations.
Middlesboro Federal is not aware of any trends or uncertainties that
will have or are reasonably expected to have a material effect on the Savings
Bank's liquidity or capital resources. The Savings Bank has no current plans for
material capital improvements or other capital expenditures that would require
more funds than are currently on hand.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most companies, the assets and liabilities of a financial
institution are primarily monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation. In the current interest
rate environment, liquidity and the maturity structure of the Savings Bank's
assets and liabilities are critical to the maintenance of acceptable performance
levels.
NEW ACCOUNTING PRONOUNCEMENTS
Disclosures About Fair Value of Financial Instruments In December
--------------------------------------------------------
1991, the FASB issued Statement of Financial Accounting Standards No. 107 (SFAS
No. 107) "Disclosure About Fair Value of Financial Instruments." SFAS No. 107
requires all entities to disclose the fair value of financial instruments (both
assets and liabilities recognized and not recognized in the financial
statements) for which it is practicable to estimate fair value, except those
financial instruments specifically excluded. The disclosure shall be either in
the body of the financial statements or in the accompanying notes and shall also
include the methods and significant assumptions used to estimate the fair value
of financial instruments. Additional information is required to be disclosed if
it is not practicable for an entity to estimate the fair value of a financial
instrument or a class of financial instruments as well as the reasons why it is
not practicable to estimate fair value. SFAS No. 107 is effective for entities
with less than $150 million in total assets in the current statement of
financial condition for financial statements issued for the fiscal year
beginning July 1, 1995.
15
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Accounting By Creditors For Impairment of a Loan During May 1993, the
-------------------------------------------------
FASB issued SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" that
requires impaired loans be measured based upon the present value of expected
future cash flows discounted at the loan's effective interest rate or at the
loan's market price or fair value of collateral, if the loan is collateral
dependent. Adoption of SFAS No. 114, as amended by SFAS No. 118, occurred on
June 30, 1996, and is did not have a material impact on the financial
statements.
Earnings Per Share In February 1997, the FASB issued SFAS No. 128
-------------------
which requires companies to present basis earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share are computed without including
potential common shares, i.e. no dilutive effect. Diluted earnings per share is
computed taking into consideration common shares outstanding and dilutive
potential common shares, including options, warrants, convertible securities,
and contingent stock agreements. SFAS No. 128 is effective for periods ending
after December 15, 1997.
Comprehensive Income In June, 1997, the FASB issued SFAS No. 130,
---------------------
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
This statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal years beginning after
December 15, 1997.
Disclosures about Segments of an Enterprise and Related Information In
-------------------------------------------------------------------
June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement is effective for financial statements for periods beginning after
December 15, 1997. The Company does not believe that the adoption of this
accounting statement will have a material impact on its financial statements.
16
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
From time to time between 1987 and 1994 the Savings Bank has purchased
whole loans and loan participations from an unaffiliated mortgage broker based
in Lexington, Kentucky. The mortgage broker had been servicing such loans for
the Savings Bank remitting payments on a monthly basis. During the three months
ended September 30, 1999, the Savings Bank became aware that certain such loans
might have been refinanced although the mortgage broker failed to remit the
payoffs on such loans to the Savings Bank. At March 31, 2000, the aggregate
principal balance of such loans amounted to $668,000. The Savings Bank has begun
to service all such loans directly and is pursuing a claim for the unpaid
principal balance with its fidelity insurance carrier. Although the Savings Bank
believes it has a claim under its fidelity bond or through other insurance
policies, there can be no assurance that full or partial recovery of these loans
will be obtained or that loss in connection with these loans will be incurred.
Item 5. Other Information
-----------------
Effective December 13, 1999, the Savings Bank entered into an
Agreement with the Office of Thrift Supervision. The Agreement requires that the
Savings Bank establish the position of Compliance Officer and develop and adopt
a written compliance program designed to ensure the Savings Bank is operating in
compliance with all applicable consumer protection and other laws and
regulations. The Savings Bank is also required to ensure its compliance with its
written loan and collection policies. The Agreement limits the size of any new
commercial loans to $100,000 and any unsecured consumer loans to $25,000. The
Savings Bank was also required to modify its existing strategic plan and budget
to reflect these requirements and was required to make certain filings with the
OTS in accordance with deadlines established in the Agreement. The Savings Bank
does not believe that the terms of this Agreement will have a material adverse
effect on the Savings Bank.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - None
--------
(b) Reports on Form 8-K. During the quarter ended March 31, 2000,
-------------------
the registrant did not file any reports on Form 8-K.
17
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Cumberland Mountain Bancshares, Inc.
By:/s/ James J. Shoffner
--------------------------------
James J. Shoffner
President
Date: May 15, 2001
18