<PAGE>
<PAGE>
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 December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______
Commission File Number: No. 0-22287
CUMBERLAND MOUNTAIN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Tennessee 31-1499488
- ------------------------ ----------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
1431 Cumberland Avenue, Middlesboro, Kentucky 40965
---------------------------------------------------
(Address of principal executive office)
(606) 248-4584
-----------------
(Telephone number)
Check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of January 31, 1998, there were 677,358 shares of common
stock outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
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Page 2
CUMBERLAND MOUNTAIN BANCSHARES, INC.
FORM 10-QSB - December 31, 1997
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition
December 31, 1997 and June 30, 1997 2
Consolidated Statements of Income
Six Months Ended December 31, 1997 and 1996 3
Consolidated Statements of Stockholders' Equity
Six Months Ended December 31, 1997 4
Consolidated Statements of Cash Flows
Six Months Ended December 31, 1997 and 1996 5-6
Notes to the Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-14
Part II - Other Information 15
-----------------
Signatures 16
<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
December 31, 1997 and June 30, 1997
ASSETS
------
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 2,127 $ 699
Investment securities, held-to-maturity 7 10
Investment securities available-for-sale, at
market value 4,134 4,174
Other investments, at market value 389 103
Mortgage-backed securities available-for-sale,
at market value 5,824 6,353
Loans, net of allowance for loan losses of
$401,000 at December 31, 1997 and
$306,000 at June 30, 1997 117,330 99,623
Accrued interest receivable 892 738
Real estate held for investment 243 -
Repossessed real estate 343 13
Federal Home Loan Bank (FHLB) stock, at cost 1,827 724
Premises and equipment, net 2,601 2,024
Prepaid expenses and other assets 642 194
--------- ---------
TOTAL ASSETS $ 136,359 $ 114,655
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $ 91,365 $ 91,596
Escrows 51 -
Advances from FHLB 34,000 13,000
Notes payable 732 715
Accrued interest payable 397 241
Other liabilities 659 589
--------- ---------
Total liabilities 127,204 106,141
--------- ---------
Common stock, $0.01 per value, 8,000,000 shares
authorized, 678,800 shares issued and
outstanding 7 7
Additional paid-in capital 5,542 5,542
Retained earnings 4,659 4,093
Unearned ESOP shares (986) (986)
Net unrealized loss on investment securities
available-for-sale, net of deferred tax (67) (142)
--------- ---------
Total stockholders' equity 9,155 8,514
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 136,359 $ 114,655
========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
2<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro , Kentucky
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C>
INTEREST INCOME
Investment securities $ 53 $ 51 $ 110 $ 108
Mortgage-backed securities 88 112 182 233
Mortgage loans 1,829 1,241 3,482 2,316
Commercial and consumer loans 730 312 1,349 565
------- ------- ------- -------
Total interest income 2,700 1,716 5,123 3,222
INTEREST EXPENSE
Deposits 1,127 899 2,281 1,762
FHLB advances 440 133 711 183
Other borrowed money 33 -- 50 --
------- ------- ------- -------
1,600 1,032 3,042 1,945
------- ------- ------- -------
NET INTEREST INCOME 1,100 684 2,081 1,277
PROVISION FOR LOAN LOSSES 136 28 285 58
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 964 656 1,796 1,219
------- ------- ------- -------
NON-INTEREST INCOME
Loan fees and service charges 223 152 523 287
Gains (losses) on sales of investment
securities -- 50 -- 50
Gains (losses) on sales of repossessed assets -- (1) 20 (1)
------- ------- ------- -------
Total non-interest income 223 201 543 336
------- ------- ------- -------
NET INTEREST AND NON-INTEREST INCOME 1,187 857 2,339 1,555
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 326 280 644 649
Occupancy and equipment expense 98 38 166 73
Marketing and other professional services 58 45 119 91
Other 259 198 503 765
------- ------- ------- -------
Total non-interest expense 741 561 1,432 1,578
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 446 296 907 (23)
INCOME TAX EXPENSE 171 113 341 16
------- ------- ------- -------
NET INCOME $ 275 $ 183 $ 566 $ (39)
======= ======= ======= =======
PER SHARE OF COMMON STOCK:
Earnings (basic) $ 0.470 $ 0.359 $ 0.960 $(0.076)
======= ======= ======= =======
Earnings (dilutive) $ 0.470 $ 0.359 $ 0.960 $(0.076)
======= ======= ======= =======
Dividends $ 0.000 $ 0.000 $ 0.000 $ 0.000
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
3 <PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Unrealized
Loss on
Investment
Additional Securities Unearned
Common Paid-In Retained Available ESOP
Stock Capital Earnings for-Sale Shares Total
------- --------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ 7 $ 5,542 $ 4,093 $ (142) $ (986) $ 8,514
Net income for the six month
period ended December 31, 1997 -- -- 566 -- -- 566
Common stock issued -- -- -- -- -- --
Common stock exchanged -- -- -- -- -- --
ESOP shares purchased -- -- -- -- -- --
Decrease in unrealized loss on
investment securities available-
for-sale for the period ended
December 31, 1997, net of
deferred tax -- -- -- 75 -- 75
------- ------- ------- ------- ------- -------
Balance at December 31, 1997 $ 7 $ 5,542 $ 4,659 $ (67) $ (986) $ 9,155
======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial
statements
4<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Six Months Ended December 31,
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 566 $ (39)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation 77 39
Amortization and accretion 11 6
FHLB stock dividend (44) (18)
Provision for loan losses 285 58
(Gains) losses on sales of investment securities -- (52)
(Gains) losses on sales of other real estate (20) (2)
Changes in assets and liabilities:
Accrued interest receivable (154) (161)
Prepaid expenses and other assets (448) (140)
Accrued interest payable 156 67
Other liabilities 70 398
-------- --------
Net cash provided by (used in) operating
activities 499 156
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of FHLB stock (1,059) (156)
Principal collected on investment securities
held to maturity 3 --
Purchases of investment securities available-
for-sale -- --
Proceeds on maturities of investment securities
available-for-sale 71 240
Purchases of other investments (263) --
Principal collected on mortgage-backed securities 566 403
Proceeds on sales of mortgage-backed securities
available-for-sale -- 855
Purchase of mortgage-backed securities available-
for-sale -- --
Purchase of real estate held for investment (243) --
Proceeds from the sale of loans 2,776 --
Net (increase) decrease in purchased loans 235 577
Net (increase) decrease in loans exclusive
of loans purchased (21,281) (18,295)
Purchases of premises and equipment (662) (368)
-------- --------
Net cash provided by (used in) investing
activities (19,857) (16,744)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (231) 5,792
Net increase in advances from FHLB 21,000 10,500
Net increase in other borrowings 17 --
-------- --------
Net cash provided by (used in)
financing activities 20,786 16,292
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
5<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Six Months Ended December 31,
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,428 (296)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 699 874
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,127 $ 578
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 1,085 $ 284
======= =======
Income taxes $ 271 $ 19
======= =======
Loans transferred to other real estate during
the period $ 343 $ 68
======= =======
Total increase (decrease) in unrealized gain
(loss) on securities available for sale $ (102) $ (118)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
6<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 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 six months ended December
31, 1997 and 1996.
Operating results for the six month period ended December
31, 1997 are not necessarily indicative of the results that may
be expected for the year ended June 30, 1998.
Prior to March 31, 1997, Cumberland Mountain Bancshares,
Inc. (the "Company") did not have any material assets or
liabilities and did not engage in any material business
operations. On March 31, 1997, the Company acquired all of the
outstanding stock of Middlesboro Federal Bank, Federal Savings
Bank (the "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):
December 31,
1997
------------
Balance, beginning of year $ 306
Provision for loan losses 285
Charge-offs, net of recoveries (190)
-------
Balance, December 31, 1997 $ 401
=======
7<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(UNAUDITED)
NOTE 3 - NONACCRUAL LOANS
----------------
Nonaccrual loans are as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
---------- ----------
<S> <C> <C>
Construction Mortgage Loans $ 246 $ --
Permanent Mortgage Loans, Secured by
1-4 Dwelling Units 768 601
5 or More Dwelling Units -- --
Nonresidential Property (Except Land) 50 --
Land -- --
Nonmortgage Loans and Leases, Open End:
Credit Cards and Related Plans -- 11
------- -------
$ 1,064 $ 612
======= =======
</TABLE>
8<PAGE>
<PAGE>
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"). The principal business of the Savings Bank
consists of accepting deposits from the general public and
investing these funds in loans secured by one-to-four family
owner-occupied residential properties in the Savings Bank's
primary market area. The Bank also maintains an investment
portfolio which includes Federal Home Loan Bank stock,
Government Agency-issued bonds and mortgage-backed securities,
and other investments.
YEAR 2000 PLANNING
Like most financial institutions, the Company's principal
subsidiary relies extensively on computers in conducting its
business. It has been widely reported that many computer
programs currently in use were designed without adequately
considering the impact of the upcoming change in century on
their date codes. If these design flaws are not corrected,
these computer applications may malfunction in the year 2000.
The Savings Bank generally relies on outside vendors for its
most critical data processing services. These vendors have
advised the Savings Bank that they are actively addressing the
year 2000 issue and do not expect that any required solutions
will require material additional investments by the Savings
Bank.
FINANCIAL CONDITION
Total assets of the Company have increased 18.93% from
$114,655,000 at June 30, 1997 to $136,359,000 at December 31,
1997. This has resulted largely from the increase in loans of
17.78% to $117,330,000 at December 31, 1997 from $99,623,000 at
June 30, 1997. Over the past few years, the size of the
Company's loan portfolio has grown as a result of increased loan
demand in the Savings Bank's primary market area. Management
has attempted to grow the loan portfolio while at the same time
limiting the credit risk and improving the rate sensitivity of
the Savings Bank's interest-earning assets. While the Savings
Bank's primary emphasis continues to be the origination of one
to four family adjustable rate mortgage loans secured by
properties in its primary market area, the Savings Bank has also
invested excess funds in investment securities and mortgage-
backed securities with adjustable rates or terms to maturity of
seven years or less.
The Company's asset growth during the six months ended
December 31, 1997 was financed entirely by an increase in
advances from the Federal Home Loan Bank ("FHLB"). FHLB advances
rose by $21,000,000 from $13,000,000 at June 30, 1997 to
$34,000,000 at December 31, 1997. The Savings Bank has entered
into an agreement to purchase the Harlan, Kentucky branch of
National City Bank of Kentucky. Pursuant to this agreement, the
Savings Bank expects to assume approximately $20.0 million in
deposits. The Savings Bank anticipates that such deposit
purchase will enable it to reduce its FHLB borrowings. Total
stockholders' equity rose by $641,000, or 7.53%, principally due
to net income earned during the quarter.
RESULTS OF OPERATIONS
Net Income. The Company realized net income of $275,000
for the three-month period ended December 31, 1997, an increase
of $92,000 as compared to the three-month period ended December
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 Savings Bank has been experiencing.
The Company's net earnings increased from a net loss of
$39,000 for the six months ended December 31, 1996 to net income
of $566,000 for the six months ended December 31, 1997, an
increase of $605,000. During the six-month period ended December
31, 1996, the Savings Bank recognized an expense related to a
special assessment of $388,300 on SAIF-assessable deposits to
capitalize the Savings Association Insurance Fund mandated by
the Deposit Insurance Funds Act of 1996. In addition, the
Savings Bank expensed $152,000 to record the funding of a
retirement plan for the directors of the Savings Bank.
Excluding the one-time expenses for the SAIF assessment and
directors retirement, net income for the six-month period ended
December 31, 1996, would have been approximately $317,000. The
Company, therefore, realized an increase of $249,000, or 78.55%,
in net income for the six-month period ended December 31, 1997
compared to adjusted net income for the six-month period ended
December 31, 1996.
9<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Interest Income. Total interest income for the three-month
period ended December 31, 1997 amounted to $2,700,000, an
increase of 57.35% from the Company's total interest income of
$1,716,000 for the three-month period ended December 31, 1996.
During the three-month period ended December 31, 1997 as
compared to the three-month period ended December 31, 1996, the
Company's interest income on its loan portfolio increased 64.78%
from $1,553,000 to $2,559,000; its interest income from its
mortgage-backed securities portfolio decreased 21.43% from
$112,000 to $88,000; and interest income from its investment
securities portfolio increased 3.93% from $51,000 to $53,000.
Interest income increased from $3,222,000 for the six
months ended December 31, 1996 to $5,123,000 for the six months
ended December 31, 1997, an increase of $1,901,000 or 59%. The
Company's change in interest income was due to several factors.
The Savings Bank has been decreasing its investment securities
and mortgage-backed securities, thereby reducing the Savings
Bank's interest income from those investments. Further, the
Savings Bank's average yield on its mortgage loan portfolio has
remained relatively stable. The Savings Bank is increasing its
overall interest income by originating additional mortgage loans
and consumer loans while also decreasing its investment in
investment securities and mortgage-backed securities.
Interest Expense. The Savings Bank's interest expense is
the interest paid on its deposits and borrowings. As the
Savings Bank has been attracting more deposit funds, interest
expense has been increased. The high demand for mortgage and
consumer lending has also caused the Savings Bank to secure
advances from the Federal Home Loan Bank to fund these loans.
Such expense increased from $1,032,000 for the three-month
period ended December 31, 1996, to $1,600,000 for the three-
month period ended December 31, 1997. Interest expense
increased $1,097,000, or 56.41%, from $1,945,000 for the six-
month period ended December 31, 1996 to $3,042,000 for the six-
month period ended December 31, 1997. Approximately half of the
increase, or $528,000, is attributable to an increase in the
Savings Bank's expense on Federal Home Loan Bank advances. The
increase in interest expense on FHLB advances is due to the
increase in the balance of this account, which has primarily
been used to fund mortgage loan demand.
Net Interest Income. During the three months ended
December 31, 1997, net interest income increased 60.82% to
$1,100,000 from $684,000 for the three months ended December 31,
1996. Net interest income increased from $1,277,000 for the six
months ended December 31, 1996 to $2,081,000 for the six months
period ended December 31, 1997, an increase of $804,000 or
62.96%. 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 and thus an increase
in interest income.
10<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
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 December 31, 1997, the
Savings Bank provided $136,000 for loan losses compared to
$28,000 during the three-month period ended December 31, 1996.
The provision for losses on loans increased from $58,000 for the
six months ended December 31, 1996 to $285,000 for the six
months ended December 31, 1997. 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 and an increase in
nonaccrual loans. 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 December 31, 1997,
the Company's allowance for loan losses represented 37.69% of
total non-performing loans and .34% of the outstanding balance
of total loans.
Non-Interest Income. Non-interest income for the three-
month period ended December 31, 1997 consisted entirely 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 December 31, 1997 was $223,000, an increase of
10.95% from $201,000 for the three-month period ended December
31, 1996. Non-interest income increased from $336,000 for the
six months ended December 31, 1996 to $543,000 for the six
months ended December 31, 1997. Non-interest income primarily
reflects the demand for loans in the Savings Bank's market area.
Non-Interest Expense. For the three-month period ended
December 31, 1997, as compared to the three-month period ended
December 31, 1996, total non-interest expense increased $180,000
from $561,000 to $741,000 or 32.09%. Non-interest expense
decreased from $1,578,000 for the six months ended December 31,
1996 to $1,432,000 for the six months ended December 31, 1997, a
decrease of $146,000 or 9.26%.
Total salaries and employee benefits were $326,000 for the
three-month period ended December 31, 1997, up $46,000 over the
three-month period ended December 31, 1996 level of $280,000.
Salaries and employee benefits decreased $5,000 from $649,000
for the six months ended December 31, 1996 to $644,000 for the
six months ended December 31, 1997. The increase for the three-
month period ended December 31, 1997 primarily reflects higher
salary levels due to the increased number of personnel. The
decrease in salaries and employee benefits expense for the six-
month period ended December 31, 1997, as compared to the six-
month period ended December 31, 1996, primarily reflects a one
time charge of $152,000 to record the funding of a retirement
plan for the directors of the Savings Bank during the three-
month period ended September 30, 1996.
11<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Occupancy and equipment expense was $98,000 for the three-
month period ended December 31, 1997, up $60,000 from the three-
month period ended December 31, 1996. For the six months ended
December 31, 1997, occupancy and equipment expenses increased
$93,000 as compared to the six months ended December 31, 1996.
These increases were primarily due to increased depreciation,
repairs and maintenance costs associated with the expansion of
the existing main office building and the opening of a new
branch office.
Other expenses of $259,000 increased $61,000, or 30.81%,
over the three-month period ended December 31, 1996 amount of
$198,000. The increase in other expenses is primarily due to
the increased operating costs associated with expansion of the
Savings Bank over the past year. For the six-month period ended
December 31, 1997, other expenses decreased $262,000 as
compared to the six-month period ended December 31, 1996. This
decrease was primarily attributable to the one time special
assessment to capitalize the Savings Association Insurance Fund
of $388,300 expensed in the period ended September 30, 1996.
Income Taxes. Income tax expense for the three-month
period ended December 31, 1997 and 1996 was $171,000 and
$113,000, respectively. For the six months ended December 31,
1997 and 1996, income tax expense increased $325,000 to $341,000
from $16,000. The changes in income tax expense are a result of
changes in net taxable income during the periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no business other than that of
the Savings Bank and does not currently have any material
funding commitments. The Company's principal sources of
liquidity are cash on hand, payments received on its loan to the
Company's Employee Stock Ownership Plan and dividends received
from the Savings Bank. The Savings Bank is subject to various
regulatory restrictions on the payment of dividends.
The Savings Bank is required by the Office of Thrift
Supervision regulations to maintain minimum levels of specified
liquid assets. On November 24, 1997, the OTS lowered this
liquidity requirement from 5 to 4 percent of the Savings Bank's
liquidity base. Additionally, the OTS streamlined the
calculations used to measure compliance with liquidity
requirements, expanded the types of investments considered to be
liquid assets, and reduced the liquidity base by modifying the
definition of net withdrawable account to exclude accounts with
maturities exceeding one year. The Savings Bank's liquidity
ratio for the month ended December 31, 1997 was 7.00% and its
liquidity ratio was 7.28% at December 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 $91,365,000 and $91,596,000 at
December 31, 1997 and June 30, 1997, respectively.
12<PAGE>
<PAGE>
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 $2,127,000 at
December 31, 1997 and $699,000 at June 30, 1997. The variations
in levels of cash and cash equivalents are influenced by deposit
flows and anticipated future deposit flows.
At December 31, 1997, the Savings Bank had $988,000 in
commitments to originate loans. At December 31, 1997, the
Savings Bank had $52,812,000 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.
13<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
NEW ACCOUNTING PRONOUNCEMENTS
Disclosures About Fair Value of Financial Instruments. In
December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 (SFAS No. 107) "Disclosure About Fair Value of
Financial Instruments." SFAS No. 107 requires all entities to
disclose the fair value of financial instruments (both assets
and liabilities recognized and not recognized in the financial
statements) for which it is practicable to estimate fair value,
except those financial instruments specifically excluded. The
disclosure shall be either in the body of the financial
statements or in the accompanying notes and shall also include
the methods and significant assumptions used to estimate the
fair value of financial instruments. Additional information is
required to be disclosed if it is not practicable for an entity
to estimate the fair value of a financial instrument or a class
of financial instruments as well as the reasons why it is not
practicable to estimate fair value. SFAS No. 107 is effective
for entities with less than $150 million in total assets in the
current statement of financial condition for financial
statements issued for the fiscal year beginning July 1, 1995.
Accounting By Creditors For Impairment of a Loan. During
May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan" that requires impaired loans be
measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or at the
loan's market price or fair value of collateral, if the loan is
collateral dependent. Adoption of SFAS No. 114, as amended by
SFAS No. 118, occurred on June 30, 1996, and is did not have a
material impact on the financial statements.
Earnings Per Share. In February 1997, the FASB issued SFAS
No. 128 which requires companies to present basic earnings per
share and, if applicable, diluted earnings per share, instead of
primary and fully diluted earnings per share, respectively.
Basic earnings per share is 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. Early application is not permitted.
14<PAGE>
<PAGE>
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
December 31, 1997, the registrant did not file any reports on
Form 8-K.
15<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Cumberland Mountain Bancshares, Inc.
By: /s/ James J. Shoffner
-------------------------------
James J. Shoffner
President
(Duly authorized representative)
By: /s/ J.D. Howard
-------------------------------
J.D. Howard
Secretary, Treasurer and Chief
Financial Officer
(Principal Financial Officer)
16
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