<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 March 31, 1999
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE ACT
From the transition period from ____________
to __________________
Commission File Number 0-22287
-------
CUMBERLAND MOUNTAIN BANCSHARES, INC.
(Exact name of small business issuer as specified in its
charter)
Tennessee 31-1499488
(State of Incorporation) (IRS Employer Identification No.)
1431 Cumberland Avenue, Middlesboro, Kentucky 40965
(Address of principal executive offices)
(606) 248-4584
(Telephone number)
Check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of April 30, 1999, there were 678,800 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
FORM 10-QSB March 31, 1999
INDEX
Page
----
Part I - Financial Information
---------------------
Item 1. Financial Statements
Consolidated Statement of Financial Condition
March 31, 1999 and June 30, 1998 2
Consolidated Statements of Income
Nine Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Stockholders' Equity
Nine Months Ended March 31, 1999 4
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1999 and 1998 5-6
Notes to the Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
Part II - Other Information 17
-----------------
Signatures 18
<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
March 31, 1999 and June 30, 1998
ASSETS
------
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 789 $ 1,664
Investment securities, held-to-maturity -- 7
Investment securities available-for-sale, at
market value 3,368 3,398
Other investments, at market value 195 303
Mortgage-backed securities available-for-sale,
at market value 3,963 5,578
Loans, net of allowance for loan losses of
$978,000 at March 31, 1999 and
$798,000 at June 30, 1998 112,665 118,061
Accrued interest receivable 934 985
Real estate held for investment 1,661 620
Repossessed real estate 60 100
Federal Home Loan Bank (FHLB) stock, at cost 1,779 1,688
Premises and equipment, net 4,460 3,215
Prepaid expenses and other assets 589 287
-------- ---------
TOTAL ASSETS $130,463 $ 135,906
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $107,933 $ 97,719
Advances from FHLB 10,000 26,000
Notes payable 1,734 1,748
Accrued interest payable 976 283
Other liabilities 778 1,395
-------- ---------
Total liabilities 121,421 127,145
-------- ---------
Common stock, $0.01 per value, 8,000,000 shares
authorized, 678,800 shares issued and
outstanding 7 7
Additional paid-in capital 5,581 5,542
Retained earnings 4,798 4,845
Unearned ESOP shares (869) (1,553)
Unearned Stock Option shares (413) --
Net unrealized loss on investment securities
available-for-sale, net of deferred tax (62) (80)
-------- ---------
Total stockholders' equity 9,042 8,761
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $130,463 $ 135,906
======== =========
</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 Nine Months
Ended March 31, Ended March 31,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Investment securities $ 61 $ 52 $ 176 $ 162
Mortgage-backed securities 61 88 203 270
Loans 2,442 2,625 7,542 7,442
FHLB stock 30 33 91 77
------- ------- ------- -------
Total interest income 2,594 2,798 8,012 7,951
INTEREST EXPENSE
Deposits 1,321 1,161 3,864 3,444
FHLB advances 185 465 869 1,176
Other borrowed money 34 17 126 67
------- ------- ------- -------
Total interest expense 1,540 1,643 4,859 4,687
NET INTEREST INCOME 1,054 1,155 3,153 3,264
PROVISION FOR LOAN LOSSES 87 605 807 809
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 967 550 2,346 2,374
------- ------- ------- -------
NON-INTEREST INCOME
Loan fees and service charges 233 207 571 729
Gains (losses) on sales of investment
securities -- 42 24 42
Gains (losses) on sales of repossessed assets (9) (1) (19) 19
Gain (losses) on sale of real estate held
for investment 26 40 26 40
Other 51 -- 51 --
------- ------- ------- -------
Total non-interest income 301 288 653 830
------- ------- ------- -------
NET INTEREST AND NON-INTEREST INCOME 1,268 838 2,999 3,204
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 380 356 1,114 973
Data processing fees 67 79 186 189
SAIF deposit insurance premiums 22 14 65 54
Occupancy and equipment expense 139 101 423 292
Franchise and other taxes 43 46 129 96
Marketing and other professional services 41 31 155 134
ESOP expense 52 -- 156 --
Other 229 236 763 607
------- ------- ------- -------
Total non-interest expense 973 863 2,991 2,345
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 295 (25) 8 859
INCOME TAX EXPENSE 102 (8) 55 310
------- ------- ------- -------
NET INCOME $ 193 $ (17) $ (47) $ 549
======= ======= ======= =======
PER SHARE OF COMMON STOCK:
Earnings (basic) $ 0.2840 $(0.0290) $(0.0690) $0.9310
======== ========= ======== =======
Earnings (dilutive) $(0.2775) $(0.0290) $(0.0676) $0.9310
======== ======= ======== =======
Dividends $ -- $ -- $ -- $ --
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
3 <PAGE>
<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Unrealized
Loss on
Investment Unearned
Additional Securities Unearned Stock
Common Paid-In Retained Available- ESOP Option
Stock Capital Earnings for Sale Shares Shares Total
------- --------- -------- ----------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ 7 $ 5,542 $ 4,845 $ (80) $(1,553) $ -- $ 8,761
Net income for the nine month
period ended March 31, 1999 -- -- (47) -- -- -- (47)
Common stock issued -- -- -- -- -- -- --
ESOP shares transferred -- -- -- -- 605 -- 605
ESOP shares earned -- 39 -- -- 79 -- 118
Stock Option shares transferred -- -- -- -- -- (413) (413)
Decrease in unrealized loss on
investment securities available-
for-sale for the period ended
March 31, 1999, net of
deferred tax -- -- -- 18 -- -- 18
------- ------- ------- ------- ------- ------- ------
Balance at March 31, 1999 $ 7 $ 5,581 $ 4,798 $ (62) $ (869) $ (413) $9,042
======= ======= ======= ======= ======= ======= ======
</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)
Nine Months Ended March 31,
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (47) $ 549
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 252 118
Amortization and accretion 9 15
FHLB stock dividend (91) (77)
Provision for loan losses 807 890
(Gains) losses on sales of investment securities (24) 42
(Gains) losses on sales of other real estate 19 (19)
(Gains) losses on sales of real estate held
for investment (26) (40)
Changes in assets and liabilities:
Accrued interest receivable 51 (213)
Prepaid expenses and other assets (302) (383)
Accrued interest payable 2 156
Other liabilities (617) (58)
-------- --------
Net cash provided by (used in) operating
activities 724 1,333
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of FHLB stock -- (1,059)
Principal collected on investment securities
held to maturity 7 3
Purchases of investment securities available-
for-sale (3,000) (999)
Proceeds on maturities of investment securities
available-for-sale 3,000 1,571
Purchases of other investments -- (356)
Proceeds on sales of other investments 390 486
Principal collected on mortgage-backed securities 1,649 901
Purchase of mortgage-backed securities
available-for-sale (510)
Purchase of real estate held for investment (1,266) (619)
Proceeds from sales of real estate held for
investment 245 321
Net (increase) decrease in repossessed real estate 40 --
Proceeds from the sale of loans 975 2,776
Net (increase) decrease in purchased loans 203 261
Net (increase) decrease in loans exclusive
of loans purchased 3,475 (25,223)
Purchases of premises and equipment (1,497) (1,059)
-------- --------
Net cash provided by (used in) investing
activities 4,201 (23,516)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 10,214 6,533
Net increase (decrease) in advances from FHLB (16,000) 17,500
Net increase (decrease) in other borrowings (14) 15
-------- --------
Net cash provided by (used in)
financing activities (5,800) 24,048
</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)
Nine Months Ended March 31,
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (875) 1,865
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,664 699
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 789 $ 2,564
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 1,472 $ 1,386
======= =======
Income taxes $ -- $ 396
======= =======
Loans transferred to other real estate during
the period $ 231 $ 343
======= =======
Total increase (decrease) in unrealized gain
(loss) on securities available for sale $ (18) $ (69)
======= =======
</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
March 31, 1999
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies that affect the significant
elements of the financial statements are summarized below:
BASIS OF PRESENTATION AND ORGANIZATION: 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, 1999 and 1998.
Operating results for the nine month period ended March 31,
1999 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1999.
Prior to March 31, 1997, the Cumberland Mountain
Bancshares, Inc. (the "Company") did not have any material
assets or liabilities and did not engage in any material
business operations. On March 31, 1997, the Company acquired
all of the outstanding stock of Middlesboro Federal Bank,
Federal Savings Bank (the "Bank") pursuant to the Plan of
Conversion of Cumberland Mountain Bancshares, M.H.C., the Bank's
former mutual holding company, and the Agreement and Plan of
Reorganization between the Company and the Bank. In connection
with the Conversion and Reorganization, the Company sold 439,731
shares of Common Stock in an initial public offering and issued
1.333 shares of Common Stock in exchange for each share of the
Bank's common stock then outstanding. The Company's financial
statements for the periods prior to March 31, 1997 consist of
the financial statements of the Bank.
CASH AND CASH EQUIVALENTS: The interest-bearing and
------------------------- noninterest-bearing components of
cash and cash equivalents are as follows:
March 31,
1999
--------
Interest bearing $ 295
Non-interest bearing 494
------
$ 789
======
7
<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(UNAUDITED)
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as
follows (amounts in thousands):
March 31,
1999
--------
Balance, beginning of year $ 798
Provision for loan losses 807
Charge-offs, net of recoveries (627)
-------
Balance, December 31, 1998 $ 978
=======
NOTE 3 - NONACCRUAL LOANS
Nonaccrual loans is as follows (amounts in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
-------- --------
<S> <C> <C>
Construction Mortgage Loans $ - $ -
Permanent Mortgage Loans, Secured by:
1-4 Dwelling Units 843 1,031
5 or More Dwellng Units - -
Nonresidential Property (Except Land) 32 572
Land - 126
Nonmortgage Loans and Leases, Closed End:
Commercial 225 -
Auto 34 -
Other Consumer 118 -
------ ------
$1,253 $1,729
====== ======
</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" 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.
YEAR 2000 PLANNING
Like most financial institutions, the Company's
principal subsidiary relies extensively on computers in
conducting its business. It has been widely reported that many
computer programs currently in use were designed without
adequately considering the impact of the upcoming change in
century on their date codes. If these design flaws are not
corrected, these computer applications may malfunction in the
year 2000. Subsequent to fiscal year end, the Company converted
its mission-critical processing systems to a new system, which
is Year 2000 compliant and is fully tested and fully certified.
The Company has substantially completed testing of systems
provided by third party providers. It estimates that the
additional costs associated with resolving all Year 2000
problems (other than the costs associated with the new
processing system) will not exceed $100,000. Since the decision
to convert to a new processing system was not related to Year
2000 compliance, the costs of such system (approximately
$450,000) has been capitalized. The Company has developed a
contingency plan to address the potential failure of the
Company's efforts (or the efforts of third parties on whom the
Company relies) to fully address the Year 2000 problem. The
contingency plan if mission critical systems fail on January 1,
2000 is to revert to a manual processing system until which time
that systems can be modified or new systems put in place. Staff
will be trained in December 1999 on the manual backup procedures
and written procedures and required forms will be available in
the appropriate work areas. The Company has also identified
certain non-technological systems, such as its HVAC and alarm
systems, which have embedded technology that could be affected
by the Year 2000 problem and has begun the process of testing
and/or determining what efforts are required to make such
systems Year 2000 compliant. The Year 2000 project team has
identified and contacted all vendors of such equipment and have
been assured within a reasonable comfort level that such systems
will continue to function beyond the Year 2000.
FINANCIAL CONDITION
Total assets of the Company have decreased 4.01% from
$135,906,000 at June 30, 1998 to $130,463,000 at March 31, 1999.
This decline in assets has resulted primarily from the decrease
in loans of $5.4 million, or 4.57% to $112,665,000 at March 31,
1999 from $118,061,000 at June 30, 1998. This decrease in loans
was primarily the result of higher loan prepayments coupled with
a decline in loan originations due to increased competition from
secondary market originators.
Management is continually attempting to grow the loan
portfolio while at the same time limiting the credit risk and
improving the rate sensitivity of the Savings Bank's
interest-earning assets. While the Savings Bank's primary
emphasis continues to be the origination of one to four family
adjustable rate mortgage loans secured by properties in its
primary market area, the Savings Bank will, from time to time,
invest excess funds in investment securities and mortgage-backed
securities with adjustable rates or terms to maturity of seven
years or less.
9<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION (CONTINUED)
The Company's allowed for a reduction in borrowings with
the repayment of advances from the FHLB. FHLB
advances declined by $16,000,000 from $26,000,000 at June 30,
1998 to $10,000,000 at March 31, 1999. Total stockholders'
equity rose by $281,000, or 3.21%, principally due to the
reclassification of unearned employee stock ownership plan
("ESOP") and stock option shares.
RESULTS OF OPERATIONS
Net Income The Company realized net income of $193,000 for
the three-month period ended March 31, 1999. This compared to a
net loss of $17,000 for the three-month period ended March 31,
1998. This increase in net income was primarily the result of a
decrease in the provision for loan losses of $518,000 from
$605,000 for the three-month period ended March 31, 1998 to
$87,000 for the three-month period ended March 31, 1999. The
Savings Bank's higher provision for loan losses during the
quarter ended March 31, 1998, was due to the effort of
management to raise the amount of allowances for loan losses to
a level more consistent with the type of lending conducted and
past due loans in the Savings Bank's portfolio.
For the nine-month period ended March 31, 1999, the Company
realized a net loss of $47,000, a decrease from net income of
$549,000 for the nine-month period ended March 31,
1998. This decrease was primarily the result of a decrease in
loan fees and service charges of $158,000 during the nine-month
period ended March 31, 1999 combined with an increase of
$646,000 in non-interest expense during this same period. The
Savings Bank's loan growth has slowed during the nine-month
period ended March 31, 1999, resulting in substantially less
origination fee income. This reduction in loan growth was
primarily due to management's efforts to strengthen the
portfolio by tightening underwriting standards and collection
efforts as well as increased competition from secondary market
originators.
Interest Income Total interest income for the three-month
period ended March 31, 1999 amounted to $2,594,000, a decrease
of 7.29% from the Company's total interest income of
$2,798,000 for the three-month period ended March 31, 1998.
During the three-month period ended March 31, 1999 as compared
to the three-month period ended March 31, 1998, the Company's
interest income on its loan portfolio decreased 6.98% from
$2,625,000 to $2,442,000; its interest income from its
mortgage-backed securities portfolio decreased 30.69% from
$88,000 to $61,000; interest income from its investment
securities portfolio increased 17.31% from $52,000 to $61,000;
and interest income from FHLB stock decreased 9.09% from $33,000
to $30,000. The Savings Bank is attempting to increase the
overall interest income of the Company by originating additional
mortgage loans and consumer loans while also maintaining its
investment in investment securities and mortgage-backed
securities.
Interest income increased from $7,951,000 for the nine
months ended March 31, 1998 to $8,012,000 for the nine months
ended March 31, 1999, an increase of $61,000 or 0.77%. The
Savings Bank has been reinvesting the proceeds from payments on
lower yielding mortgage-backed securities into higher yielding
mortgage and consumer loans resulting in higher interest
income on loans and lower interest income on mortgage-backed
securities. Further, the Savings Bank's average yield on its
mortgage loan portfolio has remained relatively stable.
10<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
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 on these funds has increased. The slowing demand for
mortgage and consumer lending has also allowed the Savings Bank
to repay advances from the FHLB. Interest expense decreased
from $1,643,000 for the three-month period ended March 31, 1998,
to $1,540,000 for the three-month period ended March 31, 1999.
The decrease in interest expense on FHLB advances is due to the
decrease in the balance of this account, which had primarily
been used to fund mortgage and consumer loan demand.
Interest expense increased $172,000, or 3.67%, from
$4,687,000 for the nine-month period ended March 31, 1998 to
$4,859,000 for the nine-month period ended March 31, 1999.
Interest expense on deposits increased 12.20%, or $420,000 while
interest expense on FHLB advances decreased 26.11%, or $307,000
for the nine-month period ended March 31, 1999. The increase in
interest expense on deposits is directly attributable to the
growth in deposits experienced over this time period,
particularly at the new branch facility in Fountain City,
Tennessee.
Net Interest Income During the three months ended March
31, 1999, net interest income decreased 8.75% to $1,054,000 from
$1,155,000 for the three months ended March 31,
1998. For the nine-month period ended March 31, 1999, net
interest income decreased 3.40% to $3,153,000 from $3,264,000
for the nine-month period ended March 31, 1998. This decrease
was due primarily to the reduction in loan growth by the Savings
Bank coupled with the replacement of lower-cost short-term FHLB
advances with higher-cost longer-term deposits at the Savings
Bank's new branch office in Fountain City.
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, 1999, the
Savings Bank provided $87,000 for loan losses compared to
$605,000 during the three-month period ended March 31, 1998.
The provision for losses on loans decreased from $890,000 for
the nine months ended March 31, 1998 to $807,000 for the nine
months ended March 31, 1999. The provision for loan loss
amounts represent management's effort to maintain an adequate
reserve against losses. In determining the appropriate
provision, management considers a number of factors, including
specific loans in the Savings Bank's portfolio, real estate
market trends in the Company's market area, economic conditions,
interest rates, and other conditions that may affect the
borrower's ability to comply with repayment terms. At March 31,
1999, the Company's allowance for loan losses represented 78.06%
of total non-accrual loans and .86% of the outstanding balance
of total loans.
11<PAGE>
<PAGE>
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, 1999 consisted primarily of
loan fees and service charges. The Savings Bank's loan fees and
service charges fluctuate as loan demand in the market area
changes. The Company's non-interest income for the three-month
period ended March 31, 1999 was $301,000, an increase of 4.52%
from $288,000 for the three-month period ended March 31, 1998.
Included in non-interest income for the three-month period ended
March 31, 1999 is a $26,000 gain on the sale of real estate held
for development and a $51,000 fee required to be paid by an
officer of the Company in an amount equal to his profit on the
sale of shares of Common Stock such officer acquired in excess
of regulatory limitations.
Non-interest income decreased from $830,000 for the nine
months ended March 31, 1999 to $653,000, a 21.33% decline, for
the nine months ended March 31, 1999. Non-interest income
primarily reflects the demand for loans in the Savings Bank's
market area as well as the aggressiveness of management in
obtaining these loans.
Non-Interest Expense For the three-month period ended
March 31, 1999, as compared to the three-month period ended
March 31, 1998, total non-interest expense increased $110,000
from $863,000 to $973,000 or 12.75%. Non-interest expense
increased from $2,345,000 for the nine months ended March 31,
1998 to $2,991,000 for the nine months ended March 31, 1999,
an increase of $646,000 or 27.55%.
Total salaries and employee benefits were $380,000 for the
three-month period ended March 31, 1999, up $24,000 over the
three-month period ended March 31, 1998 level of $356,000.
Salaries and employee benefits increased $141,000 from $973,000
for the nine months ended March 31, 1998 to $1,114,000 for the
nine months ended March 31, 1999. The increase primarily
reflects higher salary levels due to the increased number of
personnel that has resulted from the recently opened Fountain
City branch office.
Occupancy and equipment expense was $139,000 for the
three-month period ended March 31, 1999, up $38,000 from the
three-month period ended March 31, 1998. For the nine months
ended March 31, 1999, occupancy and equipment expenses increased
$131,000 as compared to the nine months ended March 31, 1998.
These increases were primarily due to increased depreciation and
maintenance costs associated with the October 1998 opening of a
new branch office in Fountain City, Tennessee.
Franchise and other taxes increased $33,000, or 34.38%, to
$129,000 for the nine-month period ended March 31, 1999,
compared to $96,000 for the nine-month period ended March 31,
1998. This increase is due mainly to the increase in deposits
over the past twelve months, which have resulted in a higher
assessment level for state taxes.
The Company recognized a $52,000 expense for the
three-month period ended March 31, 1999 and a $156,000 expense
for the nine-month period ended March 31, 1999 as a result of
the release of shares for allocation of the Company's ESOP. The
Company makes annual contributions to the ESOP equal to the
ESOP's debt service less dividends received by the ESOP. As the
debt is repaid, shares are released from collateral and
allocated to active employees, based on the proportion of debt
service paid during the year. As shares are released from
collateral, the Company reports compensation expense equal to
the current market price of shares and the shares become
outstanding.
12<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Other expenses of $229,000 decreased $7,000 over the
three-month period ended March 31, 1998 amount of $236,000. For
the nine-month period ended March 31, 1999, other expenses
increased $156,000 as compared to the nine-month period ended
March 31, 1998. The increase in other expenses for the
nine-month period ending March 31, 1999, is primarily due to
increases in legal and consulting fees as well as collection
expenses. Consulting fees increased $106,000 for the nine-month
period ended March 31, 1999 as compared to the nine-month
period ended March 31, 1998. This increase was primarily due to
the employment of Professional Bank Services, Inc., a
Louisville, Kentucky consulting firm utilized to assist
management in strategic planning and loan review. An increase
in collection expenses has resulted from management's efforts to
strengthen collection efforts in order to reduce non-performing
loans.
Income Taxes Income tax expense for the three-month period
ended March 31, 1999 was $102,000 compared to a credit of $8,000
for the three-month period ended March 31, 1998. For the nine
months ended March 31, 1999, income tax expense decreased
$255,000 to $55,000 compared to $310,000 for the nine months
ended March 31, 1998. 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 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, 1999 was 5.96% and its
liquidity ratio was 6.41% at March 31, 1998.
The Savings Bank's principal sources of funds for
investments and operations are net income, deposits from its
primary market area, principal and interest payments on loans
and mortgage-backed securities and proceeds from maturing
investment securities. Its principal funding commitments are
for the origination or purchase of loans and the payment of
maturing deposits. Deposits are considered a primary source of
funds supporting the Savings Bank's lending and investment
activities. Deposits were $107,933,000 and $97,719,000 at March
31, 1999 and June 30, 1998, respectively.
13<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 $789,000 at
March 31, 1999 and $1,664,000 at June 30, 1998. The variations
in levels of cash and cash equivalents are influenced by deposit
flows and anticipated future deposit flows.
At March 31, 1999, the Savings Bank had $2,495,000 in
commitments to originate loans. At March 31, 1999, the Savings
Bank had $64,150,000 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.
14
<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 it did not have a
material impact on the financial statements.
Earnings Per Share. In February 1997, the FASB issued SFAS
------------------ No. 128 which requires companies to
present basic earnings per share and, if applicable, diluted
earnings per share, instead of primary and fully diluted
earnings per share, respectively. Basic earnings per share are
computed without including potential common shares, i.e. no
dilutive effect. Diluted earnings per share is computed taking
into consideration common shares outstanding and dilutive
potential common shares, including options, warrants,
convertible securities, and contingent stock agreements. SFAS
No. 128 is effective for periods ending after December 15, 1997.
Comprehensive Income. In June, 1997, the FASB issued SFAS
-------------------- No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose
financial statements. This statement requires that all items
that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements.
This statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement
of financial position. This statement is effective for fiscal
years beginning after December 15, 1997.
15
<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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<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
------------------- March 31, 1999, the registrant
did not file any reports on Form 8-K.
17<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
Date: May 12, 1999
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<FISCAL-YEAR-END> JUN-30-1999
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