<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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
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 [ ]
As of January 31, 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 - December 31, 1998
INDEX
Page
----
Part I - Financial Information
----------------------
Item 1. Financial Statements
Consolidated Statement of Financial Condition
December 31, 1998 and June 30, 1998 2
Consolidated Statements of Income
Three and Six Months Ended December 31, 1998
and 1997 3
Consolidated Statements of Stockholders' Equity
Six Months Ended December 31, 1998 4
Consolidated Statements of Cash Flows
Six Months Ended December 31, 1998 and 1997 5-6
Notes to the Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-15
Part II - Other Information 16
-----------------
Signatures 17
<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
December 31, 1998 and June 30, 1998
ASSETS
------
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 3,124 $ 1,664
Investment securities, held-to-maturity -- 7
Investment securities available-for-sale, at
market value 3,374 3,398
Other investments, at market value 195 303
Mortgage-backed securities available-for-sale,
at market value 4,549 5,578
Loans, net of allowance for loan losses of
$1,088,000 at December 31, 1998 and
$798,000 at June 30, 1998 115,822 118,061
Accrued interest receivable 979 985
Real estate held for investment 1,049 620
Repossessed real estate 428 100
Federal Home Loan Bank (FHLB) stock, at cost 1,749 1,688
Premises and equipment, net 4,496 3,215
Prepaid expenses and other assets 596 287
-------- ---------
TOTAL ASSETS $136,360 $ 135,906
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $110,658 $ 97,719
Advances from FHLB 14,000 26,000
Notes payable 1,743 1,748
Accrued interest payable 285 283
Other liabilities 874 1,395
-------- ---------
Total liabilities 127,560 127,145
-------- ---------
Common stock, $0.01 per value, 8,000,000 shares
authorized, 678,800 shares issued and
outstanding 7 7
Additional paid-in capital 5,568 5,542
Retained earnings 4,605 4,845
Unearned ESOP shares (908) (1,553)
Unearned Stock Option shares (413) --
Accumulated other comprehensive income, net (59) (80)
-------- ---------
Total stockholders' equity 8,800 8,761
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $136,360 $ 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 Six Months
Ended December 31, Ended December 31,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Investment securities $ 71 $ 53 $ 115 $ 110
Mortgage-backed securities 65 88 142 182
Loans 2,566 2,545 5,100 4,817
FHLB stock 30 27 61 44
------- ------- ------- -------
Total interest income 2,732 2,713 5,418 5,153
INTEREST EXPENSE
Deposits 1,285 1,129 2,543 2,283
FHLB advances 314 440 684 711
Other borrowed money 46 33 92 50
------- ------- ------- -------
NET INTEREST INCOME 1,645 1,602 3,319 3,044
PROVISION FOR LOAN LOSSES 1,087 1,111 2,099 2,109
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 582 136 720 285
------- ------- ------- -------
505 975 1,379 1,824
------- ------- ------- -------
NON-INTEREST INCOME
Loan fees and service charges 166 239 338 522
Gains (losses) on sales of investment
securities -- -- 24 --
Gains (losses) on sales of repossessed assets -- -- (10) 20
Gain (losses) on sale of real estate held
for investment -- -- -- --
Other -- -- -- --
------- ------- ------- -------
Total non-interest income 166 239 352 542
------- ------- ------- -------
NET INTEREST AND NON-INTEREST INCOME 671 1,214 1,731 2,366
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 384 311 734 617
Data processing fees 47 70 119 110
SAIF deposit insurance premiums 21 21 43 40
Occupancy and equipment expense 179 110 284 191
Francise and other taxes 50 27 86 50
Marketing and other professional services 74 43 114 103
ESOP expense 52 -- 104 --
Other 332 186 534 371
------- ------- ------- -------
Total non-interest expense 1,139 768 2,018 1,482
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE (468) 446 (287) 884
INCOME TAX EXPENSE (133) 171 (47) 318
------- ------- ------- -------
NET INCOME $ (335) $ 275 $ (240) $ 566
======= ======= ======= =======
PER SHARE OF COMMON STOCK:
Earnings (basic) $(0.4940) $0.4700 $(0.3540) $0.9600
======== ======= ======== =======
Earnings (dilutive) $(0.4839) $0.4700 $(0.3466) $0.9600
======== ======= ======== =======
Dividends $ -- $ -- $ -- $ --
======== ======= ======== =======
</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 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 six month
period ended December 31, 1998 -- -- (240) -- -- -- (240)
Common stock issued -- -- -- -- -- -- --
ESOP shares transferred -- -- -- -- 605 -- 605
ESOP shares earned -- 26 -- -- 40 -- 66
Stock Option shares transferred -- -- -- -- -- (413) (413)
Decrease in unrealized loss on
investment securities available-
for-sale for the period ended
December 31, 1998, net of
deferred tax -- -- -- 21 -- -- 21
------- ------- ------- ------- ------- ------- ------
Balance at December 31, 1998 $ 7 $ 5,568 $ 4,605 $ (59) $ (908) $ (413) $8,800
======= ======= ======= ======= ======= ======= ======
</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>
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (240) $ 566
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 161 77
Amortization and accretion 7 11
FHLB stock dividend (61) (44)
Provision for loan losses 720 285
(Gains) losses on sales of investment securities (24) --
(Gains) losses on sales of other real estate 10 (20)
(Gains) losses on sales of real estate held
for investment -- --
Changes in assets and liabilities:
Accrued interest receivable 6 (154)
Prepaid expenses and other assets (308) (448)
Accrued interest payable 2 156
Other liabilities (521) 70
-------- --------
Net cash provided by (used in) operating
activities (248) 499
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of FHLB stock -- (1,059)
Principal collected on investment securities
available-for-sale 7 3
Purchases of investment securities available-
for-sale (2,000) --
Proceeds on maturities of investment securities
available-for-sale 2,000 71
Purchases of other investments -- (263)
Proceeds on sales of other investments 390 --
Principal collected on mortgage-backed securities 1,067 566
Purchase of real estate held for investment (429) (243)
Proceeds from sales of real estate held for
investment -- --
Net (increase) decrease in repossessed real estate (338) --
Proceeds from the sale of loans 975 2,776
Net (increase) decrease in purchased loans 116 235
Net (increase) decrease in loans exclusive
of loans purchased 428 (21,281)
Purchases of premises and equipment (1.442) (662)
-------- --------
Net cash provided by (used in) investing
activities 774 (19,857)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 12,939 (231)
Net increase (decrease) in advances from FHLB (12,000) 21,000
Net increase in other borrowings (5) 17
-------- --------
Net cash provided by (used in)
financing activities 934 20,786
</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>
1998 1997
-------- --------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,460 1,428
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,664 699
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,124 $ 2,127
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 777 $ 1,085
======= =======
Income taxes $ -- $ 271
======= =======
Loans transferred to other real estate during
the period $ 171 $ 343
======= =======
Total increase (decrease) in unrealized gain
(loss) on securities available for sale $ (21) $ (102)
======= =======
</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, 1998
(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 have been included in the
results of operations for the six months ended December 31,
19987 and 1997.
Operating results for the six month period ended December
31, 1998 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.
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as
follows (amounts in thousands):
December 31,
1998
------------
Balance, beginning of year $ 798
Provision for loan losses 720
Charge-offs, net of recoveries (430)
-------
Balance, December 31, 1998 $ 1,088
=======
7<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(UNAUDITED)
NOTE 3 - NONACCRUAL LOANS
Nonaccrual loans are as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ----------
<S> <C> <C>
Construction Mortgage Loans $ -- $ --
Permanent Mortgage Loans, Secured by:
1-4 Dwelling Units 1,427 1,031
5 or More Dwelling Units -- --
Nonresidential Property (Except Land) 32 572
Land -- 126
Nonmortgage Loans and Leases, Closed End:
Commercial 313 --
Auto 80 --
Other Consumer 142 --
------- -------
$ 1,994 $ 1,729
======= =======
</TABLE>
8<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 ("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 expects to complete testing of systems provided by
third party providers by March 31, 1999. 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 increased 0.34% from
$135,906,000 at June 30, 1998 to $136,360,000 at December 31,
1998. This small change in assets has resulted largely from the
increases in cash and cash equivalents of $1.5 million, or
87.74% to $3,124,000 at December 31, 1998 from $1,664,000 at
June 30, 1998 and premises and equipment of $1.3 million, or
39.85% to $4,496,000 at December 31, 1998 from $3,215,000 at
June 30, 1998. These increases were primarily offset by a
decrease of $2.2 million, or 1.90%, in loans. The increase in
premises and equipment represented the completion of the Savings
Bank's new branch location in Fountain City, Tennessee.
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 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 stagnant asset growth during the six months
ended December 31, 1998 has allowed for a reduction in
borrowings with the repayment of advances from the FHLB. FHLB
advances declined by $12,000,000 from $26,000,000 at June 30,
1998 to $14,000,000 at December 31, 1998. Total stockholders'
equity rose by $42,000, or 0.48%, principally due to the
reclassification of unearned employee stock ownership plan
("ESOP") and stock option shares.
9<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net Income The Company realized a net loss of $335,000
for the three-month period ended December 31, 1998, a decrease
from net income of $275,000 for the three-month period ended
December 31, 1997. This decrease was primarily the result of an
increase in the provision for loan losses of $446,000 coupled
with an increase in non-interest expense of $371,000 during the
quarter ended December 31, 1998. The Savings Bank's provision
for loan losses during the quarter ended December 31, 1998, were
due to the effort of management to raise the 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. The increase in non-interest expense resulted
primarily from the effect of additional personnel costs and
occupancy expenses associated with the new branch office,
expenses associated with the Company's ESOP, and fees for
professional services utilized during the three-month period
ended December 31, 1998.
For the six-month period ended December 31, 1998, the
Company realized a net loss of $240,000, a decrease from net
income of $566,000 for the six-month period ended December 31,
1997. This decrease was primarily the result of the above
mentioned factors along with a decrease in loan fees and service
charges of $190,000 during the six-month period ended December
31, 1998. The Savings Bank's loan growth slowed during the six-
month period ended December 31, 1998, 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.
Interest Income Total interest income for the three-month
period ended December 31, 1998 amounted to $2,732,000, an
increase of 0.70% from the Company's total interest income of
$2,713,000 for the three-month period ended December 31, 1997.
During the three-month period ended December 31, 1998 as
compared to the three-month period ended December 31, 1997, the
Company's interest income on its loan portfolio increased 0.83%
from $2,545,000 to $2,566,000; its interest income from its
mortgage-backed securities portfolio decreased 26.14% from
$88,000 to $65,000; interest income from its investment
securities portfolio increased 33.97% from $53,000 to $71,000;
and interest income from FHLB stock increased 11.12% from
$27,000 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 their investment in investment securities and
mortgage-backed securities.
Interest income increased from $4,817,000 for the six
months ended December 31, 1997 to $5,100,000 for the six months
ended December 31, 1998, an increase of $283,000 or 5.88%. 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.
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 increased
from $1,602,000 for the six-month period ended December 31,
1997, to $1,645,000 for the six-month period ended December 31,
1998. 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.
10
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Interest expense increased $275,000, or 9.04%, from
$3,044,000 for the six-month period ended December 31, 1997 to
$3,319,000 for the six-month period ended December 31, 1998.
Interest expense on deposits increased 11.39%, or $260,000 while
interest expense on FHLB advances decreased 3.80%, or $27,000
for the six-month period ended December 31, 1998. 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
December 31, 1998, net interest income decreased 2.16% to
$1,087,000 from $1,111,000 for the three months ended December
31, 1997. For the six-month period ended December 31, 1998,
net interest income decreased 0.48% to $2,099,000 from
$2,109,000 for the six-month period ended December 31, 1997.
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 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, 1998, the
Savings Bank provided $582,000 for loan losses compared to
$136,000 during the three-month period ended December 31, 1997.
The provision for losses on loans increased from $285,000 for
the six months ended December 31, 1997 to $720,000 for the six
months ended December 31, 1998. 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 over the past year. 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, 1998, the Company's allowance
for loan losses represented 54.57% of total non-accrual loans
and .93% of the outstanding balance of total loans.
Non-Interest Income Non-interest income for the three-
month period ended December 31, 1998 consisted solely 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, 1998 was $166,000, a decrease of
30.55% from $239,000 for the three-month period ended December
31, 1997. Non-interest income decreased from $542,000 for the
six months ended December 31, 1997 to $352,000, a 35.06%
decline, for the six months ended December 31, 1998. 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.
11<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Non-Interest Expense For the three-month period ended
December 31, 1998, as compared to the three-month period ended
December 31, 1997, total non-interest expense increased $371,000
from $768,000 to $1,139,000 or 48.31%. Non-interest expense
increased from $1,482,000 for the six months ended December 31,
1997 to $2,018,000 for the six months ended December 31, 1998,
an increase of $536,000 or 36.17%.
Total salaries and employee benefits were $384,000 for the
three-month period ended December 31, 1998, up $73,000 over the
three-month period ended December 31, 1997 level of $311,000.
Salaries and employee benefits increased $117,000 from $617,000
for the six months ended December 31, 1997 to $734,000 for the
six months ended December 31, 1998. The increase primarily
reflects higher salary levels due to the increased number of
personnel that has resulted from the overall growth of the
Savings Bank and the recently-opened Fountain City branch
office.
Occupancy and equipment expense was $179,000 for the
three-month period ended December 31, 1998, up $69,000 from the
three-month period ended December 31, 1997. For the six months
ended December 31, 1998, occupancy and equipment expenses
increased $93,000 as compared to the six months ended December
31, 1997. These increases were primarily due to increased
depreciation and maintenance costs associated with the October
opening of a new branch office in Fountain City, Tennessee.
Franchise and other taxes increased $23,000, or 85.19%, to
$50,000 for the three-month period ended December 31, 1998
compared to $27,000 for the three-month period ended December
31, 1997. For the six-month period ended December 31, 1998,
franchise and other taxes increased $36,000 as compared to the
six-month period ended December 31, 1997. 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 December 31, 1998 and a $104,000 expense for
the six-month period ended December 31, 1998 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.
Other expenses of $332,000 increased $146,000 over the
three-month period ended December 31, 1997 amount of $186,000.
For the six-month period ended December 31, 1998, other expenses
increased $163,000 as compared to the six-month period ended
December 31, 1997. The increase in other expenses is primarily
due to increases in legal and consulting fees as well as
collection expenses. Consulting fees increased $87,000 for the
three-month period ended December 31, 1997 as compared to the
three-month period ended December 31, 1997. This increase was
due to the employment of Professional Bank Services, Inc., a
Louisville, Kentucky consulting firm utilized to assist
management in strategic planning and loan review. The increase
in legal fees of $21,500 resulted from expenses related to
retirement planning and issues related to the construction of
the Savings Bank's new office structure in Fountain City. An
increase in collection expenses has resulted from management's
efforts to strengthen collection efforts in order to reduce non-
performing loans.
12<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Income Taxes Income tax expense for the three-month
period ended December 31, 1998 was a credit of $133,000 and for
the three-month period ended December 31, 1997 was $147,000.
For the six months ended December 31, 1998, income tax expense
was a credit of $47,000 compared to an expense of $318,000 for
the six months ended December 31, 1997. 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 month ended December 31, 1998 was 7.60% and its
liquidity ratio was 7.00% at December 31, 1997.
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 $110,658,000 and $97,719,000 at
December 31, 1998 and June 30, 1998, respectively.
The Savings Bank's most liquid assets are cash and cash
equivalents, which are cash on hand, amounts due from financial
institutions, federal funds sold, certificates of deposit with
other financial institutions that have an original maturity of
three months or less and money market mutual funds. The levels
of such assets are dependent on the Savings Bank's operating,
financing and investment activities at any given time. The
Savings Bank's cash and cash equivalents totaled $3,124,000 at
December 31, 1998 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 December 31, 1998, the Savings Bank had $272,000 in
commitments to originate loans and $500,000 in commitments to
purchase investment securities. At December 31, 1998, the
Savings Bank had $42,967,000 in certificates of deposit which
were scheduled to mature in one year or less. It is anticipated
that the majority of these certificates will be renewed in the
normal course of operations.
Middlesboro Federal is not aware of any trends or
uncertainties that will have or are reasonably expected to have
a material effect on the Savings Bank's liquidity or capital
resources. The Savings Bank has no current plans for material
capital improvements or other capital expenditures that would
require more funds than are currently on hand.
13<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein
have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial
position and operating results in terms of historical dollars,
without considering changes in the relative purchasing power of
money over time due to inflation.
Unlike most companies, the assets and liabilities of a
financial institution are primarily monetary in nature. As a
result, interest rates have a more significant impact on a
financial institution's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in
the same direction or in the same magnitude as the price of
goods and services, since such prices are affected by inflation.
In the current interest rate environment, liquidity and the
maturity structure of the Savings Bank's assets and liabilities
are critical to the maintenance of acceptable performance
levels.
NEW ACCOUNTING PRONOUNCEMENTS
Disclosures About Fair Value of Financial Instruments In
December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 (SFAS No. 107) "Disclosure About Fair Value of
Financial Instruments." SFAS No. 107 requires all entities to
disclose the fair value of financial instruments (both assets
and liabilities recognized and not recognized in the financial
statements) for which it is practicable to estimate fair value,
except those financial instruments specifically excluded. The
disclosure shall be either in the body of the financial
statements or in the accompanying notes and shall also include
the methods and significant assumptions used to estimate the
fair value of financial instruments. Additional information is
required to be disclosed if it is not practicable for an entity
to estimate the fair value of a financial instrument or a class
of financial instruments as well as the reasons why it is not
practicable to estimate fair value. SFAS No. 107 is effective
for entities with less than $150 million in total assets in the
current statement of financial condition for financial
statements issued for the fiscal year beginning July 1, 1995.
Accounting By Creditors For Impairment of a Loan During
May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan" that requires impaired loans be
measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or at the
loan's market price or fair value of collateral, if the loan is
collateral dependent. Adoption of SFAS No. 114, as amended by
SFAS No. 118, occurred on June 30, 1996, and is did not have a
material impact on the financial statements.
Earnings Per Share In February 1997, the FASB issued SFAS
No. 128 which requires companies to present basic earnings per
share and, if applicable, diluted earnings per share, instead of
primary and fully diluted earnings per share, respectively.
Basic earnings per share are computed without including
potential common shares, i.e. no dilutive effect. Diluted
earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares,
including options, warrants, convertible securities, and
contingent stock agreements. SFAS No. 128 is effective for
periods ending after December 15, 1997.
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.
14<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
15<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On October 21, 1998, the Registrant held its Annual Meeting
of Stockholders for the purpose of electing directors, ratifying
auditors and considering the approval of a stock option and
incentive plan and a management recognition plan. All matters
were approved. The results of the voting at the Annual Meeting
were as follows:
<TABLE>
<CAPTION>
PROPOSAL I - ELECTION OF DIRECTORS
<S> <C> <C>
NOMINEE VOTES FOR VOTES WITHHELD
Barry Litton 519,527 0
Reecie Stagnolia, Jr. 519,527 0
Raymond C. Walker 519,527 0
PROPOSAL II - RATIFICATION OF AUDITORS
VOTES FOR VOTES AGAINST ABSTENTIONS
519,527 0 0
PROPOSAL III - APPROVAL OF 1998 STOCK OPTION AND INCENTIVE PLAN
VOTES FOR VOTES AGAINST ABSTENTIONS
362,632 10,999 3,332
PROPOSAL IV - APPROVAL OF MANAGEMENT RECOGNITION PLAN
VOTES FOR VOTES AGAINST ABSTENTIONS
361,033 14,331 1,599
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27 - Financial Data Schedule (EDGAR only)
(b) Reports on Form 8-K. During the quarter ended
December 31, 1998, the registrant did not file any reports on
Form 8-K.
16<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.
Date: February 16, 1999 By: /s/ James J. Shoffner
-------------------------------
James J. Shoffner
President
(Duly authorized representative)
17
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 3,124
<INT-BEARING-DEPOSITS> 2,269
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,923
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 116,910
<ALLOWANCE> 1,088
<TOTAL-ASSETS> 136,360
<DEPOSITS> 110,658
<SHORT-TERM> 8,000
<LIABILITIES-OTHER> 1,159
<LONG-TERM> 7,743
<COMMON> 0
0
7
<OTHER-SE> 8,793
<TOTAL-LIABILITIES-AND-EQUITY> 136,360
<INTEREST-LOAN> 5,462
<INTEREST-INVEST> 318
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,418
<INTEREST-DEPOSIT> 2,543
<INTEREST-EXPENSE> 3,319
<INTEREST-INCOME-NET> 2,099
<LOAN-LOSSES> 720
<SECURITIES-GAINS> 24
<EXPENSE-OTHER> 2,018
<INCOME-PRETAX> (287)
<INCOME-PRE-EXTRAORDINARY> (287)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (240)
<EPS-PRIMARY> 0.354
<EPS-DILUTED> 0.347
<YIELD-ACTUAL> 3.31
<LOANS-NON> 1,994
<LOANS-PAST> 0
<LOANS-TROUBLED> 482
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 798
<CHARGE-OFFS> 492
<RECOVERIES> 62
<ALLOWANCE-CLOSE> 1,088
<ALLOWANCE-DOMESTIC> 1,088
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
