<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, 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 January 31, 2000, there were 680,558 shares of common
stock outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
FORM 10-QSB - December 31, 1999
INDEX
Page
----
Part I - Financial Information
---------------------
Item 1. Financial Statements
Consolidated Statement of Financial Condition
December 31, 1999 and June 30, 1999 2
Consolidated Statements of Income
Three and Six Months Ended December 31, 1999
and 1998 3
Consolidated Statements of Stockholders' Equity
Six Months Ended December 31, 1999 4
Consolidated Statements of Cash Flows
Six Months Ended December 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 9-15
Part II - Other Information 16
-----------------
Signatures 17
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<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands)
December 31, 1999 and June 30, 1999
ASSETS
------
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 4,493 $ 1,317
Investment securities, held-to-maturity - -
Investment securities available-for-sale,
at market value 3,636 3,302
Other investments, held to maturity (market
value $180,000 at December 31, 1999 and
$195,000 at June 30, 1999) 180 195
Mortgage-backed securities available-for-sale,
at market value 3,116 3,579
Loans, net of allowance for loan losses of
$1,288,000 at December 31, 1999
and $1,576,000 at June 30, 1999 109,723 111,612
Accrued interest receivable 809 934
Real estate held for investment 1,551 1,236
Repossessed property 1,068 739
Federal Home Loan Bank (FHLB) stock, at cost 1,876 1,810
Premises and equipment, net 4,439 4,587
Prepaid expenses and other assets 1,563 283
-------- --------
TOTAL ASSETS $132,454 $129,594
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits 108,595 106,905
Advances from FHLB 12,500 12,000
Notes payable 1,615 1,674
Accrued interest payable 161 137
Other liabilities 683 170
-------- --------
Total liabilities 123,554 120,886
-------- --------
Common stock, $0.01 per value, 8,000,000 shares
authorized, 680,093 shares issued and
outstanding 7 7
Treasury stock, 5,200 shares outstanding, at cost (88) (88)
Additional paid-in capital 5,537 5,560
Retained earnings 4,764 4,490
Unearned ESOP shares (860) (897)
Unearned Stock Option shares (241) (241)
Undistributed MRP shares (90) --
Net unrealized loss on investment securities
available-for-sale, net of deferred tax (129) (123)
-------- --------
Total stockholders' equity 8,900 8,708
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $132,454 $129,594
======== ========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
2
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
-----------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Investment securities $ 56 $ 71 $ 116 $ 115
Mortgage-backed securities 48 65 98 142
Loans 2,295 2,566 4,605 5,100
FHLB Stock 32 30 65 61
------- -------- ------- --------
Total interest income 2,431 2,732 4,884 5,418
INTEREST EXPENSE
Deposits 1,264 1,285 2,519 2,543
FHLB advances 167 314 327 684
Other borrowed money 35 46 71 92
------- -------- ------- --------
Total interest expense 1,466 1,645 2,917 3,319
NET INTEREST INCOME 965 1,087 1,967 2,099
PROVISION FOR LOAN LOSSES 98 582 160 720
------- -------- ------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 867 505 1,807 1,379
------- -------- ------- --------
NON-INTEREST INCOME
Loan fees and service charges 204 166 405 338
Gains (losses) on sales of investment
securities (1) -- (1) 24
Gains (losses) on sales of
repossessed assets (13) -- (23) (10)
Gains (losses) on sales of real
estate held for investment (5) -- 11 --
Other 9 -- 10 --
------- -------- ------- --------
Total non-interest income 194 166 402 352
------- -------- ------- --------
NET INTEREST AND NON-INTEREST INCOME 1,061 671 2,209 1,731
------- -------- ------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 374 384 747 734
Data processing fees 60 47 114 119
SAIF deposit insurance premiums 24 21 48 43
Occupancy and equipment expense 144 179 290 284
Franchise and other taxes 34 50 66 86
Marketing and other professional
services 47 74 80 114
ESOP expense 13 52 26 104
Other 209 332 433 534
------- -------- ------- --------
Total non-interest expense 905 1,139 1,804 2,018
------- -------- ------- --------
INCOME BEFORE INCOME TAX EXPENSE 156 (468) 405 (287)
INCOME TAX EXPENSE 48 (133) 131 (47)
------- -------- ------- --------
NET INCOME $ 108 $ (335) $ 274 $ (240)
------- -------- ------- --------
PER SHARE OF COMMON STOCK:
Earnings (basic) $0.1895 $(0.5818) $0.4792 $(0.4153)
======= ======== ======= ========
Earnings (dilutive) $0.1727 $(0.5577) $0.4372 $(0.3922)
======= ======== ======= ========
Dividends $ - $ - $ - $ -
======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
3
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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
------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1999 $ 7 $ 5,560 $ 4,490 $ (123) $ (897)
Net income for the six month
period ended December 31, 1999 -- -- 274 -- --
Common stock issued -- -- -- -- --
ESOP shares transferred -- -- -- -- --
ESOP shares earned -- (11) -- -- 37
Stock Option shares transferred -- -- -- -- --
MRP shares acquired -- (12) -- -- --
Decrease in unrealized loss on
investment securities available-
for-sale for the period ended
December 31, 1999, net of
deferred tax -- -- -- (6) --
------- ------- ------- ------- -------
Balance at September 30, 1999 $ 7 $ 5,537 $ 4,764 $ (129) $ (860)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Unearned
Stock Unearned
Option MRP Treasury
Shares Shares Stock Total
------- --------- -------- -------
<S> <C> <C> <C> <C>
Balance at June 30, 1999 $ (241) $ -- $ (88) $ 8,708
Net income for the six month
period ended December 31, 1999 -- -- -- 274
Common stock issued -- -- -- --
ESOP shares transferred -- -- -- --
ESOP shares earned -- -- -- 26
Stock Option shares transferred -- -- -- --
MRP shares acquired -- (90) -- (102)
Decrease in unrealized loss on
investment securities available-
for-sale for the period ended
December 31, 1999, net of
deferred tax -- -- -- (6)
------- ------- ------- -------
Balance at December 31, 1999 $ (241) $ (90) $ (88) $ 8,900
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial
statements
4
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<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Six Months Ended December 31,
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 274 $ (240)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation 203 161
Amortization and accretion 6 7
FHLB stock dividend (66) (61)
Provision for loan losses 160 720
(Gains) losses on sales of investment securities 1 (24)
(Gains) losses on sales of other repossessed
assets 23 10
(Gains) losses on sales of property held for
investment (11) --
Changes in assets and liabilities:
Accrued interest receivable 125 6
Prepaid expenses and other assets (1,280) (308)
Accrued interest payable 24 2
Other liabilities 513 (521)
-------- --------
Net cash provided by (used in) operating
activities (28) (248)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of FHLB stock -- --
Principal collected on investment securities
held-to-maturity 7
Purchases of investment securities available-
for-sale (1,000) (2,000)
Proceeds on maturities of investment securities
available-for-sale 500 2,000
Principal collected on investment securities
available-for-sale 140 --
Purchases of other investments -- --
Proceeds on sales of other investments 15 390
Principal collected on mortgage-backed securities 471 1,067
Purchase of real estate held for investment (483) (429)
Proceeds from sales of property held for
investment 183 --
Purchase of loans (3,776) --
Proceeds from the sale of loans -- 975
Net (increase) decrease in purchased loans 2,817 116
Net (increase) decrease in loans exclusive
of loans purchased 2,678 428
Net (increase) decrease in repossessed property (352) (338)
Purchases of premises and equipment (55) (1,442)
-------- --------
Net cash provided by (used in) investing
activities 1,138 774
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 1,690 12,939
Net increase (decrease) in advances from FHLB 500 (12,000)
Net increase (decrease) in other borrowings (59) (5)
ESOP shares earned, net of tax 38 --
Purchase of shares for MRP (103) --
-------- --------
Net cash provided by (used in)
financing activities 2,066 934
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Six Months Ended December 31,
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,176 1,460
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,317 1,664
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,493 $ 3,124
======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 631 $ 777
======= =======
Income taxes $ -- $ --
======= =======
Loans transferred to other repossessed property
during the period $ 322 $ 171
======= =======
Total increase (decrease) in unrealized gain
(loss) on securities available for sale $ 9 $ (21)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
6
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(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, 1999 and 1998.
Operating results for the six month period ended December 31,
1999 is not necessarily indicative of the results that may be
expected for the year ending June 30, 2000.
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):
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Balance, beginning of year $ 1,576
Provision for loan losses 160
Charge-offs, net of recoveries (448)
--------
Balance, December 31, 1999 $ 1,288
========
</TABLE>
7
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(UNAUDITED)
NOTE 3 - NONACCRUAL LOANS
Nonaccrual loans are as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ --------
<S> <C> <C>
Construction Mortgage Loans $ -- $ --
Permanent Mortgage Loans, Secured by:
1-4 Dwelling Units 1,204 872
5 or More Dwellng Units -- --
Nonresidential Property (Except Land) 75 265
Land 10 --
Nonmortgage Loans and Leases, Closed End:
Commercial 804 258
Auto 59 71
Mobile Home 54 --
Other Consumer 35 62
------ ------
$2,241 $1,528
====== ======
</TABLE>
8
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<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.
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein,
the following discussion contains forward-looking statements
that involve risks and uncertainties. Economic circumstances,
the Company's operations and the Company's actual results could
differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include
changes in the economy and interest rates in the nation and the
Company's market area generally. Some of the forward-looking
statements included herein are the statements regarding
management's determination of the amount and adequacy of the
allowance for loan losses on loans, the effect of certain recent
accounting pronouncements.
FINANCIAL CONDITION
Total assets of the Company have increased 2.21% from
$129,594,000 at June 30, 1999 to $132,454,000 at December 31,
1999. This increase in assets has resulted primarily from the
increase in cash and cash equivalents of $3.2 million, or
241.15% to $4,493,000 at December 31, 1999 from $1,317,000 at
June 30, 1999. This increase in cash and cash equivalents was
primarily the result of management's liquidity planning process
for potential cash needs by the Savings Bank's deposit customers
related to the Year 2000.
It was anticipated that unusual market responses to the
century date change could have led to a perceived need for extra
liquidity by the Savings Bank's customers during the century
date change period. In an effort to be prepared for that
possible situation, management proactively managed the possible
liquidity needs of the Savings Bank to ensure that no
interruption in service to its customers was realized.
Management believes it is essential to maintain the highest
degree of confidence in the Savings Bank and the Savings Bank's
ability to meet its customer's demands and is happy to report
that no significant disruption in service or cash availability
was experienced.
The Company's increase in liquidity during the six months
ended December 31, 1999 was partially financed by an increase in
borrowings of advances from the FHLB. FHLB advances increased
by $500,000 from $12,000,000 at June 30, 1999 to $12,500,000 at
September 30, 1999. Total stockholders' equity rose by
$192,000, or 2.2%, principally due to net income realized during
the six months ended December 31, 1999.
9
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net Income The Company realized net income of $108,000
----------
for the three-month period ended December 31, 1999. This
compared to a net loss of $333,000 for the three-month period
ended December 31, 1998. This increase in net income was
primarily the result of a decrease in the provision for loan
losses of $484,000 from $582,000 for the three-month period
ended December 31, 1998 to $98,000 for the three-month period
ended December 31, 1999. The decrease in provision for loan
losses is the result of management's efforts in prior quarters
to increase the amount of allowances for loan losses to levels
sufficient to absorb any losses suffered in future quarters.
Management is continuing their efforts to strengthen the
portfolio by tightening underwriting standards and collection
efforts.
For the six-month period ended December 31, 1999, the
Company realized net income of $274,000, compared to a net loss
of $238,000 for the six-month period ended December 31, 1998.
This change in net income was primarily the result of a decrease
in the above mentioned provision for loan losses along with a
reduction in non-interest expense of $212,000 during the six-
month period ended December 31, 1999 as compared to the six-
month period ended December 31, 1998. This reduction in non-
interest expense resulted primarily from a decrease in the
amount of legal and consulting costs incurred by the Savings
Bank and other cost-cutting efforts by management to control
operating expenses.
Interest Income Total interest income for the three-month
---------------
period ended December 31, 1999 amounted to $2,431,000, a
decrease of 11.02% from the Company's total interest income of
$2,732,000 for the three-month period ended December 31, 1998.
During the three-month period ended December 31, 1999 as
compared to the three-month period ended December 31, 1998, the
Company's interest income on its loan portfolio decreased 10.56%
from $2,566,000 to $2,295,000; its interest income from its
mortgage-backed securities portfolio decreased 26.15% from
$65,000 to $48,000; interest income from its investment
securities portfolio decreased 21.13% from $71,000 to $56,000;
and interest income from FHLB stock increased 6.67% from $30,000
to $32,000. The reduction in interest income on the Company's
loan portfolio has occurred primarily due to the shrinkage of
the loan portfolio combined with a $713,000 increase in non-
accrual loans.
Interest income decreased from $5,418,000 for the six-
months ended December 31, 1998 to $4,884,000 for the six-months
ended December 31, 1999, a decrease of $534,000 or 9.86%. This
decrease resulted primarily from the decrease in interest income
on loans of $495,000 or 9.71%. The major factors contributing
to this decrease include the shrinkage of the loan portfolio and
the increase in non-accrual loans as mentioned above.
Management has undertaken efforts to strengthen the quality of
the loan portfolio and increase collection efforts thereby
resulting in the origination of fewer loans over the past six-
month period.
Interest Expense Interest expense decreased from
----------------
$1,645,000 for the three-month period ended December 31, 1998,
to $1,466,000 for the three-month period ended December 31,
1999. During the three-month period ended December 31, 1999 as
compared to the three-month period ended December 31, 1998, the
Company's interest expense on FHLB advances decreased 46.82%
from $314,000 to $167,000. This decrease in interest expense on
FHLB advances is due to the decrease in the average balance of
this account during the quarter, which had primarily been used
to fund mortgage and consumer loan demand.
10
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CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS (CONTINUED)
Interest expense decreased $402,000, or 12.11%, from
$3,319,000 for the six-month period ended December 31, 1998 to
$2,917,000 for the six-month period ended December 31, 1999.
Interest expense on deposits decreased 0.98%, or $24,000 while
interest expense on FHLB advances decreased 52.19%, or $357,000
for the six-month period ended December 31, 1999. Due to a
decrease in loans being originated during the period, additional
borrowings were not necessary to fund the loan demand being
experienced.
Net Interest Income During the three months ended
-------------------
December 31, 1999, net interest income decreased 11.22% to
$965,000 from $1,087,000 for the three months ended December 31,
1998. For the six-month period ended December 31, 1999, net
interest income decreased 6.29% to $1,967,000 from $2,099,000
for the six-month period ended December 31, 1998. This decrease
was due primarily to the reduction in loan originations by the
Savings Bank.
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 December 31, 1999, the
Savings Bank provided $98,000 for loan losses compared to
$582,000 during the three-month period ended December 31, 1998.
The provision for losses on loans decreased from $720,000 for
the six months ended December 31, 1998 to $160,000 for the six
months ended December 31, 1999. The decrease in provision for
loan losses for these periods represent management's proactive
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 December 31, 1999, the Company's allowance
for loan losses represented 57.47% of total non-accrual loans
and 1.16% of the outstanding balance of total loans.
Non-Interest Income Non-interest income for the three-
-------------------
month period ended December 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 and as the fee structure is adjusted by management in
relation to market demand. The Company's non-interest income
for the three-month period ended December 31, 1999 was $194,000,
an increase of 16.87% from $166,000 for the three-month period
ended December 31, 1998. Non-interest income increased from
$352,000 for the six months ended December 31, 1998 to $402,000,
a 14.2% increase, for the six months ended December 31, 1999.
Loan fees and service charges for the three-month period
ended December 31, 1999 increased $38,000, or 22.89%, to
$204,000 from $166,000 for the three-month period ended December
31, 1998 and $67,000, or 19.82% for the six-month period ended
December 31, 1999 as compared to the six-month period ended
December 31, 1998. These increases were attributable to an
increase in loan fees charged to new loan customers, an increase
in deposit fees primarily related to the increase in the level
of deposits, and an increase in the collection of late charge
fees resulting from improved collection efforts.
11
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<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, 1999, as compared to the three-month period ended
December 31, 1998, total non-interest expense decreased $234,000
from $1,139,000 to $905,000 or 20.54%. Non-interest expense
decreased from $2,018,000 for the six months ended December 31,
1998 to $1,804,000 for the six months ended December 31, 1999, a
decrease of $214,000 or 10.6%.
Total data processing fees were $60,000 for the three-
month period ended December 31, 1999, up $13,000 over the three-
month period ended December 31, 1998 level of $47,000.
Occupancy and equipment expense was $144,000 for the three-month
period ended December 31, 1999, down $35,000 from the three-
month period ended December 31, 1998. These changes were due to
the conversion in August 1998 of the Savings Bank's core
processing system to an in-house PC-based system from an
outsource environment. When this event occurred, substantial
amounts of new equipment was purchased and is now being included
in the data processing costs for the Company thereby reducing
the occupancy and equipment expense.
The Company recognized an Employee Stock Ownership Plan
expense of $13,000 for the three-month period ended December 31,
1999, and a $26,000 expense for the six-month period ended
December 31, 1999, compared to 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. 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 $209,000 decreased $123,000 over the
three-month period ended December 31, 1998 amount of $332,000.
For the six-month period ended December 31, 1999, other expenses
decreased $101,000 as compared to the six-month period ended
December 31, 1998. The decrease in other expenses is primarily
due to a decrease in legal and consulting fees. Consulting fees
declined $68,000 for the three-month period ended December 31,
1999 as compared to the three-month period ended December 31,
1998. During the quarter ended December 31, 1998, management
utilized the services of Professional Bank Services, Inc., a
Louisville, Kentucky consulting firm to assist in implementing a
strategic plan and loan review process. Legal fees declined by
$29,000 during the three-month period ending December 31, 1999.
These fees during the three-month period ending December 31,
1998 were result of retirement planning costs and issues related
to the construction of the Savings Bank's new office structure
in Fountain City, Tennessee.
Income Taxes Income tax expense for the three-month
------------
period ended December 31, 1999 was $48,000 compared to a credit
of $133,000 for the three-month period ended December 31, 1998.
For the six months ended December 31, 1999, income tax expense
was $131,000 compared to a credit of $47,000 for the six month
period ended December 31, 1998. The changes in income tax
expense are a result of changes in net taxable income during the
periods.
12
<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 December 31, 1999 was 7.29% and its
liquidity ratio was 7.60% at December 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 Banks lending and investment
activities. Deposits were $108,595,000 and $106,905,000 at
December 31, 1999 and June 30, 1999, respectively.
The Savings Bank's most liquid assets are cash and cash
equivalents, which are cash on hand, amounts due from financial
institutions, federal funds sold, certificates of deposit with
other financial institutions that have an original maturity of
three months or less and money market mutual funds. The levels
of such assets are dependent on the Savings Bank's operating,
financing and investment activities at any given time. The
Savings Bank's cash and cash equivalents totaled $4,493,000 at
December 31, 1999 and $1,317,000 at June 30, 1999. Of these
amounts, $1,069,000 and $12,000 were deposits held in interest-
bearing accounts at December 31, 1999 and June 30, 1999,
respectively. The variations in levels of cash and cash
equivalents are influenced by deposit flows and anticipated
future deposit flows.
At December 31, 1999, the Savings Bank had $237,000 in
commitments to originate loans. At December 31, 1999, the
Savings Bank had $63,210,000 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.
14
<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
MANAGEMENT'S DISCUSSION AND ANALYSIS
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Comprehensive Income In June, 1997, the FASB issued SFAS
--------------------
No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements.
This statement requires that all items that are required to be
recognized under accounting standards as components of
comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial
statements.
This statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement
of financial position. This statement is effective for fiscal
years beginning after December 15, 1997.
Disclosures about Segments of an Enterprise and Related
-------------------------------------------------------
Information In June, 1997, the FASB issued SFAS No. 131,
- -----------
"Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 131 establishes standards for the way
that public business enterprises report information about
operating segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997. The
Company does not believe that the adoption of this accounting
statement will have a material impact on its financial
statements.
15
<PAGE>
<PAGE>
CUMBERLAND MOUNTAIN BANCSHARES, INC.
Middlesboro, Kentucky
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time between 1987 and 1994 the Savings Bank
has purchased whole loans and loan participations from an
unaffiliated mortgage broker based in Lexington, Kentucky. At
December 31, 1999, the aggregate remaining principal balance of
such loans was $2.8 million. The mortgage broker had been
servicing such loans for the Savings Bank remitting payments on
a monthly basis. During the three months ended September 30,
1999, the Savings Bank became aware that certain of such loans
may have been refinanced although the mortgage broker failed to
remit the payoffs on such loans to the Savings Bank. At
December 31, 1999, the aggregate principal balance of such loans
amounted to $768,000. The Savings Bank has begun to service all
such loans directly and is pursuing a claim for the unpaid
principal balance with its fidelity insurance carrier. Although
the Savings Bank believes that it has a claim under it fidelity
bond or through other insurance policies, there can be no
assurance that full or partial recovery of these loans will be
obtained or that losses in connection with these loans will not
be incurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-
HOLDERS
On October 20, 1999, the Registrant held its Annual
Meeting of Stockholders of the purpose of electing directors.
All matters were approved. The results of the voting at the
Annual Meeting were as follows:
PROPOSAL I - ELECTION OF DIRECTORS
NOMINEE VOTES FOR VOTES WITHELD
Barry Litton 474,620 67,716
James J. Shoffner 474,620 67,716
Item 5. Other Information
-----------------
Effective December 13, 1999, the Savings Bank entered into
an Agreement with the Office of Thrift Supervision. The
Agreement requires that the Savings Bank establish the position
of Compliance Officer and develop and adopt a written compliance
program designed to ensure that the Savings Bank is operating in
compliance with all applicable consumer protection and other
laws and regulations. The Savings Bank is also required to
ensure its compliance with its written loan and collection
policies. The Agreement limits the size of any new commercial
loans to $100,000 and any unsecured consumer loans to $25,000.
The Savings Bank was also required to modify its existing
strategic plan and budget to reflect these requirements and was
required to make certain filings with the OTS in accordance with
deadlines established in the Agreement. The Savings Bank does
not believe that the terms of this Agreement will have a
material adverse effect on the Savings Bank.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K. During the quarter ended
-------------------
December 31, 1999, 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.
By: /s/ James J. Shoffner
_________________________
James J. Shoffner
President
Date: February 11, 2000
17
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 3,424
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<INVESTMENTS-MARKET> 180
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<DEPOSITS> 108,595
<SHORT-TERM> 7,500
<LIABILITIES-OTHER> 844
<LONG-TERM> 6,615
<COMMON> 7
0
0
<OTHER-SE> 8,893
<TOTAL-LIABILITIES-AND-EQUITY> 132,454
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<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 1,804
<INCOME-PRETAX> 405
<INCOME-PRE-EXTRAORDINARY> 274
<EXTRAORDINARY> 0
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<EPS-BASIC> 0.479
<EPS-DILUTED> 0.437
<YIELD-ACTUAL> 3.24
<LOANS-NON> 2,241
<LOANS-PAST> 0
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