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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________________to________________
Commission File No. 0-25766
Community Bank Shares of Indiana, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1938254
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 W. Spring Street, New Albany, Indiana 47150
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 812-944-2224
------------
Not applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: 2,402,206 shares of common stock were outstanding as of
November 12, 2002.
COMMUNITY BANK SHARES OF INDIANA, INC.
INDEX
Part I Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders' Equity 5-6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-24
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25-27
Item 4. Controls and Procedures 28
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31-32
2
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2002 2001
---- ----
ASSETS (In thousands, except share data)
Cash and due from banks $ 7,338 $ 8,442
Interest bearing deposits in other financial institutions 2,055 2,657
Securities available for sale, at fair value 107,481 99,101
Loans held for sale 1,636 1,401
Loans, net 306,163 294,030
Federal Home Loan Bank stock, at cost 7,689 7,658
Cash surrender value of life insurance 10,370 -
Foreclosed real estate 560 560
Premises and equipment, net 11,442 11,216
Accrued interest receivable and other assets 4,345 4,551
---------------------------------------------------
Total Assets $ 459,079 $ 429,616
===================================================
LIABILITIES
Deposits $ 298,179 $ 255,892
Short-term borrowings 26,345 39,075
Federal Home Loan Bank advances 88,000 89,000
Accrued interest payable and other liabilities 3,523 3,284
---------------------------------------------------
Total Liabilities 416,047 387,251
---------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, without par value;
5,000,000 shares authorized; none issued - -
Common stock, $.10 par value per share;
10,000,000 shares authorized; 2,728,298 shares issued;
2,407,306 and 2,475,894 shares outstanding 273 273
Additional paid-in capital 19,533 19,513
Retained earnings 27,068 26,653
Accumulated other comprehensive income (loss) 1,162 (259)
Unearned ESOP and performance share awards - 9,096
Shares (13,413 shares at December 31, 2001) (96) (143)
Treasury stock, at cost - 311,896 shares (238,691
shares at December 31, 2001) (4,908) (3,672)
---------------------------------------------------
Total Stockholders' Equity 43,032 42,365
---------------------------------------------------
Total Liabilities and Stockholders' Equity $ 459,079 $ 429,616
===================================================
See accompanying notes to consolidated financial statements.
3
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME (In thousands, except per share data)
Loans, including fees $4,981 $5,635 $15,210 $17,572
Securities:
Taxable 961 1,329 2,904 3,847
Tax exempt 113 113 362 302
Federal Home Loan Bank cash and stock dividends 118 139 344 433
Interest bearing deposits in other financial institutions 72 116 115 395
------------------------- -------------------------
Total interest income 6,245 7,332 18,935 22,549
------------------------- -------------------------
INTEREST EXPENSE
Deposits 2,005 2,734 5,880 8,680
Federal Home Loan Bank advances 1,319 1,335 4,143 4,000
Short-term borrowings 63 145 237 615
------------------------- -------------------------
Total interest expense 3,387 4,214 10,260 13,295
Net interest income 2,858 3,118 8,675 9,254
Provision for loan losses 171 89 1,001 440
------------------------- -------------------------
Net interest income after provision for loan losses 2,687 3,029 7,674 8,814
------------------------- -------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 288 223 720 719
Commission income 65 128 280 502
Gain (loss) on sale of available for sale securities 237 - 357 (18)
Net gain on sale of mortgage loans 52 86 377 265
Loan servicing income, net of amortization 26 24 66 78
Increase in cash surrender value of life insurance 142 - 370 -
Other 31 27 124 118
------------------------- -------------------------
Total non-interest income 841 488 2,294 1,664
------------------------- -------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,606 1,379 4,482 3,814
Occupancy and equipment 456 390 1,240 1,071
Data processing 261 225 834 650
Other 564 412 1,511 1,260
------------------------- -------------------------
Total non-interest expense 2,887 2,406 8,067 6,795
------------------------- -------------------------
Income before income taxes 641 1,111 1,901 3,683
Income tax expense 139 406 425 1,295
------------------------- -------------------------
Net Income $ 502 $ 705 $ 1,476 $ 2,388
========================= =========================
Earnings per share:
Basic $ 0.21 $ 0.28 $ 0.60 $ 0.95
========================= =========================
Diluted $ 0.21 $ 0.28 $ 0.60 $ 0.95
========================= =========================
See accompanying notes to consolidated financial statements.
4
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------------------
Unearned
Accumulated ESOP
Common Additional Other And Total
Shares Common Paid-In Retained Comprehensive Performance Treasury Stockholders'
Outstanding Stock Capital Earnings Income Shares Stock Equity
- --------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2002 2,475,894 $ 273 $ 19,513 $ 26,653 $ (259) $ (143)$ (3,672) $ 42,365
Cash dividends declared on
common stock ($0.145 per share) - - - (355) - - - (355)
Repurchase common stock (35,037) - - - - - (567) (567)
Commitment of shares to be released
under the ESOP 1,439 - 8 - - 15 - 23
Stock options exercised 2,000 - (5) - - - 31 26
Comprehensive income:
Net income - - - 718 - - - 718
Change in unrealized gain (loss)
on securities available for sale,
net of tax effects - - - - (106) - - (106)
Minimum pension liability, net of tax
effects - - - - (2) - - (2)
- --------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 610
- --------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 2,444,296 $ 273 $ 19,516 $ 27,016 $ (367) $ (128)$ (4,208) $ 42,102
======================================================================================================================================
Cash dividends declared on
common stock ($0.145 per share) - - - (358) - - - (358)
Repurchase common stock (1,870) - - - - - (32) (32)
Commitment of shares to be released
under the ESOP 1,439 - 10 - - 15 - 25
Stock options exercised 3,602 - (2) - - - 56 54
Vesting of performance share awards 300 - - - - 2 - 2
Comprehensive income:
Net income - - - 256 - - - 256
Change in unrealized gain (loss)
on securities available for sale,
net of tax effects - - - - 1,151 - - 1,151
Minimum pension liability, net of tax
effects - - - - 43 - - 43
- --------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 1,450
- --------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 2,447,767 $ 273 $ 19,524 $ 26,914 $ 827 $ (111)$ (4,184) $ 43,243
======================================================================================================================================
5
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------------------
Unearned
Accumulated ESOP
Common Additional Other And Total
Shares Common Paid-In Retained Comprehensive Performance Treasury Stockholders'
Outstanding Stock Capital Earnings Income Shares Stock Equity
- --------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 2,447,767 $ 273 $ 19,524 $ 26,914 $ 827 $ (111)$ (4,184) $ 43,243
Cash dividends declared on
common stock ($0.145 per share) - - - (348) - - - (348)
Repurchase common stock (41,900) - - - - - (724) (724)
Commitment of shares to be released
under the ESOP 1,439 - 9 - - 15 - 24
Comprehensive income:
Net income - - - 502 - - - 502
Change in unrealized gain (loss)
on securities available for sale,
net of tax effects - - - - 341 - - 341
Change in unrealized gain (loss)
on interest rate swap, net of tax
effects - - - - 106 - - 106
Minimum pension liability, net of tax
effects - - - - (112) - - (112)
- --------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 837
- --------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2002 2,407,306 $ 273 $ 19,533 $ 27,068 $ 1,162 $ (96)$ (4,908) $ 43,032
======================================================================================================================================
See accompanying notes to consolidated financial statements.
6
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES (In thousands)
Net income $ 1,476 $ 2,388
Adjustments to reconcile net income to net cash
from operating activities:
Provision for loan losses 1,001 440
Depreciation expense 735 569
Net amortization of securities 539 161
Loss (gain) on sale of available for sale securities (357) 18
Mortgage loans originated for sale (14,563) (30,255)
Proceeds from mortgage loan sales 30,739 29,587
Net gain on sales of mortgage loans (377) (265)
Increase in cash surrender value of life insurance (370) -
Federal Home Loan Bank stock dividends (31) (45)
ESOP and performance share award expense 72 75
Changes in assets and liabilities:
Accrued interest receivable and other assets 424 1,468
Accrued interest payable and other liabilities (856) (692)
----------------------------
Net cash from operating activities 18,432 3,449
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest bearing deposits with banks 602 (7,149)
Activity in available for sale securities:
Sales 28,094 2,982
Purchases (48,689) (58,417)
Maturities, prepayments and calls 14,149 46,342
Loan originations and payments, net (28,991) 7,625
Purchase of premises and equipment, net (961) (1,041)
Investment in cash surrender value of life insurance (10,000) -
----------------------------
Net cash from investing activities (45,796) (9,658)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 42,287 5,160
Net change in short-term borrowings (12,730) 577
Proceeds from Federal Home Loan Bank advances 11,000 7,000
Repayment of advances from Federal Home Loan Bank (12,000) (9,800)
Purchase of treasury stock (1,323) (552)
Stock options exercised 87 -
Dividends paid (1,061) (1,089)
----------------------------
Net cash from financing activities 26,260 1,296
----------------------------
Net change in cash and due from banks (1,104) (4,913)
Cash and due from banks at beginning of period 8,442 12,805
----------------------------
Cash and due from banks at end of period $ 7,338 $ 7,892
============================
Non cash transfers:
Transfer from loans to loans held for sale $ 16,034 $ -
Transfer from loans to foreclosed real estate $ 145 $ -
Transfer from loans to repossessed assets $ 32 $ -
See accompanying notes to consolidated financial statements.
7
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Presentation of Interim Information
Community Bank Shares of Indiana, Inc. (the "Company") was incorporated
on April 7, 1995. The Company is a multi-bank holding company
headquartered in New Albany, Indiana. The Company's wholly owned
banking subsidiaries (the "Banks") are Community Bank of Southern
Indiana ("Community") and Community Bank of Kentucky ("Community of
Kentucky"). During the quarter ended March 31, 2002, a former
subsidiary of the Company, Heritage Bank of Southern Indiana, was
merged with and into Community. Community and Community of Kentucky are
state-chartered stock commercial banks headquartered in New Albany,
Indiana and Bardstown, Kentucky, respectively.
In the opinion of management, the unaudited consolidated financial
statements include all normal adjustments considered necessary to
present fairly the financial position as of September 30, 2002, the
results of operations for the three and nine months ended September 30,
2002 and 2001, and cash flows for the nine months ended September 30,
2002 and 2001. All of these adjustments are of a normal, recurring
nature. Interim results are not necessarily indicative of results for a
full year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with
the instructions for Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by accounting principles
generally accepted in the United States of America for complete
financial statements.
For further information, refer to the consolidated financial statements
and footnotes included in the Company's annual report for the year
ended December 31, 2001.
The consolidated financial statements include the accounts of the
Company and the Banks. All material intercompany balances and
transactions have been eliminated in consolidation.
8
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Securities
The amortized cost and fair value of available for sale securities and the
related unrealized holding gains and losses were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
(in thousands)
September 30, 2002:
Securities available for sale:
U. S. Government and federal agency $14,332 $ 285 $ - $ 14,617
State and municipal 11,827 512 - 12,339
Mortgage-backed 69,483 1,041 - 70,524
Corporate bonds 9,900 104 (3) 10,001
------------------------------------------------------
Total securities available for sale $ 105,542 $1,942 $ (3) $ 107,481
======================================================
December 31, 2001:
Securities available for sale:
U. S. Government and federal agency $27,023 $ 232 $ (166) $ 27,089
State and municipal 10,838 94 (225) 10,707
Mortgage-backed 54,467 327 (440) 54,354
Corporate bonds 6,950 32 (31) 6,951
------------------------------------------------------
Total securities available for sale $99,278 $ 685 $ (862) $ 99,101
======================================================
3. Loans
Loans at September 30, 2002 and December 31, 2001 consisted of the
following:
September 30, 2002 December 31, 2001
---------------------------------------------------
(in thousands)
Commercial $ 101,368 $ 94,159
Mortgage loans on real estate:
Residential 73,753 81,249
Commercial 67,797 76,754
Construction 27,823 14,506
Home equity 28,622 19,818
Consumer and other 10,327 10,574
---------------------------------------------------
Subtotal 309,690 297,060
Less:
Allowance for loan losses (3,527) (3,030)
---------------------------------------------------
Loans, net $ 306,163 $ 294,030
===================================================
9
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Deposits
Deposits at September 30, 2002 and December 31, 2001 consisted of the
following:
September 30, 2002 December 31, 2001
------------------------------------------------
(in thousands)
Demand (NOW) $ 35,920 $ 43,378
Money market accounts 76,893 10,782
Savings 32,801 45,897
Individual retirement accounts 17,193 15,412
Certificates of deposit, $100,000 and over 31,577 39,030
Other certificates of deposit 78,909 81,277
------------------------------------------------
Total interest bearing deposits 273,293 235,776
Total non-interest bearing deposits 24,886 20,116
------------------------------------------------
Total deposits $ 298,179 $ 255,892
================================================
10
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Supplemental Disclosure for Earnings Per Share
Earnings per share were computed as follows:
Three months ended Nine months ended
In thousands, except for share September 30, September 30,
------------------------------- --------------------------------
and per share amounts 2002 2001 2002 2001
---------------------
-------------- --------------- --------------- ---------------
Basic:
Earnings:
Net income $ 502 $ 705 $ 1,476 $ 2,388
============== =============== =============== ===============
Shares:
Weighted average
common shares outstanding 2,421,323 2,496,238 2,446,096 2,504,260
============== =============== =============== ===============
Net income per share, basic $ 0.21 $ 0.28 $ 0.60 $ 0.95
============== =============== =============== ===============
Diluted:
Earnings:
Net income $ 502 $ 705 $ 1,476 $ 2,388
============== =============== =============== ===============
Shares:
------
Weighted average
Common shares outstanding 2,421,323 2,496,238 2,446,096 2,504,260
Add: Dilutive effect of
outstanding options 16,187 8,376 17,337 495
-------------- --------------- --------------- ---------------
Weighted average common shares
outstanding, as adjusted 2,437,510 2,504,614 2,463,433 2,504,755
============== =============== =============== ===============
Net income per share, diluted $ 0.21 $ 0.28 $ 0.60 $ 0.95
============== =============== =============== ===============
Stock options for 70,700 and 103,400 shares of common stock were excluded from
the three months ended September 30, 2002 and September 30, 2001 diluted net
income per share, respectively, because their impact was antidilutive. Stock
options for 70,700 and 135,817 shares of common stock were excluded from the
nine months ended September 30, 2002 and September 30, 2001 diluted net income
per share, respectively, because their impact was antidilutive.
11
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Derivative Financial Instruments and Hedging Activities
The Company uses derivative financial instruments for the purpose of
hedging the risks of future cash flows caused by movements in interest rates.
The Company uses derivatives only for the purpose of hedging such risks, not for
speculation. The Company entered into a hedging relationship such that the
change in cash flows of items and transactions being hedged are expected to be
offset by corresponding changes in the values of the derivatives. At September
30, 2002, a hedging relationship existed for $25.0 million in floating rate
commercial loans. During 2002, the hedge was highly effective, thus changes in
the fair value of the swap are reported in other comprehensive income and will
be reclassified to earnings over the life of the hedge.
Following is an analysis of the changes in the net gain on cash flow hedges
included in accumulated other comprehensive income, net of tax:
September 30, December 31,
2002 2001
------------------------------------------------
(in thousands)
Beginning balance $ - $ - - -
Net gain for the year 128 -
Transferred to earnings (22) -
------------------------------------------------
Ending balance $ 106 $ -
================================================
12
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Safe Harbor Statement for Forward-Looking Statements
This report may contain forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts but rather
statements based on the Company's current expectations regarding its business
strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends" and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous
risks and uncertainties could cause or contribute to the Company's actual
results, performance and achievements to be materially different from those
expressed or implied by the forward-looking statements. Factors that may cause
or contribute to these differences include, without limitation, general economic
conditions, including changes in market interest rates and changes in monetary
and fiscal policies of the federal government; legislative and regulatory
changes; competitive conditions in the banking markets served by the Banks; the
adequacy of the allowance for losses on loans and the level of future provisions
for losses on loans; and other factors disclosed periodically in the Company's
filings with the Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf.
The Company assumes no obligation to update any forward-looking statements.
Financial Condition
Total assets increased 6.9% to $459.1 million at September 30, 2002 from $429.6
million at December 31, 2001, primarily a result of increases in net loans
receivable of $12.1 million, securities available for sale of $8.4 million and
other assets of $10.2 million. Funding was provided by total liabilities, which
increased by $28.8 million from December 31, 2001, primarily a result of
increases in deposits of $42.3 million offset by reductions in short term
borrowings of $12.7 million. Total equity increased $667,000 from December 31,
2001, primarily as a result of increases in unrealized gains on securities and
retained earnings, offset by treasury stock purchases and dividends to
shareholders.
Loans receivable, net, were $306.2 million at September 30, 2002 as compared to
$294.0 million at December 31, 2001, an increase of 4.1%. This increase was
primarily the result of increases in commercial business loans of $7.2 million,
construction real estate loans of $13.3 million, and home equity lines of credit
of $8.8 million as the Company continued to emphasize lending in these areas.
Commercial mortgage loans decreased $9.0 million to $67.8 at September 30, 2002
from $76.8 million at December 31, 2001 because of principal payments on loans
in this category that exceeded the dollar volume of new loans. In addition, the
balance of residential mortgage loans declined by $7.5 million because of
increases in mortgage loans sold and increased refinancing activity. The Company
currently retains fifteen-year mortgage loans that it originates and sells
substantially all thirty-year conforming mortgage loans into the secondary
market to reduce the interest rate risk of holding such assets should interest
rates rise.
13
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Securities available for sale increased 8.5% from $99.1 million at December 31,
2001 to $107.5 million at September 30, 2002 as management worked to reduce
liquidity on hand by investing cash inflows from loan repayments and net
increases in total deposits. Additionally, $27.8 million in securities have been
sold during 2002 to take advantage of $357,000 in market gains.
During the first quarter of 2002 the Company invested $10.0 million in cash
surrender value of life insurance on key employees to offset existing employee
benefits. The increase in cash surrender value of life insurance is not taxable
for state or federal income tax purposes, resulting in a higher yield than
alternative investment opportunities.
Total deposits increased from $255.9 million at December 31, 2001 to $298.2
million at September 30, 2002, an increase of 16.5%. Growth in deposits over the
last nine months occurred primarily in money market accounts, which management
attributes primarily to its competitive pricing. The Company priced its money
market accounts near the top of the range of rates within its market area over
the first six months of 2002. The Company lowered its money market rate closer
to the market average at the end of the third quarter of 2002; consequently, the
rate of growth in these accounts slowed at the end of the third quarter. The
Company expects that it will not experience significant growth in money market
accounts over the next year as it plans on maintaining its interest rate on
these accounts closer to the market average. The Company continues to focus on
non-interest demand deposits as a way to reduce its borrowing costs.
Non-interest bearing deposits increased $4.8 million to $24.9 million at
September 30, 2002 from $20.1 million at December 31, 2001, an increase of
23.9%. The Company is opening non-interest deposit accounts at a faster rate
than in past years, but these accounts generally have low average balances and a
large number of such accounts is required to substantially affect the total
outstanding balance of such accounts. Total certificates of deposit declined
$9.8 million for the nine months ended September 30, 2002 as the Company focused
on the opening of lower-cost transaction accounts.
Results of Operations
Net Income. Net income was $502,000 ($0.21 per share diluted) for the three
months ended September 30, 2002 compared to $705,000 ($0.28 per share diluted)
for the three months ended September 30, 2001. Return on average assets was
0.44% for the three months ended September 30, 2002 as compared to 0.66% for the
same period in 2001. Return on average equity was 4.74% for the third quarter of
2002 as compared to 6.46% for the same quarter in 2001. Net income, earnings per
share, return on average assets, and return on average equity all decreased for
the three months ended September 30, 2002 as compared to the same period in 2001
primarily because of (i) increases in non-interest expense and the provision for
loan losses and (ii) a decrease in net interest income. Partially offsetting
these items were increased non-interest income and a reduced effective income
tax rate. Return on average equity was favorably affected by the repurchase of
the Company's common stock; average treasury stock was $4.6 million for the
three months ended September 30, 2002 as compared to $3.3 million for the same
period in 2001.
14
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Net income was $1,476,000 ($0.60 per share diluted) for the nine months ended
September 30, 2002 compared to $2,388,000 ($0.95 per share diluted) for the nine
months ended September 30, 2001. Return on average assets was 0.44% for the nine
months ended September 30, 2002 as compared to 0.77% for the same period in
2001. Return on average equity was 4.59% for the nine months ended September 30,
2002 as compared to 7.50% for the same period in 2001. Net income, earnings per
share, return on average assets, and return on average equity all declined due
to the same factors that affected results for the third quarter of 2002. Return
on average equity was favorably affected by the repurchase of the Company's
common stock; average treasury stock was $4.2 million for the nine months ended
September 30, 2002 as compared to $3.1 million for the same period in 2001.
The Company does not expect net income for the fourth quarter of 2002 to vary
significantly from net income of $567,000 for the same period in 2001. In
response to the decline in the prime interest rate of 0.5% in early November
2002, the Company anticipates that its net interest margin will continue to
decline over the period due to the asset sensitivity of the Company's balance
sheet (See Part I - Item 3, Quantitative and Qualitative Disclosures about
Market Risk, for a more detailed discussion of the Company's exposure to
fluctuations in interest rates). The Company's net interest margin is depressed
due to the rapid decline in interest rates during 2001; the Company does not
expect that its net interest margin will improve dramatically over the next
year.
15
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Net interest income. Net interest income decreased $260,000 from $3.1 million
for the third quarter of 2001 to $2.9 million for the third quarter of 2002,
primarily because of the rapid decline in market interest rates during 2001 and
the high cost associated with the Company's long-term Federal Home Loan Bank
advances. The yield on interest-earning assets decreased to 5.81% for the third
quarter of 2002 from 7.25% for the same quarter in 2001. The cost of
interest-bearing liabilities decreased to 3.45% from 4.68% over the same period.
As a result, net interest margin declined to 2.66% for the third quarter of 2002
from 3.08% for the same period in 2001. Partially offsetting the decline in net
interest margin was an increase in average interest-earning assets to $426.7
million for the third quarter of 2002 from $401.5 million for the same quarter
in 2001.
Net interest income decreased $579,000 from $9.3 million for the nine months
ended September 30, 2001 to $8.7 million for the same period in 2002 because of
the same factors outlined above with respect to the third quarter of 2002. As a
result, net interest margin declined to 2.79% for the first nine months of 2002
compared with 3.13% for the same period in 2001. Partially offsetting the
decline in net interest margin was an increase in average interest-earning
assets to $416.3 million for the first nine months of 2002 from $395.2 million
for the same period in 2001. The yield on interest-earning assets decreased to
6.08% for the first nine months of 2002 from 7.63% for the same period in 2001.
The cost of interest-bearing liabilities decreased to 3.62% from 5.08% over the
same period.
The reasons for the decline in net interest margin for both the three and
nine-month periods ended September 30, 2002 were substantially the same. The
yield on interest-earning assets declined faster than the cost of
interest-bearing liabilities because the volume of assets repricing over the
last year exceeded the volume of liabilities repricing over the same period.
Additionally, various asset and liability concentrations have contributed to the
decline in net interest margin. At December 31, 2000, the Company owned
approximately $53.6 million in callable agency securities, which is a type of
security that can be called by the issuer as of a specific date(s) when it is in
the issuer's interest to do so. Generally, issuers of these securities will
exercise the call as market interest rates for securities with similar
characteristics fall below the coupon on a given issue. Consequently, most of
the callable agency securities owned by the Company as of December 31, 2000 were
called during 2001 as market interest rates declined. The Company reinvested the
proceeds from such called securities at substantially lower interest rates,
resulting in a decline in the Company's net interest margin over 2001 that has
persisted into 2002.
16
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
The cost of interest-bearing liabilities has been significantly affected by the
$88.0 million in funding provided by Federal Home Loan Bank (FHLB) advances,
which principally consist of putable (or convertible) instruments that give the
FHLB the option at the conversion date (and quarterly thereafter) to put an
advance back to the Banks. If an advance is put back to the Banks by the FHLB,
the Banks can choose to prepay the advance without penalty or allow the interest
rate on the advance to adjust to three-month LIBOR (London Interbank Offer Rate)
at the conversion date (and adjusted quarterly thereafter). The Company
estimates that three-month LIBOR would have to rise in excess of 300 basis
points before the FHLB would exercise its option on any of the individual
advances. The cost of FHLB advances for the third quarter of 2002 was 5.93%,
only 2 basis points less than the same period in 2001. The cost of FHLB advances
for the nine months ended September 30, 2002 was 5.88%, only 11 basis points
less than the same period in 2001. In contrast, the cost of federal funds
purchased and repurchase agreements, which are both highly interest sensitive,
fell to 1.04% and 1.15% for the three and nine months ended September 30, 2002,
respectively, from 2.74% and 2.92% for the same periods in 2001.
The Company will continue to explore strategies to improve its net interest
margin and reduce the exposure to changing interest rates. To this end, the
Company is employing a financial derivative called an interest rate swap to
hedge the cash flows on floating-rate commercial loans against possible future
declines in interest rates. An interest rate swap is a financial instrument that
derives its cash flows, and therefore its value, by reference to underlying
interest rate indexes. The Company entered into a five year interest rate swap
agreement on August 30, 2002 in an effort to mitigate the risks associated with
an asset-sensitive balance sheet and to manage interest margins in periods of
decreasing interest rates. Derivative contracts are written in amounts referred
to as notional amounts, which only provide the basis for calculating payments
between counterparties and do no represent amounts to be exchanged between
parties or a measure of financial risk. On September 30, 2002, the Company had
financial derivative instruments outstanding with notional amounts totaling $25
million and an estimated fair value of $185,000 reported in other assets and as
a component of other comprehensive income, net of tax. In connection with the
interest rate swap, the Company recorded additional interest income on loans of
$39,000 during the third quarter of 2002.
17
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Average Balance Sheets. The following tables set forth certain information
relating to the Company's average balance sheets and reflects the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are computed on daily average balances, when
available. Management does not believe that the use of month-end balances
instead of daily average balances has caused any material difference in the
information presented.
Three Months Ended September 30,
------------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------------
Average Average Average Average
ASSETS Balance Interest Yield/Cost Balance Interest Yield/Cost
------------- --------- ----------- ------------ --------- -----------
Earning assets: (in thousands) (in thousands)
Interest-bearing deposits with banks $ 14,744 $ 72 1.94% $ 13,806 $ 116 3.33%
Taxable securities 89,081 961 4.28% 90,349 1,329 5.84%
Non-taxable securities 9,798 113 4.58% 9,057 113 4.95%
Total loans and fees 305,353 4,981 6.47% 280,639 5,635 7.97%
FHLB stock 7,679 118 6.10% 7,631 139 7.23%
------------- --------- ----------- ------------ --------- -----------
Total earning assets 426,655 6,245 5.81% 401,482 7,332 7.25%
Less: Allowance for loan losses 3,506 2,954
Non-earning assets:
Cash and due from banks 9,106 7,193
Bank premises and equipment, net 11,500 10,798
Accrued interest receivable and other assets 13,380 4,633
------------- ------------
Total assets $ 457,135 $ 421,152
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 277,332 2,005 2.87% $ 242,639 2,705 4.42%
Federal funds purchased
and repurchase agreements 24,145 63 1.04% 25,220 174 2.74%
FHLB advances 88,228 1,319 5.93% 89,000 1,335 5.95%
------------- --------- ----------- ------------ --------- -----------
Total interest-bearing liabilities 389,705 3,387 3.45% 356,859 4,214 4.68%
Non-interest bearing liabilities:
Non-interest demand deposits 23,936 18,749
Accrued interest payable and other liabilities 1,495 2,268
Stockholders' equity 41,999 43,276
------------- ------------
Total liabilities and stockholders' equity $ 457,135 $ 421,152
============= ============
Net interest income $ 2,858 $ 3,118
========= =========
Net interest spread 2.36% 2.57%
Net interest margin 2.66% 3.08%
18
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Nine Months Ended September 30,
------------------------------------------------------------------------
2002 2001
------------------------------------ -----------------------------------
Average Average Average Average
ASSETS Balance Interest Yield/Cost Balance Interest Yield/Cost
------------ --------- ----------- ------------ --------- -----------
Earning assets: (in thousands) (in thousands)
Interest-bearing deposits with banks $ 7,376 $ 115 2.08% $ 11,928 $ 396 4.44%
Taxable securities 84,813 2,904 4.58% 83,703 3,847 6.14%
Non-taxable securities 10,262 362 4.72% 7,928 302 5.09%
Total loans and fees 306,220 15,210 6.64% 284,073 17,571 8.27%
FHLB stock 7,668 344 6.00% 7,611 433 7.61%
------------ --------- ----------- ------------ --------- -----------
Total earning assets 416,339 18,935 6.08% 395,243 22,549 7.63%
Less: Allowance for loan losses 3,239 2,891
Non-earning assets:
Cash and due from banks 9,075 7,366
Bank premises and equipment, net 11,349 10,620
Accrued interest receivable and other assets 12,077 4,679
------------ ------------
Total assets $ 445,601 $ 415,017
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 256,819 $ 5,880 3.06% $ 232,607 $ 8,680 4.99%
Federal funds purchased and repurchase
agreements 27,665 237 1.15% 28,194 615 2.92%
FHLB advances 94,278 4,143 5.88% 89,337 4,000 5.99%
------------ --------- ----------- ------------ --------- -----------
Total interest-bearing liabilities 378,762 10,260 3.62% 350,138 13,295 5.08%
Non-interest bearing liabilities:
Non-interest demand deposits 22,505 19,346
Accrued interest payable and other liabilities 1,322 2,948
Stockholders' equity 43,012 42,585
------------ ------------
Total liabilities and stockholders' equity $ 445,601 $ 415,017
============ ============
Net interest income $ 8,675 9,254
========= =========
Net interest spread 2.46% 2.55%
Net interest margin 2.79% 3.13%
19
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Rate/Volume Analysis. The table below illustrates the extent to which changes in
interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities affected the Company's interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Three Months Ended September 30, 2002 Nine Months Ended September 30, 2002
compared to compared to
Three Months Ended September 30, 2001 Nine Months Ended September 30, 2001
Increase/(Decrease) Due to Increase/(Decrease) Due to
------------------------------------- --------------------------------------
Total Net Total Net
Change Volume Rate Change Volume Rate
------------------------------------- --------------------------------------
(in thousands) (in thousands)
Interest income:
Interest-bearing deposits with banks $ (44) $ 7 $ (51) $ (281) $ (118) $ (163)
Taxable securities (368) (18) (350) (943) 50 (993)
Tax-exempt securities - 9 (9) 60 84 (24)
Total loans and fees (654) 466 (1,120) (2,361) 1,293 (3,654)
FHLB stock (21) 1 (22) (89) 3 (92)
------------------------------------- ---------------------------------------
Total increase (decrease) in
interest income (1,087) 465 (1,552) (3,614) 1,312 (4,926)
------------------------------------- ---------------------------------------
Interest Expense:
Deposits (700) 347 (1,047) (2,800) 829 (3,629)
Federal funds purchased and
repurchase agreements (111) (7) (104) (378) (11) (367)
FHLB advances (16) (12) (4) 143 218 (75)
------------------------------------- ---------------------------------------
Total increase (decrease) in
interest expense (827) 328 (1,155) (3,035) 1,036 (4,071)
------------------------------------- ---------------------------------------
Increase (decrease) in net
interest income $ (260) $ 137 $ (397) $ (579) $ 276 $ (855)
===================================== =======================================
20
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Allowance and Provision for Loan Losses. The provision for loan losses was
$171,000 and $1,001,000 for the three and nine months ended September 30, 2002,
respectively, as compared to $89,000 and $440,000 for the same periods in 2001.
The provision for loan losses increased for both periods because of increases in
non-performing loans and the level of probable losses incurred on impaired
loans. Loans (including impaired loans under the Financial Accounting Standard
Board's Statement of Financial Accounting Standards 114 and 118) are placed on
non-accrual status when they become past due ninety days or more as to principal
or interest (180 days for residential real estate). When loans are placed on
non-accrual status, all unpaid accrued interest is reversed. These loans remain
on non-accrual status until the loan becomes current or the loan is deemed
uncollectible and is charged off. The Company defines impaired loans to be those
commercial loans that management has classified as doubtful (collection of total
amount due is highly questionable or improbable) or loss (all or a portion of
the loan has been written off or a specific allowance for loss has been
provided). Impaired loans increased from $1.9 million at December 31, 2001, to
$3.9 million at September 30, 2002. The increase in impaired loans is related to
a determination by the Company through its normal credit risk monitoring
procedures that certain specific loans, most of which had been classified as of
December 31, 2001 as substandard (collection of total amount due is unlikely),
exhibited an increased risk of loss during the third quarter. The Company does
not believe that this indicates a trend in the overall loan portfolio. The
allowance for loan losses increased $497,000 to $3.5 million at September 30,
2002 from $3.0 million at December 31, 2001 primarily as a result of the
increase in impaired loans. Management believes, based on information presently
available, that it has adequately provided for loan losses at September 30,
2002.
Summary of Loan Loss Experience:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ---------------------------------
Activity for the period ended: 2002 2001 2002 2001
---------------------------------- ---------------------------------
(in thousands) (in thousands)
Beginning balance $ 3,714 $ 2,931 $ 3,030 $ 2,869
Charge-offs:
Real Estate - (9) (24) (9)
Commercial (360) (32) (462) (275)
Consumer (3) (26) (29) (72)
---------------------------------- ---------------------------------
Total (363) (67) (515) (365)
Recoveries:
Real Estate - 2 - 2
Commercial 4 - 7 -
Consumer 1 1 4 1
---------------------------------- ---------------------------------
Total 5 3 11 3
Provision 171 89 1,001 440
---------------------------------- ---------------------------------
Ending balance $ 3,527 $ 2,956 $ 3,527 $ 2,956
================================== =================================
21
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Non-performing loans:
September 30, 2002 December 31, 2001
------------------------------------------------
(in thousands)
Loans on non-accrual status $ 3,430 $ 1,588
Loans past due 90 days or more and still accruing - 39
------------------------------------------------
Total non-performing loans 3,430 1,627
Other real estate owned 560 560
------------------------------------------------
Total non-performing assets $ 3,990 $ 2,187
================================================
Non-performing loans to total loans 1.11% 0.55%
Non-performing assets to total loans 1.29% 0.74%
Allowance as a percent of non-performing loans 102.83% 186.23%
Allowance as a percent of total loans 1.14% 1.02%
Non-interest income. Non-interest income increased 72.3% to $841,000 for the
three months ended September 30, 2002 from $488,000 for the three months ended
September 30, 2001. The increase is attributable primarily to increases in net
gain on the sale of available for sale securities of $237,000 and other income
of $146,000. Other income increased primarily due to increased earnings on the
cash surrender value of life insurance purchased on key employees of the Banks
during the first quarter of 2002. The Banks purchased life insurance on key
employees to offset existing employee benefits expenses and because the
tax-equivalent yields were better than alternative investments. The Company
reduced its risk in relation to the life insurance purchase by spreading the
total investment among three life insurance carriers rated AA or better by
Standard & Poor's.
Also contributing to the increase in total non-interest income was an increase
of $65,000 in service charges on deposit accounts. Commission income on the sale
of investment products declined by $63,000 for the third quarter of 2002 as
compared to the same period in 2001, the result of reduced customer transactions
due to substantial declines and increased volatility in major stock markets over
the past year.
Net gain on sale of residential mortgage loans decreased to $52,000 for the
third quarter of 2002 compared to $86,000 for the same period in 2001. This
decrease is attributable to management's decision to retain primarily all new
mortgage loans originated during the third quarter of 2002 instead of selling
them in the secondary market. By retaining these loans, management feels it can
moderate the risks associated with an asset sensitive balance sheet.
The changes in non-interest income categories between the nine-month periods
ended September 30, 2001 and 2002 were caused by the same factors that affected
the three-month periods ended
22
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
September 30, 2001 and 2002. However, net gain on sale of mortgage loans
increased $112,000 because of the transfer from loans to loans held for sale and
subsequent sale of $16.0 million of residential mortgage loans at the end of the
second quarter of 2002. The Company's decision to sell these loans was based on
its assessment that interest rates would start rising in the near future. Based
on this view, the Company sold these loans, which are generally longer-term
assets, to increase the sensitivity of its interest income to rising interest
rates. The Company has since revised its assessment of the interest rate
environment and believes that interest rates will stay flat or decline for the
foreseeable future. See Part I - Item 3, Quantitative and Qualitative
Disclosures about Market Risk, in the Company's 10-Q for the period ended
June 30, 2002 for a more detailed discussion of this transaction.
Non-interest expense. Non-interest expense increased by $481,000 for the three
months ended September 30, 2002 as compared to the same period in 2001.
Compensation and benefits expense increased by $227,000 from 2001 to 2002 due to
the hiring of key personnel within the commercial and retail management areas of
the Company, the implementation of a customer call center, and the opening of
two new branches located within Wal-Mart Supercenters. Occupancy and equipment
costs increased $66,000 in the third quarter of 2002 compared to the same
quarter in 2001 due to initiatives to improve the Company's technological and
retail infrastructures and the aforementioned new branches. Data processing
service expense increased $36,000 due primarily to an increase in third party
data processing costs related to additional services offered to customers of the
Banks. Other non-interest expense increased $152,000, primarily a result of
increased marketing and advertising expenses.
Non-interest expense increased by $1,272,000 for the nine months ended September
30, 2002 as compared to the same period in 2001. The factors affecting each
category of non-interest expense in the third quarter of 2002 were predominantly
the same reasons for the increases in these categories from the first nine
months of 2001 to the same period in 2002.
Income tax expense. Income tax expense for the three-month period ended
September 30, 2002 was $139,000 as compared to $406,000 for the same period in
2001. The effective tax rate for the three months ended September 30, 2002 was
21.7% compared to 36.5% for the same period in 2001. The effective tax rate
declined substantially for the three months ended September 30, 2002 as compared
to the same period in 2001 due to various tax strategies implemented in the
first quarter of 2002 coupled with the decline in net income before taxes
between the two periods.
23
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. Historically, the Company has been able to retain a significant
amount of its deposits as they mature.
The Company's primary sources of funds are customer deposits, customer
repurchase agreements, proceeds from loan repayments, maturing securities and
FHLB advances. While loan repayments and maturities are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by market
interest rates, general economic conditions and competition. At September 30,
2002, the Company had cash and interest-bearing deposits with banks of $9.4
million and securities available-for-sale with a fair value of $107.5 million.
If the Company requires funds beyond the funds it is able to generate
internally, it has $6.8 million in additional aggregate borrowing capacity with
the Federal Home Loan Banks of Indianapolis and Cincinnati, and unused federal
funds lines of credit with various nonaffiliated financial institutions of $29.0
million.
The Banks are required to maintain specific amounts of capital pursuant to
regulatory requirements. As of September 30, 2002, the Banks were in compliance
with all regulatory capital requirements that were effective as of such date
with capital ratios as follows:
Total Tier 1 Tier 1
Capital To Capital To Capital To
Risk-weighted Risk-weighted Average
Assets Assets Assets
---------------------- ------------------- ----------------
Consolidated 14.3% 13.2% 9.1%
Community Bank 13.6% 12.5% 8.6%
Community Bank of Kentucky 18.4% 17.4% 12.3%
Minimum to be well capitalized under regulatory
capital requirements: 10.0% 6.0% 5.0%
The Company has actively been repurchasing shares of its common stock since May
21, 1999. A total of 343,007 shares (at a cost of $5.5 million) have been
repurchased under these plans, with 78,807 shares costing $1,323,000 purchased
since December 31, 2001.
The Company's Board of Directors authorized the current share repurchase plan in
March 2001 of up to $3.0 million of the Company's common stock. Through
September 30, 2002, a total of $1,888,447 had been expended to purchase shares
under this repurchase plan.
24
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Asset/liability management is the process of balance sheet control designed to
ensure safety and soundness and to maintain liquidity and regulatory capital
standards while sustaining acceptable net interest income. Interest rate risk is
the exposure to adverse changes in net interest income as a result of market
fluctuations in interest rates. Management continually monitors interest rate
and liquidity risk so that it can implement appropriate funding, investment, and
other balance sheet strategies. Management considers market interest rate risk
to be the Company's most significant ongoing business risk consideration.
The Company currently contracts with an independent third party consulting firm
to measure its interest rate risk position. The consulting firm utilizes an
earnings simulation model to analyze net interest income sensitivity. Current
balance sheet amounts, current yields and costs, corresponding maturity and
repricing amounts and rates, other relevant information, and certain assumptions
made by management are combined with gradual movements in interest rates of 100
basis points down and 200 basis points up within the model to estimate their
combined effects on net interest income over a one-year horizon. Interest rate
movements are spread equally over the forecast horizon of one year. Previously,
the Company applied instantaneous interest rate movements within its internal
model. The Company feels that using gradual interest rate movements within the
model is more representative of future interest rate changes than instantaneous
interest rate shocks. The Company does not project growth in amounts for any
balance sheet category when constructing the model because of the belief that
projected growth can mask current interest rate risk imbalances over the
projection horizon. The Company believes that the changes made to its interest
rate risk measurement process have improved the accuracy of results of the
process. Consequently, the Company believes that it has better information on
which to base asset and liability allocation decisions going forward.
Assumptions based on the historical behavior of the Company's deposit rates and
balances in relation to changes in interest rates are incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure future net interest income or precisely predict the
impact of fluctuations in market interest rates on net interest income. The
Company continually monitors and updates the assumptions as new information
becomes available. Actual results will differ from the model's simulated results
due to timing, magnitude and frequency of interest rate changes and actual
variations from the managerial assumptions utilized under the model, as well as
changes in market conditions and the application and timing of various
management strategies.
Given a gradual 200 basis point increase in the projected yield curve used in
the simulation model, it is estimated that as of September 30, 2002 net interest
income for the Company would decrease by 3.4 percent over one year ending
September 30, 2003. However, the simulation analysis indicates that over two
years net interest income would increase approximately 8.9% in response to a 200
basis points gradual increase in the yield curve over the first year. As of
December 31, 2001, the Company estimated that net interest income would decrease
6.0 percent over one year ending December 31, 2002 using an instantaneous 200
basis point upward shock to the yield curve. A gradual decline of 200 basis
points in the yield curve would cause a decrease in net interest income of an
estimated 2.8 percent over one year ending September 30, 2003. This compares to
an estimated decrease of 8.1 percent for one year ending December 31, 2002. The
Company is asset sensitive in that its interest-earning assets are likely to
reprice faster in response to changing interest rates than its interest-bearing
liabilities. The estimated changes in net interest income for all interest rate
change scenarios are within the policy guidelines established by the Company's
board of directors. However, the Company will continue to take action to limit
its exposure to stable or falling interest rate environments.
25
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The interest sensitivity profile of the Company at any point in time will be
affected by a number of factors. These factors include, among other things, the
mix of interest sensitive assets and liabilities as well as their relative
repricing schedules. It is also influenced by market interest rates, deposit
growth, loan growth, and other factors. The table below is representative only
and is not a precise measurement of the effect of changing interest rates on the
Company's net interest income in the future.
26
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The following table illustrates the Company's estimated one-year net interest
income sensitivity profile based on the asset/liability model as of September
30, 2002:
Interest Rate Sensitivity for the Year Ended September 30, 2003
------------------------------------------------------------------
Gradual Decrease in Gradual Increase in
Rates of 100 Rates of 200
Basis Points Base Basis Points
------------------------------------------------------------------
(in thousands)
Projected interest income:
Loans $19,255 $19,879 $20,623
Investments 4,632 4,778 5,020
FHLB stock 480 480 480
Interest-bearing bank deposits 144 222 371
----------------------- ------------------- ----------------------
Total interest Income 24,511 25,359 26,494
Projected interest expense:
Deposits 6,853 7,189 8,420
Other borrowings 5,385 5,547 5,877
----------------------- ------------------- ----------------------
Total interest expense 12,238 12,736 14,297
----------------------- ------------------- ----------------------
Net interest income $12,273 $12,623 $12,197
======================= =================== ======================
Change from base $(350) $(426)
Percent change from base (2.8)% (3.4)%
The following table illustrates the Company's estimated one-year net interest
income sensitivity profile based on the asset/liability model as of December 31,
2001:
Interest Rate Sensitivity for the Year Ended December 31, 2002
-----------------------------------------------------------------------------
Decrease in Rates Increase in Rates
----------------- -----------------
200 100 100 200
Basis Points Basis Points Base Basis Points Basis Points
-----------------------------------------------------------------------------
(in thousands)
Projected interest income:
Loans $18,438 $19,736 $20,951 $22,071 $23,164
Investments 4,673 5,052 5,368 5,612 5,824
Short-term investments 4 14 24 43 61
--------------- -------------- --------------- -------------- ---------------
Total interest income 23,115 24,802 26,343 27,726 29,049
Projected interest expense:
Deposits 4,762 5,373 6,559 8,060 9,406
Other borrowings 5,487 5,635 5,783 6,107 6,488
--------------- -------------- --------------- -------------- ---------------
Total interest expense 10,249 11,008 12,342 14,167 15,894
--------------- -------------- --------------- -------------- ---------------
Net interest income $12,866 $13,794 $14,001 $13,559 $13,155
=============== ============== =============== ============== ===============
Change from base $(1,135) $(207) $(442) $(846)
Percent change from base (8.1)% (1.5)% (3.2)% (6.0)%
27
PART I - ITEM 4
CONTROLS AND PROCEDURES
Company management, including the Chief Executive Officer (serving as
the principal executive officer) and Chief Financial Officer, have conducted an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the disclosure controls
and procedures are effective in ensuring that all material information required
to be filed in this quarterly report has been made known to them in a timely
fashion. There have been no significant changes in internal controls, or in
other factors that could significantly affect internal controls, subsequent to
the date the Chief Executive Officer and the Chief Financial Officer completed
their evaluation.
28
PART II
OTHER INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in
the Exhibit Index of this Form 10-Q and are filed as a part of
this report.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on July 24, 2002
reporting, under Item 5, earnings for the three months ended June
30, 2002.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
COMMUNITY BANK SHARES OF INDIANA, INC.
(Registrant)
Dated: November 12, 2002 BY: /s/ James D. Rickard
---------------------------------- -----------------------------
James D. Rickard
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: November 12, 2002 BY: /s/ Paul A. Chrisco
----------------------------------- ------------------------
Paul A. Chrisco
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
30
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, James D. Rickard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community Bank Shares
of Indiana, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ James D. Rickard
- ----------------------------------------------
James D. Rickard
President and Chief Executive Officer
31
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Paul A. Chrisco, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Community Bank Shares
of Indiana, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Paul A. Chrisco
- -------------------------------------------
Paul A. Chrisco
Senior Vice President
and Chief Financial Officer
32
EXHIBIT INDEX
COMMUNITY BANK SHARES OF INDIANA, INC.
EXHIBIT INDEX
Exhibit No. Description
- --------------------- --------------------------------------------------------------------------
11 Statement Regarding Computation of Per Share Earnings
99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
33
COMMUNITY BANK SHARES OF INDIANA, INC.
Exhibit 11.
Statement Regarding Computation of Per Share Earnings
See Part 1, Note 5 "Supplemental Disclosure for Earnings Per Share" for
calculations.
34
Exhibit 99.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Form 10-Q of Community Bank Shares of
Indiana, Inc. for the quarter ended September 30, 2002, I, James D. Rickard,
Chief Executive Officer of Community Bank Shares of Indiana, Inc., hereby
certify pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of the
Sarbanes-Oxley Act of 2002, that:
(1) Such Form 10-Q for the quarter ended September 30, 2002 fully complies with
the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in such Form 10-Q for the quarter ended September
30, 2002 fairly presents, in all material respects, the financial condition and
results of operation of Community Bank Shares of Indiana, Inc.
By: /s/ James D. Rickard
----------------------------------
James D. Rickard
President and
Chief Executive Officer
Date: November 12, 2002.
35
Exhibit 99.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Form 10-Q of Community Bank Shares of
Indiana, Inc. for the quarter ended September 30, 2002, I, Paul A. Chrisco,
Chief Financial Officer of Community Bank Shares of Indiana, Inc., hereby
certify pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of the
Sarbanes-Oxley Act of 2002, that:
(1) Such Form 10-Q for the quarter ended September 30, 2002 fully complies with
the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in such Form 10-Q for the quarter ended September
30, 2002 fairly presents, in all material respects, the financial condition and
results of operation of Community Bank Shares of Indiana, Inc.
By: /s/ Paul A. Chrisco
----------------------------------
Paul A. Chrisco
Senior Vice President and
Chief Financial Officer
Date: November 12, 2002.
36