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, 2004
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: 2,390,792 shares of common stock were outstanding as of
November 4, 2004.
COMMUNITY BANK SHARES OF INDIANA, INC.
INDEX
Page
----
Part I Financial Information
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......................8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................14-23
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...........................................................24-26
Item 4. Controls and Procedures...........................................27
Part II Other Information
Item 5. Other Information.................................................28
Item 6. Exhibits..........................................................28
Signatures........................................................................29
Exhibit Index.....................................................................30
- 2 -
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2004 2003
------------- ------------
(In thousands, except share data)
ASSETS
Cash and due from banks $ 11,268 $ 10,164
Interest bearing deposits in other financial institutions 1,053 2,217
Securities available for sale, at fair value 94,566 83,143
Loans held for sale 1,737 1,173
Loans, net 421,914 390,026
Federal Home Loan Bank stock, at cost 8,277 7,999
Accrued interest receivable 1,824 1,849
Premises and equipment, net 11,726 11,331
Cash surrender value life insurance 11,428 11,057
Other assets 2,759 2,356
-------------------------------
Total Assets $ 566,552 $ 521,315
===============================
LIABILITIES
Deposits
Non-interest bearing $ 40,977 $ 34,386
Interest bearing 347,793 306,929
-------------------------------
Total deposits 388,770 341,315
Short-term borrowings 41,396 45,325
Federal Home Loan Bank advances 83,000 90,200
Accrued interest payable 727 351
Subordinated debentures 7,000 --
Other liabilities 2,574 1,835
-------------------------------
Total Liabilities 523,467 479,026
-------------------------------
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; 2,394,394 and
2,383,696 shares outstanding 273 273
Additional paid-in capital 19,496 19,497
Retained earnings 29,130 28,299
Accumulated other comprehensive loss (458) (400)
Unearned ESOP and performance share awards - 1,053 and 3,627 shares (12) (39)
Treasury stock, at cost - 332,851 and 340,975 shares (5,344) (5,341)
-------------------------------
Total Stockholders' Equity 43,085 42,289
-------------------------------
Total Liabilities and Stockholders' Equity $ 566,552 $ 521,315
===============================
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,
-------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands, except share data)
INTEREST INCOME
Loans, including fees $ 6,028 $ 5,607 $ 17,498 $ 16,518
Securities:
Taxable 818 424 2,137 1,504
Tax-exempt 79 166 296 464
Federal Home Loan Bank cash and stock dividends 90 88 278 293
Interest bearing deposits in other financial institutions 12 12 32 29
-----------------------------------------------------------
Total interest income 7,027 6,297 20,241 18,808
-----------------------------------------------------------
INTEREST EXPENSE
Deposits 1,832 1,572 5,316 4,604
Federal Home Loan Bank advances 1,249 1,316 3,757 3,916
Short-term borrowings 156 81 291 241
-----------------------------------------------------------
Total interest expense 3,237 2,969 9,364 8,761
-----------------------------------------------------------
Net interest income 3,790 3,328 10,877 10,047
Provision for loan losses 260 330 980 959
-----------------------------------------------------------
Net interest income after provision for loan losses 3,530 2,998 9,897 9,088
-----------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 556 499 1,456 1,364
Commission income 11 9 49 99
Gain on sale of available for sale securities -- 306 138 420
Gain on sale of mortgage loans 75 146 254 528
Loan servicing income, net of amortization 17 (18) 29 (38)
Increase in cash surrender value of life insurance 121 137 371 404
Other 46 28 142 102
-----------------------------------------------------------
Total non-interest income 826 1,107 2,439 2,879
-----------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,929 1,793 5,549 5,293
Occupancy 285 252 831 698
Equipment 305 241 921 713
Data processing 373 323 937 911
Marketing and advertising 113 86 300 225
Loss on sale of foreclosed real estate -- 43 -- 163
Other 544 755 1,515 1,698
-----------------------------------------------------------
Total non-interest expense 3,549 3,493 10,053 9,701
-----------------------------------------------------------
Income before income taxes 807 612 2,283 2,266
Income tax expense 150 103 414 469
-----------------------------------------------------------
Net Income $ 657 $ 509 $ 1,869 $ 1,797
===========================================================
Earnings per share:
Basic $ 0.28 $ 0.21 $ 0.78 $ 0.76
===========================================================
Diluted $ 0.27 $ 0.21 $ 0.77 $ 0.75
===========================================================
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)
- ----------------------------------------------------------------------------------------------------------
Common Additional
Shares Common Paid-In Retained
Outstanding Stock Capital Earnings
- ----------------------------------------------------------------------------------------------------------
Balance, January 1, 2004 2,383,696 $ 273 $ 19,497 $ 28,299
Cash dividends declared on
common stock ($0.145
per share) -- -- -- (345)
Commitment of shares to be
released under the ESOP 858 -- 9 --
Stock options exercised 2,000 -- (12) --
Comprehensive income:
Net income -- -- -- 607
Change in unrealized gain
(loss) on securities
available for sale, net
of reclassifications and
tax effects -- -- -- --
Change in unrealized gain
(loss) on interest rate swaps,
net of reclassifications
and tax effects -- -- -- --
Change in minimum pension
liability, net of tax effects -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Total comprehensive income
- ----------------------------------------------------------------------------------------------------------
Balance, March 31, 2004 2,386,554 $ 273 $ 19,494 $ 28,561
- ----------------------------------------------------------------------------------------------------------
Cash dividends declared on common -- -- -- (347)
stock ($0.145 per share)
Purchase treasury stock (18,009) -- -- --
Commitment of shares to be
released under the ESOP 858 -- 11 --
Stock options exercised 20,409 -- (12) --
Comprehensive income:
Net income -- -- -- 605
Change in unrealized gain
(loss) on securities available
for sale, net of reclassifications
and tax effects -- -- -- --
Change in unrealized gain
(loss) on interest rate swaps,
net of reclassifications and
tax effects -- -- -- --
Change in minimum pension
liability, net of tax effects -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Total comprehensive income
- ----------------------------------------------------------------------------------------------------------
Balance, June 30, 2004 2,389,812 $ 273 $ 19,493 $ 28,819
- ----------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Accumulated
Other Total
Comprehensive Unearned Treasury Stockholders'
Income ESOP Stock Equity
- ------------------------------------------------------------------------------------------------------------
Balance, January 1, 2004 $ (400) $ (39) $ (5,341) $ 42,289
Cash dividends declared on
common stock ($0.145
per share) -- -- -- (345)
Commitment of shares to be
released under the ESOP -- 9 -- 18
Stock options exercised -- -- 43 31
Comprehensive income:
Net income -- -- -- 607
Change in unrealized gain
(loss) on securities
available for sale, net
of reclassifications and
tax effects 463 -- -- 463
Change in unrealized gain
(loss) on interest rate swaps,
net of reclassifications
and tax effects 553 -- -- 553
Change in minimum pension
liability, net of tax effects 4 -- -- 4
- ------------------------------------------------------------------------------------------------------------
Total comprehensive income 1,627
- ------------------------------------------------------------------------------------------------------------
Balance, March 31, 2004 $ 620 $ (30) $ (5,298) $ 43,620
- ------------------------------------------------------------------------------------------------------------
Cash dividends declared on common -- -- -- (347)
stock ($0.145 per share)
Purchase treasury stock -- -- (437) (437)
Commitment of shares to be
released under the ESOP -- 9 -- 20
Stock options exercised -- -- 331 319
Comprehensive income:
Net income -- -- -- 605
Change in unrealized gain
(loss) on securities available
for sale, net of reclassifications
and tax effects (1,705) -- -- (1,705)
Change in unrealized gain
(loss) on interest rate swaps,
net of reclassifications and
tax effects (1,189) -- -- (1,189)
Change in minimum pension
liability, net of tax effects (2) -- -- (2)
- ------------------------------------------------------------------------------------------------------------
Total comprehensive income (2,291)
- ------------------------------------------------------------------------------------------------------------
Balance, June 30, 2004 $ (2,276) $ (21) $ (5,404) $ 40,884
- ------------------------------------------------------------------------------------------------------------
- 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)
- -------------------------------------------------------------------------------------------------------
Common Additional
Shares Common Paid-In Retained
Outstanding Stock Capital Earnings
- -------------------------------------------------------------------------------------------------------
Cash dividends declared on common -- -- -- (346)
stock ($0.145 per share)
Purchase treasury stock (253) -- -- --
Commitment of shares to be
released under the ESOP 858 -- 10 --
Stock options exercised 3,977 -- (7) --
Comprehensive income:
Net income -- -- -- 657
Change in unrealized gain
(loss) on securities
available for sale, net of
reclassifications and tax
effects -- -- -- --
Change in unrealized gain
(loss) on interest rate
swaps, net of reclassifications
and tax effects -- -- -- --
Change in minimum pension
liability, net of tax effects -- -- -- --
- -------------------------------------------------------------------------------------------------------
Total comprehensive income
- -------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 2,394,394 $ 273 $ 19,496 $ 29,130
=======================================================================================================
- ----------------------------------------------------------------------------------------------------------
Accumulated
Other Total
Comprehensive Unearned Treasury Stockholders'
Income ESOP Stock Equity
- ----------------------------------------------------------------------------------------------------------
Cash dividends declared on common -- -- -- (346)
stock ($0.145 per share)
Purchase treasury stock -- -- (4) (4)
Commitment of shares to be
released under the ESOP -- 9 -- 19
Stock options exercised -- -- 64 57
Comprehensive income:
Net income -- -- -- 657
Change in unrealized gain
(loss) on securities
available for sale, net of
reclassifications and tax
effects 1,308 -- -- 1,308
Change in unrealized gain
(loss) on interest rate
swaps, net of reclassifications
and tax effects 514 -- -- 514
Change in minimum pension
liability, net of tax effects (4) -- -- (4)
- ----------------------------------------------------------------------------------------------------------
Total comprehensive income 2,475
- ----------------------------------------------------------------------------------------------------------
Balance, September 30, 2004 $ (458) $ (12) $ (5,344) $ 43,085
==========================================================================================================
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,
-----------------------------
2004 2003
----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,869 $ 1,797
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses 980 959
Depreciation expense 943 809
Net amortization of securities 305 901
Gain on sale of available for sale securities (138) (420)
Mortgage loans originated for sale (14,607) (24,254)
Proceeds from mortgage loan sales 21,810 32,544
Net gain on sales of mortgage loans (254) (528)
Increase in cash surrender value of life insurance (371) (404)
Federal Home Loan Bank stock dividends (278) (203)
ESOP and performance share award expense 57 47
Net change in
Accrued interest receivable 25 51
Accrued interest payable 376 (11)
Other assets (432) 612
Other liabilities 781 383
-----------------------------
Net cash from operating activities 11,066 12,283
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest bearing deposits with banks 1,164 (4,034)
Activity in available for sale securities:
Sales 8,596 21,870
Purchases (28,454) (47,677)
Maturities, prepayments and calls 8,369 40,909
Loan originations and payments, net (40,553) (55,648)
Purchase of premises and equipment, net (1,338) (787)
-----------------------------
Net cash from investing activities (52,216) (45,367)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 47,455 48,026
Net change in short-term borrowings (3,929) (6,961)
Proceeds from Federal Home Loan Bank advances -- 44,140
Repayment of advances from Federal Home Loan Bank (7,200) (48,840)
Proceeds from issuance of subordinated debentures 7,000 --
Purchase of treasury stock (441) (475)
Stock options exercised 407 99
Dividends paid (1,038) (1,032)
-----------------------------
Net cash from financing activities 42,254 34,957
-----------------------------
Net change in cash and due from banks 1,104 1,873
Cash and due from banks at beginning of period 10,164 6,631
-----------------------------
Cash and due from banks at end of period $ 11,268 $ 8,504
=============================
Non cash transfers:
Transfer from loans to loans held for sale $ 7,513 $ --
Transfer from loans to foreclosed real estate $ 172 $ 575
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") is a one bank holding
company headquartered in New Albany, Indiana. The Company's wholly-owned banking
subsidiary is Community Bank of Southern Indiana (the "Bank"). Until November
14, 2003, the Company also operated four bank offices in Jefferson and Nelson
County, Kentucky through its wholly- owned banking subsidiary, Community Bank of
Kentucky, Inc. ("CBKY"). On November 14, 2003 CBKY was merged with and into the
Bank. The Bank is a state-chartered stock commercial bank headquartered in New
Albany, Indiana and is regulated by the Indiana Department of Financial
Institutions and the Federal Deposit Insurance Corporation.
During 2002, the Bank established three new wholly-owned subsidiaries to manage
its investment portfolio. CBSI Holdings, Inc. and CBSI Investments, Inc. are
Nevada corporations which jointly own CBSI Investment Portfolio Management, LLC,
a Nevada limited liability corporation which holds and manages investment
securities previously owned by the Bank.
The Bank established a new Community Development Entity (CDE) subsidiary in July
2002 named CBSI Development Fund, Inc. The CDE enables the Bank to participate
in the federal New Markets Tax Credit (NMTC) Program. The NMTC Program is
administered by the Community Development Financial Institutions Fund of the
United States Treasury and is designed to promote investment in low-income
communities by providing a tax credit over seven years for equity investments in
CDE's.
During June 2004, the Company completed a placement of floating rate
subordinated debentures through Community Bank Shares (IN) Statutory Trust I
(Trust), a trust formed by the Company. Because the Trust is not consolidated
with the Company, pursuant to FASB Interpretation No. 46, the financial
statements reflect the subordinated debt issued by the Company to the Trust.
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, 2004, the results of operations for the
three and nine months ended September 30, 2004 and 2003, and cash flows for the
nine months ended September 30, 2004 and 2003. 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 on Form 10-K for the year
ended December 31, 2003. The consolidated financial statements include the
accounts of the Company and the Bank. 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)
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation.
Three months ended Nine months ended
September 30, September 30,
In thousands, except per share amounts 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------
Net income as reported $ 657 $ 509 $ 1,869 $ 1,797
Less: Stock-based compensation expense determined
under fair value based method 13 13 38 38
------------------------------------------------------
Pro forma net income $ 644 $ 496 $ 1,831 $ 1,759
======================================================
$ 0.28 $ 0.21 $ 0.78 $ 0.76
Basic earnings per share as reported
Pro forma basic earnings per share 0.27 0.21 0.77 0.74
Diluted earnings per share as reported 0.27 0.21 0.77 0.75
Pro forma diluted earnings per share 0.27 0.21 0.76 0.74
Reclassifications: Some items in the prior financial statements were
reclassified to conform to the current presentation.
- 9 -
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
Cost Gains Losses Fair Value
---------------------------------------------------
(In thousands)
September 30, 2004:
Securities available for sale:
U.S. Government and federal agency 6,202 2 (21) 6,183
State and municipal 6,356 308 -- 6,664
Mortgage-backed 66,892 376 (463) 66,805
Corporate bonds 14,669 55 (52) 14,672
Mutual funds 250 -- (8) 242
---------------------------------------------------
Total securities available for sale $ 94,369 $ 741 $ (544) $ 94,566
===================================================
December 31, 2003:
Securities available for sale:
State and municipal 14,849 407 (10) 15,246
Mortgage-backed 52,947 252 (542) 52,657
Corporate bonds 15,000 48 (58) 14,990
Mutual funds 250 -- -- 250
---------------------------------------------------
Total securities available for sale $ 83,046 $ 707 $ (610) $ 83,143
===================================================
3. Loans
Loans at September 30, 2004 and December 31, 2003 consisted of the following:
September 30, 2004 December 31, 2003
----------------------------------------
(In thousands)
Commercial $ 67,568 $ 72,981
Mortgage loans on real estate:
Residential 86,027 94,975
Commercial 186,786 161,343
Construction 32,017 15,691
Home equity 46,955 42,562
Loans secured by deposit accounts 704 546
Consumer 6,501 5,962
--------------------------------
Subtotal 426,558 394,060
Less:
Allowance for loan losses (4,644) (4,034)
--------------------------------
Loans, net $ 421,914 $ 390,026
================================
- 10 -
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Deposits
Deposits at September 30, 2004 and December 31, 2003 consisted of the following:
September 30, 2004 December 31, 2003
----------------------------------------
(In thousands)
Demand (NOW) $ 36,696 $ 35,973
Money market accounts 123,238 82,546
Savings 26,933 28,456
Individual retirement accounts-certificates of deposits 18,777 17,841
Certificates of deposit, $100,000 and over 36,896 41,028
Other certificates of deposit 105,253 101,085
-------------------------------
Total interest bearing deposits 347,793 306,929
Total non-interest bearing deposits 40,977 34,386
-------------------------------
Total deposits $ 388,770 $ 341,315
===============================
5. Supplemental Disclosure for Earnings Per Share
Earnings per share were computed as follows:
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
In thousands, except for share and per share amounts 2004 2003 2004 2003
---------- ---------- ---------- ----------
Basic:
Earnings:
Net income $ 657 $ 509 $ 1,869 $ 1,797
==========================================================
Shares:
Weighted average common shares outstanding 2,390,869 2,373,628 2,389,318 2,377,256
==========================================================
Net income per share, basic $ 0.28 $ 0.21 $ 0.78 $ 0.76
==========================================================
Diluted:
Earnings:
Net income $ 657 $ 509 $ 1,869 $ 1,797
==========================================================
Shares:
Weighted average common shares outstanding 2,390,869 2,373,628 2,389,318 2,377,256
Add: Dilutive effect of outstanding options 24,610 19,020 29,640 12,657
----------------------------------------------------------
Weighted average common shares outstanding, as
adjusted 2,415,479 2,392,648 2,418,958 2,389,913
==========================================================
Net income per share, diluted $ 0.27 $ 0.21 $ 0.77 $ 0.75
==========================================================
The Company had no antidilutive stock options at September 30, 2004. Stock
options for 40,400 and 47,100 shares of common stock were excluded from the
three and nine months ended September 30, 2003, 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
On August 30, 2002, the Company entered into a $25,000,000 interest rate swap
arrangement to exchange variable payments of interest tied to Prime for receipt
of fixed rate payments of 6.51%. An additional $25,000,000 interest rate swap
was entered into on September 19, 2003 to exchange variable payments of interest
tied to Prime for receipt of fixed rate payments of 5.22%. The variable rate of
the swaps resets daily, with net interest being settled monthly. The notional
amount of the swaps does not represent amounts exchanged by the parties. The
amount exchanged is determined by reference to the notional amount and other
terms of the swaps.
The swaps have been designated by management as cash flow hedges of its
Prime-based commercial loans to in effect convert the loans from variable
interest to weighted average fixed interest rates of 6.76% on the initial swap
until the swap's maturity on August 30, 2007, and 5.58% on the subsequent swap
until its maturity on September 19, 2008. The hedge relationships were
determined to be highly effective. As such, changes in the fair value of the
swaps are reported in other comprehensive income and will be reclassified to
earnings over the lives of the hedges. During the three months ended September
30, 2004 and 2003, the Company recognized $186,000 and $240,000 of income on the
interest rate swaps as an increase to interest income on loans. During the nine
months ended September 30, 2004 and 2003, the Company recognized $660,000 and
$533,000 of income on the interest rate swaps as an increase to interest income
on loans. The fair value and earnings reclassification of the swaps was as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands) (In thousands)
Beginning balance $ (1,456) $ 954 $ (413) $ 746
Increase (decrease) in value for the period 1,029 (617) 460 (116)
Reclassified to interest income on loans (186) (240) (660) (533)
-------------------------------------------------------------
Ending balance $ (613) $ 97 $ (613) $ 97
=============================================================
- 12 -
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Benefit Plans
The Company sponsors a defined benefit pension plan. The benefits are based on
years of service and the employees' highest average of total compensation for
five consecutive years of employment. In 1997, the plan was amended such that
there can be no new participants or increases in benefits to the participants.
The components of pension expense for the three and nine months ended September
30, 2004 and 2003 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands) (In thousands)
Interest cost $ 12 $ 12 $ 36 $ 37
Expected return on plan assets (11) (8) (31) (25)
Amortization of unrecognized loss 9 10 26 30
-------------------------------------------------------------
Pension expense $ 10 $ 14 $ 31 $ 42
=============================================================
The Company made no contributions to its pension plan during the first nine
months of 2004, but expects to contribute $37,000 during the remainder of the
year.
- 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
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 Bank; 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 8.7% to $566.6 million at September 30, 2004 from $521.3
million at December 31, 2003, primarily as a result of increases in net loans of
$31.9 million and available for sale securities of $11.4 million. The growth in
assets was driven by the Company's strong loan origination and deposit gathering
functions and further supported by the issuance of subordinated debentures
during June of 2004.
Net loans increased 8.2% to $421.9 million at September 30, 2004 from $390.0
million at December 31, 2003 and were primarily funded through the growth in
deposits. Loan growth was primarily concentrated in commercial and consumer
loans as the Company continues to see strong demand for these loan products. The
Company currently retains ten year mortgage loans that it originates and sells
most fifteen and thirty-year conforming mortgage loans into the secondary
market.
Securities available for sale increased $11.4 million from December 31, 2003 to
$94.6 million at September 30, 2004. The increase in available for sale
securities was funded primarily by deposit growth and proceeds from the issuance
of subordinated debentures. The securities portfolio serves as a source of
liquidity and earnings and contributes to the management of interest rate risk.
The current strategy for the investment portfolio is to maintain an overall
average repricing term between 3.0 and 3.5 years to limit exposure to rising
interest rates.
Total deposits increased $47.5 million to $388.8 million at September 30, 2004
from $341.3 million at December 31, 2003. The Company attributes its deposit
growth to a focused
- 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
commitment on attracting lower cost funding through various customer service and
business development initiatives. The Company placed particular emphasis on
attracting non-interest bearing demand deposits, which increased 19.2% to $41.0
million over the first nine months of 2004. Additionally, money market accounts
grew 49.3% over the same period.
Results of Operations
Net Income. Net income was $657,000 for the three months ended September 30,
2004 as compared to $509,000 for the three months ended September 30, 2003, an
increase of 29.1%. Basic net income per share was $0.28 for the third quarter of
2004, an increase of 33.3% when compared to the $0.21 for the same period in
2003. Net income per share on a diluted basis was $0.27 for the third quarter of
2004, an increase of 28.6% when compared to the $0.21 for the same period in
2003. Annualized returns on average assets and stockholders' equity were 0.47%
and 6.23%, respectively, for the third quarter of 2004, compared to 0.40% and
4.72%, respectively, for the same period in 2003. Management attributes the
increase in net income between the periods to the growth of the Company's core
retail and commercial banking lines of business and improved credit quality.
Net income was $1,869,000 for the nine months ended September 30, 2004 as
compared to $1,797,000 for the nine months ended September 30, 2003, an increase
of 4.0%. Basic net income per share was $0.78 for the nine months of 2004, an
increase of 2.6% when compared to the $0.76 for the same period in 2003. Net
income per share on a diluted basis was $0.77 for the nine months of 2004, an
increase of 2.7% when compared to the $0.75 for the same period in 2003.
Annualized returns on average assets and stockholders' equity were 0.46% and
5.85%, respectively, for the nine months of 2004, compared to 0.49% and 5.61%,
respectively, for the same period in 2003.
Net interest income. Net interest income increased $462,000, or 13.9%, for the
third quarter of 2004 compared to the third quarter of 2003 due to the growth in
the Company's earning assets and a higher net interest margin. The net interest
margin for the third quarter of 2004 was 2.86% compared to 2.76% for the
equivalent period in 2003. Management attributes the margin expansion to an
increase in the yield on investment securities resulting from slower prepayment
speeds on mortgage-backed securities. The slower prepayment speeds led to a
reduction of the amortization of premiums associated with mortgage-backed
securities in the third quarter of 2004 as compared to the same period in 2003.
Average earning assets increased 10.1% to $526.3 million for the three months
ended September 30, 2004 from $477.9 million for the equivalent period in 2003,
reflecting growth in the Company's loan and securities portfolios.
Net interest income increased $830,000, or 8.3%, for the nine months ended
September 30, 2004 compared to the same period in 2003. The Company's net
interest margin declined from 2.94% for the first nine months of 2003 to 2.85%
for the same period in 2004 as the yield on interest-earning assets continued to
decline due to the sustained lower interest rate environment while its funding
costs declined by a lesser amount due primarily to a change in the funding mix;
growth in interest-bearing liabilities resulted primarily from an increase in
lower cost deposits. Management believes the Company is well positioned for a
rising interest rate environment and, exclusive of competitive deposit rate
pressures, expects that rising interest rates will have a positive impact on the
Company's net interest margin.
- 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
The cost of interest-bearing liabilities continues to be significantly affected
by the $83.0 million in funding provided by FHLB advances, which principally
consists 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
Company. If an advance is put back to the Company by the FHLB, the Company 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
the 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
Company uses FHLB advances for both short- and long-term funding. The balances
reported at both September 30, 2004 and December 31, 2003 are substantially
comprised of long-term advances. The cost of FHLB advances for the first nine
months of 2004 was 5.98% compared with the cost of federal funds purchased and
repurchase agreements, which are both highly interest rate sensitive, was 0.83%
for the nine months ended September 30, 2004.
- 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
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. Yields on tax-exempt securities have not been presented
on a tax equivalent basis. Loans held for sale and loans no longer accruing
interest are included in total loans.
Three Months Ended September 30,
---------------------------------------------------------------------------
2004 2003
----------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(In thousands) (In thousands)
ASSETS
Earning assets:
Interest-bearing deposits with banks $ 3,164 $ 12 1.51% $ 4,759 $ 12 1.00%
Taxable securities 89,885 818 3.62% 74,986 424 2.24%
Non-taxable securities 6,362 79 4.94% 14,849 166 4.44%
Total loans and fees (1) (2) 418,686 6,028 5.73% 375,474 5,607 5.92%
FHLB stock 8,242 90 4.34% 7,865 88 4.44%
-------- -------- -------- --------
Total earning assets 526,339 7,027 5.31% 477,933 6,297 5.23%
Less: Allowance for loan losses 4,618 3,790
Non-earning assets:
Cash and due from banks 11,580 8,256
Bank premises and equipment, net 11,828 11,274
Accrued interest receivable and other
assets 13,893 15,811
-------- --------
Total assets $559,022 $509,484
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $348,817 $ 1,832 2.09% $299,530 $ 1,572 2.08%
Federal funds purchased and repurchase
agreements 31,923 81 1.01% 37,725 81 0.85%
FHLB advances 83,000 1,249 5.99% 88,022 1,316 5.93%
Subordinated debentures 7,000 75 4.26% -- -- --
-------- -------- -------- --------
Total interest-bearing liabilities 470,740 3,237 2.74% 425,277 2,969 2.77%
Non-interest bearing liabilities:
Non-interest demand deposits 42,885 35,059
Accrued interest payable and other liabilities 3,412 6,402
Stockholders' equity 41,985 42,746
-------- --------
Total liabilities and stockholders' equity $559,022 $509,484
======== ========
Net interest income $ 3,790 $ 3,328
======== ========
Net interest spread 2.57% 2.46%
Net interest margin 2.86% 2.76%
(1) The amount of fee income included in interest on loans was $136 and $140
for the three months ended September 30, 2004 and 2003.
(2) Calculations include non-accruing loans in the average loan amounts
outstanding.
- 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
Nine Months Ended September 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------ -------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(In thousands) (In thousands)
ASSETS
Earning assets:
Interest-bearing deposits with banks $ 3,753 $ 32 1.14% $ 3,372 $ 29 1.15%
Taxable securities 79,756 2,137 3.58% 70,473 1,504 2.85%
Non-taxable securities 9,543 296 4.14% 13,406 464 4.63%
Total loans and fees(1) (2) 408,803 17,498 5.72% 361,918 16,518 6.10%
FHLB stock 8,151 278 4.56% 7,779 293 5.04%
-------- -------- ---- -------- -------- ----
Total earning assets 510,006 20,241 5.30% 456,948 18,808 5.50%
Less: Allowance for loan losses 4,445 3,904
Non-earning assets:
Cash and due from banks 10,883 8,016
Bank premises and equipment, net 11,684 11,324
Accrued interest receivable and other
assets 14,530 15,405
-------- --------
Total assets $542,658 $487,789
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $337,728 $ 5,316 2.10% $285,107 $ 4,604 2.16%
Federal funds purchased and repurchase
agreements 33,051 206 0.83% 35,589 241 0.91%
FHLB advances 83,984 3,757 5.98% 88,860 3,916 5.89%
Subordinated debentures 2,792 85 4.07% -- -- --
-------- -------- -------- --------
Total interest-bearing liabilities 457,555 9,364 2.73% 409,556 8,761 2.86%
Non-interest bearing liabilities:
Non-interest demand deposits 40,290 31,115
Accrued interest payable and other
liabilities 2,126 4,275
Stockholders' equity 42,687 42,843
-------- --------
Total liabilities and stockholders' equity $542,658 $487,789
======== ========
Net interest income $ 10,877 $ 10,047
======== ========
Net interest spread 2.57% 2.64%
Net interest margin 2.85% 2.94%
(1) The amount of fee income included in interest on loans was $411 and $549
for the nine months ended September 30, 2004 and 2003.
(2) Calculations include non-accruing loans in the average loan amounts
outstanding.
- 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
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, 2004 Nine Months Ended September 30, 2004
compared to compared to
Three Months Ended September 30, 2003 Nine Months Ended September 30, 2003
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 $ -- $ (5) $ 5 $ 3 $ 3 $ --
Taxable securities 394 97 297 633 215 418
Tax-exempt securities (87) (104) 17 (168) (123) (45)
Total loans and fees 421 628 (207) 980 2,050 (1,070)
FHLB stock 2 4 (2) (15) 14 (29)
---------------------------------------------------------------------------------
Total increase (decrease) in interest income 730 620 110 1,433 2,159 (726)
---------------------------------------------------------------------------------
Interest expense:
Deposits 260 259 1 712 831 (119)
Federal funds purchased and repurchase
agreements -- (13) 13 (35) (17) (18)
FHLB advances (67) (76) 9 (159) (217) 58
Subordinated debentures 75 75 -- 85 85 --
---------------------------------------------------------------------------------
Total increase (decrease) in interest expense 268 245 23 603 682 (79)
---------------------------------------------------------------------------------
Increase (decrease) in net interest income $ 462 $ 375 $ 87 $ 830 $ 1,477 $ (647)
=================================================================================
- 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
Allowance and Provision for Loan Losses. The Bank's financial performance
depends on the quality of the loans it originates and management's ability to
assess the degree of risk in existing loans when it determines the allowance for
loan losses. An increase in loan charge-offs or non-performing loans or an
inadequate allowance for loan losses could have an adverse effect on net income.
The allowance is determined based on the application of loss estimates to graded
loans by categories.
Summary of Loan Loss Experience:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
Activity for the period ended: 2004 2003 2004 2003
-------- -------- -------- --------
(In thousands) (In thousands)
Beginning balance $ 4,629 $ 3,749 $ 4,034 $ 3,814
Charge-offs:
Residential real estate (22) -- (22) (14)
Commercial real estate (211) -- (339) (655)
Construction -- -- -- --
Commercial business (2) (141) (17) (155)
Home equity -- (23) (1) (23)
Consumer (29) (15) (33) (39)
-----------------------------------------------------
Total (264) (179) (412) (886)
Recoveries:
Residential real estate -- -- -- --
Commercial real estate 13 3 20 11
Construction -- -- -- --
Commercial business 4 -- 12 2
Home equity -- -- -- --
Consumer 2 2 10 5
-----------------------------------------------------
Total 19 5 42 18
-----------------------------------------------------
Net loan charge-offs (245) (174) (370) (868)
Provision 260 330 980 959
-----------------------------------------------------
Ending balance $ 4,644 $ 3,905 $ 4,644 $ 3,905
=====================================================
Improved asset quality led to a 21.2% reduction in the provision for loan losses
for the third quarter of 2004 when compared to the same period in 2003, as
classified loan balances decreased 13.3%, or $2.9 million, from September 30,
2003. The provision for loan losses was $260,000 and $980,000 for the three and
nine months ended September 30, 2004 as compared to $330,000 and $959,000 for
the same periods in 2003. Management believes, based on information presently
available, that it has adequately provided for loan losses at September 30,
2004.
- 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
Federal regulations require insured institutions to classify their assets on a
regular basis. The regulations provide for three categories of classified loans:
substandard, doubtful and loss. The regulations also contain a special mention
and a specific allowance category. Special mention is defined as loans that do
not currently expose an insured institution to a sufficient degree of risk to
warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified as loss, the
insured institution must either establish specified allowances for loan losses
in the amount of 100% of the portion of the asset classified loss, or charge off
such amount.
Non-performing assets. 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, unless they are adequately secured and in the
process of collection. When these loans are placed on non-accrual status, all
unpaid accrued interest is reversed and the 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 decreased from $2.1 at December 31, 2003 to $1.6 million at September 30,
2004.
September 30, 2004 December 31, 2003
------------------------------------------
(In thousands)
Loans on non-accrual status $ 2,107 $ 1,467
Loans past due 90 days or more and still accruing 11 346
-----------------------------------
Total non-performing loans 2,118 1,813
Other real estate owned 622 610
-----------------------------------
Total non-performing assets $ 2,740 $ 2,423
===================================
Non-performing loans to total loans 0.50% 0.46%
Non-performing assets to total loans 0.64% 0.61%
Allowance as a percent of non-performing loans 219.26% 222.50%
Allowance as a percent of total loans 1.09% 1.02%
- 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-interest income. Non-interest income decreased 25.4% to $826,000 for the
third quarter of 2004 compared to the same period in 2003 as a result of a
decrease in gains on the sales of available for sale securities and mortgage
loans. Mortgage loan sales declined due to a reduction in refinancing activity.
Partially offsetting the decrease in mortgage banking income was an increase in
service charges on deposit accounts. The Company continues to open a significant
number of new demand deposit accounts, which helped contribute to an 11.4%
increase in service charges on deposit accounts for the third quarter of 2004
compared to the third quarter of 2003.
Non-interest income decreased $440,000, or 15.3% for the nine months ended
September 30, 2004 compared to the same period in 2003. Non-interest income
decreased for substantially the same reasons as the quarterly change referenced
above.
Non-interest expense. Non-interest expense increased 1.6% for the third quarter
of 2004 compared to the same period in 2003 as increases in salaries and
benefits were offset by a reduction in other expenses. The increase in salaries
and benefits reflects additional staffing needs as the Company opened a full
service banking branch in Louisville, Kentucky during September 2003 and another
full service banking branch in southern Indiana during April 2004. Other
expenses declined primarily as a result of expenses related to a lawsuit
recorded during the third quarter of 2003.
Non-interest expense increased 3.6%, or $352,000 for the nine months ended
September 30, 2004 compared to the same period in 2003. Non-interest expense
increased for substantially the same reasons as the quarterly change referenced
above.
Income tax expense. Income tax expense for the nine month period ended September
30, 2004 was $414,000 compared to $469,000 for the same period in 2003. The
effective tax rate for the nine months ended September 30, 2004 was 18.1%
compared to 20.7% for the same period in 2003. The effective tax rate declined
between the periods primarily due to a tax credit allocation from the Community
Development Financial Institutions Fund through the New Markets Tax Credit
(NMTC) Program. The NMTC Program permits taxpayers to receive a credit against
federal income taxes for making qualified equity investments in designated
Community Development Entities (CDE's) which in turn makes investments (in the
form of either loans or equity investments) in low-income communities. The
credit is claimed over a seven year period and the Company expects to recognize
a tax credit of $150,000 for tax year 2004.
Liquidity and Capital Resources
Liquidity levels are adjusted in order to meet funding needs for deposit
outflows, repayment of borrowings, and loan commitments and to meet
asset/liability objectives. 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, 2004, the Company had cash and interest-bearing
deposits with banks of $12.3 million and securities available-for-sale with a
fair value of $94.6 million. If the Company requires funds beyond the funds it
is able to generate internally, it has $21.0 million in additional
- 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
aggregate borrowing capacity with the Federal Home Loan Bank of Indianapolis and
unused federal funds lines of credit with various nonaffiliated financial
institutions of $11.4 million.
- 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
The Bank is required to maintain specific amounts of capital pursuant to
regulatory requirements. As of September 30, 2004, the Bank was 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 11.8% 10.8% 9.0%
Community Bank 11.5% 10.5% 8.8%
Minimum to be well capitalized under regulatory
capital requirements: 10.0% 6.0% 5.0%
The Company has been repurchasing shares of its common stock since May 21, 1999.
A net total of 332,851 shares at an aggregate cost of $5.3 million have been
repurchased since that time under both the current and prior repurchase plans.
The Company's Board of Directors authorized a share repurchase plan in May 2001
under which a maximum of $3.0 million of the Company's common stock may be
purchased. Through September 30, 2004, a net total of $2.8 million had been
expended to purchase 181,398 shares under the current repurchase plan.
During June 2004, the Company completed a placement of $7.0 million floating
rate subordinated debentures through Community Bank Shares (IN) Statutory Trust
I, a trust formed by the Company. These securities are reported as liabilities
for financial reporting, but Tier 1 Capital for regulatory purposes. The Company
intends to utilize the proceeds for general business purposes and to support the
Bank's future opportunities for growth.
Off Balance Sheet Arrangements and Contractual Obligations
The amount and nature of the Company's off balance sheet arrangements and
contractual obligations at September 30, 2004 were not significantly different
from the information that was reported in the Company's annual report on Form
10-K for the year ended December 31, 2003.
- 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 maintaining 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 200
basis points up and 100 basis points down 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 period of one year. The Company
feels that using gradual interest rate movements within the model is more
representative of future 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 projected 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.
The base scenario represents projected net interest income over a one year
forecast horizon exclusive of interest rate changes to the simulation model.
Given a gradual 200 basis point increase in the projected yield curve used in
the simulation model (Up 200 Scenario), it is estimated that as of September 30,
2004 the Company's net interest income would decrease by an estimated 1.4%, or
$222,000 over the one year forecast horizon. However, considering reasonable
growth assumptions, the Company expects that net interest income would trend
positive over the forecast horizon. As of December 31, 2003, in the Up 200
Scenario the Company estimated that net interest income would decrease 4.5%, or
$669,000 over a one year forecast horizon ending December 31, 2004. Given a
gradual 100 basis point decrease in the projected yield curve used in the
simulation model (Down 100 Scenario), it is estimated that as of September 30,
2004 the Company's net interest income would decrease by an estimated 0.1% or
$13,000 over the one year forecast horizon. As of December 31, 2003, in the Down
100 Scenario the Company estimated that net interest income would increase 0.5%
or $76,000 over a one year forecast horizon ending December 31, 2004.
- 25 -
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The projected results are within the Company's asset/liability management policy
limits which states that the negative impact to net interest income should not
exceed 5% and 7% in a 100 basis point decrease and 200 basis point increase in
the projected yield curve over a one year forecast horizon. The forecast results
are heavily dependent on the assumptions regarding changes in deposit rates; the
Company can minimize the reduction in net interest income in a period of rising
interest rates to the extent that it can curtail raising deposit rates during
this period. The Company continues to explore transactions and strategies to
both increase its net interest income and minimize its interest rate risk.
The interest sensitivity profile of the Company at any point in time will be
affected by a number of factors. These factors include 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 tables below illustrate the Company's estimated annualized
earnings sensitivity profile based on the above referenced asset/liability model
as of September 30, 2004 and December 31, 2003, respectively. The tables below
are representative only and are not precise measurements of the effect of
changing interest rates on the Company's net interest income in the future.
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, 2004:
Interest Rate Sensitivity as of September 30, 2004
---------------------------------------------------------
Gradual Decrease in Gradual Increase in
Rates of 100 Rates of 200
Basis Points Base Basis Points
---------------------------------------------------------
(In thousands)
Projected interest income:
Loans $ 23,746 $ 24,333 $ 25,822
Investments 3,626 3,755 3,917
FHLB stock 365 365 365
Interest-bearing bank deposits 17 23 34
-----------------------------------------------
Total interest Income 27,754 28,476 30,138
Projected interest expense:
Deposits 7,020 7,445 8,761
Federal funds purchased
and repurchase agreements 262 488 940
FHLB advances 4,678 4,705 4,759
Subordinated debentures 312 343 405
-----------------------------------------------
Total interest expense 12,272 12,981 14,865
-----------------------------------------------
Net interest income $ 15,482 $ 15,495 $ 15,273
===============================================
Change from base $ (13) $ (222)
Percent change from base (0.1)% (1.4)%
- 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 December 31,
2003:
Interest Rate Sensitivity as of December 31, 2003
----------------------------------------------------------------
Gradual Decrease in Gradual Increase in
Interest Rates of 100 Interest Rates of 200
Basis Points Base Basis Points
----------------------------------------------------------------
(In thousands)
Projected interest income:
Loans $ 22,244 $ 22,654 $ 23,538
Investments 2,987 3,064 3,196
FHLB stock 400 400 400
Interest-bearing bank deposits 10 22 46
--------- --------- ---------
Total interest income 25,641 26,140 27,180
Projected interest expense:
Deposits 5,358 5,692 6,827
Federal funds purchased
and repurchase agreements 170 373 870
FHLB advances 5,065 5,103 5,180
--------- --------- ---------
Total interest expense 10,593 11,168 12,877
--------- --------- ---------
Net interest income $ 15,048 $ 14,972 $ 14,303
========= ========= =========
Change from base $ 76 $ (669)
Percent change from base 0.5% (4.5)%
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PART I - ITEM 4
CONTROLS AND PROCEDURES
Company management, including the Chief Executive Officer (serving as the
principal executive officer) and Chief Financial Officer (serving as the
principal financial officer), have conducted an evaluation of the effectiveness
of disclosure controls and procedures pursuant to Securities Exchange Act of
1934 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.
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PART II
OTHER INFORMATION
Item 5. Other Information
On April 27th 2004, the Board of Directors of the Company adopted a Charter of
the Nominating Process and Nominations Review Committee (the "Charter"). The
Nominations Review Committee formed by the Company's Board of Directors is to be
comprised of independent directors and is charged with the duty of identifying
and recommending director candidates to the Company Board of Directors. The
Charter provides that any Company shareholder may submit candidates for
membership on the Company Board of Directors by delivering a request to the
Company's Secretary that any such candidate be considered for said position and
setting forth information regarding said candidate's qualifications to serve as
a Company director.
Item 6. Exhibits
(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.
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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, 2004 BY: /s/ James D. Rickard
- ------------------------ -----------------------------
James D. Rickard
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: November 12, 2004 BY: /s/ Paul A. Chrisco
- ------------------------ -----------------------------
Paul A. Chrisco
Senior Vice-President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
COMMUNITY BANK SHARES OF INDIANA, INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------------------------------------------------------------
11 Statement Regarding Computation of Per Share Earnings
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of Sarbanes-Oxley Act
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of Sarbanes-Oxley Act
32.1 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
32.2 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
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