UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|X| Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 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)
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Indiana |
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35-1938254 |
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(State
or Other Jurisdiction of |
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(I.R.S.
Employer |
101 West Spring Street, New Albany, Indiana 47150
(Address of Principal
Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (812) 944-2224
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
(Title of Class)
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 twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES |_| NO |X|
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price of $21.10 per share of such stock as of March 15, 2005, was $55,344,372. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the Registrant.)
As of March 15, 2005, there were issued and outstanding 2,622,956 shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Proxy Statement for the Annual Meeting of Stockholders on May 17, 2005.
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2
PART I
General
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 Company’s financial statements reflect the subordinated debt issued by the Company to the Trust.
The Company had total assets of $590.1 million, total deposits of $411.3 million, and stockholders’ equity of $42.8 million as of December 31, 2004. The Company’s principal executive office is located at 101 West Spring Street, New Albany, Indiana 47150, and the telephone number at that address is (812) 944-2224.
Business Strategy
The Company’s current business strategy is to operate a well-capitalized, profitable and independent community bank with a significant presence in its primary market areas. The Company’s growth strategy is focused on expansion through organic growth within its market areas. The Bank offers business and personal banking services through a full range of deposit products that include non-interest and interest-bearing checking accounts, ATM’s, debit cards, savings accounts, money market accounts, certificates of deposit and individual retirement accounts. The Bank’s loan products include: secured and unsecured business loans of various terms to local businesses and professional organizations; consumer loans including home equity lines of credit, automobile and recreational vehicle, construction, and loans secured by deposit accounts; and residential real estate loans. In addition, the Company also offers non-deposit investment products such as stocks, bonds, mutual funds, and annuities to customers within its banking market areas through a strategic alliance with Smith Barney.
Internal Growth. Management believes the optimum way to grow the Company is by attracting new loan and deposit customers within its existing markets through its extensive product offering and attentive customer service. Management believes the Bank’s customers seek a banking relationship with a service-oriented community banking institution and feels the Company’s banking centers have an atmosphere which facilitates personalized service and a broad range of product offerings to meet customers’ needs.
Branch Expansion. Management continues to consider opportunities for branch expansion and is focusing its current efforts within existing markets. Management considers a variety of criteria when evaluating potential branching opportunities. These include: the market location of the potential branch and demographics of the surrounding communities; the investment required and opportunity costs; staffing needs; and other criteria management deems of particular importance.
Lending Activities
Commercial Business Loans. The Company originates non-real estate related business loans to local small businesses and professional organizations. This type of commercial loan has been offered at both variable rates and fixed rates and can be unsecured or secured by general business assets such as equipment, accounts receivable or inventory. The Company has increased its origination of commercial business loans over the last few years. Such loans generally have shorter terms and higher interest rates than commercial real estate loans. However, commercial business loans also involve a higher level of credit risk because of the type and nature of the collateral.
Commercial Real Estate Loans. The Company’s commercial real estate loans are secured by improved property such as offices, small business facilities, apartment buildings, nursing homes, warehouses and other non-residential buildings, most of which are located in the Company’s primary market area and most of which are to be used or occupied by the borrowers. Commercial real estate loans have been offered at adjustable interest rates and at fixed rates with balloon provisions at the end of the term financing. The Company continues to originate commercial real estate loans, commercial real estate construction loans and land loans. Loans
3
secured by commercial real estate generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentrations of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multifamily and commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. The Company has increased its origination of multi-family residential or commercial real estate loans over the last few years, but attempts to protect itself against the increased credit risk associated with these loans through its underwriting standards and ongoing monitoring processes.
Residential Real Estate Loans. The Company originates one-to-four family, owner-occupied, residential mortgage loans secured by property located in the Company’s market area. While the Company currently sells most residential real estate loans into the secondary market, the Company occasionally originates and retains these loans in its own portfolio. The majority of the Company’s residential mortgage loans consist of loans secured by owner-occupied, single family residences. The Company currently offers residential mortgage loans for terms up to thirty years, with adjustable (“ARM”) or fixed interest rates. Origination of fixed-rate mortgage loans versus ARM loans is monitored continuously and is affected significantly by the level of market interest rates, customer preference, and loan products offered by the Company’s competitors. Therefore, even if management’s strategy is to emphasize ARM loans, market conditions may be such that there is greater demand for fixed-rate mortgage loans.
The primary purpose of offering ARM loans is to make the Company’s loan portfolio more interest rate sensitive. ARM loans, however, can carry increased credit risk because during a period of rising interest rates the risk of default on ARM loans may increase due to increases in borrowers’ monthly payments.
The Company’s fixed-rate mortgage loans are amortized on a monthly basis with principal and interest due each month. Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option.
After the initial fixed rate period, the Company’s ARM loans generally adjust annually with interest rate adjustment limitations of two percentage points per year and six percentage points over the life of the loan. The Company also makes ARM loans with interest rates that adjust every one, three or five years. Under the Company’s current practice, after the initial fixed rate period the interest rate on ARM loans adjusts to the applicable U.S. Treasury Constant Maturity Index plus a spread. The Company’s policy is to qualify borrowers for one-year ARM loans based on the initial interest rate plus the maximum annual rate increase.
The Company has used different indices for its ARM loans such as the National Average Median Cost of Funds, the Sixth District Net Cost of Funds Monthly Index, the National Average Contract Rate for Previously Occupied Homes, the average three year Treasury Bill Rate, and the Eleventh District Cost of Funds. Consequently, the adjustments in the Company’s portfolio of ARM loans tend not to reflect any one particular change in any specific interest rate index, but general interest rate trends overall.
Secondary market regulations limit the amount that a bank may lend based on the appraised value of real estate. Such regulations permit a maximum loan-to-value ratio of 95% percent for residential property and from 65-90% for all other real estate related loans.
The Company occasionally makes real estate loans with loan-to-value ratios in excess of 80%. For the loans sold into the secondary market, individual investor requirements pertaining to private mortgage insurance apply. For the mortgage real estate loans retained by the Company with loan-to-value ratios of 80-90%, the Company may require the first 20% of the loan to be covered by private mortgage insurance. For the mortgage real estate loans retained by the Company with loan-to-value ratios of 90-95%, the Company may require private mortgage insurance to cover the first 25-30% of the loan amount. The Company requires fire and casualty insurance, as well as title insurance or an opinion of counsel regarding good title, on all properties securing real estate loans made by the Company
Construction Loans. The Company originates loans to finance the construction of owner-occupied residential property. The Company makes construction loans to private individuals for the purpose of constructing a personal residence or to local real estate builders and developers. Construction loans generally are made with either adjustable or fixed-rate terms of up to 12 months. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction loans are structured to be converted to permanent loans at the end of the construction period or to be terminated upon receipt of permanent financing from another financial institution.
Consumer Loans. The principal types of consumer loans offered by the Company are home equity lines of credit, auto loans, home improvement loans, and loans secured by deposit accounts. Home equity lines of credit are predominately made at rates which adjust periodically and are indexed to the prime rate. Some consumer loans are offered on a fixed-rate basis depending upon the borrower’s preference. The Company’s home equity lines of credit are generally secured by the borrower’s principal residence and a personal guarantee.
The underwriting standards employed by the Company for consumer loans include a determination of the applicant’s credit history and an assessment of the prospective borrower’s ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment and from any verifiable secondary income. The underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.
Mortgage-Banking Operations. The Bank originates qualified government guaranteed loans and conventional secondary market loans which are generally sold with the servicing released. This arrangement provides necessary liquidity to the Bank while
4
providing additional loan products to the Bank’s customers.
Loan Solicitation and Processing. Loans are originated through a number of sources including loan sales staff, real estate broker referrals, existing customers, borrowers, builders, attorneys and walk-in customers. Processing procedures are affected by the type of loan requested and whether the loan will be funded by the Company or sold into the secondary market.
Mortgage loans that are sold into the secondary market are submitted, when possible, for Automated Underwriting, which allows for faster approval and an expedited closing. The Company’s responsibility on these loans is the fulfillment of the loan purchaser’s requirements. These loans often have reduced underwriting features and may be made without an appraisal or credit report at the option of the purchaser. Loans that are reviewed in a more traditional manner, which are mostly loans held for the Company’s own portfolio, require credit reports, appraisals, and income verification before they are approved or disapproved. Private mortgage insurance is generally required on loans with a ratio of loan to appraised value of greater than eighty percent. Property insurance and flood certifications are required on all real estate loans.
Installment loan documentation varies by the type of collateral offered to secure the loan. In general, an application and credit report is required before a loan is submitted for underwriting. The underwriter determines the necessity of any additional documentation, such as income verification or appraisal of collateral. An authorized loan officer approves or declines the loan after review of all applicable loan documentation collected during the underwriting process.
Commercial loans are underwritten by the commercial loan officer who makes the initial contact with the customer applying for credit. The underwriting of these loans is reviewed after the fact for compliance with the Company’s general underwriting standards. A loan exceeding the authority of the underwriting loan officer requires the approval of a loan committee or the Board of Directors of the Bank, depending on the loan amount.
Loan Commitments. The Company issues standby loan origination commitments to qualified borrowers primarily for the construction and purchase of residential real estate and commercial real estate. Such commitments are made with specified terms and conditions for periods of thirty days for commercial real estate loans and sixty days for residential real estate loans.
Employees
As of December 31, 2004, the Company employed 183 employees, 155 full-time and 28 part-time. None of these employees are represented by a collective bargaining group. Neither the Company nor any subsidiary has ever experienced a work stoppage.
Competition and Market Area Served
The banking business is highly competitive, and as such the Bank competes not only with other commercial banks, but also with savings and loan associations, trust companies and credit unions for deposits and loans, as well as stock brokerage firms, insurance companies, and other entities providing one or more of the services and products offered by the Bank. In addition to competition, the Company’s business and operating results are affected by the general economic conditions prevalent in its market.
The Bank’s primary market areas consist of Floyd and Clark counties in Southern Indiana and Jefferson and Nelson counties in Kentucky. These are four of the thirteen counties comprising the Louisville, Kentucky Standard Metropolitan Statistical Area, which has a population in excess of one million. The aggregate population of Floyd and Clark counties is approximately 171,000 and the populations of Jefferson and Nelson Counties are approximately 699,000 and 40,000, respectively. The Company’s headquarters are located in New Albany, Indiana, a city of 38,000 located approximately three miles from the center of Louisville.
Nature of Company’s Business
The business of the Company is not seasonal. The Company’s business does not depend upon a single customer, or a few customers, the loss of any one or more of which would have a material adverse effect on the Company. No material portion of the Company’s business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any governmental entity.
Regulation and Supervision
As a bank holding company, the Company is regulated under the Bank Holding Company Act of 1956, as amended (the “Act”). The Act limits the business of bank holding companies to banking, managing or controlling banks and other subsidiaries authorized under the Act, performing certain servicing activities for subsidiaries and engaging in such other activities as the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) may determine to be closely related to banking. The Company is registered with and is subject to regulation by the Federal Reserve Board. Among other things, applicable statutes and regulations require the Company to file an annual report and such additional information as the Federal Reserve Board may require pursuant to the Act and the regulations which implement the Act. The Federal Reserve Board also conducts examinations of the Company.
The Act provides that a bank holding company must obtain the prior approval of the Federal Reserve Board to acquire more than five percent of the voting stock or substantially all the assets of any bank or bank holding company. The Act also provides that, with certain exceptions, a bank holding company may not (i) engage in any activities other than those of banking or managing or controlling banks and other authorized subsidiaries, or (ii) own or control more than five percent of the voting shares of any company that is not a bank, including any foreign company. A bank holding company is permitted, however, to acquire shares of
5
any company, the activities of which the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A bank holding company may also acquire shares of a company which furnishes or performs services for a bank holding company and acquire shares of the kinds and in the amounts eligible for investment by national banking associations. In addition, the Federal Reserve Act restricts the Bank’s extension of credit to the Company.
On November 12, 1999, Congress enacted the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act permits bank holding companies to qualify as “financial holding companies” that may engage in a broad range of financial activities, including underwriting, dealing in and making a market in securities, insurance underwriting and agency activities and merchant banking. The Federal Reserve Board is authorized to expand the list of permissible financial activities. The Gramm-Leach-Bliley Act also authorizes banks to engage through financial subsidiaries in nearly all of the activities permitted for financial holding companies. The Company has not elected the status of financial holding company and at this time has no plans for these investments or broader financial activities.
As a state-chartered commercial bank, the Bank is subject to examination, supervision and extensive regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the Indiana Department of Financial Institutions (“DFI”). The Bank is a member of and owns stock in the Federal Home Loan Bank (“FHLB”) of Indianapolis. Additionally, the Bank also owns stock in the FHLB of Cincinnati acquired through the aforementioned CBKY subsidiary. The FHLB institutions located in Indianapolis and Cincinnati are two of the twelve regional banks in the FHLB system. The Bank is also subject to regulation by the Federal Reserve Board, which governs reserves to be maintained against deposits and regulates certain other matters. The extensive system of banking laws and regulations to which the Bank is subject is intended primarily for the protection of Bank customers and depositors, and not Company shareholders.
The FDIC and DFI regularly examine the Bank and prepare reports for the consideration of the Bank’s Board of Directors on any deficiencies that they may find in the Bank’s operations. The relationship of the Bank with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in such matters as the form and content of the Bank’s mortgage documents and communication of loan and deposit rates to both existing and prospective customers. Financial institutions in various regions of the United States have been called upon by examiners to write down assets to their fair market values and to establish increased levels of reserves, primarily as a result of perceived weaknesses in real estate values and a more restrictive regulatory climate.
The investment and lending authority of a state-chartered bank is prescribed by state and federal laws and regulations, and such banks are prohibited from engaging in any activities not permitted by such laws and regulations. These laws and regulations generally are applicable to all state chartered banks. The Bank may not lend to a single or related group of borrowers on an unsecured basis an amount in excess of the greater of $500,000 or fifteen percent of the Bank’s unimpaired capital and surplus. An additional amount may be lent, equal to ten percent of unimpaired capital and surplus, if such loan is secured by readily marketable collateral, which is defined to include certain securities, but generally does not include real estate.
Federal Regulations
Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than ten percent stockholder of a bank, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution’s loans to one borrower limit (15% of the Bank’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board of directors approval for certain loans. In addition, the aggregate amount of extensions of credit to all insiders cannot exceed the institution’s unimpaired capital and surplus. At December 31, 2004 the Bank was in compliance with the above restrictions.
Safety and Soundness. The Federal Deposit Insurance Act (“FDIA”), as amended by the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to the internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest-rate-risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits and such other operational and managerial standards as the agencies may deem appropriate. The federal bank regulatory agencies adopted, effective August 9, 1995, a set of guidelines prescribing safety and soundness standards pursuant to FDICIA, as amended. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.
The FDIC generally is authorized to take enforcement action against a financial institution that fails to meet its capital requirements; such action may include restrictions on operations and banking activities, the imposition of a capital directive, a cease and desist order, civil money penalties or harsher measures such as the appointment of a receiver or conservator or a forced merger into another institution. In addition, under current regulatory policy, an institution that fails to meet its capital requirements is prohibited from paying any dividends. Except under certain circumstances, further disclosure of final enforcement action by the FDIC is required.
Prompt Corrective Action. Under Section 38 of the FDIA, as amended by the FDICIA, each federal banking agency was required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies, including the FDIC, adopted substantially similar regulations to implement Section 38 of the FDIA, effective as of December 19, 1992. Under the regulations, an institution is deemed to be (i) “well-capitalized” if it has total risk-based capital of 10.0% or more, a Tier 1 risk-based
6
capital ratio of 6.0% or more, a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (ii) “adequately-capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well-capitalized,” (iii) “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% ( 3.0% under certain circumstances), (iv) “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier II average capital ratio that is less than 3.0%, and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Section 38 of the FDIA and the regulations promulgated thereunder also specify circumstances under which a federal banking agency may reclassify a well-capitalized institution as adequately-capitalized and may require an adequately-capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). At December 31, 2004, the Company and the Bank were deemed well-capitalized for purposes of the above regulations.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Indianapolis. The FHLB of Indianapolis is one of the 12 regional FHLB’s that, prior to the enactment of FIRREA, were regulated by the Federal Home Loan Bank Board (FHLBB). FIRREA separated the home financing credit function of the FHLB’s from the regulatory functions of the FHLB’s regarding savings institutions and their insured deposits by transferring oversight over the FHLB’s from the FHLBB to a new federal agency, the Federal Home Financing Board (“FHFB”).
As a member of the FHLB system, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to the greater of one percent of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year, or 1/20 (or such greater fraction as established by the FHLB) of outstanding FHLB advances. At December 31, 2004, $8.4 million of FHLB stock was outstanding for the Bank, which was in compliance with this requirement. In past years, the Bank has received dividends on its FHLB stock.
Insurance of Accounts. The Bank’s deposits are insured up to $100,000 per insured member (as defined by law and regulation) and, except for certain deposits assumed by the Bank upon the merger of Heritage Bank of Southern Indiana into the Bank in 2002, which are insured by the Bank Insurance Fund (BIF), are insured by the Savings Association Insurance Fund (SAIF). This insurance is backed by the full faith and credit of the United States Government. The SAIF and the BIF are both administered and managed by the FDIC. As insurer, the FDIC is authorized to conduct examinations of and to require reporting by SAIF and BIF insured institutions. It also may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to either fund. The FDIC also has the authority to initiate enforcement actions against financial institutions. The annual assessment for deposit insurance is based on a risk-related premium system. Each insured institution is assigned to one of three capital groups: well-capitalized, adequately-capitalized or undercapitalized. Within each capital group, institutions are assigned to one of three subgroups (A, B, or C) on the basis of supervisory evaluations by the institution’s primary federal supervisor and if applicable, state supervisor. Assignment to one of the three capital groups, coupled with assignment to one of three supervisory subgroups, will determine which of the nine risk classifications is appropriate for an institution. Institutions are assessed insurance rates based on their assigned risk classifications. The well-capitalized, subgroup “A” category institutions are assessed the lowest insurance rate, while institutions assigned to the undercapitalized subgroup “C” category are assessed the highest insurance rate. As of December 31, 2004 the Bank was assigned to the well-capitalized, subgroup “A” category and paid an annual insurance rate of 1.44 cents per $100 of deposits.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC.
The Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits. Cash on hand or on deposit with the Federal Reserve Bank of $3.2 million and $2.2 million was required to meet regulatory reserve and clearing requirements at year-end 2004 and 2003, respectively. These balances do not earn interest.
Banks are authorized to borrow from the Federal Reserve Bank “discount window,” but Federal Reserve Board regulations require banks to exhaust other reasonable alternative sources of funds, including FHLB advances, before borrowing from the Federal Reserve Bank.
Federal Taxation. For federal income tax purposes, the Company and its subsidiaries file a consolidated federal income tax return on a calendar year basis. Consolidated returns have the effect of eliminating intercompany distributions, including dividends, from the computation of consolidated taxable income for the taxable year in which the distributions occur.
The Company and its subsidiaries are subject to the rules of federal income taxation generally applicable to corporations under the Internal Revenue Code of 1986, as amended (the “Code”).
The Company has not been audited by the Internal Revenue Service for the past ten years.
Indiana Taxation. The Company is subject to a franchise tax imposed by the State of Indiana. The tax is imposed at the rate of 8.5 percent of the Company’s adjusted gross income. In computing adjusted gross income, no deductions are allowed for municipal interest, U.S. Government interest and pre-1990 net operating losses. In 2000, the Indiana financial institution tax law was amended to treat resident financial institutions the same as nonresident financial institutions by providing for apportionment of Indiana income
7
based on receipts in Indiana. This revision allowed for the exclusion of receipts from out of state sources and federal government and agency obligations.
Currently, income from the Bank’s subsidiaries CBSI Holdings, Inc., CBSI Investments, Inc. and CBSI Investment Portfolio Management, LLC is not subject to the Indiana franchise tax.
The Company’s state franchise tax returns have not been audited since 1997.
Kentucky Taxation. The Company is subject to a franchise tax imposed by the Commonwealth of Kentucky on its operations in Kentucky. The tax is imposed at a rate of 1.1% on taxable net capital, which equals capital stock paid in, surplus, undivided profits and capital reserves, net unrealized holding gains or losses on available for sale securities, and cumulative foreign currency translation adjustments less an amount equal to the same percentage of the total as the book value of United States obligations and Kentucky obligations bears to the book value of the total assets of the financial institution. A financial institution whose business activity is taxable within and without Kentucky must apportion its net capital based on the three factor apportionment formula of receipts, property and payroll unless the Kentucky Revenue Cabinet has granted written permission to use another method.
8
The Company conducts its business through its corporate headquarters located in New Albany, Indiana. The Bank operates a main office and ten branch offices in Clark and Floyd Counties, Indiana, and five branch offices in Jefferson and Nelson Counties, Kentucky. The following table sets forth certain information concerning the main offices and each branch office at December 31, 2004. The Company’s aggregate net book value of premises and equipment was $11.5 million at December 31, 2004.
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Location |
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Year Opened |
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Owned or Leased |
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Community Bank of Southern Indiana: |
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101 West Spring St. - Main
Office |
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1937 |
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Owned |
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401 East Spring St. - Drive
Thru for Main Office |
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2001 |
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Owned |
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2626 Charlestown Road |
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1995 |
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Owned |
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4328 Charlestown Road |
|
2004 |
|
Leased |
|
|
|
|
|
|
|
|
|
480 New Albany Plaza |
|
1974 |
|
Leased |
|
|
|
|
|
|
|
|
|
901 East Highway 131 |
|
1981 |
|
Owned |
|
|
|
|
|
|
|
|
|
701 Highlander Point Drive |
|
1990 |
|
Owned |
|
|
|
|
|
|
|
|
|
102 Heritage Square |
|
1992 |
|
Owned |
|
|
|
|
|
|
|
|
|
201 W. Court Ave. |
|
1996 |
|
Owned |
|
|
|
|
|
|
|
|
|
5112 Highway 62 |
|
1997 |
|
Owned |
|
|
|
|
|
|
|
|
|
2910 Grantline Rd. |
|
2002 |
|
Leased |
|
|
|
|
|
|
|
|
|
400 Blankenbaker Parkway,
Suite 100 |
|
2002 |
|
Leased |
|
|
|
|
|
|
|
|
|
106A West John Rowan Blvd.
- Main Office |
|
1997 |
|
Leased |
|
|
|
|
|
|
|
|
|
119 East Stephen Foster
Ave. |
|
1972 |
|
Owned |
|
|
|
|
|
|
|
|
|
7101 Cedar Springs |
|
2002 |
|
Leased |
|
|
|
|
|
|
|
|
|
4510 Shelbyville Rd. |
|
2003 |
|
Leased |
There are various claims and law suits in which the Company or its subsidiaries are periodically involved, such as claims to enforce liens, foreclosure or condemnation proceedings on properties in which the Bank holds mortgages or security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2004.
9
PART II
Market Information
The Company’s common stock is traded on the Nasdaq Small Cap market under the symbol of CBIN. The quarterly dividends paid by the Company, as well as the quarterly range of low and high trade prices per share of the Company’s common stock as reported by Nasdaq is shown below.
|
|
2004 |
|
2003 |
|
||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
|
|
QUARTER ENDED |
|
HIGH |
|
LOW |
|
DIVIDEND |
|
QUARTER ENDED |
|
HIGH |
|
LOW |
|
DIVIDEND |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
March 31 |
|
$ |
20.87 |
|
$ |
18.96 |
|
|
$ |
0.132 |
|
|
March 31 |
|
$ |
14.54 |
|
$ |
13.68 |
|
|
$ |
0.132 |
|
|
|
|
June 30 |
|
|
22.73 |
|
|
20.23 |
|
|
|
0.132 |
|
|
June 30 |
|
|
16.55 |
|
|
13.68 |
|
|
|
0.132 |
|
|
|
|
September 30 |
|
|
21.36 |
|
|
19.45 |
|
|
|
0.132 |
|
|
September 30 |
|
|
17.73 |
|
|
15.38 |
|
|
|
0.132 |
|
|
|
|
December 31 |
|
|
22.45 |
|
|
17.95 |
|
|
|
0.145 |
|
|
December 31 |
|
|
20.30 |
|
|
14.90 |
|
|
|
0.132 |
|
|
Holders
As of March 15, 2005 there were 734 holders of the Company’s common stock.
Dividends
The Company intends to continue its historical practice of paying quarterly cash dividends although there is no assurance that such dividends will continue to be paid in the future. The payment of dividends in the future is dependent on future income, financial position, capital requirements, the discretion and judgment of the Board of Directors, and other considerations. In addition, the payment of dividends is subject to the regulatory restrictions described in Note 11 to the Company’s consolidated financial statements.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth certain information regarding Company compensation plans under which equity securities of the Company are authorized for issuance.
|
Plan category
|
|
Number of securities |
|
Weighted –average |
|
Number of securities |
|
|||||||
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|||||||
|
Equity
compensation plans approved by security holders
|
|
|
126 |
|
|
|
$ |
16.27 |
|
|
|
289 |
* |
|
|
Equity
compensation plans not approved by security holders |
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
126 |
|
|
|
$ |
16.27 |
|
|
|
289 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Of the shares reflected, 13,750 shares are available to be awarded under the Company’s 1997 Stock Incentive Plan and 275,000 shares are available to be awarded under the Company’s 2003 Performance Units Plan. At the annual meeting of Company shareholders scheduled for May 17, 2005, Company shareholders will be asked to approve a stock award plan under which 400,000 shares of Company common stock may be awarded. If said Award Plan is adopted by Company shareholders, the Company’s 1997 Stock Incentive Plan will be terminated. |
10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the Company’s selected historical consolidated financial information from 2000 through 2004. This information should be read in conjunction with the Consolidated Financial Statements and the related Notes. Factors affecting the comparability of certain indicated periods are discussed in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”
|
|
|
|
Years Ended December 31, |
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
(dollars in thousands, except per share data) |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
27,786 |
|
$ |
25,252 |
|
$ |
25,052 |
|
$ |
29,295 |
|
$ |
30,488 |
|
|
|
Interest expense |
|
|
12,796 |
|
|
11,675 |
|
|
13,354 |
|
|
17,045 |
|
|
18,314 |
|
|
|
Net interest income |
|
|
14,990 |
|
|
13,577 |
|
|
11,698 |
|
|
12,250 |
|
|
12,174 |
|
|
|
Provision for loan losses |
|
|
1,105 |
|
|
1,274 |
|
|
1,144 |
|
|
520 |
|
|
1,197 |
|
|
|
Non-interest income |
|
|
3,271 |
|
|
3,684 |
|
|
3,160 |
|
|
2,186 |
|
|
1,974 |
|
|
|
Non-interest expense |
|
|
13,903 |
|
|
13,104 |
|
< | ||||||||