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EXCEL - IDEA: XBRL DOCUMENT - Your Community Bankshares, Inc. | Financial_Report.xls |
EX-32.2 - EXHIBIT 32.2 - Your Community Bankshares, Inc. | v312071_ex32-2.htm |
EX-32.1 - EXHIBIT 32.1 - Your Community Bankshares, Inc. | v312071_ex32-1.htm |
EX-31.2 - EXHIBIT 31.2 - Your Community Bankshares, Inc. | v312071_ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - Your Community Bankshares, Inc. | v312071_ex31-1.htm |
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 March 31, 2012
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 incorporation or | |
organization) | (I.R.S. Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer ¨ Accelerated Filer ¨ Non- Accelerated Filer x Smaller Reporting Company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ¨ Yes ¨ 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: 3,358,479 shares of common stock were outstanding as of May 10, 2012.
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 Comprehensive Income | 5 | |
Consolidated Statement of Changes in Shareholders Equity | 6 | |
Consolidated Statements of Cash Flows | 7 | |
Notes to Consolidated Financial Statements | 8 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 37 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 48 |
Item 4. | Controls and Procedures | 51 |
Part II | Other Information | |
Item 1. | Legal Proceedings | 52 |
Item 1A. | Risk Factors | 52 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 52 |
Item 6. | Exhibits | 52 |
Signatures | 53 | |
Exhibit Index | 54 |
2 |
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(In thousands, except share data) | ||||||||
ASSETS | ||||||||
Cash and due from financial institutions | $ | 12,237 | $ | 15,166 | ||||
Interest-bearing deposits in other financial institutions | 13,922 | 30,297 | ||||||
Securities available for sale | 220,619 | 198,746 | ||||||
Loans held for sale | 638 | 1,154 | ||||||
Loans, net of allowance for loan losses of $10,841 and $10,234 | 487,511 | 489,740 | ||||||
Federal Home Loan Bank and Federal Reserve stock | 5,952 | 5,952 | ||||||
Accrued interest receivable | 3,244 | 3,196 | ||||||
Premises and equipment, net | 13,595 | 13,780 | ||||||
Company owned life insurance | 20,183 | 20,012 | ||||||
Other intangible assets | 807 | 865 | ||||||
Foreclosed and repossessed assets | 4,678 | 5,076 | ||||||
Prepaid FDIC insurance premium | 2,833 | 2,999 | ||||||
Settlement receivable for security sales | - | 3,371 | ||||||
Other assets | 4,683 | 7,000 | ||||||
Total Assets | $ | 790,902 | $ | 797,354 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Deposits | ||||||||
Non interest-bearing | $ | 132,677 | $ | 127,877 | ||||
Interest-bearing | 448,671 | 453,481 | ||||||
Total deposits | 581,348 | 581,358 | ||||||
Other borrowings | 52,970 | 50,879 | ||||||
Federal Home Loan Bank advances | 55,000 | 55,000 | ||||||
Subordinated debentures | 17,000 | 17,000 | ||||||
Accrued interest payable | 326 | 329 | ||||||
Settlement liability for security purchases | - | 6,914 | ||||||
Other liabilities | 3,452 | 6,389 | ||||||
Total liabilities | 710,096 | 717,869 | ||||||
Commitments and contingent liabilities | — | — | ||||||
Shareholders’ equity | ||||||||
Preferred stock, without par value; 5,000,000 authorized; 28,000 shares issued and outstanding in 2012 and 2011, respectively; aggregate liquidation preference of $28,000 | 28,000 | 28,000 | ||||||
Common stock, $.10 par value per share; 10,000,000 shares authorized; 3,863,937 shares issued; 3,358,486 and 3,327,484 outstanding in 2012 and 2011, respectively | 386 | 386 | ||||||
Additional paid-in capital | 44,024 | 44,488 | ||||||
Retained earnings | 14,475 | 13,201 | ||||||
Accumulated other comprehensive income | 2,603 | 2,666 | ||||||
Treasury stock, at cost (2012- 505,451 shares, 2011- 536,453 shares) | (8,682 | ) | (9,256 | ) | ||||
Total shareholders’ equity | 80,806 | 79,485 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 790,902 | $ | 797,354 |
See accompanying notes to consolidated financial statements.
3 |
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Interest and dividend income | ||||||||
Loans, including fees | $ | 6,846 | $ | 6,913 | ||||
Taxable securities | 797 | 1,153 | ||||||
Tax-exempt securities | 721 | 588 | ||||||
Federal Home Loan Bank and Federal Reserve dividends | 48 | 49 | ||||||
Interest-bearing deposits in other financial institutions | 11 | 9 | ||||||
Interest and dividend income | 8,423 | 8,712 | ||||||
Interest expense | ||||||||
Deposits | 600 | 1,171 | ||||||
Other borrowings | 173 | 196 | ||||||
Federal Home Loan Bank advances | 220 | 262 | ||||||
Subordinated debentures | 113 | 102 | ||||||
Interest expense | 1,106 | 1,731 | ||||||
Net interest income | 7,317 | 6,981 | ||||||
Provision for loan losses | 1,506 | 810 | ||||||
Net interest income after provision for loan losses | 5,811 | 6,171 | ||||||
Non-interest income | ||||||||
Service charges on deposit accounts | 870 | 752 | ||||||
Commission income | 42 | 41 | ||||||
Net gain on sales of available for sale securities | 727 | 584 | ||||||
Mortgage banking income | 93 | 45 | ||||||
Earnings on company owned life insurance | 171 | 161 | ||||||
Interchange income | 248 | 240 | ||||||
Other income | 157 | 135 | ||||||
Non-interest income | 2,308 | 1,958 | ||||||
Non-interest expense | ||||||||
Salaries and employee benefits | 3,158 | 3,059 | ||||||
Occupancy | 532 | 557 | ||||||
Equipment | 258 | 270 | ||||||
Data processing | 582 | 544 | ||||||
Marketing and advertising | 61 | 51 | ||||||
Legal and professional service fees | 366 | 429 | ||||||
FDIC insurance premiums | 177 | 266 | ||||||
Foreclosed and repossessed assets, net | 132 | 79 | ||||||
Other expense | 616 | 592 | ||||||
Total non-interest expense | 5,882 | 5,847 | ||||||
Income before income taxes | 2,237 | 2,282 | ||||||
Income tax expense | 402 | 494 | ||||||
Net Income | 1,835 | 1,788 | ||||||
Preferred stock dividends and discount accretion | (226 | ) | (266 | ) | ||||
Net income available to common shareholders | $ | 1,609 | $ | 1,522 | ||||
Earnings per common share: | ||||||||
Basic | $ | 0.48 | $ | 0.46 | ||||
Diluted | $ | 0.48 | $ | 0.44 | ||||
Dividends per common share | $ | 0.10 | $ | 0.10 |
See accompanying notes to consolidated financial statements.
4 |
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
Net income | $ | 1,835 | $ | 1,788 | ||||
Other comprehensive income (loss), net of tax | ||||||||
Unrealized gain on securities: | ||||||||
Unrealized gain arising during the period (net of tax of $190 and $578, respectively) | 370 | 1,122 | ||||||
Reclassification adjustment for gains included in net income (net of tax of $247 and $199, respectively) | (480 | ) | (385 | ) | ||||
Net unrealized gain (loss) on securities | (110 | ) | 737 | |||||
Defined benefit pension plans: | ||||||||
Net gain arising during the period (net of tax of $24 and $5, respectively) | 47 | 11 | ||||||
Total other comprehensive income (loss) | (63 | ) | 748 | |||||
Comprehensive income | $ | 1,772 | $ | 2,536 |
5 |
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollar amounts in thousands, except per share data)
(Unaudited)
Preferred Stock | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Stock | Total Shareholders’ Equity | ||||||||||||||||||||||
Balance, January 1, 2012 | $ | 28,000 | $ | 386 | $ | 44,488 | $ | 13,201 | $ | 2,666 | $ | (9,256 | ) | $ | 79,485 | |||||||||||||
Net income | — | — | — | 1,835 | — | — | 1,835 | |||||||||||||||||||||
Change in unrealized gain (losses) on securities available for sale, net of reclassifications and tax effects | — | — | — | — | (110 | ) | — | (110 | ) | |||||||||||||||||||
Unrealized gain on pension benefits, net of tax effects | — | — | — | — | 47 | — | 47 | |||||||||||||||||||||
Cash dividends declared on common stock ($0.10 per share) | — | — | — | (335 | ) | — | — | (335 | ) | |||||||||||||||||||
Dividends on preferred stock | — | — | — | (226 | ) | — | — | (226 | ) | |||||||||||||||||||
Issuance of treasury stock under dividend reinvestment plan | — | — | (23 | ) | — | — | 76 | 53 | ||||||||||||||||||||
Issuance of stock award shares | — | — | (498 | ) | — | — | 498 | — | ||||||||||||||||||||
Stock award expense | — | — | 57 | — | — | — | 57 | |||||||||||||||||||||
Balance, March 31, 2012 | $ | 28,000 | $ | 386 | $ | 44,024 | $ | 14,475 | $ | 2,603 | $ | (8,682 | ) | $ | 80,806 |
See accompanying notes to consolidated financial statements.
6 |
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, | ||||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 1,835 | $ | 1,788 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Provision for loan losses | 1,506 | 810 | ||||||
Depreciation and amortization | 385 | 375 | ||||||
Net amortization of securities | 283 | 223 | ||||||
Net gain on sales of available for sale securities | (727 | ) | (584 | ) | ||||
Mortgage loans originated for sale | (4,640 | ) | (3,563 | ) | ||||
Proceeds from mortgage loan sales | 5,249 | 4,063 | ||||||
Net gain on sales of mortgage loans | (93 | ) | (45 | ) | ||||
Earnings on company owned life insurance | (171 | ) | (161 | ) | ||||
Shared based compensation expense | 57 | 65 | ||||||
Net (gain) loss on disposition of foreclosed and repossessed assets | 43 | (30 | ) | |||||
Net gain on disposition of premises and equipment | (21 | ) | - | |||||
Net change in: | ||||||||
Accrued interest receivable | (48 | ) | (236 | ) | ||||
Accrued interest payable | (3 | ) | (72 | ) | ||||
Other assets | (2,340 | ) | 1,279 | |||||
Other liabilities | (1,437 | ) | 423 | |||||
Net cash from operating activities | (122 | ) | 4,335 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Net change in interest-bearing deposits | 16,375 | 14,420 | ||||||
Available for sale securities: | ||||||||
Sales | 24,330 | 13,535 | ||||||
Purchases | (52,836 | ) | (23,771 | ) | ||||
Maturities, prepayments and calls | 6,909 | 6,862 | ||||||
Loan originations and payments, net | 446 | 6,904 | ||||||
Proceeds from the sale of foreclosed and repossessed assets | 641 | 695 | ||||||
Purchases of premises and equipment | (147 | ) | (229 | ) | ||||
Investment in company owned life insurance | - | (116 | ) | |||||
Proceeds from the sale of premises and equipment | 21 | - | ||||||
Net cash from investing activities | (4,261 | ) | 18,300 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net change in deposits | (10 | ) | (14,613 | ) | ||||
Net change in other borrowings | 2,091 | 3,145 | ||||||
Proceeds from Federal Home Loan Bank advances | 10,000 | - | ||||||
Repayment of Federal Home Loan Bank advances | (10,000 | ) | (10,000 | ) | ||||
Cash dividends paid on preferred shares | (345 | ) | (243 | ) | ||||
Cash dividends paid on common shares | (282 | ) | (278 | ) | ||||
Net cash from financing activities | 1,454 | (21,989 | ) | |||||
Net change in cash and due from financial institutions | (2,929 | ) | 646 | |||||
Cash and due from financial institutions at beginning of period | 15,166 | 11,658 | ||||||
Cash and due from financial institutions at end of period | $ | 12,237 | $ | 12,304 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 1,109 | $ | 1,803 | ||||
Income taxes paid, net of refunds | $ | 850 | $ | - | ||||
Supplemental noncash disclosures: | ||||||||
Transfer from loans to foreclosed real estate | $ | 282 | $ | 1,262 | ||||
Issuance of treasury shares under dividend reinvestment plan | $ | 76 | $ | 67 | ||||
Sale and financing of foreclosed and repossessed assets | $ | - | $ | 271 | ||||
Security transactions in suspense, net (payable) receivable | $ | - | $ | (1,295 | ) |
See accompanying notes to consolidated financial statements.
7 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Presentation of Interim Information
Community Bank Shares of Indiana, Inc. (“we,” “our” or “us”) is a bank holding company headquartered in New Albany, Indiana. Our wholly-owned banking subsidiaries are Your Community Bank (“Your Community Bank” or “YCB”), and The Scott County State Bank (“Scott County State Bank”). YCB and SCSB (YCB and SCSB are at times collectively referred to herein as the “Banks”) are state-chartered commercial banks headquartered in New Albany, Indiana and Scottsburg, Indiana, respectively, and are both regulated by the Indiana Department of Financial Institutions. Your Community Bank is also regulated by the Federal Deposit Insurance Corporation and (with respect to its Kentucky branches) the Kentucky Office of Financial Institutions. Scott County State Bank is also regulated by the Federal Reserve.
Your Community Bank has three 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 Your Community Bank.
In June 2004 and June 2006, we completed placements of floating rate subordinated debentures through two trusts that we formed, Community Bank Shares (IN) Statutory Trust I and Trust II (“Trusts”). Because the Trusts are not consolidated with us, our financial statements reflect the subordinated debt we issued to the Trusts.
To prepare financial statements in conformity with U.S. generally accepted accounting principles management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, valuation of other intangible assets, fair value and impairment of securities and deferred tax assets are particularly subject to change.
In the opinion of management, the unaudited consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of March 31, 2012, the results of operations for the three months ended March 31, 2012 and 2011, and cash flows for the three months ended March 31, 2012 and 2011. 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 U.S. GAAP 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 U.S. GAAP for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2011. The consolidated financial statements include our accounts and our subsidiaries’ accounts. All material intercompany balances and transactions have been eliminated in consolidation.
8 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Securities
The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
March 31, 2012: | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
State and municipal | $ | 69,369 | $ | 6,059 | $ | (48 | ) | $ | 75,380 | |||||||
U.S. Government sponsored entities and agencies | 2,042 | 23 | - | 2,065 | ||||||||||||
Residential mortgage-backed agencies issued by U.S. Government sponsored entities | 140,259 | 1,878 | (64 | ) | 142,073 | |||||||||||
Collateralized debt obligations, including trust preferred securities | 4,043 | - | (3,197 | ) | 846 | |||||||||||
Mutual funds | 250 | 5 | - | 255 | ||||||||||||
Total securities available for sale | $ | 215,963 | $ | 7,965 | $ | (3,309 | ) | $ | 220,619 | |||||||
December 31, 2011: | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
State and municipal | $ | 70,728 | $ | 5,803 | $ | (4 | ) | $ | 76,527 | |||||||
Residential mortgage-backed agencies issued by U.S. Government sponsored entities | 118,876 | 2,190 | (39 | ) | 121,027 | |||||||||||
Collateralized debt obligations, including trust preferred securities | 4,069 | - | (3,132 | ) | 937 | |||||||||||
Mutual funds | 250 | 5 | - | 255 | ||||||||||||
Total securities available for sale | $ | 193,923 | $ | 7,998 | $ | (3,175 | ) | $ | 198,746 |
Total other-than-temporary impairment recognized in accumulated other comprehensive income was $1.7 million and $1.6 million for securities at March 31, 2012 and December 31, 2011.
Sales of available for sale securities were as follows.
Three Months Ended March 31 | ||||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
Proceeds | $ | 24,330 | $ | 13,535 | ||||
Gross gains | 727 | 584 | ||||||
Gross losses | - | - |
The tax provision applicable to these realized gains amounted to $247,000 and $199,000, respectively.
9 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Securities (Continued)
The amortized cost and fair value of the contractual maturities of available for sale securities at March 31, 2012 were as follows. Mortgage-backed agencies and mutual funds which do not have a single maturity date are shown separately.
March 31, 2012 | ||||||||
Amortized Cost | Fair Value | |||||||
(In thousands) | ||||||||
Within one year | $ | 466 | $ | 466 | ||||
One to five years | 2,443 | 2,508 | ||||||
Five to ten years | 14,987 | 16,184 | ||||||
Beyond ten years | 57,558 | 59,133 | ||||||
Residential mortgage-backed securities issued by U.S. Government sponsored entities | 140,259 | 142,073 | ||||||
Mutual funds | 250 | 255 | ||||||
Total | $ | 215,963 | $ | 220,619 |
Securities with unrealized losses at March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
March 31, 2012 | ||||||||||||||||||||||||
State and municipal | $ | 1,708 | $ | (48 | ) | $ | - | $ | - | $ | 1,708 | $ | (48 | ) | ||||||||||
Residential mortgage-backed securities issued by U.S. Government sponsored entities | 12,207 | (64 | ) | - | - | 12,207 | (64 | ) | ||||||||||||||||
Collateralized debt obligations, including trust preferred securities | - | - | 846 | (3,197 | ) | 846 | (3,197 | ) | ||||||||||||||||
Total temporarily impaired | $ | 13,915 | $ | (112 | ) | $ | 846 | $ | (3,197 | ) | $ | 14,761 | $ | (3,309 | ) |
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||||||
State and municipal | $ | 561 | $ | (4 | ) | $ | - | $ | - | $ | 561 | $ | (4 | ) | ||||||||||
Residential mortgaged-backed securities issued by U.S. Government sponsored agencies | 26,297 | (39 | ) | - | - | 26,297 | (39 | ) | ||||||||||||||||
Collateralized debt obligations, including trust preferred securities | - | - | 937 | (3,132 | ) | 937 | (3,132 | ) | ||||||||||||||||
Total temporarily impaired | $ | 26,858 | $ | (43 | ) | $ | 937 | $ | (3,132 | ) | $ | 27,795 | $ | (3,175 | ) |
10 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Securities (Continued)
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under FASB ASC 320-10. However, certain purchased beneficial interests, including collateralized debt obligations that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB ASC 325-40.
In determining OTTI under the FASB ASC 320-10 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
The second segment of the portfolio uses the OTTI guidance provided by FASB ASC 325-40 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the FASB ASC 325-40 model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected cash flows.
As of March 31, 2012, the Company’s security portfolio consisted of 275 securities, 14 of which were in an unrealized loss position. The unrealized losses are related to the Company’s state and municipal, residential mortgage-backed securities issued by U.S. Government sponsored entities, and collateralized debt obligations, as discussed below:
State and Municipal
At March 31, 2012 the Company had approximately $1.7 million of state and municipal securities with an unrealized loss of $48,000. Of the 176 state and municipal securities in the Company’s portfolio, 172 had an investment grade rating as of March 31, 2011 while 4 were not rated. The decline in value in these securities is attributable to interest rate and liquidity, and not credit quality. All of the state and municipal securities in the Company’s portfolio have a fair value as a percentage of amortized cost greater than 90%. The Company does not have the intent to sell its state and municipal securities and it is unlikely that we will be required to sell the securities before the anticipated recovery. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2012.
11 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Securities (Continued)
Mortgage-backed Securities
At March 31, 2012, all of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2012.
Collateralized Debt Obligations
The Company’s unrealized losses on collateralized debt obligations relate to its investment in six pooled trust preferred securities.
Our analysis of six of these investments falls within the scope of FASB ASC 325-40 and includes $4.0 million amortized cost of pooled trust preferred securities (CDOs). See the table below for a detail of the CDOs (in thousands):
Current Moody Rating | Par Value | Amortized Cost | Estimated Fair Value | Previously Recognized OTTI Related to Credit Loss, Pre-Tax | Current Quarter OTTI Related to Credit Loss, Pre-Tax | |||||||||||||||||
Security 1 | B+ (S&P) | $ | 2,000 | $ | 2,000 | $ | 470 | $ | - | $ | - | |||||||||||
Security 2 | Ba3 | 150 | - | - | 146 | - | ||||||||||||||||
Security 3 | Ca | 49 | 43 | 19 | 5 | - | ||||||||||||||||
Security 4 | Ca | 317 | 282 | 107 | 35 | - | ||||||||||||||||
Security 5 | Ca | 1,572 | 859 | 125 | 637 | - | ||||||||||||||||
Security 6 | Ca | 1,572 | 859 | 125 | 637 | - | ||||||||||||||||
$ | 5,660 | $ | 4,043 | $ | 846 | $ | 1,460 | $ | - |
12 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Securities (Continued)
The issuers in five of the six securities are banks and bank holding companies while one is comprised of insurance companies. The Company uses the OTTI evaluation model to evaluate the present value of expected cash flows. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. To develop our assumptions we reviewed the underlying issuers and determined the specific default rate by reviewing the financial condition of each issuer and whether they were currently in deferral or default. We considered all defaults to be immediate. We considered all relevant data in developing our assumptions, however, we specifically reviewed each issuer’s profitability, credit ratings, if available, credit ratios, and credit quality metrics for the loan portfolios (if a bank). For those issuers we identified at risk of default, we estimated the amount of loss, net of any anticipated recoveries, which ranged from 100% for those issuers already in default at the evaluation date to 5.00%. After four years we assume a 0.40% annual default rate until scheduled maturity of the underlying note. Additionally, we assumed that all bank and bank holding company issuers with total assets of greater than $15 billion would prepay their obligations before the phase-out period begins for inclusion in Tier 1 capital on January 1, 2013 in accordance with the Dodd-Frank Act. Upon completion of the analysis, our model indicated we did not have additional other-than-temporary impairment. At March 31, 2012 the six securities subject to FASB ASC 325-40 accounted for the $3.2 million of unrealized loss in the collateralized debt obligations category at March 31, 2012.
There were no credit losses recognized in earnings related to these securities for the three month periods ended March 31, 2012 and 2011. Prior to 2011, the Company had recognized credit losses of $1.5 million.
13 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans
Loans at March 31, 2012 and December 31, 2011 consisted of the following:
March 31, 2012 | December 31, 2011 | |||||||
(In thousands) | ||||||||
Commercial | $ | 100,237 | $ | 100,884 | ||||
Construction | 44,267 | 44,722 | ||||||
Commercial real estate: | ||||||||
Owner occupied nonfarm/residential | 95,704 | 92,848 | ||||||
Other nonfarm/residential | 79,902 | 77,875 | ||||||
Residential real estate: | ||||||||
Secured by first liens | 127,455 | 131,054 | ||||||
Home equity | 43,723 | 44,832 | ||||||
Consumer | 7,064 | 7,759 | ||||||
Subtotal | 498,352 | 499,974 | ||||||
Less: | ||||||||
Allowance for loan losses | (10,841 | ) | (10,234 | ) | ||||
Loans, net | $ | 487,511 | $ | 489,740 |
14 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans (Continued)
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2012 and 2011 (in thousands):
March 31, 2012
Commercial | Construction | Commercial Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||||||
Beginning balance | $ | 2,999 | $ | 1,112 | $ | 3,207 | $ | 2,681 | $ | 235 | $ | 10,234 | ||||||||||||
Provision for loan losses | 135 | 321 | 830 | 228 | (8 | ) | 1,506 | |||||||||||||||||
Loans charged-off | (342 | ) | (333 | ) | - | (297 | ) | (67 | ) | (1,039 | ) | |||||||||||||
Recoveries | 33 | - | 17 | 57 | 33 | 140 | ||||||||||||||||||
Ending balance | $ | 2,825 | $ | 1,100 | $ | 4,054 | $ | 2,669 | $ | 193 | $ | 10,841 |
March 31, 2011
Commercial | Construction | Commercial Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||||||
Beginning balance | $ | 3,245 | $ | 1,893 | $ | 2,499 | $ | 2,803 | $ | 424 | $ | 10,864 | ||||||||||||
Provision for loan losses | 302 | (46 | ) | 336 | 249 | (31 | ) | 810 | ||||||||||||||||
Loans charged-off | (582 | ) | (19 | ) | (16 | ) | (181 | ) | (111 | ) | (909 | ) | ||||||||||||
Recoveries | 37 | 2 | 7 | 1 | 69 | 116 | ||||||||||||||||||
Ending balance | $ | 3,002 | $ | 1,830 | $ | 2,826 | $ | 2,872 | $ | 351 | $ | 10,881 |
15 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans (Continued)
The following table presents the balance in the allowance for loan losses and the recorded investment in loans, which includes the unpaid principal balance, net of partial charge-offs of $6.7 million and $6.5 million as of March 31, 2011 and December 31, 2011, by portfolio segment and based on impairment method as of March 31, 2012 and December 31, 2011 (in thousands):
March 31, 2012:
Commercial | Construction | Commercial Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 313 | $ | 843 | $ | 2,559 | $ | 464 | $ | 11 | $ | 4,190 | ||||||||||||
Collectively evaluated for impairment | 2,512 | 257 | 1,495 | 2,205 | 182 | 6,651 | ||||||||||||||||||
Total ending allowance balance | $ | 2,825 | $ | 1,100 | $ | 4,054 | $ | 2,669 | $ | 193 | $ | 10,841 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 1,177 | $ | 13,368 | $ | 22,002 | $ | 3,364 | $ | 138 | $ | 40,049 | ||||||||||||
Loans collectively evaluated for impairment | 99,060 | 30,899 | 153,604 | 167,814 | 6,926 | 458,303 | ||||||||||||||||||
Total ending loans balance | $ | 100,237 | $ | 44,267 | $ | 175,606 | $ | 171,178 | $ | 7,064 | $ | 498,352 |
December 31, 2011:
Commercial | Construction | Commercial Real Estate | Residential Real Estate | Consumer | Total | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 517 | $ | 815 | $ | 1,749 | $ | 563 | $ | 17 | $ | 3,661 | ||||||||||||
Collectively evaluated for impairment | 2,482 | 297 | 1,458 | 2,118 | 218 | 6,573 | ||||||||||||||||||
Total ending allowance balance | $ | 2,999 | $ | 1,112 | $ | 3,207 | $ | 2,681 | $ | 235 | $ | 10,234 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 1,548 | $ | 13,902 | $ | 20,899 | $ | 3,811 | $ | 146 | $ | 40,306 | ||||||||||||
Loans collectively evaluated for impairment | 99,336 | 30,820 | 149,824 | 172,075 | 7,613 | 459,668 | ||||||||||||||||||
Total ending loans balance | $ | 100,884 | $ | 44,722 | $ | 170,723 | $ | 175,886 | $ | 7,759 | $ | 499,974 |
There were no impaired loans at March 31, 2012 and December 31, 2011 which did not have allocated allowance for loan losses.
16 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans (Continued)
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the three month period ending March 31, 2012 (in thousands):
March 31, 2012: | Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized and Received | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial | $ | 2,694 | $ | 1,177 | $ | 313 | $ | 1,363 | $ | 4 | ||||||||||
Construction | 17,505 | 13,368 | 843 | 13,635 | 58 | |||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied nonfarm/nonresidential | 10,220 | 10,220 | 2,297 | 9,970 | 130 | |||||||||||||||
Other nonfarm/nonresidential | 12,703 | 11,782 | 262 | 11,481 | 68 | |||||||||||||||
Residential real estate: | ||||||||||||||||||||
Secured by first liens | 3,069 | 2,993 | 316 | 3,205 | 13 | |||||||||||||||
Home equity | 371 | 371 | 148 | 383 | 1 | |||||||||||||||
Consumer | 145 | 138 | 11 | 142 | - | |||||||||||||||
Total | $ | 46,707 | $ | 40,049 | $ | 4,190 | $ | 40,179 | $ | 274 |
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011:
Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | ||||||||||
(In thousands) | ||||||||||||
Commercial | $ | 3,064 | $ | 1,548 | $ | 517 | ||||||
Construction | 17,709 | 13,902 | 815 | |||||||||
Commercial real estate: | ||||||||||||
Owner occupied nonfarm/nonresidential | 9,719 | 9,719 | 924 | |||||||||
Other nonfarm/nonresidential | 12,299 | 11,180 | 825 | |||||||||
Residential real estate: | ||||||||||||
Secured by first liens | 3,491 | 3,416 | 297 | |||||||||
Home equity | 395 | 395 | 266 | |||||||||
Consumer | 146 | 146 | 17 | |||||||||
Total | $ | 46,823 | $ | 40,306 | $ | 3,661 |
The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for net charge-offs.
17 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans (Continued)
The following table presents information for loans individually evaluated for impairment by class of loans for the three months ended March 31, 2011:
Average Recorded Investment | Interest Income Recognized and Received | |||||||
(In thousands) | ||||||||
Commercial | $ | 213 | $ | 1 | ||||
Construction | 8,841 | 1 | ||||||
Commercial real estate: | ||||||||
Owner occupied nonfarm/nonresidential | 767 | - | ||||||
Other nonfarm/nonresidential | 11,082 | 89 | ||||||
Residential real estate: | ||||||||
Secured by first liens | 4,773 | 24 | ||||||
Home equity | 124 | - | ||||||
Consumer | 196 | - | ||||||
Total | $ | 25,996 | $ | 115 |
The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Nonaccrual | Loans Past Due Over 90 Days Still Accruing | Nonaccrual | Loans Past Due Over 90 Days Still Accruing | |||||||||||||
(In thousands) | ||||||||||||||||
Commercial | $ | 887 | $ | - | $ | 1,040 | $ | - | ||||||||
Construction | 6,951 | - | 7,457 | - | ||||||||||||
Commercial real estate: | ||||||||||||||||
Owner occupied nonfarm/nonresidential | 1,335 | - | 1,036 | - | ||||||||||||
Other nonfarm/nonresidential | 2,681 | - | 2,290 | - | ||||||||||||
Residential real estate: | ||||||||||||||||
Secured by first liens | 2,865 | - | 3,427 | - | ||||||||||||
Home equity | 324 | - | 372 | - | ||||||||||||
Consumer | 127 | - | 150 | - | ||||||||||||
Total | $ | 15,170 | $ | - | $ | 15,772 | $ | - |
18 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans (Continued)
The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 and December 31, 2011 by class of loans:
March 31, 2012:
30 – 59 Days Past Due | 60 – 89 Days Past Due | Greater than 89 Days Past Due | Total Past Due | Loans Not Past Due | Loans Past Due Over 90 Days Still Accruing | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Commercial | $ | 849 | $ | - | $ | 416 | $ | 1,265 | $ | 98,972 | $ | - | ||||||||||||
Construction | 473 | 2,656 | 7,521 | 10,650 | 33,617 | - | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Owner occupied nonfarm/nonresidential | 339 | - | 765 | 1,104 | 94,600 | - | ||||||||||||||||||
Other nonfarm/nonresidential | 222 | - | 2,680 | 2,902 | 77,000 | - | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Secured by first liens | 1,154 | 2,076 | 2,676 | 5,906 | 121,549 | - | ||||||||||||||||||
Home equity | 462 | 745 | 341 | 1,548 | 42,175 | - | ||||||||||||||||||
Consumer | 113 | 10 | 123 | 246 | 6,818 | - | ||||||||||||||||||
Total | $ | 3,612 | $ | 5,487 | $ | 14,522 | $ | 23,621 | $ | 474,731 | $ | - |
December 31, 2011:
30 – 59 Days Past Due | 60 – 89 Days Past Due | Greater than 89 Days Past Due | Total Past Due | Loans Not Past Due | Loans Past Due Over 90 Days Still Accruing | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Commercial | $ | 263 | $ | 457 | $ | 953 | $ | 1,673 | $ | 99,211 | $ | - | ||||||||||||
Construction | 154 | - | 8,027 | 8,181 | 36,541 | - | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Owner occupied nonfarm/nonresidential | 299 | - | 466 | 765 | 92,083 | - | ||||||||||||||||||
Other nonfarm/nonresidential | 209 | 42 | 2,290 | 2,541 | 75,334 | - | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Secured by first liens | 1,181 | 238 | 3,391 | 4,810 | 126,244 | - | ||||||||||||||||||
Home equity | 800 | 152 | 409 | 1,361 | 43,471 | - | ||||||||||||||||||
Consumer | 213 | 14 | 147 | 374 | 7,385 | - | ||||||||||||||||||
Total | $ | 3,119 | $ | 903 | $ | 15,683 | $ | 19,705 | $ | 480,269 | $ | - |
19 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans (Continued)
Troubled Debt Restructurings:
Troubled debt restructurings totaled $26.5 million and $26.6 million at March 31, 2012 and December 31, 2011. Of the total TDRs, $2.3 million and $2.4 million were on non-accrual as of March 31, 2012 and December 31, 2011. The Company has allocated $3.2 million and $2.4 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2012 and December 31, 2011. The Company did not have any commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings as of March 31, 2012 and December 31, 2011.
The detail of outstanding TDRs by class and modification type as of March 31, 2011 and December 31, 2011 follows (in thousands):
March 31, 2012:
Recorded Investment | Allowance for Loan Losses Allocated | |||||||
Commercial: | ||||||||
Interest only payments | $ | 470 | $ | 180 | ||||
Extended maturity | 294 | 74 | ||||||
Multiple modifications | 280 | 12 | ||||||
Construction: | ||||||||
Extended maturity | 926 | 306 | ||||||
Multiple modifications | 5,327 | 307 | ||||||
Commercial real estate: | ||||||||
Owner occupied nonfarm/nonresidential | ||||||||
Interest only | 8,911 | 2,269 | ||||||
Other nonfarm/nonresidential | ||||||||
Interest rate reduction | 8,070 | 27 | ||||||
Interest only payments | 205 | 4 | ||||||
Multiple modifications | 1,127 | 30 | ||||||
Residential real estate: | ||||||||
Secured by first liens | ||||||||
Interest rate reduction | 99 | 1 | ||||||
Interest only payments | 123 | 2 | ||||||
Extended maturity | 306 | 7 | ||||||
Multiple modifications | 372 | 5 | ||||||
Home equity | ||||||||
Interest rate reduction | 29 | 1 | ||||||
Total | $ | 26,539 | $ | 3,225 |
20 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans (Continued)
December 31, 2011:
Recorded Investment | Allowance for Loan Losses Allocated | |||||||
Commercial: | ||||||||
Interest only payments | $ | 500 | $ | 24 | ||||
Extended maturity | 489 | 281 | ||||||
Multiple modifications | 332 | 12 | ||||||
Construction: | ||||||||
Extended maturity | 926 | 320 | ||||||
Multiple modifications | 5,333 | 80 | ||||||
Commercial real estate: | ||||||||
Owner occupied nonfarm/nonresidential | ||||||||
Interest only | 8,710 | 887 | ||||||
Other nonfarm/nonresidential | ||||||||
Interest rate reduction | 8,070 | 616 | ||||||
Interest only payments | 206 | 4 | ||||||
Multiple modifications | 1,127 | 87 | ||||||
Residential real estate: | ||||||||
Secured by first liens | ||||||||
Interest rate reduction | 100 | 7 | ||||||
Interest only payments | 124 | 8 | ||||||
Extended maturity | 307 | 4 | ||||||
Multiple modifications | 373 | 29 | ||||||
Home equity | ||||||||
Interest rate reduction | 30 | 1 | ||||||
Consumer | ||||||||
Interest rate reduction | 8 | - | ||||||
Total | $ | 26,635 | $ | 2,360 |
21 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans (Continued)
A loan is considered in payment default once it is 30 days contractually past due under the modified terms. The following table summarizes the Company’s TDR’s by class, modification type and performance as of March 31, 2012 and December 31, 2011 (in thousands):
March 31, 2012: | TDRs Greater than 30 Days Past Due and Still Accruing | TDRs on Nonaccrual | Total TDRs Not Performing to Modified Terms | Total TDRs Defaulted Within 12 Months of Modification | ||||||||||||
Commercial: | ||||||||||||||||
Interest only | $ | - | $ | 470 | $ | 470 | $ | 470 | ||||||||
Multiple modifications | - | 211 | 211 | 211 | ||||||||||||
Construction: | ||||||||||||||||
Extended maturity | - | 510 | 510 | 510 | ||||||||||||
Multiple modifications | 2,656 | - | 2,656 | 2,656 | ||||||||||||
Commercial real estate: | ||||||||||||||||
Owner occupied nonfarm/nonresidential | - | - | ||||||||||||||
Interest only | 8,710 | - | 8,710 | 8,710 | ||||||||||||
Other nonfarm/nonresidential | ||||||||||||||||
Multiple modifications | - | 1,127 | 1,127 | 1,127 | ||||||||||||
Residential: | ||||||||||||||||
Secured by first liens | ||||||||||||||||
Multiple modifications | 149 | - | 149 | - | ||||||||||||
Home equity | - | - | - | - | ||||||||||||
Consumer | - | - | - | - | ||||||||||||
Total | $ | 11,515 | $ | 2,318 | $ | 13,833 | $ | 13,684 |
December 31, 2011: | TDRs Greater than 30 Days Past Due and Still Accruing | TDRs on Nonaccrual | Total TDRs Not Performing to Modified Terms | Total TDRs Defaulted Within 12 Months of Modification | ||||||||||||
Commercial: | ||||||||||||||||
Interest only | $ | - | $ | 500 | $ | 500 | $ | 500 | ||||||||
Extended maturity | 1 | 248 | 249 | 249 | ||||||||||||
Multiple modifications | 262 | - | 262 | 262 | ||||||||||||
Construction: | ||||||||||||||||
Extended maturity | - | 510 | 510 | 510 | ||||||||||||
Commercial real estate: | ||||||||||||||||
Owner occupied nonfarm/nonresidential | - | - | - | - | ||||||||||||
Other nonfarm/nonresidential | ||||||||||||||||
Multiple modifications | - | 1,127 | 1,127 | 1,127 | ||||||||||||
Residential: | ||||||||||||||||
Secured by first liens | ||||||||||||||||
Multiple modifications | 111 | - | 111 | - | ||||||||||||
Home equity | - | - | - | - | ||||||||||||
Consumer | - | - | - | - | ||||||||||||
Total | $ | 374 | $ | 2,385 | $ | 2,759 | $ | 2,648 |
22 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans (Continued)
During the quarter ending March 31, 2012, the term of one loan was modified to adjust the scheduled loan payments from principal and interest to interest only for a period of 4 months.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the company’s internal underwriting policy.
The following table presents loans by class modified as troubled debt restructurings that occurred during the quarter ending March 31, 2012 and their performance, by modification type (in thousands):
Number of Loans | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | TDRs Performing to Modified Terms | TDRs Not Performing to Modified Terms | ||||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied nonfarm/nonresidential | ||||||||||||||||||||
Interest only | 1 | $ | 201 | $ | 201 | $ | 201 | $ | - |
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. On a monthly basis, the Company reviews its loans that are risk rated Watch, Special Mention, Substandard, or Doubtful to determine they are properly classified. In addition, the Company reviews loans rated as a “pass” that have exhibited signs that may require a classification change, such as past due greater than 30 days and other relevant information including: loan officer recommendations, knowledge of specific borrower circumstances, and receipt of borrower financial statements. The Company uses the following definitions for risk ratings:
Watch. Loans classified as watch are not considered “rated” or “classified” for regulatory purposes, but are considered criticized assets which exhibit modest deterioration in financial performance or external threats.
Special Mention. Loans classified as special mention exhibit potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan, or in the Company’s credit position at some future date. Economic or market conditions exist which may affect the borrower more severely than other companies in its industry.
Substandard. Loans classified as substandard are characterized by having well defined financial weakness. Substandard loans are usually evidenced by chronic or emerging past due performance and serious deficiencies in the primary source of repayment.
Doubtful. Loans classified as doubtful have a well-defined and documented financial weaknesses. They have all the weaknesses of a substandard loan with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Generally, loans classified as doubtful are on non-accrual.
23 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans (Continued)
Loans not meeting the criteria above that are listed as pass are included in groups of homogeneous loans. The risk category of loans by class of loans based on the most recent analysis performed as of March 31, 2012 and December 31, 2011 is as follows:
March 31, 2012:
Watch | Special Mention | Substandard | Doubtful | Pass | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Commercial | $ | 10,206 | $ | 618 | $ | 963 | $ | 752 | $ | 87,698 | $ | 100,237 | ||||||||||||
Construction | 9,515 | - | 6,348 | 7,625 | 20,779 | 44,267 | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Owner occupied nonfarm/nonresidential | 1,517 | 973 | 659 | 9,720 | 82,835 | 95,704 | ||||||||||||||||||
Other nonfarm/nonresidential | 5,490 | - | 9,191 | 2,718 | 62,503 | 79,902 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Secured by first liens | 1,997 | 636 | 4,061 | 1,930 | 118,831 | 127,455 | ||||||||||||||||||
Home equity | 210 | - | 1,085 | 155 | 42,273 | 43,723 | ||||||||||||||||||
Consumer | 59 | - | 144 | 27 | 6,834 | 7,064 | ||||||||||||||||||
Total | $ | 28,994 | $ | 2,227 | $ | 22,451 | $ | 22,927 | $ | 421,753 | $ | 498,352 |
December 31, 2011:
Watch | Special Mention | Substandard | Doubtful | Pass | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Commercial | $ | 5,261 | $ | 653 | $ | 742 | $ | 1,209 | $ | 93,019 | $ | 100,884 | ||||||||||||
Construction | 9,787 | - | 3,225 | 8,153 | 23,557 | 44,722 | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Owner occupied nonfarm/nonresidential | 1,835 | 988 | 9,075 | 1,009 | 79,941 | 92,848 | ||||||||||||||||||
Other nonfarm/nonresidential | 5,779 | 213 | 8,648 | 2,705 | 60,530 | 77,875 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Secured by first liens | 2,145 | 385 | 3,813 | 1,720 | 122,991 | 131,054 | ||||||||||||||||||
Home equity | 1,149 | - | 386 | 300 | 42,997 | 44,832 | ||||||||||||||||||
Consumer | 87 | - | 176 | 27 | 7,469 | 7,759 | ||||||||||||||||||
Total | $ | 26,043 | $ | 2,239 | $ | 26,065 | $ | 15,123 | $ | 430,504 | $ | 499,974 |
24 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Deposits
Deposits at March 31, 2012 and December 31, 2011 consisted of the following:
March 31, 2012 | December 31, 2011 | |||||||
(In thousands) | ||||||||
Demand (NOW) | $ | 83,315 | $ | 92,683 | ||||
Money market accounts | 131,917 | 134,818 | ||||||
Savings | 38,487 | 36,010 | ||||||
Individual retirement accounts | 28,250 | 28,375 | ||||||
Certificates of deposit, $100,000 and over | 71,911 | 69,873 | ||||||
Other certificates of deposit | 94,791 | 91,722 | ||||||
Total interest bearing deposits | 448,671 | 453,481 | ||||||
Total non-interest bearing deposits | 132,677 | 127,877 | ||||||
Total deposits | $ | 581,348 | $ | 581,358 |
5. Earnings Per Common Share
Earnings per share were computed as follows:
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Basic: | ||||||||
Net income | $ | 1,835 | $ | 1,788 | ||||
Preferred stock dividends and discount amortization | (226 | ) | (266 | ) | ||||
Net income available to common shareholders | $ | 1,609 | $ | 1,522 | ||||
Average shares outstanding | 3,356,466 | 3,306,455 | ||||||
Net income per common share, basic | $ | 0.48 | $ | 0.46 | ||||
Diluted: | ||||||||
Net income available to common shareholders | $ | 1,609 | $ | 1,522 | ||||
Average shares outstanding for basic | 3,356,466 | 3,306,455 | ||||||
Add: Dilutive effect of outstanding warrants | - | 136,039 | ||||||
Average shares and dilutive potential common shares | 3,356,466 | 3,442,494 | ||||||
Net income per common share, diluted | $ | 0.48 | $ | 0.44 |
Stock options for 168,100 and 188,700 shares of common stock were excluded from the calculation of diluted net income per common share for the three months ended March 31, 2012 and 2011, respectively, because their effect was antidilutive.
Deferred stock units totaling 0 and 40,333 were excluded from the calculation of diluted net income per common share for the three months ended March 31, 2012 and 2011, respectively, because all of the conditions necessary for issuance of common stock had not been met as of those dates.
25 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Earnings Per Common Share (Continued)
Restricted share awards of 37,022 and 33,022 common shares were excluded from the calculation of diluted net income per common share for the three months ended March 31, 2012 and 2011 because all of the conditions necessary for issuance of common stock had not been met as of those dates.
6. Stock-Based Compensation Plans
Our stock option plan provides for the granting of both incentive and nonqualified stock options at exercise prices not less than the fair market value of the common stock on the date of grant and expiration dates of up to ten years. Terms of the options are determined by our Board of Directors at the date of grant and generally vest over periods of three to four years. Payment of the option price may be in cash or shares of common stock at fair market value on the exercise date at the election of the employee. Non-employee directors are eligible to receive only nonqualified stock options. We may grant stock options under the current plan for an additional 163,195 shares of common stock. The aggregate intrinsic value for options outstanding and exercisable at March 31, 2012 and December 31, 2011 was $0. There was no remaining compensation cost related to unvested options as of March 31, 2012 and December 31, 2011, respectively. The Company recognized $0 in expense for stock options for the three months ended March 31, 2012 and 2011, respectively. The Company has options vested and expected to vest of 168,100 with aggregate intrinsic value of $0 and a weighted average remaining contractual term of 4.0 years as of March 31, 2012. As of December 31, 2011, the Company had options vested and expected to vest of 168,100 which had an aggregate intrinsic value of $0 and a weighted average remaining contractual term of 4.2 years. During the three months ended March 31, 2012, there were no options granted or forfeited.
For the three months ended March 31, 2012 and 2011, we recognized $57,000 and $28,000 in expense for restricted stock awards, respectively. During the three months ended March 31, 2012, there were no restricted stock awards forfeited or granted to employees. At March 31, 2012, there were 37,022 outstanding and unvested restricted stock awards.
For the three months ended March 31, 2012 and 2011, we recognized $0 and $37,000 in expense for deferred stock units, respectively. During the three months ended March 31, 2012, there were no deferred stock units granted or forfeited. At March 31, 2012, there were no outstanding and unvested deferred stock units.
26 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value.
Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. These valuation methods are classified as Level 2 in the fair value hierarchy.
Collateralized debt obligations which are collateralized by financial institutions and insurance companies are determined by us utilizing an estimate of the expected cash flows based on our review of the underlying issuers’ financial condition and the anticipated deferral of payments and defaults of issuers. The fair values of our collateralized debt obligations are determined by the Company’s accounting department and reviewed by the Chief Financial Officer (CFO). We provide our estimate of default for each issuer, which ranges from 100% loss to 0.40% loss at March 31, 2012, to the capital market traders of our bond accountant who provide the cash flows we will receive based upon our assumptions. To determine the discounted projected cash flows for our collateralized debt obligations, we utilize discount rates ranging from 12.66% to 39.67% (30.17% weighted average rate) depending on the security. The discount rates were determined utilizing a risk free rate of three month Libor plus 300 bps (3.47% at 3/31/12), which includes a premium for market illiquidity, and a credit component based on the quality of the collateral and the deal structure.
The significant unobservable inputs used in the fair value measurement of the Company’s collateralized debt obligations are probabilities of specific-issuer defaults and deferrals and specific-issuer recovery assumptions. Significant increases in specific-issuer default assumptions or decreases in specific-issuer recovery assumptions would result in a significantly lower fair value measurement. Conversely, decreases in specific-issuer default assumptions or increases in specific-issuer recovery assumptions would result in a higher fair value measurement.
27 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Fair Value (Continued)
Impaired Loans: Impaired loans are evaluated at the time the loan is identified as impaired and are recorded at the lower of the carrying amount of the loan or the fair value of the underlying collateral. For collateral dependent loans, the fair value of real estate is primarily determined based on appraisals by qualified licensed appraisers. These appraisals may use a single valuation approach or a combination depending on the type of collateral including the comparable sales or income capitalization approach. The appraisals are discounted to reflect management’s estimate of the fair value of the collateral given the current circumstances and condition of the collateral including the market for the particular collateral and management’s experience with similar types of collateral. Impaired loans are evaluated quarterly for additional impairment. Fair value of impaired loans is classified as Level 3 in the fair value hierarchy.
Foreclosed and Repossessed Assets: Foreclosed and repossessed assets are initially recorded at fair value less estimated costs to sell when acquired. The fair value of foreclosed and repossessed assets is primarily determined based on appraisals by qualified appraisers whose qualifications have been reviewed by the Company. The appraisals are discounted to reflect management’s estimate of the fair value of the collateral given the current circumstances of the collateral and reduced by management’s estimate of costs to dispose of the asset. Also, management reviews the assumptions included the appraisals and makes adjustments where circumstances warrant such as recent experience with similar assets. Fair value of foreclosed and repossessed assets is classified as Level 3 in the fair value hierarchy.
Assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using | ||||||||||||||||
Assets at Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
(in thousands) | ||||||||||||||||
Assets (March 31, 2012): | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
State and municipal | $ | 75,380 | $ | — | $ | 75,284 | $ | 96 | ||||||||
U.S. Government sponsored entities and agencies | 2,065 | — | 2,065 | — | ||||||||||||
Residential mortgage-backed securities issued by U.S. Government sponsored entities | 142,073 | — | 142,073 | — | ||||||||||||
Collateralized debt obligations, including trust preferred securities | 846 | — | — | 846 | ||||||||||||
Mutual Funds | 255 | — | 255 | — | ||||||||||||
Total available for sale securities | $ | 220,619 | $ | — | $ | 219,677 | $ | 942 |
28 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Fair Value (Continued)
Assets (December 31, 2011): | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
State and municipal | $ | 76,527 | $ | — | $ | 76,375 | $ | 152 | ||||||||
Residential mortgage-backed securities issued by U.S. Government sponsored entities | 121,027 | — | 121,027 | — | ||||||||||||
Collateralized debt obligations, including trust preferred securities | 937 | — | — | 937 | ||||||||||||
Mutual Funds | 255 | — | 255 | — | ||||||||||||
Total available for sale securities | $ | 198,746 | $ | — | $ | 197,657 | $ | 1,089 |
There were no transfers between Level 1 and Level 2 during 2012 or 2011.
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31:
Collateralized Debt Obligations, Including Trust Preferred Securities | State and Municipal Securities | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(in thousands) | ||||||||||||||||
Balance, beginning of period | $ | 937 | $ | 1,359 | $ | 152 | $ | - | ||||||||
Net unrealized gain (loss) included in other comprehensive income | (65 | ) | 36 | - | - | |||||||||||
Principal paydowns | (26 | ) | - | (56 | ) | - | ||||||||||
Balance, end of period | $ | 846 | $ | 1,395 | $ | 96 | $ | - |
29 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Fair Value (Continued)
The table below summarizes changes in unrealized gains and losses recorded in earnings for the three month periods ended March 31 for level 3 assets that are still held at March 31:
Changes in Unrealized Gains/Losses Relating to Assets Still Held at Reporting Date for the Three Months Ended March 31 Collateralized Debt Obligations, Including Trust Preferred Securities | Changes in Unrealized Gains/Losses Relating to Assets Still Held at Reporting Date for the Three Months Ended March 31 State and Municipal Securities | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Interest income on securities | $ | 16 | $ | 14 | $ | 1 | $ | - | ||||||||
Other changes in fair value | - | - | - | - | ||||||||||||
Total | $ | 16 | $ | 14 | $ | 1 | $ | - |
Assets measured at fair value on a nonrecurring basis are summarized below.
Fair Value Measurements Using | ||||||||||||||||
Assets at Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
(in thousands) | ||||||||||||||||
Assets (March 31, 2012): | ||||||||||||||||
Impaired loans: | ||||||||||||||||
Commercial | $ | 443 | $ | — | $ | — | $ | 443 | ||||||||
Construction | 8,918 | — | — | 8,918 | ||||||||||||
Commercial real estate: | ||||||||||||||||
Owner Occupied nonfarm/nonresidential | 7,042 | — | — | 7,042 | ||||||||||||
Other nonfarm/nonresidential | 8,595 | — | — | 8,595 | ||||||||||||
Residential real estate: | ||||||||||||||||
Secured by first liens | 916 | — | — | 916 | ||||||||||||
Home equity | 98 | — | — | 98 | ||||||||||||
Consumer | 25 | — | — | 25 | ||||||||||||
Foreclosed and repossessed assets: | ||||||||||||||||
Construction | 1,744 | — | — | 1,744 | ||||||||||||
Commercial real estate: | ||||||||||||||||
Other nonfarm/nonresidential | 1,858 | — | — | 1,858 | ||||||||||||
Residential real estate: | ||||||||||||||||
Secured by first liens | 1,065 | — | — | 1,065 | ||||||||||||
Consumer | 11 | — | — | 11 |
30 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Fair Value (Continued)
Fair Value Measurements Using | ||||||||||||||||
Assets at Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
(in thousands) | ||||||||||||||||
Assets (December 31, 2011): | ||||||||||||||||
Impaired loans: | ||||||||||||||||
Commercial | $ | 872 | $ | — | $ | — | $ | 872 | ||||||||
Construction | 6,248 | — | — | 6,248 | ||||||||||||
Commercial real estate: | ||||||||||||||||
Owner Occupied nonfarm/nonresidential | 8,096 | — | — | 8,096 | ||||||||||||
Other nonfarm/nonresidential | 9,375 | — | — | 9,375 | ||||||||||||
Residential real estate: | ||||||||||||||||
Secured by first liens | 1,336 | — | — | 1,336 | ||||||||||||
Home equity | 23 | — | — | 23 | ||||||||||||
Consumer | 34 | — | — | 34 | ||||||||||||
Foreclosed and repossessed assets: | ||||||||||||||||
Construction | 2,118 | — | — | 2,118 | ||||||||||||
Commercial real estate: | ||||||||||||||||
Other nonfarm/nonresidential | 1,865 | — | — | 1,865 | ||||||||||||
Residential real estate: | ||||||||||||||||
Secured by first liens | 1,092 | — | — | 1,092 | ||||||||||||
Consumer | 1 | — | — | 1 |
31 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Fair Value (Continued)
The Company measures for impairment using the fair value of the collateral less costs to sell for collateral-dependent loans. The Company’s collateral dependent impaired loans had a carrying value of $26.0 million as of March 31, 2012 with a valuation allowance of $4.0 million, resulting in provision for loan losses of $1.2 million for the three months ended March 31, 2012. The Company recorded $606,000 in provision for loan losses for collateral-dependent impaired loans for the three months ended March 31, 2011.
The Company evaluates the fair value of foreclosed and repossessed assets at the time they are transferred from loans and on a quarterly basis thereafter. During the three months ended March 31, 2012 and 2011, the Company did not recognize charges to write down foreclosed and repossessed assets to their fair value.
32 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Fair Value (Continued)
The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2012:
Fair Value | Valuation Technique(s) |
Unobservable Input(s) |
Range (Weighted Average) | ||||||
(in thousands) | |||||||||
Impaired Loans: | |||||||||
Commercial | $ | 443 | Sales comparison approach | Adjustments for differences between comparable sales | 9%-60% (23%) | ||||
Construction | 8,918 | Income capitalization approach | Capitalization rate | 9%-23% (19%) | |||||
Sales comparison approach | Adjustments for differences between comparable sales | 12% | |||||||
Commercial real estate | 15,637 | Income capitalization approach | Capitalization rate | 12%-38% (27%) | |||||
Sales comparison approach | Adjustments for differences between comparable sales | 20%-39% (20%) | |||||||
Residential real estate | 1,014 | Sales comparison approach | Adjustments for differences between comparable sales | 18%-40% (27%) | |||||
Consumer | 25 | Sales comparison approach | Adjustments for differences between comparable sales | 25% | |||||
Foreclosed and repossessed assets: | |||||||||
Construction | $ | 1,744 | Income capitalization approach | Capitalization rate | 52%-60% (53%) | ||||
Sales comparison approach | Adjustments for differences between comparable sales | 10%-61% (30%) | |||||||
Commercial real estate | 1,858 | Sales comparison approach | Adjustments for differences between comparable sales | 9%-50% (33%) | |||||
Residential real estate | 1,065 | Sales comparison approach | Adjustments for differences between comparable sales | 0%-59% (21%) | |||||
Consumer | 11 | Sales comparison approach | Adjustments for differences between comparable sales | 0% |
33 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Fair Value (Continued)
Fair value of Financial Instruments
Carrying amount and estimated fair values of financial instruments, not previously presented, at March 31, 2012 and December 31, 2011 were as follows:
Fair Value Measurements Using | ||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
March 31, 2012: | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and due from financial institutions | $ | 12,237 | $ | 12,237 | $ | — | $ | — | $ | 12,237 | ||||||||||
Interest-bearing deposits in other financial institutions | 13,922 | 13,922 | — | — | 13,922 | |||||||||||||||
Loans held for sale | 638 | — | 644 | — | 644 | |||||||||||||||
Loans, net | 487,511 | — | — | 501,424 | 501,424 | |||||||||||||||
Accrued interest receivable | 3,244 | — | 1,160 | 2,084 | 3,244 | |||||||||||||||
Federal Home Loan Bank and Federal Reserve Stock | 5,952 | n/a | n/a | n/a | n/a | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 581,348 | — | 571,044 | — | 571,044 | |||||||||||||||
Other borrowings | 52,970 | — | 51,496 | — | 51,496 | |||||||||||||||
Federal Home Loan Bank Advances | 55,000 | — | 55,695 | — | 55,695 | |||||||||||||||
Subordinated debentures | 17,000 | — | — | 10,262 | 10,262 | |||||||||||||||
Accrued interest payable | 326 | 309 | 17 | 326 |
34 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Fair Value (Continued)
Carrying Amount | Fair Value | |||||||
(in thousands) | ||||||||
December 31, 2011: | ||||||||
Financial assets | ||||||||
Cash and due from financial institutions | $ | 15,166 | $ | 15,166 | ||||
Interest-bearing deposits in other financial institutions | 30,297 | 30,297 | ||||||
Loans held for sale | 1,154 | 1,166 | ||||||
Loans, net of allowance for loan losses and impaired loans | 460,302 | 472,612 | ||||||
Accrued interest receivable | 3,196 | 3,196 | ||||||
Federal Home Loan Bank and Federal Reserve Stock | 5,952 | n/a | ||||||
Financial liabilities | ||||||||
Deposits | 581,358 | 569,892 | ||||||
Other borrowings | 50,879 | 49,165 | ||||||
Federal Home Loan Bank Advances | 55,000 | 55,825 | ||||||
Subordinated debentures | 17,000 | 10,403 | ||||||
Accrued interest payable | 329 | 329 |
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
(a) Cash and Cash Equivalents
The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
(b) FHLB and FRB Stock
It is not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on transferability.
35 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Fair Value (Continued)
(c) Loans
Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.
(e) Deposits
The fair value disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
(f) Other Borrowings
The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
(g) Accrued Interest Receivable/Payable
The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification depending upon the classification of the associated asset or liability.
(i) Off-balance Sheet Instruments
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
36 |
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
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 our current expectations regarding our business strategies and their intended results and our 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 our 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 our subsidiaries; 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 our 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 us or on our behalf. We assume no obligation to update any forward-looking statements.
Financial Condition
Total assets decreased by $6.5 million from $797.4 million as of December 31, 2011 to $790.9 million as of March 31, 2012. The decline was attributable mostly to decreases in interest-bearing deposits in other financial institutions of $16.4 million, net loans of $2.2 million, and cash and due from financial institutions of $2.9 million as the Company utilized available liquidity to increase its securities available for sale by $21.9 million.
Net loans decreased by $2.2 million from $489.7 million as of December 31, 2011 to $487.5 million at March 31, 2012. The decrease in loans was attributable to net charge-offs during the first quarter of $899,000 and provision for loan losses of $1.5 million during the same period. Also contributing to the decrease in loans were transfers to foreclosed and repossessed assets and new loan originations lower than repayments.
Securities available for sale increased from December 31, 2011 by $22.9 million to $220.6 million as of March 31, 2012 primarily due to purchases of $52.8 million, offset by sales of $24.3 million and maturities, prepayments and calls of $6.9 million. The securities portfolio serves as a source of liquidity and earnings and plays an important part in 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.
37 |
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
Total deposits as of March 31, 2012 and December 31, 2011 were $581.3 million while non-interest bearing deposits increased during the period by $4.8 million and was fully offset by a decrease interest bearing deposits of $4.8 million. The Company continued its funding strategy by emphasizing growth in non-interest bearing deposits and pricing its interest bearing deposits at an appropriate level given on-balance sheet liquidity and the amount of unpledged securities in its investment portfolio.
Net Income Available to Common Shareholders. Net income available to common shareholders increased to $1.6 million for the three months ended March 31, 2012 from $1.5 million for the same period in 2011. Basic and diluted earnings per common share increased to $0.48 per share for the first quarter of 2012 as compared to $0.46 and $0.44 per common share for the first quarter of 2011. The increase in net income available to common shareholders was attributable to increases in net interest income of $336,000, non-interest income of $350,000 and decreases in income tax expense of $92,000 and dividends on preferred stock of $40,000, offset by increases in the provision for loan losses of $696,000 and non-interest expense of $35,000. The annualized return on average assets and average shareholders’ equity were 0.93% and 9.06% for the three months ended March 31, 2012, respectively, compared to 0.92% and 11.36% for the equivalent periods in 2011.
Net interest income. Net interest income increased to $7.3 million for the three months ended March 31, 2012 from $7.0 million in 2011, or $336,000 and 4.8% and the Company’s net interest margin on a fully taxable equivalent basis increased to 4.24% from 3.99%. The increase in the net interest margin and income was primarily due to reduction in the average cost of funds and average balance of interest bearing liabilities from 1.16% and $607.4 million for the first quarter in 2011 to 0.77% and $581.4 million for 2012. Also contributing to the increase in the Company’s net interest margin was an increase in the average balance of non-interest bearing deposits to $125.8 million in 2012 from $119.6 million. The average yield on interest earning assets declined to 4.85% for 2012 from 4.94% in 2011 mostly due to a decrease in the yield on taxable securities. Over the previous two years, the Company has reinvested proceeds from the sale and maturity of investment securities back into the portfolio due to weak loan demand and at lower rates given the current environment. The decrease in the cost of funds was mostly achieved through the reduction the cost of savings and other accounts and time deposits to 0.30% and 0.85% in 2012, respectively from 0.49% and 1.51%. The Company has been lowering offering rates for its deposit products given the level of on-balance sheet liquidity which has resulted in some deposit runoff with average balance for interest bearing deposits decreasing to $456.5 million in 2012 from $493.7 million in 2011. Given the current average cost of the Company’s interest-bearing deposits, it is unlikely they will be able to be lowered significantly again without a corresponding decrease in balances.
38 |
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
Average Balance Sheets. The following tables set forth certain information relating to our average balance sheets and reflect 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. For analytical purposes, net interest margin and net interest spread are adjusted to a taxable equivalent adjustment basis to recognize the income tax savings on tax-exempt assets, such as state and municipal securities. A tax rate of 34% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent (“FTE”) basis. Loans held for sale and loans no longer accruing interest are included in total loans.
Three Months Ended March 31, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Average Balance | Interest | Average Yield/Cost | Average Balance | Interest | Average Yield/Cost | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||
Interest-bearing deposits with banks | $ | 14,370 | $ | 11 | 0.31 | % | $ | 17,944 | $ | 9 | 0.20 | % | ||||||||||||
Taxable securities | 136,975 | 797 | 2.36 | 152,543 | 1,153 | 3.07 | ||||||||||||||||||
Tax-exempt securities | 71,202 | 1,092 | 6.22 | 54,829 | 891 | 6.59 | ||||||||||||||||||
Total loans and fees (1) (2) | 506,237 | 6,846 | 5.48 | 507,636 | 6,913 | 5.52 | ||||||||||||||||||
FHLB and Federal Reserve stock | 6,018 | 48 | 3.25 | 6,808 | 49 | 2.93 | ||||||||||||||||||
Total earning assets | 734,802 | 8,794 | 4.85 | 739,760 | 9,015 | 4.94 | ||||||||||||||||||
Less: Allowance for loan losses | (10,573 | ) | (10,765 | ) | ||||||||||||||||||||
Non-earning assets: | ||||||||||||||||||||||||
Cash and due from banks | 13,647 | 11,423 | ||||||||||||||||||||||
Bank premises and equipment, net | 13,852 | 13,635 | ||||||||||||||||||||||
Other assets | 44,260 | 38,432 | ||||||||||||||||||||||
Total assets | $ | 795,988 | $ | 792,485 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings and other | $ | 260,340 | $ | 190 | 0.30 | % | $ | 265,173 | $ | 322 | 0.49 | % | ||||||||||||
Time deposits | 196,179 | 410 | 0.85 | 228,535 | 849 | 1.51 | ||||||||||||||||||
Other borrowings | 52,462 | 173 | 1.34 | 49,946 | 196 | 1.60 | ||||||||||||||||||
FHLB advances | 55,278 | 220 | 1.61 | 46,722 | 262 | 2.27 | ||||||||||||||||||
Subordinated debentures | 17,189 | 113 | 2.67 | 17,000 | 102 | 2.43 | ||||||||||||||||||
Total interest-bearing liabilities | 581,448 | 1,106 | 0.77 | 607,376 | 1,731 | 1.16 | ||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||
Non-interest demand deposits | 125,772 | 119,594 | ||||||||||||||||||||||
Accrued interest payable and other liabilities | 6,605 | 1,684 | ||||||||||||||||||||||
Stockholders’ equity | 82,163 | 63,832 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 795,988 | $ | 792,485 | ||||||||||||||||||||
Net interest income (taxable equivalent basis) | $ | 7,688 | $ | 7,284 | ||||||||||||||||||||
Less: taxable equivalent adjustment | (371 | ) | (303 | ) | ||||||||||||||||||||
Net interest income | $ | 7,317 | $ | 6,981 | ||||||||||||||||||||
Net interest spread | 4.08 | % | 3.79 | % | ||||||||||||||||||||
Net interest margin | 4.24 | 3.99 |
(1) | The amount of direct loan origination cost included in interest on loans was $74 and $195 for the three months ended March 31, 2012 and 2011. |
(2) | Calculations include non-accruing loans in the average loan amounts outstanding. |
39 |
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
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 our interest income and interest expense on a FTE basis 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 March 31, 2012 compared to Three Months Ended March 31, 2011 Increase/(Decrease) Due to | ||||||||||||
Total Net Change | Volume | Rate | ||||||||||
(In thousands) | ||||||||||||
Interest income: | ||||||||||||
Interest-bearing deposits with banks | $ | 2 | $ | (2 | ) | $ | 4 | |||||
Taxable securities | (356 | ) | (109 | ) | (247 | ) | ||||||
Tax-exempt securities | 201 | 253 | (52 | ) | ||||||||
Total loans and fees | (67 | ) | (19 | ) | (48 | ) | ||||||
FHLB and Federal Reserve stock | (1 | ) | (6 | ) | 5 | |||||||
Total increase (decrease) in interest income | (221 | ) | 117 | (338 | ) | |||||||
Interest expense: | ||||||||||||
Savings and other | (132 | ) | (6 | ) | (126 | ) | ||||||
Time deposits | (439 | ) | (107 | ) | (332 | ) | ||||||
Other borrowings | (23 | ) | 9 | (32 | ) | |||||||
FHLB advances | (42 | ) | 43 | (85 | ) | |||||||
Subordinated debentures | 11 | 1 | 10 | |||||||||
Total increase (decrease) in interest expense | (625 | ) | (60 | ) | (565 | ) | ||||||
Increase (decrease) in net interest income | $ | 404 | $ | 177 | $ | 227 |
40 |
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
Allowance and Provision for Loan Losses. Our financial performance depends on the quality of the loans we originate 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 March 31, | ||||||||
Activity for the period ended: | 2012 | 2011 | ||||||
(In thousands) | ||||||||
Beginning balance | $ | 10,234 | $ | 10,864 | ||||
Charge-offs: | ||||||||
Residential real estate | (87 | ) | (82 | ) | ||||
Commercial real estate | - | (16 | ) | |||||
Construction | (333 | ) | (19 | ) | ||||
Commercial business | (342 | ) | (582 | ) | ||||
Home equity | (210 | ) | (99 | ) | ||||
Consumer | (67 | ) | (111 | ) | ||||
Total | (1,039 | ) | (909 | ) | ||||
Recoveries: | ||||||||
Residential real estate | 43 | — | ||||||
Commercial real estate | 17 | 7 | ||||||
Construction | — | 2 | ||||||
Commercial business | 33 | 37 | ||||||
Home equity | 14 | 1 | ||||||
Consumer | 33 | 69 | ||||||
Total | 140 | 116 | ||||||
Net loan charge-offs | (899 | ) | (793 | ) | ||||
Provision | 1,506 | 810 | ||||||
Ending balance | $ | 10,841 | $ | 10,881 |
41 |
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
Provision for loan losses increased to $1.5 million for the first three months of 2012 as compared to $810,000 for the same period in 2011 while net charge-offs also increased over the same periods from $793,000 to $899,000 for the respective periods. The provision for the first quarter of 2012 was impacted by the continued elevated levels of non-performing and classified loans and an increase in the estimated loss for certain previously classified credits. The Company’s non-performing loans decreased slightly to $15.2 million as of March 31, 2012 from $15.8 million as of December 31, 2011, but experienced increases in both past due and classified credits. The Company’s credits classified as substandard or doubtful, the two most severe ratings, increased from $41.2 million at December 31, 2011 to $45.4 million at March 31, 2012 (see Footnote 3 to the Company’s consolidated financial statements for a description of the rating classifications and more loan detail). Total loans past due also increased from a total of $19.7 million as of December 31, 2011 to $23.6 million as of March 31, 2012, the majority of which were 60-89 days past due and totaled $5.5 million. The increase in the Company’s provision for the first quarter in 2012 was primarily driven by the aforementioned increase in classified and past due credits. Management anticipates provision for loan losses will remain elevated until the pace of new identified classified credits slows substantially while resolutions to the current identified credits are achieved. Due to the aforementioned increase in provision, the allowance for loan losses as a percentage of loans also increased to 2.18% of loans as of March 31, 2012 from 2.05% at December 31, 2011.
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. The Company continues to closely monitor its loan portfolio to identify any additional problem credits, deterioration in underlying collateral values, and credits requiring further downgrades in accordance with the Company’s internal policies. As of March 31, 2012, management has provided for probable incurred losses within the loan portfolio based on information currently available to the Company.
42 |
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
Asset Quality. Loans, including impaired loans, 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. Impaired loans are those loans for which it is probable that all scheduled interest and principal payments will not be received based on the contractual terms of the loan agreement. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. TDR’s totaled $26.5 million and $26.6 million at March 31, 2012 and December 31, 2011, while $2.3 million and $2.4 million were included in the Company’s non-accrual loans as of the same dates, respectively.
The Company’s non-performing assets as of March 31, 2012 and December 31, 2011 were as follows:
March 31, 2012 | December 31, 2011 | |||||||
(In thousands) | ||||||||
Loans on non-accrual status | $ | 15,170 | $ | 15,772 | ||||
Loans past due over 90 days still on accrual | - | - | ||||||
Total non-performing loans | 15,170 | 15,772 | ||||||
Foreclosed and repossessed assets | 4,678 | 5,076 | ||||||
Total non-performing assets | $ | 19,848 | $ | 20,848 | ||||
Non-performing loans to total loans | 3.04 | % | 3.15 | % | ||||
Non-performing assets to total loans | 3.98 | 4.17 | ||||||
Allowance as a percent of non-performing loans | 71.46 | 64.89 | ||||||
Allowance as a percent of total loans | 2.18 | 2.05 |
43 |
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
Non-interest income. Non-interest income increased by $350,000 to $2.3 million for the quarter ended March 31, 2012 from $2.0 million for the same period in 2011 mostly due to increases in gains on sales of available for sale securities of $143,000 and service charges on deposit accounts $118,000. The increase in gains on sales of available for sale securities was due to higher sales volume during 2012 as compared to 2011 as the Company sold $24.3 million in 2012 versus $13.5 million 2011. Service charge income on deposit accounts increased to $870,000 in 2012 from $752,000 in 2011 due mostly to new service fees introduced in the second half of 2011. To offset reductions in fee income due to recent regulatory changes, the Company introduced new fees in 2011 such as paper statement and minimum balance fees.
Non-interest expense. Non-interest expense increased by $35,000 to $5.9 million in 2012 from $5.8 million in 2011 due to increases in salaries and employee benefits and foreclosed and reposed assets, net, offset by decreases in legal and professional fees and FDIC insurance premiums. Salaries and employee benefits increased to $3.2 million in 2012 from $3.1 million while the number of full time equivalent employees decreased from 200 to 198 over the same period. The increase in expense is attributable to pay raises and the associated payroll taxes between the periods which increased the average expense per FTE to $15,949 in 2012 from $15,925 in 2011, or 4.3%. Expense for foreclosed and repossessed assets, net increased by $53,000 to $132,000 for the first quarter of 2012 from $79,000 in 2011 as the Company recognized a net loss on disposals in 2012 of $46,000 as compared a net gain of $24,000 in 2011 while net expenses associated with maintaining foreclosed and repossessed assets declined by $16,000 over the same period. Legal and professional fees decreased to $366,000 for the first quarter of 2012 from $429,000 in 2011. Most of the decrease was attributable to a decline in expenditures for legal services between the periods although the Company anticipates legal fees associated with collections will continue to remain elevated for the foreseeable future. FDIC insurance premiums decreased to $177,000 for the quarter ended March 31, 2012 as compared to $266,000 in the equivalent period in 2011 due to a change made by the FDIC on how it assessed premiums. Before the change, premiums were based on the Company’s total deposits at the end of the reporting period. Beginning in the second quarter of 2011, premiums were assessed on the Company’s average total assets less average Tier 1 capital during the period. The change shifted more of the fee burden to larger commercial banks that typically rely more heavily on funding sources not available to smaller institutions, such as commercial paper.
Income tax expense. Income tax expense for the three months ended March 31, 2012 was $402,000 as compared to $494,000 for the equivalent period in 2011. The decrease in income tax expense was due to the Company’s tax credits from an investment in low income housing and higher tax exempt income from municipal securities. The Company’s effective tax rate for 2012 was 18.0% as compared to 21.6% in 2011 due to tax preference items and income tax credits remaining described above.
44 |
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
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. Our 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 March 31, 2012, we had cash and interest-bearing deposits with banks of $26.2 million and securities available-for-sale with a fair value of $220.6 million. If we require funds beyond the funds we are able to generate internally, we have $58.6 million in additional aggregate borrowing capacity with the Federal Home Loan Bank of Indianapolis based on our current FHLB stock holdings, unused federal funds lines of credit with various nonaffiliated financial institutions of $33.0 million. Management believes the Company’s liquidity sources are adequate to meet its operational needs.
45 |
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
The Banks are required to maintain specific amounts of capital pursuant to regulatory requirements. As of March 31, 2012, Your Community Bank and Scott County State Bank were each considered well capitalized under regulatory capital requirements and were in compliance with all regulatory capital requirements that were effective as of such date with capital ratios as follows:
March 31, 2012:
Total Capital To Risk-weighted Assets | Tier 1 Capital To Risk-weighted Assets | Tier 1 Capital To Average Assets | ||||||||||
Consolidated | 17.8 | % | 16.6 | % | 11.8 | % | ||||||
Your Community Bank | 17.5 | % | 16.3 | % | 12.0 | % | ||||||
Scott County State Bank | 19.9 | % | 18.7 | % | 12.1 | % | ||||||
Minimum for banks to be well capitalized under regulatory capital requirements: | 10.0 | % | 6.0 | % | 5.0 | % |
December 31, 2011:
Total Capital To Risk-weighted Assets | Tier 1 Capital To Risk-weighted Assets | Tier 1 Capital To Average Assets | ||||||||||
Consolidated | 17.5 | % | 16.3 | % | 11.7 | % | ||||||
Your Community Bank | 17.1 | % | 15.9 | % | 11.7 | % | ||||||
Scott County State Bank | 20.0 | % | 18.8 | % | 12.2 | % | ||||||
Minimum for banks to be well capitalized under regulatory capital requirements: | 10.0 | % | 6.0 | % | 5.0 | % |
46 |
PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
We have been repurchasing shares of our common stock since May 21, 1999. A net total of 505,451 shares at an aggregate cost of $8.7 million have been repurchased since that time under both the current and prior repurchase plans. Our Board of Directors authorized a share repurchase plan in June 2007 under which a maximum of $5.0 million of our common stock may be purchased. Through March 31, 2012, a total of $1.6 million had been expended to purchase 85,098 shares under the current repurchase plan. As a condition for participating in SBLF, the Company may only declare and pay a dividend on the common stock or other stock junior to the SBLF Preferred Stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of the Company’s Tier 1 Capital would be at least 90% of the Tier 1 Capital of the Company as of September 15, 2011, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred Stock (the “Tier 1 Dividend Threshold”). Beginning on the first day of the eleventh dividend period, the amount of the Tier 1 Dividend Threshold will be reduced by 10% for each one percent increase in QSBL from the baseline level through the ninth dividend period. Under the terms of the SBLF Preferred Stock, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the SBLF Preferred Stock, junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the SBLF Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.
During June 2004 and 2006, we completed placements of $7.0 million and $10.0 million floating rate subordinated debentures through Community Bank Shares (IN) Statutory Trust I and Trust II, (trusts we formed), respectively. These securities are reported as liabilities for financial reporting, but Tier 1 Capital for regulatory purposes. We used the proceeds for general business purposes and to support our future opportunities for growth.
Off Balance Sheet Arrangements and Contractual Obligations
The amount and nature of our off balance sheet arrangements and contractual obligations at March 31, 2012 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, 2011.
47 |
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 our most significant ongoing business risk consideration.
We currently contract with an independent third party consulting firm to measure our 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 at December 31, 2011 and March 31, 2012 within the model to estimate their combined effects on net interest income over a one-year horizon. In 2008, the Federal Open Market Committee lowered its target for the federal funds rate to 0-25 bps. A majority of our loans are indexed to the prime rate, therefore, the Company has excluded an evaluation of the effect on net interest income assuming a decrease in interest rates as further reductions in the prime rate are extremely unlikely. We feel that using gradual interest rate movements within the model is more representative of future rate changes than instantaneous interest rate shocks. Growth in amounts are not projected 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. We believe that the changes made to the model’s interest rate risk measurement process have improved the accuracy of results of the process, consequently giving better information on which to base asset and liability allocation decisions going forward.
Assumptions based on the historical behavior of our 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. We continually monitor and update 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), we estimated that as of March 31, 2012 our net interest income would decrease by an estimated 1.2%, or $357,000, over the one year forecast horizon. As of December 31, 2011, in the Up 200 Scenario we estimated that net interest income would decrease $55,000, over a one year forecast horizon ending December 31, 2012.
48 |
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The projected results are within our asset/liability management policy limits which states that the negative impact to net interest income should not exceed 7% in a 100 or 200 basis point increase or decrease 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; we can minimize the reduction in net interest income in a period of rising interest rates to the extent that we can curtail raising deposit rates during this period. We continue to explore transactions and strategies to both increase our net interest income and minimize our interest rate risk.
Our interest sensitivity profile 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 our estimated annualized earnings sensitivity profile based on the above referenced asset/liability model as of March 31, 2012 and December 31, 2011, respectively. The tables below are representative only and are not precise measurements of the effect of changing interest rates on our net interest income in the future.
The following table illustrates our estimated one year net interest income sensitivity profile based on the asset/liability model as of March 31, 2012 and ending on March 31, 2013:
Interest Rate Sensitivity as of March 31, 2012 | ||||||||
Base | Gradual Increase in Rates of 200 Basis Points | |||||||
Projected interest income: | ||||||||
Loans | $ | 27,081 | $ | 27,870 | ||||
Investments | 6,452 | 6,561 | ||||||
FHLB and FRB stock | 159 | 159 | ||||||
Interest-bearing deposits in other financial institutions | 54 | 214 | ||||||
Total interest Income | 33,746 | 34,804 | ||||||
Projected interest expense: | ||||||||
Deposits | 1,832 | 2,581 | ||||||
Federal funds purchased, line of credit and repurchase agreements | 495 | 961 | ||||||
FHLB advances | 854 | 913 | ||||||
Subordinated debentures | 438 | 580 | ||||||
Total interest expense | 3,619 | 5,035 | ||||||
Net interest income | $ | 30,127 | $ | 29,769 | ||||
Change from base | (358 | ) | ||||||
Percent change from base | (1.19 | )% |
49 |
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The following table illustrates our estimated one year net interest income sensitivity profile based on the asset/liability model as of December 31, 2011 and ending December 31, 2012:
Interest Rate Sensitivity as of December 31, 2011 | ||||||||
Base | Gradual Increase in Rates of 200 Basis Points | |||||||
Projected interest income: | ||||||||
Loans | $ | 27,912 | $ | 28,741 | ||||
Investments | 5,969 | 6,110 | ||||||
FHLB and FRB stock | 165 | 165 | ||||||
Interest-bearing deposits in other financial Institutions | 104 | 226 | ||||||
Federal funds sold | 43 | 175 | ||||||
Total interest income | 34,193 | 35,417 | ||||||
Projected interest expense: | ||||||||
Deposits | 2,048 | 2,790 | ||||||
Federal funds purchased, line of credit and Repurchase agreements | 603 | 1,028 | ||||||
FHLB advances | 871 | 900 | ||||||
Subordinated debentures | 453 | 536 | ||||||
Total interest expense | 3,975 | 5,254 | ||||||
Net interest income | $ | 30,218 | $ | 30,163 | ||||
Change from base | $ | (55 | ) | |||||
% Change from base | - | % |
50 |
PART I – ITEM 4
CONTROLS AND PROCEDURES
With the participation of the Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer) of Community Bank Shares of Indiana, Inc. (“CBIN”), CBIN’s management has evaluated the effectiveness of CBIN’s disclosure controls and procedures (as defined in Rule 13a-15(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, CBIN’s Chief Executive Officer and Chief Financial Officer have concluded that CBIN’s disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by CBIN in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by CBIN in the reports that it files or submits under the Exchange Act is accumulated and communicated to CBIN’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in CBIN’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, CBIN’s internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are various claims and lawsuits 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 Banks hold mortgages or security interests, claims involving the making and servicing of real property loans and other issues incidental to the Banks’ business. In the opinion of management, no material loss is expected from any such pending claims or lawsuits.
Item 1A. Risk Factors
In addition to the information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company did not purchase its common shares during the three months ended March 31, 2012.
The Board of Directors of the Company authorized a share repurchase plan in June 2007 under which a maximum of $5.0 million of the Company’s common stock can be purchased. As of September 30, 2011, the Company could repurchase up to $3.4 million of the Company’s common stock under the current repurchase plan. As a condition for participating in SBLF, the Company may only declare and pay a dividend on the common stock or other stock junior to the SBLF Preferred Stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of the Company’s Tier 1 Capital would be at least 90% of the Tier 1 Capital of the Company as of September 15, 2011, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred Stock (the “Tier 1 Dividend Threshold”). Beginning on the first day of the eleventh dividend period, the amount of the Tier 1 Dividend Threshold will be reduced by 10% for each one percent increase in QSBL from the baseline level through the ninth dividend period. Under the terms of the SBLF Preferred Stock, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the SBLF Preferred Stock, junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the SBLF Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.
Item 6. Exhibits
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: May 14, 2012 | BY: | /s/ James D. Rickard | |
James D. Rickard | |||
President and | |||
Chief Executive Officer | |||
(Principal Executive Officer) | |||
Dated: May 14, 2012 | BY: | /s/ Paul. A. Chrisco | |
Paul A. Chrisco | |||
Executive 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 | |
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 | |
101* | The following financial information from Community Bank Shares of Indiana, Inc. Quarterly Report on Form 10-Q for the period ended March 31, 2012, filed with the SEC on May 15, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at March 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Income for the three months ended March 31, 2012 and March 31, 2011, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and March 31, 2011 (iv) Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2012, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and March 31, 2011 and (vi) Notes to Consolidated Financial Statements Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Sections 11 and 12 of the Securities |
*Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Exchange Act of 1934, or otherwise subject to the liability of those sections, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of 1933 or the Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filings.
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