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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

o         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  o  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:  3,445,737 shares of common stock were outstanding as of November 12, 2014.

 

 

 



Table of Contents

 

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

6

 

 

 

 

Consolidated Statement of Changes in Shareholders Equity

7

 

 

 

 

Consolidated Statements of Cash Flows

8

 

 

 

 

Notes to Consolidated Financial Statements

10

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

45

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

58

 

 

 

Item 4.

Controls and Procedures

61

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

62

 

 

 

Item 1A.

Risk Factors

62

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

 

 

 

Item 6.

Exhibits

62

 

 

 

Signatures

 

63

 

 

 

Exhibit Index

 

64

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

COMMUNITY BANK SHARES OF INDIANA, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 30,
2014

 

December 31,
2013

 

 

 

(In thousands, except share data)

 

ASSETS

 

 

 

 

 

Cash and due from financial institutions

 

$

14,540

 

$

15,393

 

Interest-bearing deposits in other financial institutions

 

5,655

 

10,896

 

Securities available for sale

 

202,174

 

195,327

 

Loans held for sale

 

 

68

 

Loans, net of allowance for loan losses of $7,784 and $8,009

 

585,340

 

552,926

 

Federal Home Loan Bank and Federal Reserve stock

 

5,964

 

5,955

 

Accrued interest receivable

 

3,028

 

3,149

 

Premises and equipment, net

 

17,986

 

18,557

 

Company owned life insurance

 

21,887

 

21,386

 

Other intangible assets

 

759

 

1,004

 

Foreclosed and repossessed assets

 

4,677

 

5,988

 

Settlement receivable for security sales

 

 

11,136

 

Other assets

 

3,945

 

4,950

 

Total Assets

 

$

865,955

 

$

846,735

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Deposits

 

 

 

 

 

Non interest-bearing

 

$

187,592

 

$

187,207

 

Interest-bearing

 

467,619

 

456,418

 

Total deposits

 

655,211

 

643,625

 

Other borrowings

 

37,070

 

45,722

 

Federal Home Loan Bank advances

 

55,000

 

50,000

 

Subordinated debentures

 

17,000

 

17,000

 

Accrued interest payable

 

87

 

106

 

Other liabilities

 

5,099

 

1,943

 

Total liabilities

 

769,467

 

758,396

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred stock, without par value; 5,000,000 authorized; 28,000 shares issued and outstanding in 2014 and 2013; 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; 3,445,737 and 3,394,657 outstanding in 2014 and 2013, respectively

 

386

 

386

 

Additional paid-in capital

 

44,085

 

44,597

 

Retained earnings

 

30,196

 

25,184

 

Accumulated other comprehensive income (loss)

 

1,035

 

(1,733

)

Treasury stock, at cost (2014 - 418,200 shares, 2013 - 469,280 shares)

 

(7,214

)

(8,095

)

Total shareholders’ equity

 

96,488

 

88,339

 

Total Liabilities and Shareholders’ Equity

 

$

865,955

 

$

846,735

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

PART I - FINANCIAL INFORMATION

COMMUNITY BANK SHARES OF INDIANA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands, except share data)

 

Interest and dividend income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

7,317

 

$

7,334

 

$

21,039

 

$

20,414

 

Taxable securities

 

484

 

539

 

1,534

 

1,897

 

Tax-exempt securities

 

739

 

757

 

2,227

 

2,270

 

Federal Home Loan Bank and Federal Reserve dividends

 

72

 

83

 

188

 

187

 

Interest-bearing deposits in other financial institutions

 

18

 

19

 

53

 

63

 

Interest and dividend income

 

8,630

 

8,732

 

25,041

 

24,831

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

255

 

287

 

775

 

918

 

Other borrowings

 

19

 

26

 

72

 

83

 

Federal Home Loan Bank advances

 

81

 

91

 

257

 

376

 

Subordinated debentures

 

101

 

100

 

301

 

304

 

Interest expense

 

456

 

504

 

1,405

 

1,681

 

Net interest income

 

8,174

 

8,228

 

23,636

 

23,150

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

166

 

75

 

638

 

2,792

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

8,008

 

8,153

 

22,998

 

20,358

 

 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

874

 

904

 

2,501

 

2,510

 

Commission income

 

50

 

42

 

146

 

130

 

Net gain on sales of available for sale securities

 

172

 

28

 

468

 

543

 

Mortgage banking income

 

40

 

31

 

84

 

170

 

Earnings on company owned life insurance

 

169

 

172

 

501

 

511

 

Interchange income

 

281

 

272

 

881

 

834

 

Bargain purchase gain

 

 

 

 

1,879

 

Other income

 

113

 

131

 

335

 

396

 

Non-interest income

 

1,699

 

1,580

 

4,916

 

6,973

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

3,869

 

3,746

 

10,602

 

10,391

 

Occupancy

 

638

 

621

 

1,887

 

1,705

 

Equipment

 

333

 

337

 

961

 

936

 

Data processing

 

618

 

801

 

1,947

 

2,062

 

Marketing and advertising

 

104

 

76

 

299

 

231

 

Legal and professional service fees

 

646

 

470

 

1,804

 

1,503

 

FDIC insurance premiums

 

156

 

168

 

449

 

523

 

Foreclosed assets, net

 

(148

)

205

 

43

 

429

 

Other expense

 

641

 

610

 

1,945

 

2,051

 

Total non-interest expense

 

6,857

 

7,034

 

19,937

 

19,831

 

Income before income taxes

 

2,850

 

2,699

 

7,977

 

7,500

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

534

 

439

 

1,401

 

1,129

 

 

 

 

 

 

 

 

 

 

 

Net income

 

2,316

 

2,260

 

6,576

 

6,371

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

(110

)

(221

)

(329

)

(730

)

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

2,206

 

$

2,039

 

$

6,247

 

$

5,641

 

 

4



Table of Contents

 

PART I - FINANCIAL INFORMATION

COMMUNITY BANK SHARES OF INDIANA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands, except share data)

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.64

 

$

0.60

 

$

1.82

 

$

1.67

 

Diluted

 

$

0.63

 

$

0.60

 

$

1.80

 

$

1.67

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.12

 

$

0.11

 

$

0.36

 

$

0.32

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

PART I - FINANCIAL INFORMATION

COMMUNITY BANK SHARES OF INDIANA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(in thousands)

 

Net income

 

$

2,316

 

$

2,260

 

$

6,576

 

$

6,371

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Unrealized gain on securities:

 

 

 

 

 

 

 

 

 

Unrealized gain (losses) arising during the period

 

622

 

(288

)

4,667

 

(8,711

)

Reclassification adjustment for gains included in net income

 

(172

)

(28

)

(468

)

(543

)

Net unrealized gains (losses)

 

450

 

(316

)

4,199

 

(9,254

)

Tax effect

 

(151

)

107

 

(1,417

)

3,146

 

Net of tax

 

299

 

(209

)

2,782

 

(6,108

)

 

 

 

 

 

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

Net gain (loss) arising during the period

 

(27

)

47

 

(21

)

76

 

Tax effect

 

9

 

(16

)

7

 

(26

)

Net of tax

 

(18

)

31

 

(14

)

50

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

281

 

(178

)

2,768

 

(6,058

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

2,597

 

$

2,082

 

$

9,344

 

$

313

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

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 (Loss)

 

Treasury
Stock

 

Total
Shareholders’
Equity

 

Balance, January 1, 2014

 

$

28,000

 

$

386

 

$

44,597

 

$

25,184

 

$

(1,733

)

$

(8,095

)

$

88,339

 

Net income

 

 

 

 

6,576

 

 

 

6,576

 

Other comprehensive income

 

 

 

 

 

2,768

 

 

2,768

 

Cash dividends declared on common stock ($0.36 per share)

 

 

 

 

(1,235

)

 

 

(1,235

)

Dividends on preferred stock

 

 

 

 

(329

)

 

 

(329

)

Issuance of treasury stock under dividend reinvestment plan

 

 

 

49

 

 

 

116

 

165

 

Issuance of stock award shares

 

 

 

(951

)

 

 

684

 

(267

)

Stock options exercised

 

 

 

(13

)

 

 

81

 

68

 

Stock award expense

 

 

 

303

 

 

 

 

303

 

Tax benefit from vesting of stock award shares

 

 

 

100

 

 

 

 

100

 

Balance, September 30, 2014

 

$

28,000

 

$

386

 

$

44,085

 

$

30,196

 

$

1,035

 

$

(7,214

)

$

96,488

 

 

See accompanying notes to consolidated financial statements.

 

7



Table of Contents

 

PART I - FINANCIAL INFORMATION

COMMUNITY BANK SHARES OF INDIANA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

6,576

 

$

6,371

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

Provision for loan losses

 

638

 

2,792

 

Depreciation and amortization

 

1,319

 

873

 

Net amortization of securities

 

358

 

628

 

Net gain on sales of available for sale securities

 

(468

)

(543

)

Mortgage loans originated for sale

 

(3,186

)

(7,467

)

Proceeds from mortgage loan sales

 

3,333

 

8,503

 

Net gain on sales of mortgage loans

 

(79

)

(174

)

Earnings on company owned life insurance

 

(501

)

(511

)

Shared based compensation expense

 

303

 

145

 

Bargain purchase gain

 

 

(1,879

)

Net loss on disposition of premises and equipment

 

3

 

99

 

Net (gain) loss on disposition of foreclosed and repossessed assets

 

(335

)

154

 

Net change in:

 

 

 

 

 

Accrued interest receivable

 

121

 

46

 

Accrued interest payable

 

(19

)

(105

)

Other assets

 

(212

)

2,433

 

Other liabilities

 

3,097

 

1,501

 

Net cash from operating activities

 

10,948

 

12,866

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Net cash received in FDIC assisted acquisition

 

 

19,713

 

Net change in interest-bearing deposits

 

5,241

 

26,307

 

Available for sale securities:

 

 

 

 

 

Sales

 

43,746

 

50,231

 

Purchases

 

(46,979

)

(21,926

)

Maturities, prepayments and calls

 

11,738

 

19,755

 

Loan originations and payments, net

 

(33,072

)

(26,685

)

Proceeds from the sale of foreclosed and repossessed assets

 

1,935

 

3,173

 

Purchases of premises and equipment

 

(738

)

(6,498

)

Proceeds from the sale of premises and equipment

 

 

690

 

Additions to foreclosed and repossessed assets

 

(37

)

 

Proceeds from redemption (purchase) of Federal Reserve and FHLB stock

 

(9

)

4,032

 

Net cash from investing activities

 

(18,175

)

68,792

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net change in deposits

 

11,586

 

(67,313

)

Net change in other borrowings

 

(8,652

)

(6,437

)

Proceeds from Federal Home Loan Bank advances

 

160,000

 

53,000

 

Repayment of Federal Home Loan Bank advances

 

(155,000

)

(57,444

)

Taxes paid on stock award shares for employees

 

(267

)

 

Issuance of treasury stock, stock awards

 

68

 

 

Cash dividends paid on preferred shares

 

(291

)

(640

)

Cash dividends paid on common shares

 

(1,070

)

(922

)

Net cash from financing activities

 

6,374

 

(79,756

)

Net change in cash and due from financial institutions

 

(853

)

1,902

 

Cash and due from financial institutions at beginning of period

 

15,393

 

19,039

 

Cash and due from financial institutions at end of period

 

$

14,540

 

$

20,941

 

 

8



Table of Contents

 

PART I - FINANCIAL INFORMATION

COMMUNITY BANK SHARES OF INDIANA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

 

 

(In thousands)

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

 

$

1,424

 

$

1,755

 

Income taxes paid, net of refunds

 

$

675

 

$

990

 

 

 

 

 

 

 

Supplemental noncash disclosures:

 

 

 

 

 

Transfer from loans to foreclosed and repossessed assets

 

$

1,468

 

$

6,639

 

Issuance of treasury shares under dividend reinvestment plan

 

$

116

 

$

156

 

Sale and financing of foreclosed and repossessed assets

 

$

1,216

 

$

454

 

Issuance of treasury shares for net settlement of options

 

$

29

 

$

 

Declared, unpaid dividends on preferred stock

 

$

110

 

$

221

 

 

See accompanying notes to consolidated financial statements.

 

9



Table of Contents

 

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.  The Company formed a captive insurance company in 2012, CBIN Insurance, Inc., which issues policies to the Company’s subsidiaries to cover gaps in coverage and other risks not insured by its third-party provider.

 

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 September 30, 2014, the results of operations for the three and nine months ended September 30, 2014 and 2013, and cash flows for the nine months ended September 30, 2014 and 2013.  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, 2013.  The consolidated financial statements include our accounts and our subsidiaries’ accounts.  All material intercompany balances and transactions have been eliminated in consolidation.

 

10



Table of Contents

 

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)

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

State and municipal

 

$

80,624

 

$

4,907

 

$

(234

)

$

85,297

 

U.S. Government sponsored entities and agencies

 

9,515

 

4

 

(422

)

9,097

 

Residential mortgage-backed agencies issued by U.S. Government sponsored entities

 

109,638

 

355

 

(2,459

)

107,534

 

Mutual funds

 

250

 

 

(4

)

246

 

Total securities available for sale

 

$

200,027

 

$

5,266

 

$

(3,119

)

$

202,174

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

State and municipal

 

$

77,103

 

$

2,744

 

$

(1,137

)

$

78,710

 

U.S. Government sponsored entities and agencies

 

9,702

 

5

 

(606

)

9,101

 

Residential mortgage-backed agencies issued by U.S. Government sponsored entities

 

110,324

 

382

 

(3,432

)

107,274

 

Mutual funds

 

250

 

 

(8

)

242

 

Total securities available for sale

 

$

197,379

 

$

3,131

 

$

(5,183

)

$

195,327

 

 

Sales of available for sale securities were as follows.

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands)

 

Proceeds

 

$

10,989

 

$

527

 

$

43,746

 

$

50,231

 

Gross gains

 

172

 

28

 

511

 

638

 

Gross losses

 

 

 

(43

)

(95

)

 

The tax provision applicable to these net realized gains amounted to $58,000 and $159,000 for the three and nine months ended September 30, 2014, respectively, and $10,000 and $185,000 for the three and nine months ended September 30, 2013, respectively.

 

11



Table of Contents

 

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 September 30, 2014 were as follows.  Mortgage-backed agencies and mutual funds which do not have a single maturity date are shown separately.

 

 

 

September 30, 2014

 

 

 

Amortized Cost

 

Fair Value

 

 

 

(In thousands)

 

Within one year

 

$

55

 

$

55

 

One to five years

 

5,133

 

5,153

 

Five to ten years

 

42,865

 

44,195

 

Beyond ten years

 

42,086

 

44,991

 

Residential mortgage-backed securities issued by U.S. Government sponsored entities

 

109,638

 

107,534

 

Mutual funds

 

250

 

246

 

Total

 

$

200,027

 

$

202,174

 

 

Securities with unrealized losses at September 30, 2014 and December 31, 2013, 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)

 

September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal

 

$

453

 

$

(1

)

$

9,030

 

$

(233

)

$

9,483

 

$

(234

)

U.S. Government sponsored entities and agencies

 

 

 

8,596

 

(422

)

8,596

 

(422

)

Residential mortgage-backed agencies issued by U.S. Government sponsored entities

 

20,654

 

(121

)

59,847

 

(2,338

)

80,501

 

(2,459

)

Mutual Funds

 

 

 

246

 

(4

)

246

 

(4

)

Total temporarily impaired

 

$

21,107

 

$

(122

)

$

77,719

 

$

(2,997

)

$

98,826

 

$

(3,119

)

 

 

 

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, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal

 

$

18,492

 

$

(772

)

$

3,347

 

$

(365

)

$

21,839

 

$

(1,137

)

U.S. Government sponsored entities and agencies

 

7,032

 

(468

)

1,383

 

(138

)

8,415

 

(606

)

Residential mortgage-backed agencies issued by U.S. Government sponsored entities

 

70,019

 

(2,306

)

20,440

 

(1,126

)

90,459

 

(3,432

)

Mutual Funds

 

242

 

(8

)

 

 

242

 

(8

)

Total temporarily impaired

 

$

95,785

 

$

(3,554

)

$

25,170

 

$

(1,629

)

$

120,955

 

$

(5,183

)

 

12



Table of Contents

 

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.  Investment securities are generally evaluated for OTTI under FASB ASC 320-10.

 

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.

 

As of September 30, 2014, the Company’s security portfolio consisted of 285 securities, 61 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 agencies, and U.S. Government sponsored entities and agencies, as discussed below.

 

State and Municipal

 

At September 30, 2014 the Company had approximately $9.5 million of state and municipal securities with an unrealized loss of $234,000.  Of the 209 state and municipal securities in the Company’s portfolio, 208 had an investment grade rating as of September 30, 2014 while 1 was not rated.  The decline in value in these securities is attributable to interest rate and liquidity, and not credit quality.  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 September 30, 2014.

 

U.S. Government sponsored entities and agencies

 

At September 30, 2014 the unrealized losses in the Company’s U.S. Government sponsored entities and agencies securities portfolio were attributed to changes in interest rates and liquidity, and not due to credit quality.  Because the company does not have the intent to sell these securities and it is not likely that they will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired as of September 30, 2014.

 

Residential mortgage-backed Securities issued by U.S. Government sponsored entities

 

At September 30, 2014, 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 September 30, 2014.

 

13



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Loans

 

Loans at September 30, 2014 and December 31, 2013 consisted of the following:

 

 

 

September 30,
2014

 

December 31,
2013

 

 

 

(In thousands)

 

Commercial

 

$

119,160

 

$

107,461

 

Construction

 

40,255

 

39,986

 

Commercial real estate:

 

 

 

 

 

Owner occupied nonfarm/residential

 

111,012

 

112,072

 

Other nonfarm/residential

 

98,982

 

86,405

 

Residential real estate:

 

 

 

 

 

Secured by first liens

 

183,338

 

172,833

 

Home equity

 

34,689

 

36,780

 

Consumer

 

5,688

 

5,398

 

Subtotal

 

593,124

 

560,935

 

Less:

 

 

 

 

 

Allowance for loan losses

 

(7,784

)

(8,009

)

Loans, net

 

$

585,340

 

$

552,926

 

 

During 2014 and 2013, substantially all of the Company’s residential and commercial real estate loans were pledged as collateral to the Federal Home Loan Bank to secure advances.

 

Purchased Credit Impaired Loans:

 

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows:

 

 

 

September 30,
2014

 

December 31,
2013

 

 

 

(In thousands)

 

Commercial

 

$

155

 

$

252

 

Construction

 

35

 

36

 

Commercial Real Estate

 

1,912

 

4,032

 

Residential Real Estate

 

4,414

 

5,890

 

Carrying amount

 

$

6,516

 

$

10,210

 

 

There was no associated allowance for loan losses as of September 30, 2014 or December 31, 2013 for purchased credit impaired loans.

 

14



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Loans (Continued)

 

Accretable yield, or income expected to be collected, is as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands)

 

Balance, beginning of period

 

$

876

 

$

935

 

$

545

 

$

 

New loans purchased

 

 

 

 

1,103

 

Accretion of income

 

(85

)

(271

)

(147

)

(439

)

Reclassifications from nonaccretable difference

 

 

 

419

 

 

Disposals

 

 

 

(26

)

 

Balance, end of period

 

$

791

 

$

664

 

$

791

 

$

664

 

 

15



Table of Contents

 

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 September 30, 2014 and 2013 (in thousands):

 

Three Months Ended September 30, 2014:

 

 

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,788

 

$

2,441

 

$

1,378

 

$

2,800

 

$

74

 

$

8,481

 

Provision for loan losses

 

266

 

(129

)

92

 

(57

)

(6

)

166

 

Loans charged-off

 

(528

)

(150

)

 

(260

)

(46

)

(984

)

Recoveries

 

85

 

 

11

 

7

 

18

 

121

 

Ending balance

 

$

1,611

 

$

2,162

 

$

1,481

 

$

2,490

 

$

40

 

$

7,784

 

 

Three Months Ended September 30, 2013:

 

 

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,980

 

$

3,466

 

$

1,758

 

$

2,423

 

$

95

 

$

9,722

 

Provision for loan losses

 

(266

)

297

 

(94

)

83

 

55

 

75

 

Loans charged-off

 

 

 

 

(291

)

(77

)

(368

)

Recoveries

 

22

 

 

13

 

30

 

15

 

80

 

Ending balance

 

$

1,736

 

$

3,763

 

$

1,677

 

$

2,245

 

$

88

 

$

9,509

 

 

16



Table of Contents

 

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 nine months ended September 30, 2014 and 2013 (in thousands):

 

Nine Months Ended September 30, 2014:

 

 

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,757

 

$

2,210

 

$

1,565

 

$

2,383

 

$

94

 

$

8,009

 

Provision for loan losses

 

208

 

35

 

(167

)

530

 

32

 

638

 

Loans charged-off

 

(529

)

(150

)

(23

)

(446

)

(157

)

(1,305

)

Recoveries

 

175

 

67

 

106

 

23

 

71

 

442

 

Ending balance

 

$

1,611

 

$

2,162

 

$

1,481

 

$

2,490

 

$

40

 

$

7,784

 

 

Nine Months Ended September 30, 2013:

 

 

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,007

 

$

1,399

 

$

2,836

 

$

2,389

 

$

131

 

$

8,762

 

Provision for loan losses

 

(304

)

2,516

 

2

 

507

 

71

 

2,792

 

Loans charged-off

 

(39

)

(156

)

(1,208

)

(695

)

(172

)

(2,270

)

Recoveries

 

72

 

4

 

47

 

44

 

58

 

225

 

Ending balance

 

$

1,736

 

$

3,763

 

$

1,677

 

$

2,245

 

$

88

 

$

9,509

 

 

17



Table of Contents

 

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 by portfolio segment and based on impairment method as of September 30, 2014 and December 31, 2013 (in thousands):

 

September 30, 2014:

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

406

 

$

812

 

$

73

 

$

982

 

$

 

$

2,273

 

Collectively evaluated for impairment

 

1,205

 

1,350

 

1,408

 

1,508

 

40

 

5,511

 

Acquired with deteriorated credit quality

 

 

 

 

 

 

 

Total ending allowance balance

 

$

1,611

 

$

2,162

 

$

1,481

 

$

2,490

 

$

40

 

$

7,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

7,096

 

$

7,011

 

$

3,479

 

$

5,478

 

$

4

 

$

23,068

 

Loans collectively evaluated for impairment

 

111,909

 

33,209

 

204,603

 

208,135

 

5,684

 

563,540

 

Loans acquired with deteriorated credit quality

 

155

 

35

 

1,912

 

4,414

 

 

6,516

 

Total ending loans balance

 

$

119,160

 

$

40,255

 

$

209,994

 

$

218,027

 

$

5,688

 

$

593,124

 

 

December 31, 2013:

 

Commercial

 

Construction

 

Commercial
Real Estate

 

Residential
Real Estate

 

Consumer

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

256

 

$

1,064

 

$

77

 

$

936

 

$

12

 

$

2,345

 

Collectively evaluated for impairment

 

1,501

 

1,146

 

1,488

 

1,447

 

82

 

5,664

 

Acquired with deteriorated credit quality

 

 

 

 

 

 

 

Total ending allowance balance

 

$

1,757

 

$

2,210

 

$

1,565

 

$

2,383

 

$

94

 

$

8,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

4,485

 

$

7,092

 

$

2,072

 

$

6,047

 

$

62

 

$

19,758

 

Loans collectively evaluated for impairment

 

102,724

 

32,858

 

192,373

 

197,676

 

5,336

 

530,967

 

Loans acquired with deteriorated credit quality

 

252

 

36

 

4,032

 

5,890

 

 

10,210

 

Total ending loans balance

 

$

107,461

 

$

39,986

 

$

198,477

 

$

209,613

 

$

5,398

 

$

560,935

 

 

18



Table of Contents

 

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 nine month period ended September 30, 2014:

 

 

 

Unpaid Principal
Balance

 

Recorded
Investment

 

Allowance for
Loan Losses
Allocated

 

Average
Recorded
Investment

 

Interest Income
Recognized and
Received

 

 

 

(In thousands)

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

3,896

 

$

3,896

 

$

 

$

1,986

 

$

23

 

Construction

 

5,593

 

2,853

 

 

2,448

 

35

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

918

 

918

 

 

835

 

35

 

Other nonfarm/nonresidential

 

2,381

 

2,381

 

 

1,611

 

17

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens

 

2,111

 

2,036

 

 

2,352

 

14

 

Home equity

 

469

 

469

 

 

376

 

3

 

Consumer

 

4

 

4

 

 

9

 

 

Total

 

$

15,372

 

$

12,557

 

$

 

$

9,617

 

$

127

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

3,350

 

$

3,200

 

$

406

 

$

3,043

 

$

1

 

Construction

 

4,494

 

4,158

 

812

 

4,612

 

117

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

180

 

180

 

73

 

184

 

7

 

Other nonfarm/nonresidential

 

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens

 

2,210

 

2,111

 

670

 

2,042

 

52

 

Home equity

 

862

 

862

 

312

 

914

 

31

 

Consumer

 

 

 

 

22

 

 

Total

 

$

11,096

 

$

10,511

 

$

2,273

 

$

10,817

 

$

208

 

 

19



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Loans (Continued)

 

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013:

 

 

 

Unpaid Principal
 Balance

 

Recorded
Investment

 

Allowance for
Loan Losses
Allocated

 

 

 

(In thousands)

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial

 

$

1,538

 

$

1,538

 

$

 

Construction

 

4,645

 

2,279

 

 

Commercial real estate:

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

704

 

704

 

 

Other nonfarm/nonresidential

 

1,180

 

1,180

 

 

Residential real estate:

 

 

 

 

 

 

 

Secured by first liens

 

2,536

 

2,461

 

 

Home equity

 

759

 

759

 

 

Consumer

 

23

 

23

 

 

Total

 

$

11,385

 

$

8,944

 

$

 

 

 

 

Unpaid Principal
Balance

 

Recorded
Investment

 

Allowance for
Loan Losses
Allocated

 

 

 

(In thousands)

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial

 

$

2,947

 

$

2,947

 

$

256

 

Construction

 

5,149

 

4,813

 

1,064

 

Commercial real estate:

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

188

 

188

 

77

 

Other nonfarm/nonresidential

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

Secured by first liens

 

1,784

 

1,775

 

508

 

Home equity

 

1,052

 

1,052

 

428

 

Consumer

 

39

 

39

 

12

 

Total

 

$

11,159

 

$

10,814

 

$

2,345

 

 

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.

 

20



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Loans (Continued)

 

The following table presents the information related to loans individually evaluated for impairment by class of loans for the three month period ended September 30, 2014:

 

 

 

Average
Recorded
Investment

 

Interest Income
Recognized and
Received

 

 

 

(In thousands)

 

With no related allowance recorded:

 

 

 

 

 

Commercial

 

$

2,821

 

$

 

Construction

 

2,621

 

20

 

Commercial real estate:

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

915

 

11

 

Other nonfarm/nonresidential

 

2,063

 

12

 

Residential real estate:

 

 

 

 

 

Secured by first liens

 

2,400

 

8

 

Home equity

 

263

 

1

 

Consumer

 

4

 

 

Total

 

$

11,087

 

$

52

 

 

 

 

Average
Recorded
Investment

 

Interest Income
Recognized and
Received

 

 

 

(In thousands)

 

With an allowance recorded:

 

 

 

 

 

Commercial

 

$

3,094

 

$

 

Construction

 

4,378

 

35

 

Commercial real estate:

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

181

 

2

 

Other nonfarm/nonresidential

 

 

 

Residential real estate:

 

 

 

 

 

Secured by first liens

 

2,151

 

20

 

Home equity

 

865

 

9

 

Consumer

 

16

 

 

Total

 

$

10,685

 

$

66

 

 

21



Table of Contents

 

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 for the three and nine month periods ended September 30, 2013:

 

 

 

Three Months

 

Nine Months

 

 

 

Average
Recorded
Investment

 

Interest Income
Recognized and
Received

 

Average
Recorded
Investment

 

Interest Income
Recognized and
Received

 

 

 

(In thousands)

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial

 

$

420

 

$

 

$

549

 

$

11

 

Construction

 

5,139

 

8

 

4,728

 

25

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

722

 

12

 

543

 

12

 

Other nonfarm/nonresidential

 

342

 

3

 

2,077

 

8

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

2,239

 

9

 

2,060

 

23

 

Home equity

 

763

 

7

 

709

 

21

 

Consumer

 

24

 

 

21

 

 

Total

 

$

9,649

 

$

39

 

$

10,687

 

$

100

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial

 

$

154

 

$

1

 

$

162

 

$

3

 

Construction

 

6,960

 

65

 

6,015

 

138

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

190

 

2

 

561

 

19

 

Other nonfarm/nonresidential

 

1,011

 

 

3,291

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

2,206

 

15

 

2,387

 

49

 

Home equity

 

1,095

 

12

 

1,101

 

40

 

Consumer

 

26

 

 

19

 

 

Total

 

$

11,642

 

$

95

 

$

13,536

 

$

249

 

 

22



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Loans (Continued)

 

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 September 30, 2014 and December 31, 2013:

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Nonaccrual

 

Loans Past
Due Over 90
Days Still
Accruing

 

Nonaccrual

 

Loans Past
Due Over 90
Days Still
Accruing

 

 

 

(In thousands)

 

Commercial

 

$

4,113

 

$

 

$

336

 

$

 

Construction

 

2,372

 

 

2,474

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

235

 

 

 

 

Other nonfarm/nonresidential

 

942

 

 

1,706

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

1,286

 

55

 

2,669

 

 

Home equity

 

227

 

 

475

 

 

Consumer

 

34

 

 

128

 

 

Total

 

$

9,209

 

$

55

 

$

7,788

 

$

 

 

23



Table of Contents

 

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 September 30, 2014 and December 31, 2013 by class of loans:

 

September 30, 2014:

 

 

 

30 — 59
Days
Past
Due

 

60 — 89
Days
Past
Due

 

Greater
than 89
Days
Past
Due

 

Total
Past
Due

 

Loans Not
Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

822

 

$

216

 

$

4,065

 

$

5,103

 

$

114,057

 

Construction

 

 

 

2,372

 

2,372

 

37,883

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

100

 

164

 

234

 

498

 

110,514

 

Other nonfarm/nonresidential

 

 

 

942

 

942

 

98,040

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens

 

954

 

409

 

1,340

 

2,703

 

180,635

 

Home equity

 

288

 

107

 

226

 

621

 

34,068

 

Consumer

 

58

 

45

 

33

 

136

 

5,552

 

Total

 

$

2,222

 

$

941

 

$

9,212

 

$

12,375

 

$

580,749

 

 

December 31, 2013:

 

 

 

30 — 59
Days
Past
Due

 

60 — 89
Days
Past
Due

 

Greater
than 89
Days
Past
Due

 

Total
Past
Due

 

Loans Not
Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

3,207

 

$

129

 

$

336

 

$

3,672

 

$

103,789

 

Construction

 

122

 

 

2,474

 

2,596

 

37,390

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

151

 

428

 

 

579

 

111,493

 

Other nonfarm/nonresidential

 

 

 

1,706

 

1,706

 

84,699

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens

 

3,513

 

533

 

2,354

 

6,400

 

166,433

 

Home equity

 

744

 

141

 

404

 

1,289

 

35,491

 

Consumer

 

78

 

24

 

72

 

174

 

5,224

 

Total

 

$

7,815

 

$

1,255

 

$

7,346

 

$

16,416

 

$

544,419

 

 

24



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Loans (Continued)

 

Troubled Debt Restructurings:

 

Troubled debt restructurings totaled $10.9 million and $10.5 million at September 30, 2014 and December 31, 2013.  Of the total TDRs, $3.7 million and $389,000 were on non-accrual as of September 30, 2014 and December 31, 2013.  The Company has allocated $1.2 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2014 and December 31, 2013.  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 September 30, 2014 and December 31, 2013.

 

The detail of outstanding TDRs by class and modification type as of September 30, 2014 and December 31, 2013 follows (in thousands):

 

September 30, 2014:

 

 

 

Recorded
Investment

 

Allowance for
Loan Losses
Allocated

 

Commercial:

 

 

 

 

 

Extended maturity

 

$

3,720

 

$

134

 

Interest only payments

 

556

 

 

Construction:

 

 

 

 

 

Interest rate reduction

 

1,386

 

180

 

Extended maturity

 

119

 

 

Multiple modifications

 

2,578

 

386

 

Commercial real estate:

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

 

 

Interest only payments

 

180

 

73

 

Other nonfarm/nonresidential

 

 

 

 

 

Interest only payments

 

193

 

 

Residential real estate:

 

 

 

 

 

Secured by first liens

 

 

 

 

 

Interest rate reduction

 

915

 

140

 

Interest only payments

 

17

 

 

Extended maturity

 

300

 

42

 

Multiple modifications

 

253

 

43

 

Home equity

 

 

 

 

 

Multiple modifications

 

657

 

210

 

Total

 

$

10,874

 

$

1,208

 

 

25



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Loans (Continued)

 

December 31, 2013:

 

 

 

Recorded
Investment

 

Allowance for
Loan Losses
Allocated

 

Commercial:

 

 

 

 

 

Extended maturity

 

$

4,099

 

$

134

 

Multiple modifications

 

63

 

3

 

Construction:

 

 

 

 

 

Interest rate reduction

 

1,386

 

113

 

Extended maturity

 

396

 

90

 

Multiple modifications

 

2,633

 

374

 

Commercial real estate:

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

 

 

Interest only

 

188

 

77

 

Other nonfarm/nonresidential

 

 

 

 

 

Interest only payments

 

198

 

 

Residential real estate:

 

 

 

 

 

Secured by first liens

 

 

 

 

 

Interest rate reduction

 

61

 

7

 

Interest only payments

 

87

 

25

 

Extended maturity

 

307

 

36

 

Multiple modifications

 

370

 

110

 

Home equity

 

 

 

 

 

Multiple modifications

 

675

 

217

 

Total

 

$

10,463

 

$

1,186

 

 

26



Table of Contents

 

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 September 30, 2014 and December 31, 2013 (in thousands):

 

September 30, 2014:

 

 

 

TDRs Greater
than 30 Days
Past Due and
Still Accruing

 

TDRs on
Nonaccrual

 

Total
TDRs Not
Performing
to
Modified
Terms

 

Total TDRs
Performing
to Modified
Terms

 

Commercial:

 

 

 

 

 

 

 

 

 

Extended maturity

 

$

 

$

3,720

 

$

3,720

 

$

 

Interest only payments

 

 

 

 

556

 

Construction:

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

 

 

 

1,386

 

Extended maturity

 

 

 

 

119

 

Multiple modifications

 

 

 

 

2,578

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

 

 

 

 

 

 

Interest only payments

 

 

 

 

180

 

Other nonfarm/nonresidential

 

 

 

 

 

 

 

 

 

Interest only payments

 

 

 

 

193

 

Residential:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

 

 

 

915

 

Interest only payments

 

 

17

 

17

 

 

Extended maturity

 

 

 

 

300

 

Multiple modifications

 

223

 

 

223

 

30

 

Home equity

 

 

 

 

 

 

 

 

 

Multiple modifications

 

 

 

 

657

 

Total

 

$

223

 

$

3,737

 

$

3,960

 

$

6,914

 

 

27



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Loans (Continued)

 

December 31, 2013:

 

 

 

TDRs Greater
than 30 Days
Past Due and
Still Accruing

 

TDRs on
Nonaccrual

 

Total
TDRs Not
Performing
to
Modified
Terms

 

Total TDRs
Performing
to Modified
Terms

 

Commercial:

 

 

 

 

 

 

 

 

 

Extended maturity

 

$

2,749

 

$

 

$

2,749

 

$

1,350

 

Multiple modifications

 

 

 

 

63

 

Construction:

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

 

 

 

1,386

 

Extended maturity

 

 

 

 

396

 

Multiple modifications

 

 

 

 

2,633

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

 

 

 

 

 

 

 

 

Interest only payments

 

 

 

 

188

 

Other nonfarm/nonresidential

 

 

 

 

 

 

 

 

 

Interest only payments

 

 

 

 

198

 

Residential:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

 

 

 

61

 

Interest only payments

 

 

87

 

87

 

 

Extended maturity

 

 

 

 

307

 

Multiple modifications

 

68

 

302

 

370

 

 

Home equity

 

 

 

 

 

 

 

 

 

Multiple modifications

 

 

 

 

675

 

Total

 

$

2,817

 

$

389

 

$

3,206

 

$

7,257

 

 

28



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Loans (Continued)

 

There was one troubled debt restructuring for $86,000 that defaulted within 12 months of modifications during the nine months ended September 30, 2013.

 

During the quarter and nine months ended September 30, 2014, the terms of certain loans were modified as troubled debt restructurings.  The modification of the terms of such loans included one or a combination of the following:  a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or adjustment of scheduled loan payments from principal and interest to interest only.

 

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 nine months ended September 30, 2014 and 2013 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

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

1

 

$

556

 

$

556

 

$

556

 

$

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

Interest rate reduction

 

2

 

888

 

888

 

856

 

 

Multiple modifications

 

1

 

31

 

31

 

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

Secured by first liens

 

 

 

 

 

 

 

 

 

 

 

Interest only payments

 

2

 

86

 

86

 

 

86

 

Multiple modifications

 

1

 

302

 

302

 

302

 

 

 

29



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.   Loans (Continued)

 

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:

 

The Company uses the following definitions for its criticized loan 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.

 

The Company uses the following definitions for its classified loan risk ratings:

 

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.

 

30



Table of Contents

 

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 September 30, 2014 and December 31, 2013 is as follows:

 

September 30, 2014:

 

 

 

Criticized

 

Classified

 

Pass

 

Total

 

 

 

(In thousands)

 

Commercial

 

$

4,365

 

$

6,149

 

$

108,646

 

$

119,160

 

Construction

 

3,571

 

7,011

 

29,673

 

40,255

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/residential

 

7,274

 

1,063

 

102,675

 

111,012

 

Other nonfarm/residential

 

6,442

 

2,188

 

90,352

 

98,982

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

11,175

 

4,209

 

167,954

 

183,338

 

Home equity

 

607

 

1,379

 

32,703

 

34,689

 

Consumer

 

9

 

39

 

5,640

 

5,688

 

Total

 

$

33,443

 

$

22,038

 

$

537,643

 

$

593,124

 

 

December 31, 2013:

 

 

 

Criticized

 

Classified

 

Pass

 

Total

 

 

 

(In thousands)

 

Commercial

 

$

4,612

 

$

3,207

 

$

99,642

 

$

107,461

 

Construction

 

3,337

 

7,129

 

29,520

 

39,986

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/residential

 

6,199

 

704

 

105,169

 

112,072

 

Other nonfarm/residential

 

6,364

 

1,706

 

78,335

 

86,405

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

5,060

 

4,504

 

163,269

 

172,833

 

Home equity

 

129

 

1,929

 

34,722

 

36,780

 

Consumer

 

2

 

87

 

5,309

 

5,398

 

Total

 

$

25,703

 

$

19,266

 

$

515,966

 

$

560,935

 

 

4.   Deposits

 

Deposits at September 30, 2014 and December 31, 2013 consisted of the following:

 

 

 

September 30,
2014

 

December 31,
2013

 

 

 

(In thousands)

 

Demand (NOW)

 

$

133,228

 

$

122,051

 

Money market accounts

 

152,553

 

141,073

 

Savings

 

47,942

 

45,117

 

Individual retirement accounts

 

24,103

 

25,418

 

Certificates of deposit, $100,000 and over

 

50,376

 

55,641

 

Other certificates of deposit

 

59,417

 

67,118

 

Total interest bearing deposits

 

467,619

 

456,418

 

Total non-interest bearing deposits

 

187,592

 

187,207

 

Total deposits

 

$

655,211

 

$

643,625

 

 

31



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.   Earnings Per Common Share

 

Earnings per share were computed as follows:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands, except for share and per share amounts)

 

Basic:

 

 

 

 

 

 

 

 

 

Net income

 

$

2,316

 

$

2,260

 

$

6,576

 

$

6,371

 

Preferred stock dividend

 

(110

)

(221

)

(329

)

(730

)

Net income available to common shareholders

 

$

2,206

 

$

2,039

 

$

6,247

 

$

5,641

 

Average shares outstanding

 

3,443,787

 

3,390,030

 

3,434,660

 

3,386,168

 

Net income per common share, basic

 

$

0.64

 

$

0.60

 

$

1.82

 

$

1.67

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

2,206

 

$

2,039

 

$

6,247

 

$

5,641

 

Average shares:

 

 

 

 

 

 

 

 

 

Common shares outstanding for basic

 

3,443,787

 

3,390,030

 

3,434,660

 

3,386,168

 

Add: Dilutive effects of outstanding stock options

 

21,221

 

 

29,661

 

 

Add: Dilutive effects of outstanding stock awards

 

15,808

 

 

8,471

 

 

Average dilutive potential common shares

 

3,480,816

 

3,390,030

 

3,472,792

 

3,386168

 

Net income per common share, diluted

 

$

0.63

 

$

0.60

 

$

1.80

 

$

1.67

 

 

No stock options were excluded from the calculation of diluted net income per common share for the three months ended September 30, 2014.  Stock options for 10,000 shares of common stock were excluded from the calculation of diluted net income per common share for the nine months ended September 30, 2014 because their effect was antidilutive.  This compares to stock options for 157,800 shares of common stock that were excluded from the calculation of diluted net income per common share for the three and nine months ended September 30, 2013.

 

No restricted share awards were excluded from the calculation of diluted net income per common share for the three and nine months ended September 30, 2014.  Restricted share awards of 49,599 common shares were excluded from the calculation of diluted net income per common share for the three and nine months ended September 30, 2013 because all of the conditions necessary for issuance of common stock had not been met as of those dates.

 

32



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 152,295 shares of common stock. The aggregate intrinsic value for options outstanding and exercisable at September 30, 2014 and December 31, 2013 was $391,000 and $1,000, respectively. There was no remaining compensation cost related to unvested options as of September 30, 2014 and December 31, 2013, respectively.  The Company did not recognize expense for stock option for the three and nine months ended September 30, 2014 and 2013. The Company has options vested and expected to vest of 123,500 with aggregate intrinsic value of $391,000 and a weighted average remaining contractual term of 1.68 years as of September 30, 2014.  As of December 31, 2013, the Company had options vested and expected to vest of 153,200 which had an aggregate intrinsic value of $1,000 and a weighted average remaining contractual term of 2.3 years.

 

During the nine months ended September 30, 2014, there were no options granted or forfeited while 20,350 stock options were exercised.  Of the total stock options exercised, 17,350 were exercised using the cashless option with the Company issuing net shares to the option holders.  3,000 of the options were exercised with cash with the Company receiving proceeds of $68,000 from the option holder.

 

For the three and nine months ended September 30, 2014, we recognized $102,000 and $303,000 in expense for restricted stock awards, respectively.  During the three months ended September 30, 2014, there were no restricted stock awards granted or forfeited.  During the nine months ended September 30, 2014, 34,550 awards granted to employees and no shares forfeited.  The restricted share awards granted had an aggregate fair value of $766,000 at the date of grant.  Of the total awards, 650 of awards vested at the grant date, 1,300 vest in 2015, 2,600 vest in 2016, and 10,000 vest in 2017, 2018, and 2019. The fair value of the restricted stock awards was calculated based on the Company’s stock price at the date of issuance.  As of September 30, 2014, there was $716,000 of total unrecognized compensation cost related to nonvested awards granted.  The cost is expected to be recognized over a weighted-average period of 3.7 years.  For the three and nine months ended September 30, 2013, we recognized $44,000 and $145,000 in expense for restricted stock awards, respectively.

 

33



Table of Contents

 

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.

 

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.

 

34



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.  Fair Value (Continued)

 

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 (September 30, 2014):

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

State and municipal

 

$

85,297

 

$

 

$

85,297

 

$

 

U.S. Government sponsored entities and agencies

 

9,097

 

 

9,097

 

 

Residential mortgage-backed securities issued by U.S. Government sponsored entities

 

107,534

 

 

107,534

 

 

Mutual Funds

 

246

 

 

246

 

 

 

 

 

 

 

 

 

 

 

 

Total available for sale securities

 

$

202,174

 

$

 

$

202,174

 

$

 

 

 

 

 

 

 

 

 

 

 

Assets (December 31, 2013):

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

State and municipal

 

$

78,710

 

$

 

$

78,710

 

$

 

U.S. Government sponsored entities and agencies

 

9,101

 

 

9,101

 

 

Residential mortgage-backed securities issued by U.S. Government sponsored entities

 

107,274

 

 

107,274

 

 

Mutual Funds

 

242

 

 

242

 

 

 

 

 

 

 

 

 

 

 

 

Total available for sale securities

 

$

195,327

 

$

 

$

195,327

 

$

 

 

There were no transfers between Level 1 and Level 2 during 2014 or 2013.

 

35



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.  Fair Value (Continued)

 

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 (September 30, 2014):

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,794

 

$

 

$

 

$

2,794

 

Construction

 

1,796

 

 

 

1,796

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner Occupied nonfarm/nonresidential

 

107

 

 

 

107

 

Other nonfarm/nonresidential

 

 

 

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

1,391

 

 

 

1,391

 

Home equity

 

104

 

 

 

104

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed and repossessed assets:

 

 

 

 

 

 

 

 

 

Construction

 

1,514

 

 

 

1,514

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

588

 

 

 

588

 

Other nonfarm/nonresidential

 

2,250

 

 

 

2,250

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

292

 

 

 

292

 

Consumer

 

33

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

Assets (December 31, 2013):

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,631

 

$

 

$

 

$

2,631

 

Construction

 

2,153

 

 

 

2,153

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner Occupied nonfarm/nonresidential

 

111

 

 

 

111

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

1,213

 

 

 

1,213

 

Home equity

 

165

 

 

 

165

 

Consumer

 

27

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

Foreclosed and repossessed assets:

 

 

 

 

 

 

 

 

 

Construction

 

1,641

 

 

 

1,641

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Owner occupied nonfarm/nonresidential

 

875

 

 

 

875

 

Other nonfarm/nonresidential

 

2,425

 

 

 

2,425

 

Residential real estate:

 

 

 

 

 

 

 

 

 

Secured by first liens

 

1,026

 

 

 

1,026

 

Consumer

 

21

 

 

 

21

 

 

36



Table of Contents

 

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 $7.9 million as of September 30, 2014 with a valuation allowance of $1.7 million, resulting in provision for loan losses of $264,000 and $716,000 for the three and nine months ended September 30, 2014.  The Company recorded $452,000 and $3.0 million in provision for loan losses for collateral-dependent impaired loans for the three and nine months ended September 30, 2013.  Impaired loans totaled $18.4 million as of December 31, 2013, which included collateral dependent loans with a carrying value of $8.0 million and a valuation allowance of $1.7 million.

 

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 and nine months ended September 30, 2014, the Company recognized charges to write down foreclosed and repossessed assets to their fair value of $251,000 compared to $25,000 and $144,000 for the three and nine months ended September 30, 2013.

 

37



Table of Contents

 

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 September 30, 2014:

 

 

 

Fair Value

 

Valuation
Technique(s)

 

Unobservable
Input(s)

 

Range (Weighted
Average)

 

 

 

(in thousands)

 

 

 

 

 

 

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

Impaired Loans:

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,794

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

24%-73% (72%)

 

Construction

 

1,796

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

13%-55% (40%)

 

Commercial real estate

 

107

 

Income capitalization approach

 

Capitalization rate

 

22%

 

Residential real estate

 

1,495

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

10%-84% (29%)

 

Foreclosed and repossessed assets:

 

 

 

 

 

 

 

 

 

Construction

 

$

1,514

 

Income capitalization approach

 

Capitalization rate

 

9%

 

 

 

 

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

15%-23% (22%)

 

Commercial real estate

 

2,838

 

Income capitalization approach

 

Capitalization rate

 

4%

 

 

 

 

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

10%-50% (32%)

 

Residential real estate

 

292

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

19%-60% (28%)

 

Consumer

 

33

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

75%

 

 

38



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.  Fair Value (Continued)

 

 

 

Fair Value

 

Valuation
Technique(s)

 

Unobservable
Input(s)

 

Range -
(Weighted
Average)

 

 

 

(in thousands)

 

 

 

 

 

 

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

Impaired Loans:

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,631

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

24%-73% (72%)

 

Construction

 

2,153

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

14%-19% (15%)

 

Commercial real estate

 

111

 

Income capitalization approach

 

Capitalization rate

 

22%

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

1,378

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

14%-40% (28%)

 

Consumer

 

27

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

29%

 

Foreclosed and repossessed assets:

 

 

 

 

 

 

 

 

 

Construction

 

$

1,641

 

Income capitalization approach

 

Capitalization rate

 

9%

 

 

 

 

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

15%-45% (23%)

 

Commercial real estate

 

3,300

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

10%-50% (31%)

 

Residential real estate

 

1,026

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

18%-60% (25%)

 

Consumer

 

21

 

Sales comparison approach

 

Adjustments for differences between comparable sales

 

0%

 

 

39



Table of Contents

 

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 September 30, 2014 and December 31, 2013 were as follows:

 

 

 

Carrying

 

Fair Value Measurements Using

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and due from financial institutions

 

$

14,540

 

$

14,540

 

$

 

$

 

$

14,540

 

Interest-bearing deposits in other financial institutions

 

5,655

 

5,655

 

 

 

5,655

 

Loans held for sale

 

 

 

 

 

 

Loans, net

 

585,340

 

 

 

594,224

 

594,224

 

Accrued interest receivable

 

3,028

 

 

1,142

 

1,886

 

3,028

 

Federal Home Loan Bank and Federal Reserve Stock

 

5,964

 

n/a

 

n/a

 

n/a

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

655,211

 

 

642,609

 

 

642,609

 

Other borrowings

 

37,070

 

 

32,011

 

 

32,011

 

Federal Home Loan Bank Advances

 

55,000

 

 

55,078

 

 

55,078

 

Subordinated debentures

 

17,000

 

 

 

9,836

 

9,836

 

Accrued interest payable

 

87

 

 

73

 

14

 

87

 

 

40



Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.  Fair Value (Continued)

 

 

 

Carrying

 

Fair Value Measurements Using

 

 

 

Amount

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and due from financial institutions

 

$

15,393

 

$

15,393

 

$

 

$

 

$

15,393

 

Interest-bearing deposits in other financial institutions

 

10,896

 

10,896

 

 

 

10,896

 

Loans held for sale

 

68

 

 

69

 

 

69

 

Loans, net

 

552,926

 

 

 

562,882

 

562,882

 

Accrued interest receivable

 

3,149

 

 

987

 

2,161

 

3,149

 

Federal Home Loan Bank and Federal Reserve Stock

 

5,955

 

n/a

 

n/a

 

n/a

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

643,625

 

 

621,065

 

 

621,065

 

Other borrowings

 

45,722

 

 

45,717

 

 

45,717

 

Federal Home Loan Bank Advances

 

50,000

 

 

50,102

 

 

50,102

 

Subordinated debentures

 

17,000

 

 

 

9,878

 

9,878

 

Accrued interest payable

 

106

 

 

92

 

14

 

106

 

 

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.

 

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Table of Contents

 

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.

 

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Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.  Accumulated Other Comprehensive Income (Loss)

 

The changes in accumulated other comprehensive income (loss) by component, net of tax, is presented below for the three month periods ended September 30, 2014 and 2013 (in thousands):

 

 

 

Unrealized Gains and
Losses on Available-
for-Sale Securities

 

Defined Benefit
Pension Items

 

Total

 

September 30, 2014:

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,119

 

$

(365

)

$

754

 

Other comprehensive income (loss) before reclassifications

 

413

 

(18

)

395

 

Reclassification for gains included in net income

 

(114

)

 

(114

)

Balance, end of period

 

$

1,418

 

$

(383

)

$

1,035

 

 

 

 

 

 

 

 

 

September 30, 2013:

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(1,892

)

$

(515

)

$

(2,407

)

Other comprehensive income before reclassifications

 

(191

)

31

 

(160

)

Reclassification for gains included in net income

 

(18

)

 

(18

)

Balance, end of period

 

$

(2,101

)

$

(484

)

$

(2,585

)

 

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Table of Contents

 

COMMUNITY BANK SHARES OF INDIANA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.  Accumulated Other Comprehensive Income (Loss) (continued)

 

The changes in accumulated other comprehensive income (loss) by component, net of tax, is presented below for the nine month periods ended September 30, 2014 and 2013 (in thousands):

 

 

 

Unrealized Gains and
Losses on Available-
for-Sale Securities

 

Defined Benefit
Pension Items

 

Total

 

September 30, 2014:

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(1,364

)

$

(369

)

$

(1,733

)

Other comprehensive income (loss) before reclassifications

 

3,091

 

(14

)

3,077

 

Reclassification for gains included in net income

 

(309

)

 

(309

)

Balance, end of period

 

$

1,418

 

$

(383

)

$

1,035

 

 

 

 

 

 

 

 

 

September 30, 2013:

 

 

 

 

 

 

 

Balance, beginning of period

 

$

4,007

 

$

(534

)

$

3,473

 

Other comprehensive income before reclassifications

 

(5,750

)

50

 

(5,700

)

Reclassification for gains included in net income

 

(358

)

 

(358

)

Balance, end of period

 

$

(2,101

)

$

(484

)

$

(2,585

)

 

The amounts reclassified out of the unrealized gains and losses on available-for-sale securities component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013 were included in the net gain on sales of available for sale securities line item on the consolidated statements of income.

 

9.  Subsequent Event – Holding Company Borrowing

 

On November 13, 2014, the Company entered into an agreement to borrow $10.0 million from an unaffiliated institution.  The proceeds of the loan will be used to help facilitate the Company’s pending acquisition of First Financial Service Corporation.  The loan bears an interest rate of 5.35% and is payable in quarterly principal installments of $500,000 plus accrued interest with a final maturity of January 2, 2020.  The Company pledged the stock of both its subsidiary banks, Your Community Bank and The Scott County State Bank, as collateral.

 

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Table of Contents

 

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.

 

Recent Developments

 

Effective November 1, 2014, we changed our stock transfer agent from Registrar and Transfer Company to Broadridge Corporate Issuer Solutions, Inc.  Broadridge’s contact information is P.O. Box 1342, Brentwood, New York 11717; telephone (866) 321-8022 or (720) 378-5956.

 

Broadridge’s contact information is also available on our website under our “Corporate Information” tab.  Our website address is:  www.yourcommunitybank.com

 

Financial Condition

 

Total assets increased by $19.2 million to $866.0 million as of September 30, 2014 from $846.7 million as of December 31, 2013.  The increase in total assets was primarily due to an increase in net loans of $32.4 million and securities available for sale of $6.8 million.

 

Net loans increased to $585.3 million as of September 30, 2014 from $552.9 million as of December 31, 2013.  The growth in the Company’s portfolio is largely attributable to loans generated in its Lexington, Kentucky branches after its acquisition of First Federal of Lexington, Kentucky in 2013 and the subsequent hiring of new lenders.

 

Securities available for sale increased by $6.8 million to $202.2 million as of September 30, 2014 from $195.3 million at December 31, 2013 primarily due to purchases of $47.0 million, offset by sales of $43.7 million and maturities of $11.7 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.

 

Total deposits increased by $11.6 million to $655.2 million as of September 30, 2014 from $643.6 million at December 31, 2013.  Interest bearing deposits increased by $11.2 million during the period while non-interest bearing deposits increased by $385,000.  The Company continues to deploy its funding strategy by emphasizing non-interest bearing deposits while pricing its interest bearing deposits at an appropriate level given on-balance sheet liquidity and the amount of unpledged securities in its investment portfolio.

 

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Table of Contents

 

Net Income Available to Common Shareholders.  Net income available to common shareholders increased to $2.2 million for the three months ended September 30, 2014 from $2.0 million for the same period in 2013.  Basic and diluted earnings per common share, respectively, increased to $0.64 per share and $0.63 for the third quarter of 2014 as compared to $0.60 per common share for the third quarter of 2013.  The increase in net income available to common shareholders was attributable to increases in non-interest income of $119,000 and decreases in non-interest expense of $177,000 and preferred stock dividend of $111,000, offset primarily by increases in provision for loan losses of $91,000 and income tax expense of $95,000.  The annualized return on average assets and average shareholders’ equity were 1.06% and 9.59% for the three months ended September 30, 2014, respectively, compared to 1.09% and 10.68% for the equivalent period in 2013.

 

Net income available to common shareholders for the nine month period ended September 30, 2014 increased to $6.2 million from $5.6 million in the equivalent period in 2013. Basic and diluted earnings per common share, respectively, were $1.82 and $1.80 in 2014, an increase from $1.67 in 2013. The increase in earnings was due to decreases in provision for loan losses of $2.2 million and preferred stock dividends of $401,000 and an increase in net interest income of $486,000, offset by decreases in non-interest income of $2.1 million and increase in non-interest expense of $106,000 and income tax expense of $272,000.  The annualized return on average assets and shareholders’ equity were 1.02% and 9.44% for the nine months ended September 30, 2014, respectively, compared to 1.03% and 9.87% for the equivalent period in 2013.

 

During the second quarter of 2014, the Company announced it entered into a Definitive Agreement and Plan of Merger (“Merger Agreement”) with First Financial Service Corporation (“First Financial”), and its wholly owned subsidiary, First Federal Savings Bank (“First Federal”), whereby First Federal will be merged with and into Your Community Bank.  Your Community Bank will be the surviving bank.  The transaction is expected to close in early 2015 subject to all required regulatory approval and shareholder approval of both companies.  First Federal is based in Elizabethtown, Kentucky with offices in Louisville, Shepherdsville, Bardstown, and other communities in Kentucky.  As of June 30, 2014, First Financial had total assets of $802.3 million, net loans of $445.8 million, and total deposits of $723.6 million.

 

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Table of Contents

 

Net interest income.  Net interest income decreased $54,000 from the three months ended September 30, 2013 to same period in 2014, while the Company’s net interest margin on a fully taxable equivalent basis also decreased to 4.23% from 4.47%.  The decrease in the net interest margin was a result of lower yield on interest earning assets that was not fully offset by a decline in cost of funds.  The yield on interest-earning assets decreased to 4.45% for the third quarter of 2014 from 4.74% in 2013 while the average balance of interest-earning assets increased to $802.6 million in 2014 from $764.1 million in 2013.  The primary reason for the decline was the yield on loans, which decreased to 4.90% in 2014 from 5.32% in 2013.  In the current rate environment, higher yielding loans are maturing or renewing at lower rates which has pressured the Company’s net interest margin.  As a result, interest income from loans has remained relatively flat, decreasing by $17,000 from the third quarter of 2013, while the average balance of loans over the same period has increased by $45.1 million.  The average cost of funds declined to 0.32% for the third quarter of 2014 from 0.36% in 2013.  The decrease in the cost of funds was achieved through reductions in the average cost of time deposits and the average balance as the Company’s deposit mix has shifted to lower costing savings and other transaction type accounts.  In addition, the Company has been lowering offering rates for its deposit products given the level of on-balance sheet liquidity which has resulted in deposit runoff with the average balance for time deposits decreasing to $138.6 million in 2014 from $159.3 million in 2013.

 

Net interest income for the nine months ended September 30, 2014 increased to $23.6 million from $23.2 million in 2013 while the net interest margin on a fully taxable equivalent basis decreased to 4.17% in 2014 from 4.26% in 2013.  Net interest margin for 2014 was impacted by the decline in yield on interest earning assets from 4.55% to 4.41%, which was not fully offset by the decrease in the cost of interest-bearing liabilities which declined from 0.40% to 0.33% over the same period.  The largest component of the Company’s interest earning assets, loans, had an average balance of $580.2 million and an average yield of 4.85% for 2014 as compared to an average balance and yield of $514.3 million and 5.31% in 2013 as the Company continues to experience maturation, renewals, and lower rates of originations.  The cost of interest bearing liabilities decreased slightly to 0.33% during the same period with the largest decrease coming from time deposits which had an average cost of 0.29% and an average balance of $143.8 million in 2014 as compared to 0.39% and $165.0 million in 2013.  The Company has lowered its offering rates for time deposits which has resulted in a lower average cost, but has also to a reduction in accounts and average balances.  In addition, the cost of FHLB advances also decreased to 0.79% from 1.75% in 2013, which was a result of the maturation of higher yielding advances during second half of 2013 and the first six months of 2014.

 

47



Table of Contents

 

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 September 30,

 

 

 

2014

 

2013

 

 

 

Average
Balance

 

Interest

 

Average
Yield/Cost

 

Average
Balance

 

Interest

 

Average
Yield/Cost

 

 

 

(In thousands)

 

(In thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits with banks

 

$

14,224

 

$

18

 

0.51

%

$

10,745

 

$

19

 

0.68

%

Taxable securities

 

109,297

 

484

 

1.76

 

120,421

 

539

 

1.78

 

Tax-exempt securities

 

80,809

 

1,120

 

5.50

 

79,780

 

1,147

 

5.70

 

Total loans and fees (1) (2)

 

592,327

 

7,317

 

4.90

 

547,209

 

7,334

 

5.32

 

FHLB and Federal Reserve stock

 

5,964

 

72

 

4.78

 

5,990

 

83

 

5.51

 

Total earning assets

 

802,621

 

9,011

 

4.45

 

764,145

 

9,122

 

4.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Allowance for loan losses

 

(8,505

)

 

 

 

 

(9,676

)

 

 

 

 

Non-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

16,032

 

 

 

 

 

16,713

 

 

 

 

 

Bank premises and equipment, net

 

18,143

 

 

 

 

 

14,377

 

 

 

 

 

Other assets

 

38,889

 

 

 

 

 

40,583

 

 

 

 

 

Total assets

 

$

867,180

 

 

 

 

 

$

826,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and other

 

$

338,092

 

$

155

 

0.18

%

$

317,922

 

$

150

 

0.19

%

Time deposits

 

138,573

 

100

 

0.28

 

159,340

 

137

 

0.34

 

Other borrowings

 

35,879

 

19

 

0.21

 

42,824

 

26

 

0.24

 

FHLB advances

 

40,707

 

81

 

0.79

 

23,261

 

91

 

1.55

 

Subordinated debentures

 

17,000

 

101

 

2.36

 

17,000

 

100

 

2.32

 

Total interest-bearing liabilities

 

570,251

 

456

 

0.32

 

560,347

 

504

 

0.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest demand deposits

 

195,011

 

 

 

 

 

175,931

 

 

 

 

 

Accrued interest payable and other liabilities

 

6,127

 

 

 

 

 

5,929

 

 

 

 

 

Stockholders’ equity

 

95,791

 

 

 

 

 

83,935

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

867,180

 

 

 

 

 

$

826,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (taxable equivalent basis)

 

 

 

$

8,555

 

 

 

 

 

$

8,618

 

 

 

Less: taxable equivalent adjustment

 

 

 

(381

)

 

 

 

 

(390

)

 

 

Net interest income

 

 

 

$

8,174

 

 

 

 

 

$

8,228

 

 

 

Net interest spread

 

 

 

 

 

4.14

%

 

 

 

 

4.38

%

Net interest margin

 

 

 

 

 

4.23

 

 

 

 

 

4.47

 

 

48



Table of Contents

 


(1)  The amount of direct loan origination cost included in interest on loans was $64 and $80 for the three months ended September 30, 2014 and 2013.

(2)  Calculations include non-accruing loans in the average loan amounts outstanding.

(3)  The amount of accretion recorded for acquired loans included in interest income was $126 and $286 for the three months ended September 30, 2014 and 2013.

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

 

 

Average
Balance

 

Interest

 

Average
Yield/Cost

 

Average
Balance

 

Interest

 

Average
Yield/Cost

 

 

 

(In thousands)

 

(In thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other financial institutions

 

$

13,614

 

$

53

 

0.52

%

$

15,213

 

$

63

 

0.56

%

Taxable securities

 

114,196

 

1,534

 

1.80

 

148,816

 

1,897

 

1.70

 

Tax-exempt securities

 

80,472

 

3,374

 

5.61

 

79,234

 

3,439

 

5.80

 

Total loans and fees (1) (2)

 

580,204

 

21,039

 

4.85

 

514,290

 

20,414

 

5.31

 

FHLB and Federal Reserve stock

 

5,960

 

188

 

4.21

 

6,579

 

187

 

3.79

 

Total earning assets

 

794,446

 

26,188

 

4.41

 

764,132

 

26,000

 

4.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Allowance for loan losses

 

(8,495

)

 

 

 

 

(8,735

)

 

 

 

 

Non-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

14,318

 

 

 

 

 

17,241

 

 

 

 

 

Bank premises and equipment, net

 

18,330

 

 

 

 

 

14,036

 

 

 

 

 

Other assets

 

40,073

 

 

 

 

 

43,506

 

 

 

 

 

Total assets

 

$

858,672

 

 

 

 

 

$

830,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and other

 

$

325,757

 

$

460

 

0.19

%

$

309,635

 

$

434

 

0.19

%

Time deposits

 

143,751

 

315

 

0.29

 

164,962

 

484

 

0.39

 

Other borrowings

 

40,325

 

72

 

0.24

 

45,219

 

83

 

0.24

 

FHLB advances

 

43,718

 

257

 

0.79

 

28,760

 

376

 

1.75

 

Subordinated debentures

 

17,000

 

301

 

2.37

 

17,000

 

304

 

2.39

 

Total interest-bearing liabilities

 

570,551

 

1,405

 

0.33

 

565,576

 

1,681

 

0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest demand deposits

 

189,897

 

 

 

 

 

172,166

 

 

 

 

 

Accrued interest payable and other liabilities

 

5,094

 

 

 

 

 

6,144

 

 

 

 

 

Stockholders’ equity

 

93,130

 

 

 

 

 

86,294

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

858,672

 

 

 

 

 

$

830,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (taxable equivalent basis)

 

 

 

$

24,783

 

 

 

 

 

$

24,319

 

 

 

Less: taxable equivalent adjustment

 

 

 

(1,147

)

 

 

 

 

(1,169

)

 

 

Net interest income

 

 

 

$

23,636

 

 

 

 

 

$

23,150

 

 

 

Net interest spread

 

 

 

 

 

4.08

%

 

 

 

 

4.15

%

Net interest margin

 

 

 

 

 

4.17

 

 

 

 

 

4.26

 

 


(1)  The amount of direct loan origination cost included in interest on loans was $262 and $263 for the nine months ended September 30, 2014 and 2013.

(2)  Calculations include non-accruing loans in the average loan amounts outstanding.

(3)  The amount of accretion recorded for acquired loans included in interest income was $232 and $473 for the nine months ended September 30, 2014 and 2013.

 

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Table of Contents

 

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 fully taxable equivalent 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 September 30, 2014
compared to
Three Months Ended September 30, 2013
Increase/(Decrease) Due to

 

Nine Months Ended September 30, 2014
compared to
Nine Months Ended September 30, 2013
Increase/(Decrease) Due to

 

 

 

Total Net
Change

 

Volume

 

Rate

 

Total Net
Change

 

Volume

 

Rate

 

 

 

(In thousands)

 

(In thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other financial institutions

 

$

(1

)

$

5

 

$

(6

)

$

(10

)

$

(6

)

$

(4

)

Taxable securities

 

(55

)

(49

)

(6

)

(363

)

(461

)

98

 

Tax-exempt securities

 

(27

)

15

 

(42

)

(65

)

53

 

(118

)

Total loans and fees

 

(17

)

580

 

(597

)

625

 

2,481

 

(1,856

)

FHLB and Federal Reserve stock

 

(11

)

 

(11

)

1

 

(18

)

19

 

Total increase (decrease) in interest income

 

(111

)

551

 

(662

)

188

 

2,049

 

(1,861

)

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and other

 

5

 

9

 

(4

)

26

 

23

 

3

 

Time Deposits

 

(37

)

(17

)

(20

)

(169

)

(57

)

(112

)

Other borrowings

 

(7

)

(4

)

(3

)

(11

)

(9

)

(2

)

FHLB advances

 

(10

)

48

 

(58

)

(119

)

143

 

(262

)

Subordinated debentures

 

1

 

 

1

 

(3

)

 

(3

)

Total increase (decrease) in interest expense

 

(48

)

36

 

(84

)

(276

)

100

 

(376

)

Increase (decrease) in net interest income

 

$

(63

)

$

515

 

$

(578

)

$

464

 

$

1,949

 

$

(1,485

)

 

50



Table of Contents

 

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(In thousands)

 

Activity for the period ended:

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

8,481

 

$

9,722

 

$

8,009

 

$

8,762

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Residential real estate

 

(200

)

(236

)

(343

)

(608

)

Commercial real estate

 

 

 

(23

)

(1,208

)

Construction

 

(150

)

 

(150

)

(156

)

Commercial business

 

(528

)

 

(529

)

(39

)

Home equity

 

(60

)

(55

)

(103

)

(87

)

Consumer

 

(46

)

(77

)

(157

)

(172

)

Total

 

(984

)

(368

)

(1,305

)

(2,270

)

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

Residential real estate

 

3

 

19

 

10

 

28

 

Commercial real estate

 

11

 

13

 

106

 

47

 

Construction

 

 

 

67

 

4

 

Commercial business

 

85

 

22

 

175

 

72

 

Home equity

 

4

 

11

 

13

 

16

 

Consumer

 

18

 

15

 

71

 

58

 

Total

 

121

 

80

 

442

 

225

 

Net loan charge-offs

 

(863

)

(288

)

(863

)

(2,045

)

Provision for loan losses

 

166

 

75

 

638

 

2,792

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

7,784

 

$

9,509

 

$

7,784

 

$

9,509

 

 

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Table of Contents

 

Provision for loan losses increased to $166,000 for the three months ended September 30, 2014 from $75,000 in 2013 and decreased to $638,000 for the nine months ended September, 30, 2014 from $2.8 million in the same period of 2013.  Net charge-offs for the three and nine months ended September 30, 2014 were $863,000 compared to $288,000 and $2.0 million in 2013.  The Company’s non-performing loans increased to $9.3 million as of September 30, 2014 from $7.8 million as of December 31, 2013.  The increase in non-performing loans was primarily due to two commercial loans totaling $3.7 million that were placed on non-accrual status during the first and third quarters of 2014.  As of September 30, 2014, the Company had allocated $134,000 for loan losses to these two credits.  The decrease in the Company’s provision for loan losses for the nine months ended September 30, 2014 was due primarily to the allocation of $2.0 million for one credit in the second quarter of 2013 that was not repeated in 2014.  In the fourth quarter of 2013, the Company charged-off the allocated allowance which has a remaining balance of $814,000 as of September 30, 2014.  Currently, the Company does not have an allocation for loan losses for this credit.

 

The Company’s classified (substandard and doubtful) and criticized (watch and special mention) loans increased to $22.0 million and $33.4 million, respectively, as of September 30, 2014 from $19.3 million and $25.7 million as of December 31, 2013 while total past due loans decreased to $12.4 million to $16.4 million for the same periods.  The increase in classified credits was due primarily to aforementioned credits totaling $3.7 million.  The impact of the increase in classified credits on the allowance for loan losses was countered by a decrease in the allocation for loans collectively evaluated for impairment.  The Company allocates allowance for loan losses for loans collectively evaluated for impairment by using its average three year charge-off history, adjusted for certain factors.  Due primarily to a reduction in the average three year charge-off history, the amount allocated for those loans was reduced from 1.07% as of the end of 2013 to 0.98% at September 30, 2014.  The Company’s net charge-offs have declined substantially in 2014 with annualized net charge-offs of $1.2 million through September 30, 2014 as compared to net charge-offs of $4.2 million, $5.6 million, and $5.0 million for the years ended December 31, 2013, 2012, and 2011, respectively.  Due to the downward trend, the Company has continued to allocate a lower amount of allowance for loan losses for historical net charge-offs.  The Company has adjusted its qualitative adjustments upwards given the increase in classified and criticized credits and impaired loans, offset by a decrease in past due loans, however, these net adjustments to increase the allowance were fully offset by the aforementioned decrease in net charge-offs.

 

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

 

52



Table of Contents

 

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 September 30, 2014, management has provided for probable incurred losses within the loan portfolio based on information currently available to the Company.

 

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 $10.9 million and $10.5 million at September 30, 2014 and December 31, 2013, while $3.7 million and $389,000 were included in the Company’s non-accrual loans as of the same dates, respectively.

 

The Company’s non-performing assets as of September 30, 2014 and December 31, 2013 were as follows:

 

 

 

September 30,
2014

 

December 31,
2013

 

 

 

(In thousands)

 

 

 

 

 

 

 

Loans on non-accrual status

 

$

9,209

 

$

7,788

 

Loans past due over 90 days still on accrual

 

55

 

 

Total non-performing loans

 

9,264

 

7,788

 

Foreclosed and repossessed assets

 

4,677

 

5,988

 

Total non-performing assets

 

$

13,941

 

$

13,776

 

 

 

 

 

 

 

Non-performing loans to total loans

 

1.56

%

1.39

%

Non-performing assets to total loans

 

2.35

 

2.46

 

Allowance as a percent of non-performing loans

 

84.02

 

102.84

 

Allowance as a percent of total loans

 

1.31

 

1.43

 

 

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Table of Contents

 

Non-interest income.  Non-interest income increased to $1.7 million for the third quarter of 2014 from $1.6 million for 2013, an increase of $119,000.  The increase was due to gains on sales of available for sale securities of $172,000 for the third quarter of 2014 compared to $28,000 in 2013 as securities sold increased to $11.0 million in 2014 from $527,000 in 2013.  The increase in non-interest income was partially offset by a decrease in service charges on deposit accounts, which decreased to $874,000 in 2014 from $904,000 in 2013 as income recognized from ATM’s declined from 2013 to 2014.

 

Non-interest income decreased by $2.1 million to $4.9 million for the nine months ended September 30, 2014 from $7.0 million in 2013.  The decrease is primarily due to a bargain purchase gain of $1.9 million related to the acquisition of First Federal Lexington, Kentucky recorded in the second quarter of 2013 as well as decreases in gains on sales of available for sale securities and mortgage banking income.  Gains on sales of available for sale securities decreased to $468,000 for the first nine months of 2014 from $543,000 in 2013 as sales decreased during the same periods to $43.7 million from $50.2 million.  Mortgage banking income declined to $84,000 in 2014 from $170,000 in 2013 due to a change in strategy to retaining the majority of 1-4 family, fixed rate loans in the portfolio rather than selling them into the secondary market.

 

Non-interest expense.  Non-interest expense decreased by $177,000 to $6.9 million for the three months ended September 30, 2014 from $7.0 million in 2013 due to decreases in data processing and foreclosed assets, net, offset by an increase in salaries and employee benefits and legal and professional services.  The decrease in data processing expense of $183,000 was related to data integration expense incurred in 2013 from the acquisition of First Federal Lexington, Kentucky that was not repeated in 2014.  Foreclosed assets, net, which includes gains and losses on sales, maintenance expense, and property taxes on foreclosed assets, was $(148,000) in 2014 compared to $205,000 in 2013 as the Company recognized gains on sales of $282,000 in 2014 as compared to losses of $106,000 in 2013.  Salaries and employee benefits increased to $3.9 million in 2014 from $3.7 million and is attributable to an increase in stock award compensation.  Legal and professional fees increased by $176,000 to $646,000 during 2014 from $470,000 in 2013 due to expenditures incurred related to the Company’s pending acquisition of First Financial Service Corporation in Elizabethtown, Kentucky (“FFKY”).  During the third quarter of 2014, the Company incurred $188,000 of expense, primarily legal, associated with preparation of agreements and related SEC filings.  The Company anticipates incurring significant professional service fees for the FFKY acquisition including legal, accounting, and valuation services for the remainder of 2014 and into 2015.

 

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Table of Contents

 

Non-interest expense was $19.9 million for the nine months ended September 30, 2014, an increase of $106,000 from $19.8 million in 2013 as increases in salaries and employee benefits, occupancy, and legal and professional service fees were offset by a decrease in foreclosed assets, net, data processing, and other expense.  Salaries and employee benefits increased to $10.6 million in 2014 from $10.4 million in 2013 due to an increase in the number of employees, wage increases, and stock award compensation.  Occupancy expense increased to $1.9 million in 2014 from $1.7 million for the same period in 2013 due to the additional branch locations acquired as part of the 2013 acquisition of First Federal Lexington, Kentucky as well as increased snow removal and associated utility costs.  Legal and professional service fees increased $301,000 to $1.8 million for the nine months ended September 30, 2014 from $1.5 million as the Company incurred $557,000 for consulting and legal fees associated with its pending acquisition of FFKY.  Foreclosed assets, net, decreased by $386,000 to $43,000 for the nine months ended September 30, 2014 from $429,000 due to net gains recorded on sales of $335,000 in 2014 compared to a net loss of $154,000 in 2013 and an increase in net foreclosed and repossessed asset expense to $378,000 from $275,000.  Data processing expense decreased to $1.9 million for the first nine months of 2014 from $2.1 million in 2013 which was a result of the data integration fees from the First Federal Lexington, Kentucky acquisition that was not repeated in 2014. Other expenses were $1.9 million for 2014, a decrease of $106,000 from $2.1 million in 2013 due to a $100,000 loss incurred in 2013 on the disposal of land previously held for future branch development.

 

Income tax expense.  Income tax expense for the three months ended September 30, 2014 was $534,000 as compared to $439,000 for the equivalent period in 2013 while the effective tax rate increased to 18.7% for 2014 from 16.3% for 2013.  The increase in income tax expense was primarily due to $188,000 of acquisition related expenditures incurred in the third quarter of 2014 which are non-deductible.

 

Income tax expense for the nine months ended September 30, 2014 increased to $1.4 million from $1.1 million in 2013 while the effective tax rate also increased to 17.6% in 2014 from 15.1% in 2013.  The increase in income tax expense and effective tax rate was due to expenditures associated with the FFKY acquisition of $557,000 recognized in 2014 which are non-deductible.

 

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Table of Contents

 

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 September 30, 2014, we had cash and interest-bearing deposits with banks of $20.2 million and securities available-for-sale with a fair value of $202.2 million.  If we require funds beyond the funds we are able to generate internally, we have $143.2 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 $31.5 million.  Management believes the Company’s liquidity sources are adequate to meet its operational needs.

 

On November 13, 2014, the Company entered into an agreement to borrow $10.0 million from an unaffiliated institution.  The proceeds of the loan will be used to help facilitate the Company’s pending acquisition of First Financial Service Corporation.  The loan bears an interest rate of 5.35% and is payable in quarterly principal installments of $500,000 plus accrued interest with a final maturity of January 2, 2020.  The Company pledged the stock of both its subsidiary banks, Your Community Bank and The Scott County State Bank, as collateral.

 

The Banks are required to maintain specific amounts of capital pursuant to regulatory requirements.  As of September 30, 2014, 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:

 

September 30, 2014:

 

 

 

Total
Capital To
Risk-weighted
Assets

 

Tier 1
Capital To
Risk-weighted
Assets

 

Tier 1
Capital To
Average
Assets

 

Consolidated

 

19.2

%

18.0

%

13.0

%

Your Community Bank

 

16.4

%

15.2

%

11.2

%

Scott County State Bank

 

16.9

%

15.9

%

9.7

%

 

 

 

 

 

 

 

 

Minimum for banks to be well capitalized under regulatory capital requirements:

 

10.0

%

6.0

%

5.0

%

 

December 31, 2013:

 

 

 

Total
Capital To
Risk-weighted
Assets

 

Tier 1
Capital To
Risk-weighted
Assets

 

Tier 1
Capital To
Average
Assets

 

Consolidated

 

18.5

%

17.2

%

12.5

%

Your Community Bank

 

16.1

%

14.9

%

11.1

%

Scott County State Bank

 

20.0

%

19.0

%

11.8

%

 

 

 

 

 

 

 

 

Minimum for banks to be well capitalized under regulatory capital requirements:

 

10.0

%

6.0

%

5.0

%

 

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Table of Contents

 

We have been repurchasing shares of our common stock since May 21, 1999.  A net total of 418,200 shares at an aggregate cost of $7.2 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 September 30, 2014, 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 September 30, 2014 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, 2013.

 

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Table of Contents

 

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, 2013 and September 30, 2014 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 September 30, 2014 our net interest income would increase by an estimated 0.05%, or $16,000, over the one year forecast horizon.  As of December 31, 2013, in the Up 200 Scenario we estimated that net interest income would decrease $226,000, over a one year forecast horizon ending December 31, 2014.

 

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Table of Contents

 

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 September 30, 2014 and December 31, 2013, 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 September 30, 2014 and ending on September 30, 2015:

 

 

 

Interest Rate Sensitivity as of
September 30, 2014

 

 

 

Base

 

Gradual Increase in
Rates of 200
Basis Points

 

 

 

 

 

 

 

Projected interest income:

 

 

 

 

 

Loans

 

$

28,491

 

$

29,481

 

Investments

 

5,275

 

5,331

 

FHLB and FRB stock

 

193

 

193

 

Interest-bearing deposits in other financial institutions

 

4

 

17

 

Total interest Income

 

33,963

 

35,022

 

 

 

 

 

 

 

Projected interest expense:

 

 

 

 

 

Deposits

 

960

 

1,767

 

Federal funds purchased, line of credit and repurchase agreements

 

65

 

148

 

FHLB advances

 

596

 

608

 

Subordinated debentures

 

400

 

541

 

Total interest expense

 

2,021

 

3,064

 

Net interest income

 

$

31,942

 

$

31,958

 

 

 

 

 

 

 

Change from base

 

 

 

16

 

Percent change from base

 

 

 

0.05

%

 

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Table of Contents

 

The following table illustrates our estimated one year net interest income sensitivity profile based on the asset/liability model as of December 31, 2013 and ending December 31, 2014:

 

 

 

Interest Rate Sensitivity as of
December 31, 2013

 

 

 

Base

 

Gradual Increase
in
Rates of 200
Basis Points

 

Projected interest income:

 

 

 

 

 

Loans

 

$

26,757

 

$

27,848

 

Investments

 

5,245

 

5,312

 

FHLB and FRB stock

 

181

 

181

 

Interest-bearing deposits in other financial Institutions

 

5

 

25

 

Federal funds sold

 

15

 

54

 

Total interest income

 

32,203

 

33,420

 

 

 

 

 

 

 

Projected interest expense:

 

 

 

 

 

Deposits

 

974

 

1,745

 

Federal funds purchased, line of credit and Repurchase agreements

 

185

 

714

 

FHLB advances

 

329

 

329

 

Subordinated debentures

 

399

 

542

 

Total interest expense

 

1,887

 

3,330

 

Net interest income

 

$

30,316

 

$

30,090

 

 

 

 

 

 

 

Change from base

 

 

 

$

(226

)

% Change from base

 

 

 

(0.7

)%

 

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Table of Contents

 

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 September 30, 2014, 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, 2013.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company did not purchase its common shares during the nine months ended September 30, 2014.

 

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, 2014, 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:

November 14, 2014

 

BY:

/s/ James D. Rickard

 

 

 

James D. Rickard

 

 

 

President and

 

 

 

  Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

Dated:

November 14, 2014

 

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 September 30, 2014, filed with the SEC on November 14, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2014 and September 30, 2013, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and September 30, 2013 (iv) Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2014, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and September 30, 2013 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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