UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|_| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 0-25766
Community Bank Shares of Indiana, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1938254
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 W. Spring Street, New Albany, Indiana 47150
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 812-944-2224
Not applicable
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: 2,372,597 shares of common stock were outstanding as of August
14, 2003.
COMMUNITY BANK SHARES OF INDIANA, INC.
INDEX
Page
----
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets................................3
Consolidated Statements of Income..........................4
Consolidated Statements of Changes in Stockholders'
Equity.....................................................5
Consolidated Statements of Cash Flows......................6
Notes to Consolidated Financial Statements..............7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................12-20
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................21-22
Item 4. Controls and Procedures...................................23
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K..........................24
Signatures....................................................................25
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002...26-27
-2-
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2003 2002
---------- ----------
(In thousands, except share data)
ASSETS
Cash and due from banks $ 10,994 $ 6,631
Interest bearing deposits in other financial institutions 5,037 950
Securities available for sale, at fair value 91,525 92,374
Loans held for sale 2,128 9,230
Loans, net 364,096 321,634
Federal Home Loan Bank stock, at cost 7,808 7,700
Accrued interest receivable 2,098 1,967
Premises and equipment, net 11,247 11,324
Cash surrender value life insurance 10,781 10,514
Other assets 3,583 3,225
---------- ----------
Total Assets $ 509,297 $ 465,549
========== ==========
LIABILITIES
Deposits
Non-interest bearing $ 35,813 $ 25,790
Interest bearing 301,535 264,040
---------- ----------
Total deposits 337,348 289,830
Short-term borrowings 37,028 36,393
Federal Home Loan Bank advances 88,000 92,700
Accrued interest payable 323 337
Other liabilities 3,109 2,992
---------- ----------
Total Liabilities 465,808 422,252
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, without par value; 5,000,000 shares authorized;
none issued -- --
Common stock, $.10 par value per share; 10,000,000 shares
authorized; 2,728,298 shares issued; 2,372,597 and
2,394,545 shares outstanding 273 273
Additional paid-in capital 19,541 19,533
Retained earnings 27,973 27,373
Accumulated other comprehensive income (loss) 1,270 1,332
Unearned ESOP - 5,745 shares (7,657 shares at December 31,
2002) (60) (80)
Treasury stock, at cost - 350,956 shares (326,096 shares at
December 31, 2002) (5,508) (5,134)
---------- ----------
Total Stockholders' Equity 43,489 43,297
---------- ----------
Total Liabilities and Stockholders' Equity $ 509,297 $ 465,549
========== ==========
See accompanying notes to consolidated financial statements.
-3-
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands, except share data)
INTEREST INCOME
Loans, including fees $ 5,505 $ 5,121 $ 10,910 $ 10,229
Securities:
Taxable 493 958 1,080 1,942
Tax-exempt 150 117 299 249
Federal Home Loan Bank cash and stock dividends 99 116 204 226
Interest bearing deposits in other financial institutions 13 32 17 44
-------- -------- -------- --------
Total interest income 6,260 6,344 12,510 12,690
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 1,623 1,944 3,031 3,874
Federal Home Loan Bank advances 1,302 1,480 2,600 2,824
Short-term borrowings 60 76 161 174
-------- -------- -------- --------
Total interest expense 2,985 3,500 5,792 6,872
-------- -------- -------- --------
Net interest income 3,275 2,844 6,718 5,818
Provision for loan losses 333 692 629 830
-------- -------- -------- --------
Net interest income after provision for loan losses 2,942 2,152 6,089 4,988
-------- -------- -------- --------
NON-INTEREST INCOME
Service charges on deposit accounts 454 232 865 432
Commission income 34 66 90 215
Gain on sale of available for sale securities 20 58 115 120
Gain on sale of mortgage loans 158 252 381 325
Increase in cash surrender value of life insurance 134 138 267 228
Other 53 62 128 132
-------- -------- -------- --------
Total non-interest income 853 808 1,846 1,452
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,744 1,496 3,501 2,875
Occupancy 222 181 446 384
Equipment 240 208 471 400
Data processing 295 312 588 573
Marketing and advertising 87 86 139 181
Loss on sale of foreclosed real estate -- 2 121 2
Other 548 407 1,015 765
-------- -------- -------- --------
Total non-interest expense 3,136 2,692 6,281 5,180
-------- -------- -------- --------
Income before income taxes 659 268 1,654 1,260
Income tax expense 117 12 366 286
-------- -------- -------- --------
Net Income $ 542 $ 256 $ 1,288 $ 974
======== ======== ======== ========
Earnings per share:
Basic $ 0.23 $ 0.10 $ 0.54 $ 0.40
======== ======== ======== ========
Diluted $ 0.23 $ 0.10 $ 0.54 $ 0.39
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
-4-
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Additional Other Total
Shares Common Paid-In Retained Comprehensive Unearned Treasury Stockholders'
Outstanding Stock Capital Earnings Income ESOP Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2003 2,394,545 $ 273 $ 19,533 $ 27,373 $ 1,332 $(80) $(5,134) $ 43,297
Cash dividends declared on common
stock ($0.145 per share) -- -- -- (344) -- -- -- (344)
Purchase treasury stock (23,500) -- -- -- -- -- (369) (369)
Commitment of shares to be
released under the ESOP 956 -- 5 -- -- 10 -- 15
Stock options exercised 1,000 -- (2) -- -- -- 15 13
Comprehensive income:
Net income -- -- -- 746 -- -- -- 746
Change in unrealized gain
(loss) on interest rate swap,
net of reclassifications and
tax effects -- -- -- -- 45 -- -- 45
Change in unrealized gain
(loss) on securities available
for sale, net of tax effects -- -- -- -- (223) -- -- (223)
Change in minimum pension
liability, net of tax effects -- -- -- -- (7) -- -- (7)
---------- ------- -------- -------- ------- ---- ------- --------
Total comprehensive income 561
---------- ------- -------- -------- ------- ---- ------- --------
Balance, March 31, 2003 2,373,001 $ 273 $ 19,536 $ 27,775 $ 1,147 $(70) $(5,488) $ 43,173
========== ======= ======== ======== ======= ==== ======= ========
Cash dividends declared on common
stock ($0.145 per share) -- -- -- (344) -- -- -- (344)
Purchase treasury stock (1,360) -- -- -- -- -- (20) (20)
Commitment of shares to be
released under the ESOP 956 -- 5 -- -- 10 -- 15
Comprehensive income:
Net income -- -- -- 542 -- -- -- 542
Change in unrealized gain (loss)
on interest rate swap, net of
reclassifications and tax
effects -- -- -- -- 82 -- -- 82
Change in unrealized gain
(loss) on securities available
for sale, net of tax effects -- -- -- -- 12 -- -- 12
Change in minimum pension
liability, net of tax effects -- -- -- -- 29 -- -- 29
---------- ------- -------- -------- ------- ---- ------- --------
Total comprehensive income 665
---------- ------- -------- -------- ------- ---- ------- --------
Balance, June 30, 2003 2,372,597 $ 273 $ 19,541 $ 27,973 $ 1,270 $(60) $(5,508) $ 43,489
========== ======= ======== ======== ======= ==== ======= ========
See accompanying notes to consolidated financial statements.
-5-
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------
2003 2002
-------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,288 $ 974
Adjustments to reconcile net income to net cash from operating
activities:
Provision for loan losses 629 830
Depreciation expense 539 444
Net amortization of securities 556 336
Gain on sale of available for sale securities (115) (120)
Mortgage loans originated for sale (15,412) (10,371)
Proceeds from mortgage loan sales 22,895 26,581
Net gain on sales of mortgage loans (381) (325)
Loss on sale of foreclosed real estate 121 2
Increase in cash surrender value of life insurance (267) (228)
Federal Home Loan Bank stock dividends (108) (21)
ESOP expense 30 51
Net change in
Accrued interest receivable (131) 177
Accrued interest payable (14) 22
Other assets (380) (1,097)
Other liabilities 183 (407)
-------- --------
Net cash from operating activities 9,433 16,848
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest bearing deposits with banks (4,087) (17,363)
Activity in available for sale securities:
Sales 8,769 15,561
Purchases (25,354) (12,304)
Maturities, prepayments and calls 16,672 10,020
Loan originations and payments, net (43,506) (20,811)
Purchase of premises and equipment, net (462) (633)
Proceeds from sale of foreclosed real estate 509 143
Investment in cash surrender value of life insurance -- (10,000)
-------- --------
Net cash from investing activities (47,459) (35,387)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 47,518 40,248
Net change in short-term borrowings 635 (17,269)
Proceeds from Federal Home Loan Bank advances 44,140 11,000
Repayment of advances from Federal Home Loan Bank (48,840) (9,000)
Purchase of treasury stock (389) (599)
Stock options exercised 13 82
Dividends paid (688) (715)
-------- --------
Net cash from financing activities 42,389 23,747
-------- --------
Net change in cash and due from banks 4,363 5,208
Cash and due from banks at beginning of period 6,631 8,442
-------- --------
Cash and due from banks at end of period $ 10,994 $ 13,650
======== ========
Non cash transfers:
Transfer from loans to loans held for sale $ -- $ 16,034
Transfer from loans to foreclosed real estate $ 415 $ 145
Transfer from loans to foreclosed real estate $ -- $ 31
See accompanying notes to consolidated financial statements.
-6-
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Presentation of Interim Information
Community Bank Shares of Indiana, Inc. (the "Company") was incorporated on April
7, 1995. The Company is a multi-bank holding company headquartered in New
Albany, Indiana. The Company's wholly-owned banking subsidiaries (the "Banks")
are Community Bank of Southern Indiana ("Community") and Community Bank of
Kentucky ("Community of Kentucky"). During the quarter ended March 31, 2002, a
former subsidiary of the Company, Heritage Bank of Southern Indiana, was merged
with and into Community. Community and Community of Kentucky are state-chartered
stock commercial banks headquartered in New Albany, Indiana and Bardstown,
Kentucky, respectively.
In the opinion of management, the unaudited consolidated financial statements
include all normal adjustments considered necessary to present fairly the
financial position as of June 30, 2003, the results of operations for the three
and six months ended June 30, 2003 and 2002, and cash flows for the six months
ended June 30, 2003 and 2002. All of these adjustments are of a normal,
recurring nature. Interim results are not necessarily indicative of results for
a full year.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions for Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report for the year ended December
31, 2002. The consolidated financial statements include the accounts of the
Company and the Banks. All material intercompany balances and transactions have
been eliminated in consolidation.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation.
Three months ended Six months ended
June 30, June 30,
In thousands, except per share amounts 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------
Net income as reported $ 542 $ 256 $ 1,288 $ 974
Less: Stock-based compensation expense determined
under fair value based method 18 13 36 26
-------- -------- -------- --------
Pro forma net income $ 524 $ 243 $ 1,252 $ 948
======== ======== ======== ========
Basic earnings per share as reported $ 0.23 $ 0.10 $ 0.54 $ 0.40
Pro forma basic earnings per share 0.22 0.10 0.53 0.39
Diluted earnings per share as reported 0.23 0.10 0.54 0.39
Pro forma diluted earnings per share 0.22 0.10 0.53 0.38
-7-
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Newly Issued But Not Yet Effective Accounting Standards: The Financial
Accounting Standards Board (FASB) recently issued two new accounting standards,
Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, and Statement 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equities, both of which generally become
effective in the quarter beginning July 1, 2003. Management determined that,
upon adopting the new standards, they will not materially affect the Company's
operating results or financial condition.
-8-
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Securities
The amortized cost and fair value of available for sale securities and the
related unrealized holding gains and losses were as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------
(in thousands)
June 30, 2003:
Securities available for sale:
U.S. Government and federal agency $ 3,025 $ 94 $ -- $ 3,119
State and municipal 12,667 753 -- 13,420
Mortgage-backed 65,827 551 (106) 66,272
Corporate bonds 8,650 64 -- 8,714
---------- ---------- ---------- ----------
Total securities available for sale $ 90,169 $ 1,462 $ (106) $ 91,525
========== ========== ========== ==========
December 31, 2002:
Securities available for sale:
U.S. Government and federal agency $ 8,552 $ 204 $ -- $ 8,756
State and municipal 12,687 391 (38) 13,040
Mortgage-backed 60,209 1,109 (23) 61,295
Corporate bonds 9,249 34 -- 9,283
---------- ---------- ---------- ----------
Total securities available for sale $ 90,697 $ 1,738 $ (61) $ 92,374
========== ========== ========== ==========
3. Loans
Loans at June 30, 2003 and December 31, 2002 consisted of the following:
June 30, 2003 December 31, 2002
---------------------------------
(in thousands)
Commercial $ 120,055 $ 106,576
Mortgage loans on real estate:
Residential 89,787 81,618
Commercial 77,806 67,745
Construction 35,478 29,081
Home equity 32,898 29,595
Loans secured by deposit accounts 337 345
Consumer 11,484 10,488
---------- ----------
Subtotal 367,845 325,448
Less:
Allowance for loan losses (3,749) (3,814)
---------- ----------
Loans, net $ 364,096 $ 321,634
========== ==========
-9-
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Deposits
Deposits at June 30, 2003 and December 31, 2002 consisted of the following:
June 30, 2003 December 31, 2002
---------------------------------
(in thousands)
Demand (NOW) $ 34,751 $ 38,008
Money market accounts 86,608 74,448
Savings 29,123 30,656
Individual retirement accounts-savings 315 338
Individual retirement accounts-
certificates of deposits 17,692 16,173
Certificates of deposit, $100,000 and
over 37,059 28,048
Other certificates of deposit 95,987 76,369
---------- ----------
Total interest bearing deposits 301,535 264,040
Total non-interest bearing deposits 35,813 25,790
---------- ----------
Total deposits $ 337,348 $ 289,830
========== ==========
5. Supplemental Disclosure for Earnings Per Share
Earnings per share were computed as follows:
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
In thousands, except for share and per share amounts 2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic:
Earnings:
Net income $ 542 $ 256 $ 1,288 $ 974
========== ========== ========== ==========
Shares:
Weighted average common shares outstanding 2,372,746 2,445,269 2,378,143 2,457,247
========== ========== ========== ==========
Net income per share, basic $ 0.23 $ 0.10 $ 0.54 $ 0.40
========== ========== ========== ==========
Diluted:
Earnings:
Net income $ 542 $ 256 $ 1,288 $ 974
========== ========== ========== ==========
Shares:
Weighted average common shares outstanding 2,372,746 2,445,269 2,378,143 2,457,247
Add: Dilutive effect of outstanding options 10,246 22,417 8,466 17,800
---------- ---------- ---------- ----------
Weighted average common shares outstanding, as
adjusted 2,382,992 2,467,686 2,386,609 2,475,047
========== ========== ========== ==========
Net income per share, diluted $ 0.23 $ 0.10 $ 0.54 $ 0.39
========== ========== ========== ==========
Stock options for 58,700 and 64,000 shares of common stock were excluded from
the three months ended June 30, 2003 and June 30, 2002 diluted net income per
share, respectively, because their impact was antidilutive. Stock options for
65,900 and 71,700 shares of common stock were excluded from the six months ended
June 30, 2003 and June 30, 2002 diluted net income per share, respectively,
because their impact was antidilutive.
-10-
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Derivative Financial Instruments and Hedging Activities
The Company uses derivative financial instruments for the purpose of hedging the
risks of future cash flows caused by movements in interest rates. The Company
uses derivatives only for the purpose of hedging such risks, not for
speculation. The Company enters into hedging relationships such that the changes
in cash flows of items and transactions being hedged are expected to be offset
by corresponding changes in the cash flows of the derivatives. At June 30, 2003,
hedging relationships existed for $50.0 million ($25 million from August 2002
and $25 million from June 2003) in floating rate commercial loans. Changes in
the fair value of the swaps are accordingly reported in other comprehensive
income and will be reclassified to earnings over the lives of the hedges. During
the six months ended June 30, 2003, the Company reclassified $293,000 of the
market value of the interest rate swaps as an increase to interest income on
loans.
Following is an analysis of the changes in the pretax net gain on cash flow
hedges included in accumulated other comprehensive income.
Six months ended
------------------------------
June 30, 2003 June 30, 2002
------------------------------
(in thousands)
Beginning balance $ 746,000 $ --
Increase in value for the period 501,000 --
Reclassified to interest income on loans (293,000) --
---------- ----------
Ending balance $ 954,000 $ --
========== ==========
-11-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Safe Harbor Statement for Forward-Looking Statements
This report may contain forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts but rather
statements based on the Company's current expectations regarding its business
strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends" and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous
risks and uncertainties could cause or contribute to the Company's actual
results, performance and achievements to be materially different from those
expressed or implied by the forward-looking statements. Factors that may cause
or contribute to these differences include, without limitation, general economic
conditions, including changes in market interest rates and changes in monetary
and fiscal policies of the federal government; legislative and regulatory
changes; competitive conditions in the banking markets served by the Banks; the
adequacy of the allowance for losses on loans and the level of future provisions
for losses on loans; and other factors disclosed periodically in the Company's
filings with the Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking statements,
readers are cautioned not to place undue reliance on them, whether included in
this report or made elsewhere from time to time by the Company or on its behalf.
The Company assumes no obligation to update any forward-looking statements.
Financial Condition
Total assets increased 9.4% to $509.3 million at June 30, 2003 from $465.5
million at December 31, 2002, primarily as a result of increases in net loans of
$42.5 million. Funding provided by total liabilities increased 10.3% from
December 31, 2002, primarily as a result of a 16.4% increase in deposits to
$337.3 million. Total equity increased $192,000 from December 31, 2002,
primarily as a result of net income offset by an other comprehensive loss for
the period, as well as treasury stock purchases and dividends to shareholders.
The Banks continue to focus on originating loans secured by owner occupied
manufacturing and retail facilities, general business assets, and single family
residential real estate. Loan growth was particularly strong in the commercial
loan area as commercial business loans rose $13.5 million and commercial
mortgage loans rose $10.1 million as sustained lower interest rates continued to
stimulate commercial loan demand. In addition to low interest rates, commercial
loan growth was positively impacted by personnel expansion in the Louisville, KY
market. Lower market interest rates also contributed to strong growth in
residential and construction real estate loans, which increased 10.0% to $89.8
million and 22.0% to $35.5 million, respectively. The Company currently retains
ten year mortgage loans that it originates and sells substantially all fifteen
and thirty-year conforming mortgage loans into the secondary market to reduce
the interest rate risk of holding such assets should interest rates rise.
Securities available for sale decreased $849,000 from December 31, 2002 to $91.5
million at June 30, 2003. Considerable activity occurred in the securities
portfolio as the generally lower mortgage interest rates caused an increase in
the rate of prepayment on the Company's
-12-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
mortgage backed securities. Sales, maturities, prepayments and calls of $25.4
million were used to fund purchases of $25.4 million.
Total deposits increased 16.4% to $337.3 million at June 30, 2003 from $289.8
million at December 31, 2002. Growth in deposits over the last six months
occurred in non-interest bearing demand deposits, which increased 38.9% to $35.8
million, and time deposits, which grew 25.0% to $150.7 million. Non-interest
bearing deposits increased as the Company focused on building deposit
relationships that will help the Company lower its relative funding costs.
Management attributes the growth in time deposits primarily to its competitive
pricing in an effort to attract intermediate-term funding.
Results of Operations
Net Income. Net income was $542,000 ($0.23 per share diluted) for the three
months ended June 30, 2003 as compared to $256,000 ($0.10 per share diluted) for
the three months ended June 30, 2002. Return on average assets was 0.45% for the
three months ended June 30, 2003 as compared to 0.23% for the same period in
2002. Return on average equity was 5.02% for the second quarter of 2003 compared
to 2.38% for the same quarter in 2002. In addition to the growth in earnings,
return on average equity was favorably affected by the repurchase of the
Company's common stock; average treasury stock was $5.5 million for the three
months ended June 30, 2003 as compared to $4.2 million for the same period in
2002.
Net income was $1,288,000 ($0.54 per share diluted) for the six months ended
June 30, 2003 as compared to $974,000 ($0.39 per share diluted) for the six
months ended June 30, 2002. Return on average assets was 0.54% for the six
months ended June 30, 2003 as compared to 0.45% for the same period in 2002 and
return on average equity was 5.99% and 4.55%, respectively, for the same
periods.
The Company's improvement in net income during the three and six months ended
June 30, 2003 compared to the same periods in 2002 is the result of an improved
net interest margin and the continued growth of interest earning assets.
Additionally, results for 2003 were positively affected by a reduction in the
provision for loan losses from 2002, during which there was an increase in the
level of estimated loss exposure from troubled loans.
Net interest income. Net interest income increased 15.2% to $3.3 million for the
second quarter of 2003 from $2.8 million for the same period in 2002 as the
Company's net interest margin improved to 2.90% from 2.73% with respect to such
periods. The net interest margin was positively affected by the cost of
interest-bearing liabilities declining faster than yields on interest-earning
assets and an increase in average interest earning assets. The Company has been
able to mitigate the effects of generally lower market interest rates as a
result of the interest rate swaps that were previously entered into in an effort
to hedge the effects of fluctuating cash flows on floating-rate commercial
loans.
Net interest income increased 15.5% to $6.7 million for the six months ended
June 30, 2003 from $5.8 million for the same period in 2002 as the Company's net
interest margin improved to 3.04% from 2.85% for such periods. Net interest
income increased for substantially the same reasons as the quarterly change in
net interest income referenced above.
-13-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
An interest rate swap is a financial instrument that derives its cash flow, and
therefore its value, by reference to underlying interest rate indexes.
Derivative contracts are written in amounts referred to as notional amounts,
which only provide the basis for calculating payments between counterparties and
do not represent amounts to be exchanged between parties or a measure of
financial risk. At June 30, 2003, the Company had financial derivative
instruments outstanding with notional amounts totaling $50 million ($25 million
from August 2002 and $25 million from June 2003) and an estimated fair value of
$954,000 reported in other assets and as a component of other comprehensive
income, net of tax. Included in interest income on loans was earnings on the
interest rate swaps of $152,000 during the second quarter of 2003 and $293,000
for the six months ended June 30, 2003.
The cost of interest-bearing liabilities has been significantly affected by the
$88.0 million in funding provided by Federal Home Loan Bank (FHLB) advances,
which principally consists of putable (or convertible) instruments that give the
FHLB the option at the conversion date (and quarterly thereafter) to put an
advance back to the Banks. If an advance is put back to the Banks by the FHLB,
the Banks can choose to prepay the advance without penalty or allow the interest
rate on the advance to adjust to three-month LIBOR (London Interbank Offer Rate)
at the conversion date (and adjusted quarterly thereafter). The Company
estimates that three-month LIBOR would have to rise in excess of 300 basis
points before the FHLB would exercise its option on any of the individual
advances.
The Company uses FHLB advances for both short- and long-term funding. The
balances reported at both December 31, 2002 and June 30, 2003 are substantially
comprised of long-term advances. Proceeds from FHLB advances of $44.1 million
and repayment of FHLB advances of $48.8 million reported as cash flows from
financing activities were substantially all associated with variable-rate,
short-term advances.
-14-
Average Balance Sheets. The following tables set forth certain information
relating to the Company's average balance sheets and reflects the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are computed using daily average balances.
Yields on tax-exempt securities have not been presented on a tax equivalent
basis. Loans held for sale and loans no longer accruing interest are included in
total loans.
Three Months Ended June 30,
---------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- --------- ---------- --------- --------- ----------
(in thousands) (in thousands)
ASSETS
Earning assets:
Interest-bearing deposits with banks $ 4,200 $ 13 1.24% $ 6,841 $ 32 1.88%
Taxable securities 65,832 493 3.00% 81,530 958 4.71%
Non-taxable securities 12,667 150 4.75% 10,138 117 4.63%
Total loans and fees 362,758 5,505 6.09% 311,452 5,121 6.60%
FHLB stock 7,770 99 5.11% 7,668 116 6.07%
--------- --------- --------- ---------
Total earning assets 453,227 6,260 5.54% 417,629 6,344 6.09%
Less: Allowance for loan losses 4,072 3,133
Non-earning assets:
Cash and due from banks 8,212 6,616
Bank premises and equipment, net 11,309 11,327
Accrued interest receivable and other assets 15,102 14,324
--------- ---------
Total assets $ 483,778 $ 446,763
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 291,658 $ 1,623 2.23% $ 253,183 $ 1,944 3.08%
Federal funds purchased and repurchase agreements 28,784 60 0.84% 26,095 76 1.17%
FHLB advances 88,000 1,302 5.93% 99,846 1,480 5.95%
--------- --------- --------- ---------
Total interest-bearing liabilities 408,442 2,985 2.93% 379,124 3,500 3.70%
Non-interest bearing liabilities:
Non-interest demand deposits 30,604 22,148
Accrued interest payable and other liabilities 1,401 2,333
Stockholders' equity 43,331 43,158
--------- ---------
Total liabilities and stockholders' equity $ 483,778 $ 446,763
========= =========
Net interest income $ 3,275 $ 2,844
========= =========
Net interest spread 2.61% 2.39%
Net interest margin 2.90% 2.73%
-15-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Six Months Ended June 30,
---------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------- --------- ---------- --------- --------- ----------
(in thousands) (in thousands)
ASSETS
Earning assets:
Interest-bearing deposits with banks $ 2,667 $ 17 1.29% $ 4,688 $ 44 1.89%
Taxable securities 68,179 1,080 3.19% 82,326 1,942 4.76%
Non-taxable securities 12,673 299 4.76% 10,499 249 4.78%
Total loans and fees 355,026 10,910 6.20% 306,661 10,229 6.73%
FHLB stock 7,735 204 5.32% 7,663 226 5.95%
--------- --------- --------- ---------
Total earning assets 446,280 12,510 5.65% 411,837 12,690 6.21%
Less: Allowance for loan losses 3,961 3,104
Non-earning assets:
Cash and due from banks 7,894 7,993
Bank premises and equipment, net 11,350 11,273
Accrued interest receivable and other assets 15,242 12,063
--------- ---------
Total assets $ 476,805 $ 440,062
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 277,776 $ 3,031 2.20% $ 246,393 $ 3,874 3.17%
Federal funds purchased and repurchase agreements 34,099 161 0.95% 29,455 174 1.19%
FHLB advances 89,286 2,600 5.87% 97,354 2,824 5.85%
--------- --------- --------- ---------
Total interest-bearing liabilities 401,161 5,792 2.91% 373,202 6,872 3.71%
Non-interest bearing liabilities:
Non-interest demand deposits 29,111 21,777
Accrued interest payable and other liabilities 3,140 1,933
Stockholders' equity 43,393 43,150
--------- ---------
Total liabilities and stockholders' equity $ 476,805 $ 440,062
========= =========
Net interest income $ 6,718 $ 5,818
========= =========
Net interest spread 2.74% 2.50%
Net interest margin 3.04% 2.85%
-16-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Rate/Volume Analysis. The table below illustrates the extent to which changes in
interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities affected the Company's interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate
changes.
--------------------------------------------------------------------------
Three Months Ended June 30, 2003 Six Months Ended June 30, 2003
compared to compared to
Three Months Ended June 30, 2002 Six Months Ended June 30, 2002
Increase/(Decrease) Due to Increase/(Decrease) Due to
--------------------------------------------------------------------------
Total Net Total Net
Change Volume Rate Change Volume Rate
--------------------------------------------------------------------------
(in thousands) (in thousands)
Interest income:
Interest-bearing deposits with banks $ (19) $ (10) $ (9) $ (27) $ (15) $ (12)
Taxable securities (465) (161) (304) (862) (296) (566)
Tax-exempt securities 33 30 3 50 51 (1)
Total loans and fees 384 799 (415) 681 1,529 (848)
FHLB stock (17) 2 (19) (22) 2 (24)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in interest income (84) 660 (744) (180) 1,271 (1,451)
-------- -------- -------- -------- -------- --------
Interest expense:
Deposits (321) 266 (587) (843) 449 (1,292)
Federal funds purchased and repurchase
agreements (16) 7 (23) (13) 25 (38)
FHLB advances (178) (175) (3) (224) (235) 11
-------- -------- -------- -------- -------- --------
Total increase (decrease) in interest expense (515) 98 (613) (1,080) 239 (1,319)
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest income $ 431 $ 562 $ (131) $ 900 $ 1,032 $ (132)
======== ======== ======== ======== ======== ========
Allowance and Provision for Loan Losses. The provision for loan losses was
$333,000 for the three months ended June 30, 2003 as compared to $692,000 for
the same period in 2002. The elevated provision for loan losses during the
second quarter of 2002 resulted from increases in non-performing loans and the
level of estimated loss exposure from impaired loans as management determined
through its normal credit risk monitoring procedures that certain specific loans
exhibited an increased risk of loss.
Loans (including impaired loans under the Financial Accounting Standard Board's
Statement of Financial Accounting Standards 114 and 118) are placed on
non-accrual status when they become past due ninety days or more as to principal
or interest (except in situations where payment is known and imminent). When
loans are placed on non-accrual status, all unpaid accrued interest is reversed.
These loans remain on non-accrual status until the loan becomes current or the
loan is deemed uncollectible and is charged off. The Company defines impaired
loans to be those commercial loans that management has classified as doubtful
(collection of total amount due is highly questionable or improbable) or loss
(all or a portion of the loan has been written off or a specific allowance for
loss has been provided). Impaired loans increased from $1.7 million at December
31, 2002 to $1.9 million at June 30, 2003. The increase in impaired loans is
related to a determination by the Company through its normal credit risk
monitoring procedures that certain specific loans, most of which had been
classified as of
-17-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
December 31, 2002 as doubtful (collection of total amount due is highly
questionable or improbable), exhibit an increased risk of loss. The Company does
not believe that this indicates a trend in the overall loan portfolio.
Management believes, based on information presently available, that it has
adequately provided for loan losses at June 30, 2003. The following table sets
forth the activity with respect to the Company's allowance for loan losses
during the three months and six months ended June 30, 2003 and for the
comparable periods in 2002:
Summary of Loan Loss Experience:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
Activity for the period ended: 2003 2002 2003 2002
-------- -------- -------- --------
(in thousands) (in thousands)
Beginning balance $ 4,000 $ 3,144 $ 3,814 $ 3,030
Charge-offs:
Real Estate (14) (24) (14) (24)
Commercial (552) (77) (669) (102)
Consumer (24) (26) (24) (26)
-------- -------- -------- --------
Total (590) (127) (707) (152)
Recoveries:
Real Estate -- -- -- --
Commercial 3 3 10 3
Consumer 3 2 3 3
-------- -------- -------- --------
Total 6 5 13 6
Provision 333 692 629 830
-------- -------- -------- --------
Ending balance $ 3,749 $ 3,714 $ 3,749 $ 3,714
======== ======== ======== ========
Non-performing loans:
June 30, 2003 December 31, 2002
----------------------------------
(in thousands)
Loans on non-accrual status $ 2,468 $ 3,171
Loans past due 90 days or more and still
accruing 48 --
-------- --------
Total non-performing loans 2,516 3,171
Other real estate owned 415 630
-------- --------
Total non-performing assets $ 2,931 $ 3,801
======== ========
Non-performing loans to total loans 0.68% 0.97%
Non-performing assets to total loans 0.80% 1.17%
Allowance as a percent of non-performing
loans 149.01% 120.28%
Allowance as a percent of total loans 1.02% 1.17%
-18-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Non-interest income. Non-interest income increased 5.6% to $853,000 for the
three months ended June 30, 2003 from $808,000 for the three months ended June
30, 2002. The increase was primarily attributable to increases in service
charges on deposit accounts due to enhancements to the Company's checking
account product line and an increase in the total number of checking accounts.
Offsetting the increases in service charges on deposit accounts were decreases
in gain on sale of mortgage loans, gain on sale of available for sale
securities, and reduced commission income. Gain on sale of mortgage loans
declined in 2003 as a result of fewer loans sold during 2003. Management
attributes the decrease in commission income to reduced consumer confidence
levels in relation to the volatile U.S. stock market that reduced the volume of
transactions at Heritage Financial Services, a division of Community that sold
non-deposit investment products. In an effort to grow this line of business, on
May 15, 2003 the Company announced the formation of a retail brokerage strategic
alliance with Smith Barney. In June of 2003, a Smith Barney Investment Center
opened at the Company's headquarters in New Albany, Indiana. At that time, the
investment and brokerage service of Heritage Financial Services was assumed by
Smith Barney. While the Company is optimistic about the future non-interest
income potential of this strategic alliance, the Company anticipates that
commission income will be less in 2003 than in previous years as the strategic
alliance builds a stable customer base.
Non-interest income increased 27.1% to $1,846,000 for the six months ended June
30, 2003 from $1,452,000 for the six months ended June 30, 2002. Non-interest
income increased for substantially the same reasons as the quarterly change
referenced above.
Non-interest expense. Non-interest expense increased $444,000 for the three
months ended June 30, 2003 as compared to the same period in 2002, primarily the
result of an increase in salaries and employee benefits and occupancy and
equipment expenses. The majority of the increase in these areas was related to
three new offices the Company opened over the past year.
Non-interest expense increased 21.3% to $6.3 million for the six months ended
June 30, 2003 from $5.2 million for the six months ended June 30, 2002.
Non-interest expense increased for substantially the same reasons as the
quarterly change in non-interest expense referenced above.
The Company expects that non-interest expense will continue to increase
throughout 2003 as it continues to expand into the Louisville, Kentucky market
through two to three additional banking offices.
Liquidity and Capital Resources
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
satisfy financial commitments, and take advantage of investment opportunities.
Historically, the Company has been able to retain a significant amount of its
deposits as they mature.
-19-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
The Company's primary sources of funds are customer deposits, customer
repurchase agreements, proceeds from loan repayments, maturing securities and
FHLB advances. While loan repayments and maturities are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by market
interest rates, general economic conditions and competition. At June 30, 2003,
the Company had cash and due from banks and interest-bearing deposits in other
financial institutions of $16.0 million and securities available-for-sale with a
fair value of $91.5 million. If the Company requires funds beyond the funds it
is able to generate internally, it has $24.2 million in additional aggregate
borrowing capacity with the Federal Home Loan Banks of Indianapolis and
Cincinnati, and unused federal funds lines of credit with various nonaffiliated
financial institutions of $11.3 million.
The Banks are required to maintain specific amounts of capital pursuant to
regulatory requirements. As of June 30, 2003, the Banks were in compliance with
all regulatory capital requirements that were effective as of such date with
capital ratios as follows:
Total Tier 1 Tier 1
Capital To Capital To Capital To
Risk-weighted Risk-weighted Average
Assets Assets Assets
------------------------------------------
Consolidated 12.23% 11.23% 8.67%
Community 12.05% 11.00% 8.32%
Community of Kentucky 15.82% 14.92% 11.18%
Minimum to be well capitalized under
regulatory capital requirements: 10.0% 6.0% 5.0%
The Company has been repurchasing shares of its common stock since May 21, 1999
pursuant to formal repurchase plans. A net total of 349,956 shares at an
aggregate cost of $5.5 million have been repurchased since that time under both
the current and prior repurchase plans, with 24,860 shares at a cost of $389,000
purchased in 2003. The most current repurchase plan authorized in May 2001
provides for the repurchase of as much as $3.0 million of the Company's common
stock. Through June 30, 2003, a total of $2.6 million had been expended to
purchase 158,367 shares under the current repurchase plan.
Other Information
The Company is the defendant in a lawsuit in which it allegedly disbursed
$150,000 from an escrow account without all proper signatures. A trial was held
without jury on September 17-18, 2002. The Company was notified by the attorney
representing it in this matter in August 2003 that the Court had rendered
findings and a judgment adverse to the Company. The Company is currently
considering an appeal.
-20-
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Asset/liability management is the process of balance sheet control designed to
ensure safety and soundness and to maintain liquidity and regulatory capital
standards while sustaining acceptable net interest income. Interest rate risk is
the exposure to adverse changes in net interest income as a result of market
fluctuations in interest rates. Management continually monitors interest rate
and liquidity risk so that it can implement appropriate funding, investment, and
other balance sheet strategies. Management considers market interest rate risk
to be the Company's most significant ongoing business risk consideration.
The Company currently contracts with an independent consulting firm to measure
its interest rate risk position. The consulting firm utilizes an earnings
simulation model to analyze net interest income sensitivity. Current balance
sheet amounts, current yields and costs, corresponding maturity and repricing
amounts and rates, other relevant information, and certain assumptions made by
management are combined with gradual movements in interest rates of 100 basis
points down and 200 basis points up within the model to estimate their combined
effects on net interest income over a one-year horizon. Interest rate movements
are spread equally over the forecast horizon of one year. The Company does not
project growth in amounts for any balance sheet category when constructing the
model because of the belief that projected growth can mask current interest rate
risk imbalances over the projection horizon. The Company believes that the
changes made to its interest rate risk measurement process have improved the
accuracy of results of the process. Consequently, the Company believes that it
has better information on which to base asset and liability allocation decisions
going forward.
Assumptions based on the historical behavior of the Company's deposit rates and
balances in relation to changes in interest rates are incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure future net interest income or precisely predict the
impact of fluctuations in market interest rates on net interest income. The
Company continually monitors and updates the assumptions as new information
becomes available. Actual results will differ from the model's simulated results
due to timing, magnitude and frequency of interest rate changes and actual
variations from the managerial assumptions utilized under the model, as well as
changes in market conditions and the application and timing of various
management strategies.
Given a gradual 200 basis point increase in the projected yield curve used in
the simulation model, it is estimated that as of June 30, 2003 net interest
income for the Company would decrease by 1.0% over one year ending June 30,
2004. However, the simulation analysis indicates that over two years net
interest income would increase approximately 0.7% in response to a 200 basis
points gradual increase in the yield curve over the first year. As of December
31, 2002, the Company estimated that net interest income would decrease 3.0%
over one year ending December 31, 2003 using a gradual 200 basis points increase
in the yield curve. It is estimated that a gradual decline of 100 basis points
in the yield curve would cause a decrease in net interest income of 1.0% over
one year ending June 30, 2004 as compared to an estimated decrease of 1.1% for
one year ending December 31, 2003. The estimated changes in net interest income
for all interest rate change scenarios are within the policy guidelines
established by the Company's board of directors. However, the Company will
continue to take action to limit its exposure to stable or falling interest rate
environments.
The interest sensitivity profile of the Company at any point in time will be
affected by a number of factors. These factors include, among other things, the
mix of interest sensitive assets and
-21-
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
liabilities as well as their relative repricing schedules. Such profile is also
influenced by market interest rates, deposit growth, loan growth, and other
factors. The table below is representative only and is not a precise measurement
of the effect of changing interest rates on the Company's net interest income in
the future.
The following table illustrates the Company's estimated one-year net interest
income sensitivity profile based on the asset/liability model as of June 30,
2003:
Interest Rate Sensitivity for the Year Ended June 30, 2004
--------------------------------------------------------------
Gradual Decrease in Gradual Increase in
Rates of 100 Rates of 200
Basis Points Base Basis Points
--------------------------------------------------------------
(in thousands)
Projected interest income:
Loans $ 22,167 $ 22,785 $ 23,912
Investments 2,590 2,677 2,908
FHLB stock 381 381 381
Interest-bearing bank deposits 23 50 105
---------- ---------- ----------
Total interest Income 25,161 25,893 27,306
Projected interest expense:
Deposits 5,610 5,919 7,055
Other borrowings 5,260 5,471 5,894
---------- ---------- ----------
Total interest expense 10,870 11,390 12,949
---------- ---------- ----------
Net interest income $ 14,291 $ 14,503 $ 14,357
========== ========== ==========
Change from base $ (212) $ (146)
Percent change from base (1.0)% (1.0)%
The following table illustrates the Company's estimated one-year net interest
income sensitivity profile based on the asset/liability model as of December 31,
2002:
Interest Rate Sensitivity for the Year Ended December 31, 2003
--------------------------------------------------------------
Gradual Decrease in Gradual Increase in
Interest Rates of Interest Rates of
100 Basis Points Base 200 Basis Points
--------------------------------------------------------------
(in thousands)
Projected interest income:
Loans $ 21,357 $ 21,744 $ 22,508
Investments 3,203 3,340 3,608
Other investments 431 442 466
---------- ---------- ----------
Total interest income 24,991 25,526 26,582
Projected interest expense:
Deposits 5,640 5,814 6,826
Other borrowings 5,332 5,533 6,004
---------- ---------- ----------
Total interest expense 10,972 11,347 12,830
---------- ---------- ----------
Net interest income $ 14,019 $ 14,179 $ 13,752
========== ========== ==========
Change from base $ (160) $ (427)
Percent change from base (1.1)% (3.0)%
-22-
PART I - ITEM 4
CONTROLS AND PROCEDURES
Company management, including the Chief Executive Officer (serving as the
principal executive officer) and the Chief Financial Officer, have conducted an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the disclosure controls
and procedures are effective in ensuring that all material information required
to be filed in this quarterly report has been made known to them in a timely
fashion. There have been no significant changes in internal controls, or in
other factors that could significantly affect internal controls, subsequent to
the date the Chief Executive Officer and the Chief Financial Officer completed
their evaluation.
-23-
PART II
OTHER INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 20, 2003.
Matters submitted to, and approved by, stockholders are listed below,
as is a tabulation of voting. There were no abstentions with regard to
the election of Directors or non-votes on any of the matters voted on
at the meeting.
(1) The following persons nominated as Directors were elected:
Withhold
Class For Authority
----------------------------------------------------------------------
Nominees for Director for
Three-Year Terms Expiring in 2006:
Gordon L. Huncilman 1,828,858 18,679
James W. Robinson 1,827,984 19,553
Timothy T. Shea 1,824,370 23,167
Directors whose term of office continued after the meeting were
as follows: Robert J. Koetter, Sr., Gary L. Libs, Kerry M. Stemler,
George M. Ballard, Dale L. Orem, James D. Rickard, Steven R. Stemler.
(2) The appointment by the Board of Directors of Crowe Chizek and
Company LLP, as the Company's independent auditors for the fiscal year
ending December 31, 2003, was ratified by the following vote:
For Against Abstain
1,829,914 15,432 2,191
(3) Ratify performance units plan:
For Against Abstain
1,286,888 131,905 108,961
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index of this Form 10-Q and are filed as a part of this report.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on April 23, 2003 reporting, under
Item 5, earnings for the three months ended March 31, 2003.
-24-
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: August 14, 2003 BY: /s/ James D. Rickard
----------------------------------
James D. Rickard
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: August 14, 2003 BY: /s/ Paul A. Chrisco
----------------------------------
Paul A. Chrisco
Senior Vice-President and
Chief Financial Officer
(Principal Financial Officer)
-25-
EXHIBIT INDEX
COMMUNITY BANK SHARES OF INDIANA, INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- ---------------------------------------------------------------
11 Statement Regarding Computation of Per Share Earnings
31 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002