COMMUNITY BANK SHARES OF INDIANA INC - 10-Q Quarterly Report

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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, 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. Yes |X| No |_|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

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: 2,382,534 shares of common stock were outstanding as of
November 12, 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.....................................................5-6

Consolidated Statements of Cash Flows........................7

Notes to Consolidated Financial Statements................8-12

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................13-21

Item 3. Quantitative and Qualitative Disclosures About
Market Risk..............................................22-23

Item 4. Controls and Procedures.....................................24

Part II Other Information

Item 6. Exhibits and Reports on Form 8-K............................25

Signatures....................................................................26

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002....................................................................29-30

-2-

PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

September 30, December 31,
2003 2002
--------- ---------
(In thousands, except share data)

ASSETS
Cash and due from banks $ 8,504 $ 6,631
Interest bearing deposits in other financial institutions 4,984 950
Securities available for sale, at fair value 75,035 92,374
Loans held for sale 1,468 9,230
Loans, net 375,748 321,634
Federal Home Loan Bank stock, at cost 7,903 7,700
Accrued interest receivable 1,916 1,967
Premises and equipment, net 11,302 11,324
Cash surrender value life insurance 10,918 10,514
Other assets 2,529 3,225
--------- ---------
Total Assets $ 500,307 $ 465,549
========= =========

LIABILITIES
Deposits
Non-interest bearing $ 38,109 $ 25,790
Interest bearing 299,747 264,040
--------- ---------
Total deposits 337,856 289,830
Short-term borrowings 29,432 36,393
Federal Home Loan Bank advances 88,000 92,700
Accrued interest payable 326 337
Other liabilities 2,499 2,992
--------- ---------
Total Liabilities 458,113 422,252
--------- ---------

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; 2,374,534 and
2,394,545 shares outstanding 273 273
Additional paid-in capital 19,531 19,533
Retained earnings 28,138 27,373
Accumulated other comprehensive income (loss) (207) 1,332
Unearned ESOP - 4,789 shares (7,657 shares at December 31,
2002) (50) (80)
Treasury stock, at cost - 348,975 shares (326,096 shares at
December 31, 2002) (5,491) (5,134)
--------- ---------
Total Stockholders' Equity 42,194 43,297
--------- ---------
Total Liabilities and Stockholders' Equity $ 500,307 $ 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 Nine Months Ended
September 30, September 30,
-------------------- ----------------------
2003 2002 2003 2002
------ ------ ------- -------
(In thousands, except share data)

INTEREST INCOME
Loans, including fees $5,607 $4,981 $16,518 $15,210
Securities:
Taxable 424 961 1,504 2,904
Tax-exempt 166 113 464 362
Federal Home Loan Bank cash and stock dividends 88 118 293 344
Interest bearing deposits in other financial institutions 12 72 29 115
------ ------ ------- -------
Total interest income 6,297 6,245 18,808 18,935
------ ------ ------- -------

INTEREST EXPENSE
Deposits 1,572 2,005 4,604 5,880
Federal Home Loan Bank advances 1,316 1,319 3,916 4,143
Short-term borrowings 81 63 241 237
------ ------ ------- -------
Total interest expense 2,969 3,387 8,761 10,260
------ ------ ------- -------
Net interest income 3,328 2,858 10,047 8,675
Provision for loan losses 330 171 959 1,001
------ ------ ------- -------
Net interest income after provision for loan losses 2,998 2,687 9,088 7,674
------ ------ ------- -------

NON-INTEREST INCOME
Service charges on deposit accounts 499 288 1,364 720
Commission income 9 65 99 280
Gain on sale of available for sale securities 306 237 420 357
Gain on sale of mortgage loans 146 52 528 377
Increase in cash surrender value of life insurance 137 142 404 370
Other 10 57 64 190
------ ------ ------- -------
Total non-interest income 1,107 841 2,879 2,294
------ ------ ------- -------

NON-INTEREST EXPENSE
Salaries and employee benefits 1,793 1,606 5,293 4,482
Occupancy 252 225 698 608
Equipment 241 231 713 632
Data processing 323 261 911 834
Marketing and advertising 86 126 225 307
Loss on sale of foreclosed real estate 43 -- 163 2
Other 755 438 1,698 1,202
------ ------ ------- -------
Total non-interest expense 3,493 2,887 9,701 8,067
------ ------ ------- -------
Income before income taxes 612 641 2,266 1,901
Income tax expense 103 139 469 425
------ ------ ------- -------
Net Income $ 509 $ 502 $ 1,797 $ 1,476
====== ====== ======= =======

Earnings per share:
Basic $ 0.21 $ 0.21 $ 0.76 $ 0.60
====== ====== ======= =======
Diluted $ 0.21 $ 0.21 $ 0.75 $ 0.60
====== ====== ======= =======

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 reclassifications and 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 -- -- -- (344) -- -- -- (344)
stock ($0.145 per share)
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 reclassifications and 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
====================================================================================================================================

-5-

PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data)
(Unaudited)

- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Additional Other Total
Shares Common Paid-In Retained Comprehensive Unearned Treasury Stockholders'
Outstanding Stock Capital Earnings Income ESOP Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------

Cash dividends declared on common -- -- -- (344) -- -- -- (344)
stock ($0.145 per share)
Purchase treasury stock (4,769) -- -- -- -- -- (86) (86)
Commitment of shares to be
released under the ESOP 956 -- 7 -- -- 10 -- 17
Stock options exercised 5,750 -- (17) -- -- -- 103 86
Comprehensive income:
Net income -- -- -- 509 -- -- -- 509
Change in unrealized gain (loss) on
interest rate swap, net of
reclassifications and tax effects -- -- -- -- (523) -- -- (523)
Change in unrealized gain (loss) on
securities available for sale, net
of reclassifications and tax
effects -- -- -- -- (947) -- -- (947)
Change in minimum pension
liability, net of tax effects -- -- -- -- (7) -- -- (7)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (968)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2003 2,374,534 $273 $ 19,531 $ 28,138 $(207) $(50) $(5,491) $ 42,194
====================================================================================================================================

See accompanying notes to consolidated financial statements.

-6-

PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Nine Months Ended
September 30,
-------------------------
2003 2002
-------- --------
(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,797 $ 1,476
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses 959 1,001
Depreciation expense 809 735
Net amortization of securities 901 539
Gain on sale of available for sale securities (420) (357)
Mortgage loans originated for sale (24,254) (14,563)
Proceeds from mortgage loan sales 32,544 30,739
Net gain on sales of mortgage loans (528) (377)
Loss on sale of foreclosed real estate 163 2
Increase in cash surrender value of life insurance (404) (370)
Federal Home Loan Bank stock dividends (203) (31)
ESOP expense 47 72
Net change in
Accrued interest receivable 51 348
Accrued interest payable (11) 43
Other assets (433) 74
Other liabilities 383 (899)
-------- --------
Net cash from operating activities 11,401 18,432
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest bearing deposits with banks (4,034) 602
Activity in available for sale securities:
Sales 21,870 28,094
Purchases (47,677) (48,689)
Maturities, prepayments and calls 40,909 14,149
Loan originations and payments, net (55,648) (29,134)
Purchase of premises and equipment, net (787) (961)
Proceeds from sale of foreclosed real estate 882 143
Investment in cash surrender value of life insurance -- (10,000)
-------- --------
Net cash from investing activities (44,485) (45,796)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 48,026 42,287
Net change in short-term borrowings (6,961) (12,730)
Proceeds from Federal Home Loan Bank advances 44,140 11,000
Repayment of advances from Federal Home Loan Bank (48,840) (12,000)
Purchase of treasury stock (475) (1,323)
Stock options exercised 99 87
Dividends paid (1,032) (1,061)
-------- --------
Net cash from financing activities 34,957 26,260
-------- --------
Net change in cash and due from banks 1,873 (1,104)
Cash and due from banks at beginning of period 6,631 8,442
-------- --------
Cash and due from banks at end of period $ 8,504 $ 7,338
======== ========
Non cash transfers:
Transfer from loans to loans held for sale $ -- $ 16,034
Transfer from loans to foreclosed real estate $ 575 $ 145
Transfer from loans to repossessed real estate $ -- $ 32

See accompanying notes to consolidated financial statements.

-7-

PART 1 - ITEM 1

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 September 30, 2003, the results of operations for the
three and nine months ended September 30, 2003 and 2002, and cash flows for the
nine months ended September 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 Nine months ended
September 30, September 30,
In thousands, except per share amounts 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------

Net income as reported $ 509 $ 502 $ 1,797 $ 1,476
Less: Stock-based compensation expense determined under fair value
based method 13 20 38 59
----------------------------------------------------------
Pro forma net income $ 496 $ 482 $ 1,759 $ 1,417
==========================================================
$ 0.21 $ 0.21 $ 0.76 $ 0.60
Basic earnings per share as reported
Pro forma basic earnings per share 0.21 0.20 0.74 0.58

Diluted earnings per share as reported 0.21 0.21 0.75 0.60
Pro forma diluted earnings per share 0.21 0.20 0.74 0.58

-8-

PART 1 - ITEM 1

COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Reclassifications: Some items in the prior years' financial statements were
reclassified to conform to the current presentation.

Recently Adopted Accounting Standards: On January 1, 2003, the Company adopted
Interpretation 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees. On July 1, 2003, the Company adopted 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. On October 1, 2003, the Company adopted Interpretation
46, Consolidation of Variable Interest Entities. Adoption of the new standards
did not materially affect the Company's operating results or financial
condition.

-9-

PART 1 - ITEM 1

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
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-----------------------------------------------------
(in thousands)

September 30, 2003:
Securities available for sale:
U.S. Government and federal agency $ -- $ -- $ -- $ --
State and municipal 19,074 433 (37) 19,470
Mortgage-backed 43,763 173 (638) 43,298
Corporate bonds 12,277 61 (71) 12,267
--------------------------------------------------
Total securities available for sale $75,114 $ 667 $(746) $75,035
==================================================

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 September 30, 2003 and December 31, 2002 consisted of the following:

September 30, 2003 December 31, 2002
---------------------------------------
(in thousands)

Commercial $ 61,451 $ 56,075
Mortgage loans on real estate:
Residential 96,259 81,618
Commercial 137,998 118,246
Construction 37,477 29,081
Home equity 33,435 29,595
Loans secured by deposit accounts 430 345
Consumer 12,603 10,488
------------------------------
Subtotal 379,653 325,448
Less:
Allowance for loan losses (3,905) (3,814)
------------------------------
Loans, net $ 375,748 $ 321,634
==============================

-10-

PART 1 - ITEM 1

COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Deposits

Deposits at September 30, 2003 and December 31, 2002 consisted of the following:

September 30, 2003 December 31, 2002
--------------------------------------
(in thousands)

Demand (NOW) $ 37,765 $ 38,008
Money market accounts 77,863 74,448
Savings 29,701 30,656
Individual retirement accounts-savings 296 338
Individual retirement accounts-certificates of deposits 17,910 16,173
Certificates of deposit, $100,000 and over 39,088 28,048
Other certificates of deposit 97,124 76,369
----------------------------
Total interest bearing deposits 299,747 264,040

Total non-interest bearing deposits 38,109 25,790
----------------------------
Total deposits $337,856 $289,830
============================

5. Supplemental Disclosure for Earnings Per Share

Earnings per share were computed as follows:

Three months ended Nine months ended
September 30, September 30,
-------------------------- ----------------------------
In thousands, except for share and per share amounts 2003 2002 2003 2002
---------- ---------- ---------- ----------

Basic:
Earnings:
Net income $ 509 $ 502 $ 1,797 $ 1,476
========== ========== ========== ==========

Shares:
Weighted average common shares outstanding 2,373,628 2,421,323 2,377,256 2,446,096
========== ========== ========== ==========
Net income per share, basic $ 0.21 $ 0.21 $ 0.76 $ 0.60
========== ========== ========== ==========

Diluted:
Earnings:
Net income $ 509 $ 502 $ 1,797 $ 1,476
========== ========== ========== ==========

Shares:
Weighted average common shares outstanding 2,373,628 2,421,323 2,377,256 2,446,096
Add: Dilutive effect of outstanding options 19,020 16,187 12,657 17,337
---------- ---------- ---------- ----------
Weighted average common shares outstanding, as
adjusted 2,392,648 2,437,510 2,389,913 2,463,433
========== ========== ========== ==========
Net income per share, diluted $ 0.21 $ 0.21 $ 0.75 $ 0.60
========== ========== ========== ==========

-11-

PART 1 - ITEM 1

COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Stock options for 40,400 and 70,700 shares of common stock were excluded from
the three months ended September 30, 2003 and September 30, 2002 diluted net
income per share, respectively, because their impact was antidilutive. Stock
options for 47,100 and 70,700 shares of common stock were excluded from the nine
months ended September 30, 2003 and September 30, 2002 diluted net income per
share, respectively, because their impact was antidilutive.

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 September 30,
2003, hedging relationships existed for $50.0 million ($25.0 million from August
2002 and $25.0 million from September 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 nine months ended September 30, 2003, the Company
reclassified $533,000 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.

Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------

Beginning balance $ 954,000 $ -- $ 746,000 $ --
Increase (decrease) in value for the period (617,000) 128,000 (116,000) 128,000
Reclassified to interest income on loans (240,000) (22,000) (533,000) (22,000)
--------- --------- --------- ---------
Ending balance $ 97,000 $ 106,000 $ 97,000 $ 106,000
========= ========= ========= =========

-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

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 7.5% to $500.3 million at September 30, 2003 from $465.5
million at December 31, 2002, primarily as a result of increases in net loans of
$54.1 million. Funding provided by total liabilities increased 8.5% from
December 31, 2002, primarily as a result of a 16.6% increase in deposits to
$337.9 million. Total equity decreased $1.1 million from December 31, 2002,
primarily the result of other comprehensive loss for the period, treasury stock
purchases, and dividends to shareholders, partially offset by net income.

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 commercial
mortgage loans, which increased $19.8 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 the Company's expansion
of commercial operations in the Louisville, Kentucky market. Although commercial
loan growth for the year has been solid, demand for new loans in the third
quarter was not as strong as the two prior quarters. Management believes this
reflects the current economic environment and competitive pressures within the
Company's marketplace. Lower market interest rates also contributed to strong
growth in residential and construction real estate loans, which increased 17.9%
to $96.3 million and 28.9% to $37.5 million, respectively. The Company currently
retains ten year mortgage loans that it originates and sells most fifteen and
thirty-year conforming mortgage loans into the secondary market to reduce the
interest rate risk of holding such assets should interest rates rise.

-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

Securities available for sale decreased $17.3 million from December 31, 2002 to
$75.0 million at September 30, 2003. Generally lower mortgage interest rates
caused an increase in the rate of prepayment on the Company's mortgage backed
securities. Cash inflows from the investment securities portfolio were used to
fund loan growth and investment security purchases.

Total deposits increased 16.6% to $337.9 million at September 30, 2003 from
$289.8 million at December 31, 2002. Non-interest bearing demand deposits
increased 47.8% to $38.1 million over the last nine months and time deposits
grew 27.7% to $154.4 million over the same period. Non-interest bearing deposits
increased as the Company focused on attracting lower cost deposit relationships
by providing a level of customer service that would differentiate itself from
its competitors. 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 $509,000 ($0.21 per share diluted) for the three
months ended September 30, 2003 as compared to $502,000 ($0.21 per share
diluted) for the three months ended September 30, 2002. Return on average assets
was 0.40% for the three months ended September 30, 2003 as compared to 0.44% for
the same period in 2002. Return on average equity was 4.72% for the third
quarter of 2003 compared to 4.74% for the same quarter in 2002.

Net income was $1,797,000 ($0.75 per share diluted) for the nine months ended
September 30, 2003 as compared to $1,476,000 ($0.60 per share diluted) for the
nine months ended September 30, 2002. Return on average assets was 0.49% for the
nine months ended September 30, 2003 as compared to 0.44% for the same period in
2002 and return on average equity was 5.61% and 4.59%, respectively, for the
same periods. 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 nine months ended September 30, 2003 as
compared to $4.2 for the same period in 2002.

The Company's improvement in net income during the three and nine months ended
September 30, 2003 as compared to the same periods in 2002 is attributable to an
improved net interest margin, accompanied by continued growth of interest
earning assets, and increased non-interest income.

Net interest income. Net interest income increased 16.4% to $3.3 million for the
third quarter of 2003 from $2.9 million for the same period in 2002 as the
Company's net interest margin improved to 2.76% from 2.66% with respect to such
periods. The Company was able to improve its net interest margin as the cost of
interest-bearing liabilities, primarily deposits, declined faster than yields on
interest-earning assets. Also contributing to the improvement in net interest
margin was the continued growth of the Company's 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 entered
into in an effort to hedge the effects of fluctuating cash flows on
floating-rate commercial loans (see Note 6 to the Consolidating Financial
Statements.)

Net interest income increased 15.8% to $10.0 million for the nine months ended
September 30, 2003 from $8.7 million for the same period in 2002 as the
Company's net interest margin

-14-

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES

improved to 2.94% from 2.79% for such periods. Net interest income increased for
substantially the same reasons as the quarterly change in net interest income
referenced previously.

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 September 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.

-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

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 September 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 $ 4,759 $ 12 1.00% $ 14,744 $ 72 1.94%
Taxable securities 74,986 424 2.24% 89,081 961 4.28%
Non-taxable securities 14,849 166 4.44% 9,798 113 4.58%
Total loans and fees 375,474 5,607 5.92% 305,353 4,981 6.47%
FHLB stock 7,865 88 4.44% 7,679 118 6.10%
--------- --------- --------- ---------
Total earning assets 477,933 6,297 5.23% 426,655 6,245 5.81%

Less: Allowance for loan losses 3,790 3,506
Non-earning assets:
Cash and due from banks 8,256 9,106
Bank premises and equipment, net 11,274 11,500
Accrued interest receivable and other assets 15,811 13,380
--------- ---------
Total assets $ 509,484 $ 457,135
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Interest-bearing liabilities:
Deposits $ 299,530 $ 1,572 2.08% $ 277,332 $ 2,005 2.87%
Federal funds purchased and repurchase agreements 37,725 81 0.85% 24,145 63 1.04%
FHLB advances 88,022 1,316 5.93% 88,228 1,319 5.93%
--------- --------- --------- ---------
Total interest-bearing liabilities 425,277 2,969 2.77% 389,705 3,387 3.45%

Non-interest bearing liabilities:
Non-interest demand deposits 35,059 23,936
Accrued interest payable and other liabilities 6,402 1,495
Stockholders' equity 42,746 41,999
--------- ---------
Total liabilities and stockholders' equity $ 509,484 $ 457,135
========= =========

Net interest income $ 3,328 $ 2,858
========= =========
Net interest spread 2.46% 2.36%
Net interest margin 2.76% 2.66%

-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

Nine Months Ended September 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 $ 3,372 $ 29 1.15% $ 7,376 $ 115 2.08%
Taxable securities 70,473 1,504 2.85% 84,813 2,904 4.58%
Non-taxable securities 13,406 464 4.63% 10,262 362 4.72%
Total loans and fees 361,918 16,518 6.10% 306,220 15,210 6.64%
FHLB stock 7,779 293 5.04% 7,668 344 6.00%
--------- --------- --------- ---------
Total earning assets 456,948 18,808 5.50% 416,339 18,935 6.08%

Less: Allowance for loan losses 3,904 3,239
Non-earning assets:
Cash and due from banks 8,016 9,075
Bank premises and equipment, net 11,324 11,349
Accrued interest receivable and other assets 15,405 12,077
--------- ---------
Total assets $ 487,789 $ 445,601
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Interest-bearing liabilities:
Deposits $ 285,107 $ 4,604 2.16% $ 256,819 $ 5,880 3.06%
Federal funds purchased and repurchase agreements 35,589 241 0.91% 27,665 237 1.15%
FHLB advances 88,860 3,916 5.89% 94,278 4,143 5.88%
--------- --------- --------- ---------
Total interest-bearing liabilities 409,556 8,761 2.86% 378,762 10,260 3.62%

Non-interest bearing liabilities:
Non-interest demand deposits 31,115 22,505
Accrued interest payable and other liabilities 4,275 1,322
Stockholders' equity 42,843 43,012
--------- ---------
Total liabilities and stockholders' equity $ 487,789 $ 445,601
========= =========

Net interest income $ 10,047 $ 8,675
========= =========

Net interest spread 2.64% 2.46%
Net interest margin 2.94% 2.79%

-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

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 September 30, 2003 Nine Months Ended September 30, 2003
compared to compared to
Three Months Ended September 30, 2002 Nine Months Ended September 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 $ (60) $ (35) $ (25) $ (86) $ (47) $ (39)
Taxable securities (537) (134) (403) (1,400) (434) (966)
Tax-exempt securities 53 57 (4) 102 109 (7)
Total loans and fees 626 1,073 (447) 1,308 2,611 (1,303)
FHLB stock (30) 3 (33) (51) 5 (56)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in interest income 52 964 (912) (127) 2,244 (2,371)
-------- -------- -------- -------- -------- --------

Interest expense:
Deposits (433) 151 (584) (1,276) 596 (1,872)
Federal funds purchased and repurchase
agreements 18 30 (12) 4 57 (53)
FHLB advances (3) (3) - (227) (239) 12
-------- -------- -------- -------- -------- --------
Total increase (decrease) in interest expense (418) 178 (596) (1,499) 414 (1,913)
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest income $ 470 $ 786 $ (316) $ 1,372 $ 1,830 $ (458)
======== ======== ======== ======== ======== ========

Allowance and Provision for Loan Losses. The provision for loan losses was
$330,000 for the three months ended September 30, 2003 as compared to $171,000
for the same period in 2002. The increase in the provision for loan losses is
related to a determination by the Company through its normal credit risk
monitoring procedures that certain specific loans exhibited 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 September 30, 2003.

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 decreased

-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

from $1.7 million at December 31, 2002 to $1.6 million at September 30, 2003.
The following table sets forth the activity with respect to the Company's
allowance for loan losses during the three months and nine months ended
September 30, 2003 and for the comparable periods in 2002:

Summary of Loan Loss Experience:

Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
Activity for the period ended: 2003 2002 2003 2002
------- ------- ------- -------
(in thousands) (in thousands)

Beginning balance $ 3,749 $ 3,714 $ 3,814 $ 3,030
Charge-offs:
Real Estate -- -- (14) (24)
Commercial (141) (360) (810) (462)
Consumer (38) (3) (62) (29)
------- ------- ------- -------
Total (179) (363) (886) (515)

Recoveries:
Real Estate -- -- -- --
Commercial 3 4 13 7
Consumer 2 1 5 4
------- ------- ------- -------
Total 5 5 18 11

Provision 330 171 959 1,001
------- ------- ------- -------
Ending balance $ 3,905 $ 3,527 $ 3,905 $ 3,527
======= ======= ======= =======

Non-performing loans:

September 30, 2003 December 31, 2002
--------------------------------------
(in thousands)

Loans on non-accrual status $ 2,396 $ 3,171
Loans past due 90 days or more and still accruing 156 --
--------- ---------
2,552 3,171
Total non-performing loans

Other real estate owned 160 630
--------- ---------
Total non-performing assets $ 2,712 $ 3,801
========= =========
Non-performing loans to total loans 0.67% 0.97%
Non-performing assets to total loans 0.71% 1.17%
Allowance as a percent of non-performing loans 153.01% 120.28%
Allowance as a percent of total loans 1.03% 1.17%

-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

Non-interest income. Non-interest income increased 31.6% to $1,107,000 for the
three months ended September 30, 2003 from $841,000 for the three months ended
September 30, 2002. The increase was primarily attributable to an increase in
service charges on deposit accounts related to enhancements to the Company's
checking account product line and an increase in the total number of checking
accounts. Additionally, gain on sale of mortgage loans has increased as
sustained lower interest rates continued to spur the mortgage refinancing market
over the first nine months of 2003. However, due to the recent increase in
mortgage interest rates and the resulting decrease in refinancing activity,
management expects that the gain on sale of mortgage loans will decline for the
fourth quarter of 2003 relative to the third quarter of 2003.

Non-interest income increased 25.5% to $2.9 million for the nine months ended
September 30, 2003 from $2.3 million for the nine months ended September 30,
2002. Non-interest income increased for substantially the same reasons as the
quarterly change referenced above.

Offsetting the increases in non-interest income for both periods was reduced
commission income. Management attributes the decline in commission income to a
major change in its business model related to its Heritage Financial Services
non-deposit investment product. In an effort to better position this division
for future growth, 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. Under the previous Heritage
Financial Services model, commission income was reported gross as a component of
non-interest income with the corresponding costs recorded as a component of
non-interest expense. As a result of the Smith Barney strategic alliance,
commissions are netted with costs and reported as a component of non-interest
income.

Non-interest expense. Non-interest expense increased 21.0% to $3.5 million for
the three months ended September 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 new offices the Company opened over the past year. Other
operating expenses increased for the period as a result of a $150,000 loss
recorded this quarter associated with a lawsuit previously disclosed in the
Company's June 30, 2003 10Q filed on August 14, 2003. In addition, the Company
expensed approximately $76,000 as a result of the restructuring of its Heritage
Financial Services division.

Non-interest expense increased 20.3% to $9.7 million for the nine months ended
September 30, 2003 from $8.1 million for the nine months ended September 30,
2002. Non-interest expense increased for substantially the same reasons as the
quarterly change in non-interest expense referenced above.

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

-20-

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES

advantage of investment opportunities. Historically, the Company has been able
to retain a significant amount of its deposits as they mature.

The Company's primary sources of funds are customer deposits, customer
repurchase agreements, proceeds from loan repayments, maturing securities and
FHLB advances. While loan repayments and maturities are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by market
interest rates, general economic conditions and competition. At September 30,
2003, the Company had cash and due from banks and interest-bearing deposits in
other financial institutions of $13.5 million and securities available-for-sale
with a fair value of $75.0 million, of which $27.2 million were unpledged. If
the Company requires funds beyond the funds it is able to generate internally,
it has $6.8 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 $24.1 million.

The Banks are required to maintain specific amounts of capital pursuant to
regulatory requirements. As of September 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 11.98% 10.97% 8.27%
Community 11.94% 10.86% 7.96%
Community of Kentucky 14.54% 13.71% 10.52%

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 348,975 shares at an
aggregate cost of $5.5 million have been repurchased since that time under both
the current and prior repurchase plans, with 29,629 shares at a cost of $475,000
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 September 30, 2003, a total of $2.7 million had been expended to
purchase 163,136 shares under the current repurchase plan.

-21-

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 September 30, 2003 net interest
income for the Company would decrease by 3.2% over one year ending September 30,
2004. 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 0.9% over one year ending September 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.

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 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

-22-

PART I - ITEM 3

QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

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 September
30, 2003:

Interest Rate Sensitivity for the Year Ended September 30, 2004
---------------------------------------------------------------
Gradual Decrease in Gradual Increase in
Rates of 100 Rates of 200
Basis Points Base Basis Points
--------------------------------------------------------
(in thousands)

Projected interest income:
Loans $ 21,260 $ 21,780 $ 22,887
Investments 3,085 3,148 3,258
FHLB stock 379 379 379
Interest-bearing bank deposits 33 73 152
--------------------------------------------
Total interest Income 24,757 25,380 26,676

Projected interest expense:
Deposits 5,226 5,535 6,910
Other borrowings 5,163 5,347 5,716
--------------------------------------------
Total interest expense 10,389 10,882 12,626
--------------------------------------------
Net interest income $ 14,368 $ 14,498 $ 14,050
============================================
$ (130) $ (448)
Change from base
Percent change from base (0.9)% (3.2)%

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 100 Interest Rates of 200
Basis Points Base 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)%

-23-

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.

-24-

PART II
OTHER INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.

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 July 24, 2003 reporting, under
Item 5, earnings for the three months ended June 30, 2003.

-25-

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.

COMMUNITY BANK SHARES OF INDIANA, INC.
(Registrant)

Dated: November 12, 2003 BY: /s/ James D. Rickard
--------------------
James D. Rickard
President and
Chief Executive Officer
(Principal Executive Officer)

Dated: November 12, 2003 BY: /s/ Paul A. Chrisco
-------------------
Paul A. Chrisco
Senior Vice-President and
Chief Financial Officer
(Principal Financial Officer)

-26-

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

-27-