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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 March 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 0-25766
Community Bank Shares of Indiana, Inc.
(Exact name of registrant as specified in its charter)
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: 2,388,954 shares of common stock were outstanding as of May 5,
2004.
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 ..................................................... 21-23
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)
March 31, December 31,
2004 2003
--------- ------------
(In thousands, except share data)
ASSETS
Cash and due from banks $ 11,296 $ 10,164
Interest bearing deposits in other financial institutions 11,732 2,217
Securities available for sale, at fair value 85,372 83,143
Loans held for sale 803 1,173
Loans, net 395,867 390,026
Federal Home Loan Bank stock, at cost 8,097 7,999
Accrued interest receivable 1,726 1,849
Premises and equipment, net 11,407 11,331
Cash surrender value life insurance 11,185 11,057
Other assets 2,491 2,356
--------------------------
Total Assets $ 539,976 $ 521,315
==========================
LIABILITIES
Deposits
Non-interest bearing $ 41,811 $ 34,386
Interest bearing 340,133 306,929
--------------------------
Total deposits 381,944 341,315
Short-term borrowings 27,414 45,325
Federal Home Loan Bank advances 85,000 90,200
Accrued interest payable 494 351
Other liabilities 1,504 1,835
--------------------------
Total Liabilities 496,356 479,026
--------------------------
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; 2,386,554 and
2,383,696 shares outstanding 273 273
Additional paid-in capital 19,494 19,497
Retained earnings 28,561 28,299
Accumulated other comprehensive income (loss) 620 (400)
Unearned ESOP and performance share awards - 2,769 and 3,627 shares (30) (39)
Treasury stock, at cost - 338,975 and 340,975 shares (5,298) (5,341)
--------------------------
Total Stockholders' Equity 43,620 42,289
--------------------------
Total Liabilities and Stockholders' Equity $ 539,976 $ 521,315
==========================
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
March 31,
----------------------
2004 2003
------- -------
(In thousands, except share data)
INTEREST INCOME
Loans, including fees $ 5,691 $ 5,405
Securities:
Taxable 587 587
Tax-exempt 136 149
Federal Home Loan Bank cash and stock dividends 98 105
Interest bearing deposits in other financial institutions 10 4
----------------------
Total interest income 6,522 6,250
----------------------
INTEREST EXPENSE
Deposits 1,729 1,408
Federal Home Loan Bank advances 1,265 1,298
Short-term borrowings 66 101
----------------------
Total interest expense 3,060 2,807
----------------------
Net interest income 3,462 3,443
Provision for loan losses 360 296
----------------------
Net interest income after provision for loan losses 3,102 3,147
----------------------
NON-INTEREST INCOME
Service charges on deposit accounts 416 411
Commission income 23 56
Gain on sale of available for sale securities 88 95
Gain on sale of mortgage loans 120 223
Loan servicing income, net of amortization (8) 6
Increase in cash surrender value of life insurance 128 133
Other 53 51
----------------------
Total non-interest income 820 975
----------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,816 1,757
Occupancy 273 224
Equipment 277 231
Data processing 232 293
Marketing and advertising 79 52
Loss on sale of foreclosed real estate -- 121
Other 498 449
----------------------
Total non-interest expense 3,175 3,127
----------------------
Income before income taxes 747 995
Income tax expense 140 249
----------------------
Net Income $ 607 $ 746
======================
Earnings per share:
Basic $ 0.25 $ 0.31
======================
Diluted $ 0.25 $ 0.31
======================
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)
- --------------------------------------------------------------------------------------
Common Additional
Shares Common Paid-In Retained
Outstanding Stock Capital Earnings
- --------------------------------------------------------------------------------------
Balance, January 1, 2004 2,383,696 $ 273 $ 19,497 $ 28,299
Cash dividends declared on common
stock ($0.145 per share) -- -- -- (345)
Commitment of shares to be
released
under the ESOP 858 -- 9 --
Stock options exercised 2,000 -- (12) --
Comprehensive income:
Net income -- -- -- 607
Change in unrealized gain
(loss) on securities
available for sale, net
of reclassifications and
tax effects -- -- -- --
Change in unrealized gain
(loss) on interest rate
swaps, net of reclassifications
and tax effects -- -- -- --
Change in minimum pension
liability, net of tax effects -- -- -- --
- --------------------------------------------------------------------------------------
Total comprehensive income
- --------------------------------------------------------------------------------------
Balance, March 31, 2004 2,386,554 $ 273 $ 19,494 $ 28,561
======================================================================================
- -------------------------------------------------------------------------------------------
Accumulated
Other Total
Comprehensive Unearned Treasury Stockholders'
Income ESOP Stock Equity
- -------------------------------------------------------------------------------------------
Balance, January 1, 2004 $ (400) $ (39) $ (5,341) $ 42,289
Cash dividends declared on common
stock ($0.145 per share) -- -- -- (345)
Commitment of shares to be
released
under the ESOP -- 9 -- 18
Stock options exercised -- -- 43 31
Comprehensive income:
Net income -- -- -- 607
Change in unrealized gain
(loss) on securities
available for sale, net
of reclassifications and
tax effects 463 -- -- 463
Change in unrealized gain
(loss) on interest rate
swaps, net of reclassifications
and tax effects 553 -- -- 553
Change in minimum pension
liability, net of tax effects 4 -- -- 4
- -------------------------------------------------------------------------------------------
Total comprehensive income 1,627
- -------------------------------------------------------------------------------------------
Balance, March 31, 2004 $ 620 $ (30) $ (5,298) $ 43,620
===========================================================================================
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)
Three Months Ended
March 31,
-----------------------
2004 2003
-------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 607 $ 746
Adjustments to reconcile net income to net cash from operating
activities:
Provision for loan losses 360 296
Depreciation expense 302 270
Net amortization of securities 112 246
Gain on sale of available for sale securities (88) (95)
Mortgage loans originated for sale (3,734) (12,443)
Proceeds from mortgage loan sales 11,737 11,308
Net gain on sales of mortgage loans (120) (223)
Increase in cash surrender value of life insurance (128) (133)
Federal Home Loan Bank stock dividends (98) (103)
ESOP and performance share award expense 18 15
Net change in
Accrued interest receivable 123 29
Accrued interest payable 143 --
Other assets 768 648
Other liabilities (916) 681
-----------------------
Net cash from operating activities 9,086 1,242
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest bearing deposits with banks (9,515) (31)
Activity in available for sale securities:
Sales 4,941 8,165
Purchases (9,141) (2,069)
Maturities, prepayments and calls 2,649 8,613
Loan originations and payments, net (13,714) (20,013)
Purchase of premises and equipment, net (378) (213)
-----------------------
Net cash from investing activities (25,158) (5,548)
-----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 40,629 9,963
Net change in short-term borrowings (17,911) 2,018
Proceeds from Federal Home Loan Bank advances -- 44,140
Repayment of advances from Federal Home Loan Bank (5,200) (48,840)
Purchase of treasury stock -- (369)
Stock options exercised 31 13
Dividends paid (345) (344)
-----------------------
Net cash from financing activities 17,204 6,581
-----------------------
Net change in cash and due from banks 1,132 2,275
Cash and due from banks at beginning of period 10,164 6,631
-----------------------
Cash and due from banks at end of period $ 11,296 $ 8,906
=======================
Non cash transfers:
Transfer from loans to loans held for sale $ 7,513 $ --
Transfer from loans to foreclosed real estate $ -- $ 415
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") is a single bank holding
company headquartered in New Albany, Indiana. The Company's wholly-owned banking
subsidiary is Community Bank of Southern Indiana (the "Bank"). Until November
14, 2003, the Company also operated four bank offices in Jefferson and Nelson
County, Kentucky through its wholly- owned banking subsidiary, Community Bank of
Kentucky, Inc. ("CBKY"). On November 14, 2003 CBKY was merged with and into the
Bank. The Bank is a state-chartered stock commercial bank headquartered in New
Albany, Indiana and is regulated by the Indiana Department of Financial
Institutions and the Federal Deposit Insurance Corporation. During 2002, the
Bank established three new wholly-owned subsidiaries to manage its investment
portfolio. CBSI Holdings, Inc. and CBSI Investments, Inc. are Nevada
corporations which jointly own CBSI Investment Portfolio Management, LLC, a
Nevada limited liability corporation which holds and manages investment
securities previously owned by the Bank. The Bank has also established a new
Community Development Entity (CDE) subsidiary named CBSI Development Fund, Inc.
The CDE enables the Bank to participate in the federal New Markets Tax Credit
(NMTC) Program. The NMTC Program is administered by the Community Development
Financial Institutions Fund of the United States Treasury and is designed to
promote investment in low-income communities by providing a tax credit over
seven years for equity investments in CDE's.
In the opinion of management, the unaudited consolidated financial statements
include all normal adjustments considered necessary to present fairly the
financial position as of March 31, 2004, the results of operations for the three
months ended March 31, 2004 and 2003, and cash flows for the three months ended
March 31, 2004 and 2003. 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 on Form 10-K for the year
ended December 31, 2003. The consolidated financial statements include the
accounts of the Company and the Bank. All material intercompany balances and
transactions have been eliminated in consolidation.
- 7 -
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
March 31,
In thousands, except per share amounts 2004 2003
- --------------------------------------------------------------------------------------------
Net income as reported $ 607 $ 746
Less: Stock-based compensation expense determined under fair value
based method 11 18
---------------------
Pro forma net income $ 596 $ 728
=====================
$ 0.25 $ 0.31
Basic earnings per share as reported
Pro forma basic earnings per share 0.25 0.31
Diluted earnings per share as reported 0.25 0.31
Pro forma diluted earnings per share 0.25 0.31
Reclassifications: Some items in the prior years' financial statements were
reclassified to conform to the current presentation.
- 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)
March 31, 2004:
Securities available for sale:
State and municipal 9,972 526 -- 10,498
Mortgage-backed 59,377 392 (204) 59,565
Corporate bonds 14,973 89 (3) 15,059
Mutual funds 250 -- -- 250
-----------------------------------------------
Total securities available for sale $84,572 $ 1,007 $ (207) $85,372
===============================================
December 31, 2003:
Securities available for sale:
State and municipal 14,849 407 (10) 15,246
Mortgage-backed 52,947 252 (542) 52,657
Corporate bonds 15,000 48 (58) 14,990
Mutual funds 250 -- -- 250
-----------------------------------------------
Total securities available for sale $83,046 $ 707 $ (610) $83,143
===============================================
3. Loans
Loans at March 31, 2004 and December 31, 2003 consisted of the following:
March 31, 2004 December 31, 2003
-----------------------------------
(in thousands)
Commercial $ 82,844 $ 72,981
Mortgage loans on real estate:
Residential 85,401 94,975
Commercial 161,110 161,343
Construction 20,915 15,691
Home equity 43,142 42,562
Loans secured by deposit accounts 763 546
Consumer 6,081 5,962
-----------------------------
Subtotal 400,256 394,060
Less:
Allowance for loan losses (4,389) (4,034)
-----------------------------
Loans, net $ 395,867 $ 390,026
=============================
- 9 -
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Deposits
Deposits at March 31, 2004 and December 31, 2003 consisted of the following:
March 31, 2004 December 31, 2003
---------------------------------
(in thousands)
Demand (NOW) $ 37,397 $ 35,973
Money market accounts 95,384 82,546
Savings 27,905 28,456
Individual retirement accounts-certificates of
deposits 18,852 17,841
Certificates of deposit, $100,000 and over 37,536 41,028
Other certificates of deposit 123,059 101,085
-------------------------
340,133 306,929
Total interest bearing deposits
Total non-interest bearing deposits 41,811 34,386
-------------------------
Total deposits $381,944 $341,315
=========================
5. Supplemental Disclosure for Earnings Per Share
Earnings per share were computed as follows:
Three months ended
March 31,
-------------------------
In thousands, except for share and per share amounts 2004 2003
---------- ----------
Basic:
Earnings:
Net income $ 607 $ 746
=========================
Shares:
Weighted average common shares outstanding 2,385,507 2,382,646
=========================
Net income per share, basic $ 0.25 $ 0.31
=========================
Diluted:
Earnings:
Net income $ 607 $ 746
=========================
Shares:
Weighted average common shares outstanding 2,385,507 2,382,646
Add: Dilutive effect of outstanding options 29,200 6,380
-------------------------
Weighted average common shares outstanding, as adjusted 2,414,707 2,389,026
=========================
Net income per share, diluted $ 0.25 $ 0.31
=========================
Stock options for 21,700 and 95,900 shares of common stock were excluded from
the three months ended March 31, 2004 and March 31, 2003 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
On August 30, 2002, the Company entered into a $25,000,000 interest rate swap
arrangement to exchange variable payments of interest tied to Prime for receipt
of fixed rate payments of 6.51%. An additional $25,000,000 interest rate swap
was entered into on June 19, 2003 to exchange variable payments of interest tied
to Prime for receipt of fixed rate payments of 5.22%. The variable rate of the
swaps resets daily, with net interest being settled monthly. The notional amount
of the swaps does not represent amounts exchanged by the parties. The amount
exchanged is determined by reference to the notional amount and other terms of
the swaps.
The swaps have been designated by management as cash flow hedges of its
Prime-based commercial loans to in effect convert the loans from variable
interest to weighted average fixed interest rates of 6.76% on the initial swap
until the swap's maturity on August 30, 2007, and 5.58% on the subsequent swap
until its maturity on June 19, 2008. The hedge relationships were determined to
be highly effective. As such, changes in the fair value of the swaps are
reported in other comprehensive income and will be reclassified to earnings over
the lives of the hedges. During the three months ended March 31, 2004 and 2003,
the Company recognized $237,000 and $141,000 of income on the interest rate
swaps as an increase to interest income on loans. The fair value and earnings
reclassification of the swaps was as follows:
March 31, 2004 March 31, 2003
--------------------------------
(In thousands)
Beginning balance $ (413) $ 746
Increase in value for the period 1,143 215
Reclassified to interest income on loans (237) (141)
-------------------------
Ending balance $ 493 $ 820
=========================
7. Benefit Plans
The Company sponsors a defined benefit pension plan. The benefits are based on
years of service and the employees' highest average of total compensation for
five consecutive years of employment. In 1997, the plan was amended such that
there can be no new participants or increases in benefits to the participants.
The components of pension expense and related actuarial assumptions were as
follows.
March 31, 2004 March 31, 2003
--------------------------------
(In thousands)
Interest cost $ 12 $ 12
Expected return on plan assets (11) (8)
Amortization of unrecognized loss 9 10
-------------------------
Pension expense $ 10 $ 14
=========================
The Company made no contributions to its pension plan during the first quarter
of 2004, but expects to contribute $61,000 during the remainder of the year.
- 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 Bank; 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 3.6% to $540.0 million at March 31, 2004 from $521.3
million at December 31, 2003, primarily as a result of increases in
interest-bearing deposits in other financial institutions of $9.5 million and
net loans of $5.8 million. The increase in interest-bearing deposits in other
financial institutions was primarily the result of deposit growth that exceeded
loan growth. Deposits increased 11.9% from December 31, 2003 to $381.9 million.
Total equity increased $1.3 million from December 31, 2003, primarily as a
result of increases in accumulated other comprehensive income and retained
earnings. Other comprehensive income increased $1.0 million as the market value
of securities available for sale rose substantially during the first quarter of
2004.
The Bank continues to focus on originating loans secured by owner occupied
manufacturing and retail facilities, general business assets, and single family
residential real estate. Net loans increased $5.8 million to $395.9 million at
March 31, 2004 from $390.0 million at December 31, 2003. This increase includes
the $7.5 million sale of fifteen and thirty year fixed rate mortgage real estate
loans during March 2004 as the Company reduced the interest rate risk associated
with holding such assets should interest rates rise. 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.
Loan growth was particularly strong in commercial loans, which increased $14.1
million (including commercial construction loans), during the first quarter of
2004 as sustained lower interest rates continued to stimulate commercial loan
demand.
- 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
Securities available for sale increased $2.2 million from December 31, 2003 to
$85.4 million at March 31, 2004. Sales of $4.9 million and prepayments of $2.6
million were used to purchase additional securities and to manage the Company's
overall liquidity position. The current strategy for the investment portfolio is
to maintain an overall average repricing term of 3.5 years to limit exposure to
rising interest rates.
Total deposits increased $40.6 million to $381.9 million at March 31, 2004 from
$341.3 million at December 31, 2003. The Company attributes its dynamic deposit
growth to a continued focus on improving customer service levels as well as
increased business development efforts. The Company placed particular emphasis
on attracting low cost non-interest bearing demand deposits, which increased
21.6% to $41.8 million over the first three months of 2004. Money market
accounts grew 15.6% and time deposits grew 12.2% over the same period.
Results of Operations
Net Income. Net income was $607,000 ($0.25 per share diluted) for the three
months ended March 31, 2004 as compared to $746,000 ($0.31 per share diluted)
for the three months ended March 31, 2003. Return on average assets was 0.46%
for the three months ended March 31, 2004 as compared to 0.64% for the same
period in 2003. Return on average equity was 5.66% for the first quarter of 2004
compared to 7.00% for the same period in 2003. Management attributes the decline
in net income to a decrease in gain on sale of mortgage loans associated with a
slowdown in refinancing activity and a lower net interest margin.
Net interest income. Net interest income increased $19,000 to $3.5 million for
the first quarter of 2004 compared to the same period in 2003. This increase was
predominantly driven by the growth of the Company's interest earning assets,
primarily within the loan portfolio, as the Company's net interest margin
decreased from 3.18% to 2.80% between the periods. The Company's net interest
margin decreased because the yield on its interest-earning assets declined at a
faster rate than its borrowing costs. The Company's earning assets are generally
more sensitive to falling interest rates than its interest-bearing liabilities
because of the high cost of the Company's Federal Home Loan Bank (FHLB) advances
(see FHLB advance discussion in subsequent paragraph). The Company's ability to
generate higher levels of net interest income during a period of historically
low interest rates, together with the constraints imposed by the Company's FHLB
advances, evidences Management's ability to implement various asset and
liability management strategies to generate higher levels of net interest
income, while controlling the Company's exposure to interest rate risk.
The cost of interest-bearing liabilities continues to be significantly affected
by the $85.0 million in funding provided by 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
Company. If an advance is put back to the Company by the FHLB, the Company 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, 2003 and March 31, 2004 are
- 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
substantially comprised of long-term advances. The cost of FHLB advances for the
first quarter of 2004 was 5.96% compared to 5.81% for the same period in 2003.
In contrast, the cost of federal funds purchased and repurchase agreements,
which are both highly interest rate sensitive, fell to 0.77% for the three
months ended March 31, 2004 from 1.04% for the same period in 2003.
- 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
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 on daily average balances, when
available. Management does not believe that the use of month-end balances
instead of daily average balances has caused any material difference in the
information presented. 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 March 31,
-------------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- --------- ---------- -------- --------- ----------
(in thousands) (in thousands)
ASSETS
Earning assets:
Interest-bearing deposits with banks $ 5,660 $ 10 0.71% $ 1,116 $ 4 1.45%
Taxable securities 67,236 587 3.51% 70,552 587 3.37%
Non-taxable securities 14,787 136 3.70% 12,679 149 4.77%
Total loans and fees 401,052 5,691 5.71% 347,207 5,405 6.31%
FHLB stock 8,060 98 4.89% 7,700 105 5.53%
-------- --------- --------- -------- --------- ---------
Total earning assets 496,795 6,522 5.28% 439,254 6,250 5.77%
Less: Allowance for loan losses 4,162 3,849
Non-earning assets:
Cash and due from banks 9,907 7,685
Bank premises and equipment, net 11,400 11,393
Accrued interest receivable and other
assets 13,553 16,508
-------- --------
Total assets $527,493 $470,991
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Deposits $325,993 $ 1,729 2.13% $263,741 $ 1,408 2.17%
Federal funds purchased and repurchase
agreements 34,328 66 0.77% 39,473 101 1.04%
FHLB advances 85,391 1,265 5.96% 90,586 1,298 5.81%
-------- --------- --------- -------- --------- ---------
Total interest-bearing liabilities 445,712 3,060 2.76% 393,800 2,807 2.89%
Non-interest bearing liabilities:
Non-interest demand deposits 36,710 27,601
Accrued interest payable and other
liabilities 1,942 6,355
Stockholders' equity 43,129 43,235
-------- --------
Total liabilities and stockholders' equity $527,493 $470,991
======== ========
Net interest income $ 3,462 $ 3,443
========= =========
Net interest spread 2.52% 2.88%
Net interest margin 2.80% 3.18%
- 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
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.
---------------------------------
Three Months Ended March 31, 2004
compared to
Three Months Ended March 31, 2003
Increase/(Decrease) Due to
---------------------------------
Total Net
Change Volume Rate
---------------------------------
(in thousands)
Interest income:
Interest-bearing deposits with banks $ 6 $ 9 $ (3)
Taxable securities -- (28) 28
Tax-exempt securities (13) 22 (35)
Total loans and fees 286 791 (505)
FHLB stock (7) 5 (12)
---------------------------
Total increase (decrease) in interest income 272 799 (527)
---------------------------
Interest expense:
Deposits 321 330 (9)
Federal funds purchased and repurchase agreements (35) (12) (23)
FHLB advances (33) (76) 43
---------------------------
Total increase (decrease) in interest expense 253 242 11
---------------------------
Increase (decrease) in net interest income $ 19 $ 557 $(538)
===========================
- 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
Allowance and Provision for Loan Losses. The provision for loan losses was
$360,000 for the three months ended March 31, 2004 as compared to $296,000 for
the same period in 2003. The provision for loan losses increased between the
periods because of the growth in total loans and increase in impaired loans
during the quarter. Management believes, based on information presently
available, that it has adequately provided for loan losses at March 31, 2004.
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. 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
$805,000 at December 31, 2003 to $2.1 million at March 31, 2004. The increase in
impaired loans 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.
Summary of Loan Loss Experience:
Three Months Ended
March 31,
-------------------------
Activity for the period ended: 2004 2003
------- -------
(in thousands)
Beginning balance $ 4,034 $ 3,814
Charge-offs:
Residential real estate -- --
Commercial real estate -- (117)
Construction -- --
Commercial business (15) --
Home equity (1) --
Consumer -- --
-------------------------
Total (16) (117)
Recoveries:
Residential real estate -- --
Commercial real estate 3 4
Construction -- --
Commercial business 5 2
Home equity -- --
Consumer 3 1
-------------------------
Total 11 7
-------------------------
Net loan charge-offs (5) (110)
Provision 360 296
-------------------------
Ending balance $ 4,389 $ 4,000
=========================
- 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
Non-performing loans:
March 31, 2004 December 31, 2003
------------------------------------
(in thousands)
Loans on non-accrual status $2,010 $1,467
Loans past due 90 days or more and still accruing 881 346
--------------------------
Total non-performing loans 2,891 1,813
Other real estate owned 581 610
--------------------------
Total non-performing assets $3,472 $2,423
==========================
Non-performing loans to total loans 0.72% 0.46%
Non-performing assets to total loans 0.87% 0.61%
Allowance as a percent of non-performing loans 151.82% 222.50%
Allowance as a percent of total loans 1.10% 1.02%
- 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 decreased 15.9% for the first quarter
of 2004 from the same period in 2003, primarily because of the decline in gain
on sale of mortgage loans. Gain on sale of mortgage loans decreased $103,000 for
the first quarter of 2004 compared with the same period last year because of a
slowdown in refinancing activity. Service charges on deposit accounts, the
largest component of non-interest income, increased slightly to $416,000 for the
first quarter of 2004 from $411,000 for the same period in 2003.
Non-interest expense. Non-interest expense increased 1.5% for the first quarter
of 2004 compared with the same period in 2003. Increases in salaries and
employee benefits and occupancy and equipment expenses related to the opening of
new facilities were offset by a decrease in other expenses. The Company opened a
full service banking branch in Louisville, Kentucky during September 2003 and
another full service banking branch in southern Indiana during April 2004. The
decrease in other expenses for the first quarter of 2004 was primarily the
result of the Company's loss on the sale of foreclosed real estate of $121,000
during the first quarter of 2003, as the Company did not experience any such
losses during the same period in 2004.
Income tax expense. Income tax expense for the three-month period ended March
31, 2004 was $140,000 compared to $249,000 for the same period in 2002. The
effective tax rate for the three months ended March 31, 2004 was 18.7% compared
to 25.0% for the same period in 2003. The effective tax rate declined between
the periods primarily due to $37,500 in tax credits taken during the first
quarter of 2004. The Company received a tax credit allocation from the Community
Development Financial Institutions Fund through the New Markets Tax Credit
(NMTC) Program. The NMTC Program permits taxpayers to receive a credit against
federal income taxes for making qualified equity investments in designated
Community Development Entities (CDE's) which in turn makes investments (in the
form of either loans or equity investments) in low-income communities. The
credit is claimed over a seven year period and the Company expects to recognize
a tax credit of $150,000 for tax year 2004.
Liquidity and Capital Resources
Liquidity levels are adjusted in order to meet funding needs for deposit
outflows, repayment of borrowings, and loan commitments and to meet
asset/liability objectives.
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 March 31, 2004,
the Company had cash and interest-bearing deposits with banks of $23.0 million
and securities available-for-sale with a fair value of $85.4 million. If the
Company requires funds beyond the funds it is able to generate internally, it
has $17.8 million in
- 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
additional aggregate borrowing capacity with the Federal Home Loan Bank of
Indianapolis and unused federal funds lines of credit with various nonaffiliated
financial institutions of $27.0 million.
The Bank is required to maintain specific amounts of capital pursuant to
regulatory requirements. As of March 31, 2004, the Bank was 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 11.2% 10.1% 8.1%
Community Bank 11.1% 10.1% 8.0%
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.
A net total of 338,975 shares at an aggregate cost of $5.3 million have been
repurchased since that time under both the current and prior repurchase plans.
The Company's Board of Directors authorized a share repurchase plan in May 2001
under which a maximum of $3.0 million of the Company's common stock may be
purchased. Through March 31, 2004, a total of $2.6 million had been expended to
purchase 163,136 shares under the current repurchase plan.
Off Balance Sheet Arrangements and Contractual Obligations
The amount and nature of the Company's off balance sheet arrangements and
contractual obligations at March 31, 2004 were not significantly different from
the information that was reported in the Company's annual report on Form 10-K
for the year ended December 31, 2003.
- 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 maintaining acceptable net interest income. Interest rate risk
is the exposure to adverse changes in net interest income as a result of market
fluctuations in interest rates. Management continually monitors interest rate
and liquidity risk so that it can implement appropriate funding, investment, and
other balance sheet strategies. Management considers market interest rate risk
to be the Company's most significant ongoing business risk consideration.
The Company currently contracts with an independent third party 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 200
basis points up and 100 basis points down 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 period of one year. The Company
feels that using gradual interest rate movements within the model is more
representative of future rate changes than instantaneous interest rate shocks.
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 projected 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. .
The base scenario represents projected net interest income over a one year
forecast horizon exclusive of interest rate changes to the simulation model.
Given a gradual 200 basis point increase in the projected yield curve used in
the simulation model (Up 200 Scenario), it is estimated that as of March 31,
2004 the Company's net interest income would decrease by an estimated 1.6% or
$229,000 over the one year forecast horizon. As of December 31, 2003, the
Company estimated that net interest income would decrease 4.7% or $669,000 over
a one year forecast horizon ending December 31, 2004 using the Up 200 Scenario.
Given a gradual 100 basis point decrease in the projected yield curve used in
the simulation model (Down 100 Scenario), it is estimated that as of March 31,
2004 the Company's net interest income would decrease by an estimated 0.80% or
$113,000 over the one year forecast horizon. As of December 31, 2003, the
Company estimated that net interest income would increase 0.5% or $76,000 over a
one year forecast horizon ending December 31, 2004 using the Down 100 Scenario.
The changes in projected net interest income between the periods are a result of
the increase in the interest sensitivity of the Company's assets. The Company
has been making loans with short repricing characteristics, selling some longer
term securities and replacing them
- 21 -
with ones that have shorter average lives, and by holding larger interest
bearing balances in other financial institutions.
The projected results adhere to the Company's asset/liability management policy
which states the negative impact to net interest income should not exceed 5% and
7% in a 100 basis point decrease and 200 basis point increase in the projected
yield curve over a one year forecast horizon. The forecast results are heavily
dependent on the assumptions regarding changes in deposit rates; the Company can
minimize the reduction in net interest income in a period of rising interest
rates to the extent that it can resist raising deposit rates during this period.
The Company continues to explore transactions and strategies to both increase
its net interest income and minimize its interest rate risk.
The interest sensitivity profile of the Company at any point in time will be
affected by a number of factors. These factors include the mix of interest
sensitive assets and liabilities as well as their relative repricing schedules.
It is also influenced by market interest rates, deposit growth, loan growth, and
other factors. The tables below illustrate the Company's estimated annualized
earnings sensitivity profile based on the above referenced asset/liability model
as of March 31, 2004 and December 31, 2003, respectively. The tables below are
representative only and are not precise measurements 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 March 31,
2004:
Interest Rate Sensitivity for the Year Ended March 31, 2004
---------------------------------------------------------------
Gradual Decrease in Gradual Increase in
Rates of 100 Rates of 200
Basis Points Base Basis Points
---------------------------------------------------------------
(in thousands)
Projected interest income:
Loans $ 23,556 $ 24,352 $ 25,943
Investments 3,226 3,305 3,437
FHLB stock 405 405 405
Interest-bearing bank deposits 54 117 244
----------------------------------------------------
Total interest Income 27,241 28,179 30,029
Projected interest expense:
Deposits 6,409 6,785 7,966
Other borrowings 6,609 7,058 7,956
----------------------------------------------------
Total interest expense 13,018 13,843 15,922
----------------------------------------------------
Net interest income $ 14,223 $ 14,336 $ 14,107
====================================================
Change from base $ (112) $ (229)
Percent change from base (0.8)% (1.6)%
- 22 -
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
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,
2003:
Interest Rate Sensitivity for the Year Ended March 31, 2003
---------------------------------------------------------------
Gradual Decrease in Gradual Increase in
Rates of 100 Rates of 200
Basis Points Base Basis Points
---------------------------------------------------------------
(in thousands)
Projected interest income:
Loans $ 23,973 $ 24,654 $ 26,079
Investments 2,987 3,064 3,196
FHLB stock 400 400 400
Interest-bearing bank deposits 10 22 46
----------------------------------------------------
Total interest income 27,370 28,140 29,721
Projected interest expense:
Deposits 5,358 5,692 6,827
Other borrowings 6,964 7,476 8,591
----------------------------------------------------
Total interest expense 12,322 13,168 15,418
----------------------------------------------------
Net interest income $ 15,048 $ 14,972 $ 14,303
====================================================
Change from base $ 76 $ (669)
Percent change from base 0.50% (4.7)%
- 23 -
PART I - ITEM 4
CONTROLS AND PROCEDURES
Company management, including the Chief Executive Officer (serving as the
principal executive officer) and Chief Financial Officer (serving as the
principal financial officer), have conducted an evaluation of the effectiveness
of disclosure controls and procedures pursuant to Securities Exchange Act of
1934 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 January 29, 2004 reporting,
under Item 5, earnings for the three months ended December 31, 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: May 14, 2004 BY: /s/ James D. Rickard
-------------------------------
James D. Rickard
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: May 14, 2004 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 of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- 27 -