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 June 30, 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: 2,389,934 shares of common stock were outstanding as of August
4, 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.........................................7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................................13-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................23-25
Item 4. Controls and Procedures..............................................................26
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders..................................27
Item 6. Exhibits and Reports on Form 8-K.....................................................28
Signatures........................................................................................29
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.......................32-33
- 2 -
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2004 2003
----------- ------------
(In thousands, except share data)
ASSETS
Cash and due from banks $ 11,897 $ 10,164
Interest bearing deposits in other financial institutions 2,525 2,217
Securities available for sale, at fair value 95,304 83,143
Loans held for sale 1,606 1,173
Loans, net 408,161 390,026
Federal Home Loan Bank stock, at cost 8,186 7,999
Accrued interest receivable 1,803 1,849
Premises and equipment, net 11,841 11,331
Cash surrender value life insurance 11,307 11,057
Other assets 3,738 2,356
-----------------------------
Total Assets $ 556,368 $ 521,315
=============================
LIABILITIES
Deposits
Non-interest bearing $ 46,508 $ 34,386
Interest bearing 343,842 306,929
-----------------------------
Total deposits 390,350 341,315
Short-term borrowings 31,587 45,325
Federal Home Loan Bank advances 83,000 90,200
Accrued interest payable 649 351
Subordinated debentures 7,000 --
Other liabilities 2,898 1,835
-----------------------------
Total Liabilities 515,484 479,026
-----------------------------
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; 2,389,812 and
2,383,696 shares outstanding 273 273
Additional paid-in capital 19,493 19,497
Retained earnings 28,819 28,299
Accumulated other comprehensive loss (2,276) (400)
Unearned ESOP and performance share awards - 1,911 and
3,627 shares (21) (39)
Treasury stock, at cost - 336,575 and 340,975 shares (5,404) (5,341)
-----------------------------
Total Stockholders' Equity 40,884 42,289
-----------------------------
Total Liabilities and Stockholders' Equity $ 556,368 $ 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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands, except share data)
INTEREST INCOME
Loans, including fees $ 5,780 $ 5,505 $ 11,470 $ 10,910
Securities:
Taxable 731 493 1,319 1,080
Tax-exempt 81 150 217 299
Federal Home Loan Bank cash and stock dividends 89 99 188 204
Interest bearing deposits in other financial institutions 11 13 20 17
-----------------------------------------------------------
Total interest income 6,692 6,260 13,214 12,510
-----------------------------------------------------------
INTEREST EXPENSE
Deposits 1,755 1,623 3,484 3,031
Federal Home Loan Bank advances 1,243 1,302 2,508 2,600
Short-term borrowings 70 60 136 161
-----------------------------------------------------------
Total interest expense 3,068 2,985 6,128 5,792
-----------------------------------------------------------
Net interest income 3,624 3,275 7,086 6,718
Provision for loan losses 360 333 720 629
-----------------------------------------------------------
Net interest income after provision for loan losses 3,264 2,942 6,366 6,089
-----------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 484 454 900 865
Commission income 15 34 38 90
Gain on sale of available for sale securities 50 20 138 115
Gain on sale of mortgage loans 59 158 179 381
Loan servicing income, net of amortization 20 (28) 12 (21)
Increase in cash surrender value of life insurance 122 134 250 267
Other 44 53 96 128
-----------------------------------------------------------
Total non-interest income 794 825 1,613 1,825
-----------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,804 1,744 3,620 3,501
Occupancy 273 222 546 446
Equipment 339 240 616 471
Data processing 331 295 564 588
Marketing and advertising 108 87 187 139
Loss on sale of foreclosed real estate -- -- -- 121
Other 474 520 970 994
-----------------------------------------------------------
Total non-interest expense 3,329 3,108 6,503 6,260
-----------------------------------------------------------
Income before income taxes 729 659 1,476 1,654
Income tax expense 124 117 264 366
-----------------------------------------------------------
Net Income $ 605 $ 542 $ 1,212 $ 1,288
===========================================================
Earnings per share:
Basic $ 0.25 $ 0.23 $ 0.50 $ 0.54
===========================================================
Diluted $ 0.25 $ 0.23 $ 0.50 $ 0.54
===========================================================
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
==========================================================================================================
Cash dividends declared on common
stock ($0.145 per share) -- -- -- (347)
Purchase treasury stock (18,009) -- -- --
Commitment of shares to be released
under the ESOP 858 -- 11 --
Stock options exercised 20,409 -- (12) --
Comprehensive income:
Net income -- -- -- 605
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, June 30, 2004 2,389,812 $ 273 $ 19,493 $ 28,819
==========================================================================================================
- ---------------------------------------------------------------------------------------------------------------
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
=============================================================================================================
Cash dividends declared on common
stock ($0.145 per share) -- -- -- (347)
Purchase treasury stock -- -- (437) (437)
Commitment of shares to be released
under the ESOP -- 9 -- 20
Stock options exercised -- -- 331 319
Comprehensive income:
Net income -- -- -- 605
Change in unrealized gain (loss) on
securities available for sale, net of
reclassifications and tax effects (1,705) -- -- (1,705)
Change in unrealized gain (loss) on
interest rate swaps, net of
reclassifications and tax effects (1,189) -- -- (1,189)
Change in minimum pension
liability, net of tax effects (2) -- -- (2)
- -------------------------------------------------------------------------------------------------------------
Total comprehensive income (2,291)
- -------------------------------------------------------------------------------------------------------------
Balance, June 30, 2004 $ (2,276) $ (21) $ (5,404) $ 40,884
=============================================================================================================
See accompanying notes to consolidated financial statements.
- 5 -
PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-----------------------------
2004 2003
----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,212 $ 1,288
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses 720 629
Depreciation expense 625 539
Net amortization of securities 218 556
Gain on sale of available for sale securities (138) (115)
Mortgage loans originated for sale (10,266) (15,412)
Proceeds from mortgage loan sales 17,525 22,895
Net gain on sales of mortgage loans (179) (381)
Increase in cash surrender value of life insurance (250) (267)
Federal Home Loan Bank stock dividends (187) (108)
ESOP and performance share award expense 38 30
Net change in
Accrued interest receivable 46 (131)
Accrued interest payable 298 (14)
Other assets (3,590) 250
Other liabilities 3,275 183
-----------------------------
Net cash from operating activities 9,347 9,942
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest bearing deposits with banks (308) (4,087)
Activity in available for sale securities:
Sales 8,596 8,769
Purchases (28,454) (25,354)
Maturities, prepayments and calls 5,737 16,672
Loan originations and payments, net (26,368) (43,506)
Purchase of premises and equipment, net (1,135) (462)
-----------------------------
Net cash from investing activities (41,932) (47,968)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 49,035 47,518
Net change in short-term borrowings (13,738) 635
Proceeds from Federal Home Loan Bank advances -- 44,140
Repayment of advances from Federal Home Loan Bank (7,200) (48,840)
Proceeds from issuance of subordinated debentures 7,000 --
Purchase of treasury stock (437) (389)
Stock options exercised 350 13
Dividends paid (692) (688)
-----------------------------
Net cash from financing activities 34,318 42,389
-----------------------------
Net change in cash and due from banks 1,733 4,363
Cash and due from banks at beginning of period 10,164 6,631
-----------------------------
Cash and due from banks at end of period $ 11,897 $ 10,994
=============================
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 established a new Community Development Entity (CDE) subsidiary in July
2002 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.
During June 2004, the Company completed a placement of floating rate
subordinated debentures through Community Bank Shares (IN) Statutory Trust I
(Trust), a trust formed by the Company. Because the Trust is not consolidated
with the Company, pursuant to FASB Interpretation No. 46, the financial
statements reflect the subordinated debt issued by the Company to the Trust.
In the opinion of management, the unaudited consolidated financial statements
include all normal adjustments considered necessary to present fairly the
financial position as of June 30, 2004, the results of operations for the three
and six months ended June 30, 2004 and 2003, and cash flows for the six months
ended June 30, 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 Six months ended
June 30, June 30,
In thousands, except per share amounts 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------
Net income as reported $ 605 $ 542 $ 1,212 $ 1,288
Less: Stock-based compensation expense determined
under fair value based method 13 18 26 36
------------------------------------------------------
Pro forma net income $ 592 $ 524 $ 1,186 $ 1,252
======================================================
$ 0.25 $ 0.23 $ 0.50 $ 0.54
Basic earnings per share as reported
Pro forma basic earnings per share 0.25 0.22 0.50 0.53
Diluted earnings per share as reported 0.25 0.23 0.50 0.54
Pro forma diluted earnings per share 0.24 0.22 0.49 0.53
Reclassifications: Some items in the prior 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)
June 30, 2004:
Securities available for sale:
U.S. Government and federal agency 6,201 -- (156) 6,045
State and municipal 6,368 193 (11) 6,550
Mortgage-backed 69,324 55 (1,761) 67,618
Corporate bonds 14,946 54 (151) 14,849
Mutual funds 250 -- (8) 242
-------------------------------------------------------
Total securities available for sale $ 97,089 $ 302 $ (2,087) $ 95,304
=======================================================
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 June 30, 2004 and December 31, 2003 consisted of the following:
June 30, 2004 December 31, 2003
---------------------------------------
(In thousands)
Commercial $ 81,178 $ 72,981
Mortgage loans on real estate:
Residential 89,391 94,975
Commercial 164,174 161,343
Construction 25,850 15,691
Home equity 45,523 42,562
Loans secured by deposit accounts 430 546
Consumer 6,244 5,962
-------------------------------
Subtotal 412,790 394,060
Less:
Allowance for loan losses (4,629) (4,034)
-------------------------------
Loans, net $ 408,161 $ 390,026
===============================
- 9 -
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Deposits
Deposits at June 30, 2004 and December 31, 2003 consisted of the following:
June 30, 2004 December 31, 2003
---------------------------------------
(In thousands)
Demand (NOW) $ 36,062 $ 35,973
Money market accounts 106,350 82,546
Savings 27,614 28,456
Individual retirement accounts-certificates of deposits 18,850 17,841
Certificates of deposit, $100,000 and over 50,582 41,028
Other certificates of deposit 104,384 101,085
----------------------------------
Total interest bearing deposits 343,842 306,929
Total non-interest bearing deposits 46,508 34,386
----------------------------------
Total deposits $ 390,350 $ 341,315
==================================
5. Supplemental Disclosure for Earnings Per Share
Earnings per share were computed as follows:
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
In thousands, except for share and per share amounts 2004 2003 2004 2003
---------- ---------- ---------- ----------
Basic:
Earnings:
Net income $ 605 $ 542 $ 1,212 $ 1,288
==========================================================
Shares:
Weighted average common shares outstanding 2,389,179 2,372,746 2,387,675 2,378,143
==========================================================
Net income per share, basic $ 0.25 $ 0.23 $ 0.50 $ 0.54
==========================================================
Diluted:
Earnings:
Net income $ 605 $ 542 $ 1,212 $ 1,288
==========================================================
Shares:
Weighted average common shares outstanding 2,389,179 2,372,746 2,387,675 2,378,143
Add: Dilutive effect of outstanding options 35,716 10,246 32,126 8,466
----------------------------------------------------------
Weighted average common shares outstanding, as
adjusted 2,424,895 2,382,992 2,419,801 2,386,609
==========================================================
Net income per share, diluted $ 0.25 $ 0.23 $ 0.50 $ 0.54
==========================================================
The Company had no antidilutive stock options at June 30, 2004. Stock options
for 58,700 and 65,900 shares of common stock were excluded from the three and
six months ended June 30, 2003, 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 June 30, 2004 and 2003,
the Company recognized $237,000 and $143,000 of income on the interest rate
swaps as an increase to interest income on loans. During the six months ended
June 30, 2004 and 2003, the Company recognized $473,000 and $293,000 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:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
------- ------- ------- -------
(In thousands) (In thousands)
Beginning balance $ 493 $ 820 $ (413) $ 746
Increase (decrease) in value for the period (1,712) 277 (570) 501
Reclassified to interest income on loans (237) (143) (473) (293)
-------------------------------------------------
Ending balance $(1,456) $ 954 $(1,456) $ 954
=================================================
- 11 -
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 for the three and six months ended June 30,
2004 and 2003 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands) (In thousands)
Interest cost $ 12 $ 12 $ 24 $ 25
Expected return on plan assets (11) (8) (21) (17)
Amortization of unrecognized loss 9 10 17 20
-----------------------------------------------------
Pension expense $ 10 $ 14 $ 20 $ 28
=====================================================
The Company made no contributions to its pension plan during the first six
months of 2004, but expects to contribute $37,000 during the remainder of the
year.
- 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 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 6.7% to $556.4 million at June 30, 2004 from $521.3
million at December 31, 2003, primarily as a result of increases in net loans of
$18.1 million and available for sale securities of $12.2 million. The increase
in net loans and available for sale securities was primarily funded by deposit
growth and proceeds from the issuance of subordinated debentures. Deposits
increased 14.4% to $390.4 million at June 30, 2004. Total equity decreased $1.4
million from December 31, 2003, primarily as a result of the unrealized losses
on available for sale securities and interest rate swaps, which are reflected in
other comprehensive losses of $1.9 million as the market values of available for
sale securities and interest rate swaps declined in response to higher interest
rates during the second 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 4.6% to $408.2 million at June 30,
2004 from $390.0 million at December 31, 2003. This increase is net of $7.5
million transfer of held for sale and subsequently sold 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.
- 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
Loan growth was particularly strong in commercial business, real estate and
construction loans, which increased $21.1 million during the first six months of
2004 as sustained lower interest rates continued to stimulate the Company's
commercial loan operations.
Securities available for sale increased $12.2 million from $83.1 million at
December 31, 2003 to $95.3 million at June 30, 2004. The increase in available
for sale securities was funded by sales, prepayments, and maturities as well as
proceeds from the issuance of subordinated debentures. The securities portfolio
serves as a source of liquidity and earnings and contributes to the management
of interest rate risk. 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 $49.0 million to $390.4 million at June 30, 2004 from
$341.3 million at December 31, 2003. The Company attributes its deposit growth
to a focused commitment to the highest level of customer service as well as
increased business development efforts. The Company placed particular emphasis
on attracting low cost non-interest bearing demand deposits, which increased
35.3% to $46.5 million over the first six months of 2004. Money market accounts
grew 28.8% over the same period.
Results of Operations
Net Income. Net income was $605,000 ($0.25 per share diluted) for the three
months ended June 30, 2004 as compared to $542,000 ($0.23 per share diluted) for
the three months ended June 30, 2003. Return on average assets was 0.45% for
both the three months ended June 30, 2004 and June 30, 2003. Return on average
equity was 5.72% for the second quarter of 2004 compared to 5.02% for the same
period in 2003. Management attributes the increase in net income between the
periods to the growth of the Company's core retail and commercial banking lines
of business as net interest income increased 10.7% to $3.6 million between the
periods. The increase in net interest income helped offset a decline in mortgage
banking income which resulted from an increase in mortgage interest rates.
Net income was $1,212,000 ($0.50 per share diluted) for the six months ended
June 30, 2004 as compared to $1,288,000 ($0.54 per share diluted) for the six
months ended June 30, 2003. Return on average assets was 0.46% for the six
months ended June 30, 2004 as compared to 0.54% for the same period in 2003 and
return on average equity was 5.67% and 5.99%, respectively, for the same
periods. Management attributes the decrease in net income between the periods to
a lower net interest margin and a decline in mortgage banking income which
resulted from an increase in mortgage interest rates.
Net interest income. Net interest income increased $349,000 to $3.6 million for
the second 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,
specifically by growth in the loan and securities portfolios. The average rate
on interest earning assets was 5.31% for the quarter ended June 30, 2004, a
decrease of 23 basis points from 5.54% for the same period in 2003. The average
rate paid on interest-bearing liabilities decreased 22 basis points to 2.71% for
the quarter ended June 30, 2004 from 2.93% for the same period ended in 2003.
The Company's net interest margin was down nominally at 2.87% for the quarter
ended June 30, 2004 from 2.90% for the same period in 2003 as a lower yield on
interest earning assets was offset by lower deposit costs.
- 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
Net interest income increased 5.5% to $7.1 million for the six months ended June
30, 2004 from $6.7 million for the same period in 2003. The Company has been
able to mitigate the effects of generally lower market interest rates on its net
interest income through the growth of its interest earning assets.
The cost of interest-bearing liabilities continues to be significantly affected
by the $83.0 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
the 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 June 30, 2004 and December 31, 2003 are substantially comprised
of long-term advances. The cost of FHLB advances for the first six months of
2004 was 5.97% compared with the cost of federal funds purchased and repurchase
agreements, which are both highly interest rate sensitive, which was 0.75% for
the six months ended June 30, 2004.
- 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 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 June 30,
------------------------------------------------------------------------------
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 $ 4,312 $ 10 0.93% $ 4,200 $ 13 1.24%
Taxable securities 82,035 732 3.59% 65,832 493 3.00%
Non-taxable securities 7,515 81 4.34% 12,667 150 4.75%
Total loans and fees 405,011 5,779 5.74% 362,758 5,505 6.09%
FHLB stock 8,152 90 4.44% 7,770 99 5.11%
-------- -------- -------- --------
Total earning assets 507,025 6,692 5.31% 453,227 6,260 5.54%
Less: Allowance for loan losses 4,552 4,072
Non-earning assets:
Cash and due from banks 11,155 8,212
Bank premises and equipment, net 11,823 11,309
Accrued interest receivable and other
assets 17,017 15,102
-------- --------
Total assets $542,468 $483,778
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $338,251 $ 1,755 2.09% $291,658 $ 1,623 2.23%
Federal funds purchased and repurchase
agreements 32,913 60 0.73% 28,784 60 0.84%
FHLB advances 83,571 1,243 5.98% 88,000 1,302 5.93%
Subordinated debentures 1,110 10 3.62% -- -- --
-------- -------- -------- --------
Total interest-bearing liabilities 455,845 3,068 2.71% 408,442 2,985 2.93%
Non-interest bearing liabilities:
Non-interest demand deposits 41,245 30,604
Accrued interest payable and other
liabilities 2,833 1,401
Stockholders' equity 42,545 43,331
-------- --------
Total liabilities and stockholders' equity $542,468 $483,778
======== ========
Net interest income $ 3,624 $ 3,275
======== ========
Net interest spread 2.60% 2.61%
Net interest margin 2.87% 2.90%
- 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
Six Months Ended June 30,
--------------------------------------------------------------------------
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 $ 4,052 $ 20 0.99% $ 2,667 $ 17 1.29%
Taxable securities 74,636 1,319 3.55% 68,179 1,080 3.19%
Non-taxable securities 11,151 217 3.91% 12,673 299 4.76%
Total loans and fees 403,031 11,470 5.72% 355,026 10,910 6.20%
FHLB stock 8,106 188 4.66% 7,735 204 5.32%
-------- -------- ---- -------- -------- ----
Total earning assets 500,976 13,214 5.30% 446,280 12,510 5.65%
Less: Allowance for loan losses 4,357 3,961
Non-earning assets:
Cash and due from banks 10,531 7,894
Bank premises and equipment, net 11,612 11,350
Accrued interest receivable and other
assets 16,147 15,242
-------- --------
Total assets $534,909 $476,805
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $332,122 $ 3,484 2.11% $277,776 $ 3,031 2.20%
Federal funds purchased and repurchase
agreements 33,620 126 0.75% 34,099 161 0.95%
FHLB advances 84,481 2,508 5.97% 89,286 2,600 5.87%
Subordinated debentures 555 10 3.62% -- -- --
-------- -------- -------- --------
Total interest-bearing liabilities 450,778 6,128 2.73% 401,161 5,792 2.91%
Non-interest bearing liabilities:
Non-interest demand deposits 38,978 29,111
Accrued interest payable and other
liabilities 2,196 3,140
Stockholders' equity 42,957 43,393
-------- --------
Total liabilities and stockholders' equity $534,909 $476,805
======== ========
Net interest income $ 7,086 $ 6,718
======== ========
Net interest spread 2.57% 2.74%
Net interest margin 2.84% 3.04%
- 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.
-----------------------------------------------------------------------------
Three Months Ended June 30, 2004 Six Months Ended June 30, 2004
compared to compared to
Three Months Ended June 30, 2003 Six Months Ended June 30, 2003
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 $ (3) $ -- $ (3) $ 3 $ 7 $ (4)
Taxable securities 239 134 105 239 108 131
Tax-exempt securities (69) (57) (12) (82) (33) (49)
Total loans and fees 274 616 (342) 560 1,405 (845)
FHLB stock (9) 5 (14) (16) 9 (25)
-----------------------------------------------------------------------------
Total increase (decrease) in interest income 432 698 (266) 704 1,496 (792)
-----------------------------------------------------------------------------
Interest expense:
Deposits 132 247 (115) 453 574 (121)
Federal funds purchased and repurchase
agreements -- 8 (8) (35) (2) (33)
FHLB advances (59) (66) 7 (92) (142) 50
Subordinated debentures 10 10 -- 10 10 --
-----------------------------------------------------------------------------
Total increase (decrease) in interest expense 83 199 (116) 336 440 (104)
-----------------------------------------------------------------------------
Increase (decrease) in net interest income $ 349 $ 499 $ (150) $ 368 $ 1,056 $ (688)
=============================================================================
- 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
Allowance and Provision for Loan Losses. The Bank's financial performance
depends on the quality of the loans it originates and management's ability to
assess the degree of risk in existing loans when it determines the allowance for
loan losses. An increase in loan charge-offs or non-performing loans or an
inadequate allowance for loan losses could have an adverse effect on net income.
The provision for loan losses was $360,000 for the three months ended June 30,
2004 as compared to $333,000 for the same period in 2003. The provision for loan
losses increased between the periods primarily because of the growth in total
loans. Management believes, based on information presently available, that it
has adequately provided for loan losses at June 30, 2004.
Summary of Loan Loss Experience:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
Activity for the period ended: 2004 2003 2004 2003
------- ------- ------- -------
(In thousands) (In thousands)
Beginning balance $ 4,389 $ 4,000 $ 4,034 $ 3,814
Charge-offs:
Residential real estate -- (14) -- (14)
Commercial real estate (128) (538) (128) (655)
Construction -- -- -- --
Commercial business -- (14) (15) (14)
Home equity -- -- (1) --
Consumer (4) (24) (4) (24)
-------------------------------------------------
Total (132) (590) (148) (707)
Recoveries:
Residential real estate -- -- -- --
Commercial real estate 4 3 7 7
Construction -- -- -- --
Commercial business 3 -- 8 2
Home equity -- -- -- --
Consumer 5 3 8 3
-------------------------------------------------
Total 12 6 23 12
-------------------------------------------------
Net loan charge-offs (120) (584) (125) (694)
Provision 360 333 720 629
-------------------------------------------------
Ending balance $ 4,629 $ 3,749 $ 4,629 $ 3,749
=================================================
Non-performing assets. 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, unless they are adequately secured and in the
process of collection. When these loans are placed on non-accrual status, all
unpaid accrued interest is reversed and the loans remain on
- 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-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 from $2.1 at December 31, 2003 to $2.0
million at June 30, 2004.
June 30, 2004 December 31, 2003
-----------------------------------
(In thousands)
Loans on non-accrual status $ 2,400 $ 1,467
Loans past due 90 days or more and still accruing 241 346
----------------------------
Total non-performing loans 2,641 1,813
Other real estate owned 581 610
----------------------------
Total non-performing assets $ 3,222 $ 2,423
============================
Non-performing loans to total loans 0.64% 0.46%
Non-performing assets to total loans 0.78% 0.61%
Allowance as a percent of non-performing loans 175.27% 222.50%
Allowance as a percent of total loans 1.12% 1.02%
- 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
Non-interest income. Non-interest income decreased $31,000 for the three months
ended June 30, 2004 compared with the same period in 2003, primarily because of
a $99,000 decrease in gain on sale of mortgage loans resulting from an increase
in mortgage interest rates. Offsetting the decrease in mortgage banking income
was an increase in service charges on deposit accounts. The Company has opened a
significant number of new demand deposit accounts during the first six months of
2004. These new relationships helped contribute to a 6.6%, or $30,000 increase
in service charges on deposit accounts for the second quarter of 2004 compared
to the second quarter of 2003.
Non-interest income decreased $212,000, or 11.6% for the six months ended June
30, 2004 compared to the same period in 2003. Non-interest income decreased for
substantially the same reasons as the quarterly change referenced above.
Non-interest expense. Non-interest expense increased 7.1%, or $221,000 for the
three months ended June 30, 2004 when compared to the same period in 2003,
primarily the result of an increase in occupancy and equipment, and salary and
employee benefits expenses related to the opening of additional banking centers.
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.
Non-interest expense increased 3.9%, or $243,000 for the six months ended June
30, 2004 compared to the same period in 2003. Non-interest expense increased for
substantially the same reasons as the quarterly change referenced above.
Income tax expense. Income tax expense for the six-month period ended June 30,
2004 was $264,000 compared to $366,000 for the same period in 2003. The
effective tax rate for the six months ended June 30, 2004 was 17.9% compared to
22.1% for the same period in 2003. The effective tax rate declined between the
periods primarily due to 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 June 30, 2004, the Company had cash and interest-bearing
deposits with banks of $14.4 million and securities available-for-sale with a
fair value of $95.3 million. If the Company requires funds beyond the funds it
is able to generate internally, it has $15.6 million in 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.
- 21 -
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
The Bank is required to maintain specific amounts of capital pursuant to
regulatory requirements. As of June 30, 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 12.1% 11.0% 9.3%
Community Bank 10.5% 9.5% 7.9%
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 336,575 shares at an aggregate cost of $5.4 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 June 30, 2004, a total of $3.0 million had been expended to
purchase 181,145 shares under the current repurchase plan.
During June 2004, the Company completed a placement of $7.0 million floating
rate subordinated debentures through Community Bank Shares (IN) Statutory Trust
I, a trust formed by the Company. These securities are reported as liabilities
for financial reporting, but Tier 1 Capital for regulatory purposes. The Company
intends to utilize the proceeds for general business purposes and to support the
Bank's future opportunities for growth.
Off Balance Sheet Arrangements and Contractual Obligations
The amount and nature of the Company's off balance sheet arrangements and
contractual obligations at June 30, 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.
- 22 -
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 June 30, 2004
the Company's net interest income would decrease by an estimated 3.2% or
$466,000 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 June 30,
2004 the Company's net interest income would decrease by an estimated 0.2% or
$24,000 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 with ones that
- 23 -
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
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 June 30, 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 June 30,
2004:
Interest Rate Sensitivity for the Year Ended June 30, 2004
--------------------------------------------------------------
Gradual Decrease in Gradual Increase in
Rates of 100 Rates of 200
Basis Points Base Basis Points
--------------------------------------------------------------
(In thousands)
Projected interest income:
Loans $ 22,632 $ 23,187 $ 24,302
Investments 3,811 3,881 4,010
FHLB stock 361 361 361
Interest-bearing bank deposits 24 38 65
--------------------------------------------------------------
Total interest Income 26,828 27,467 28,738
Projected interest expense:
Deposits 6,834 7,211 8,472
Federal funds purchased
and repurchase agreements 34 207 552
FHLB advances 4,754 4,788 4,858
Subordinated debentures 277 308 369
--------------------------------------------------------------
Total interest expense 11,899 12,514 14,251
--------------------------------------------------------------
Net interest income $ 14,929 $ 14,953 $ 14,487
==============================================================
Change from base $ (24) $ (466)
Percent change from base (0.2)% (3.1)%
- 24 -
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 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 $ 22,244 $ 22,654 $ 23,538
Investments 2,987 3,064 3,196
FHLB stock 400 400 400
Interest-bearing bank deposits 10 22 46
--------------------------------------------------------------------
Total interest income 25,641 26,140 27,180
Projected interest expense:
Deposits 5,358 5,692 6,827
Federal funds purchased
and repurchase agreements 170 373 870
FHLB advances 5,065 5,103 5,180
--------------------------------------------------------------------
Total interest expense 10,593 11,168 12,877
--------------------------------------------------------------------
Net interest income $ 15,048 $ 14,972 $ 14,303
====================================================================
Change from base $ 76 $ (669)
Percent change from base 0.5% (4.5)%
- 25 -
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.
- 26 -
PART II
OTHER INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 18,
2004. Matters submitted to, and approved by, stockholders are listed
below, as is a tabulation of voting. There were no abstentions with
regard to the election of Directors or non-votes on any of the
matters voted on at the meeting.
(1) The following persons nominated as Directors were elected:
Withhold
Class For Authority
--------------------------------------------------------------------
Nominees for Director for
Three-Year Terms Expiring in 2007:
Gary L. Libs 1,810,552 5,331
Kerry M. Stemler 1,810,552 5,331
Directors whose term of office continued after the meeting were as
follows: Timothy T. Shea, James W. Robinson, Gordon L. Huncilman,
Robert J. Koetter, Sr., George M. Ballard, Dale L. Orem, James D.
Rickard, Steven R. Stemler.
(2) The appointment by the Board of Directors of Crowe Chizek
and Company LLC, as the Company's independent auditors for the
fiscal year ending December 31, 2004, was ratified by the following
vote:
For Against Abstain
1,803,434 4,989 7,460
- 27 -
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 May 3, 2004 reporting, under
Item 12, earnings for the three months ended March 31, 2004.
The Company filed a report on Form 8-K on June 21, 2004 reporting, under
Item 5, placement of floating rate subordinated debentures through
Community Bank Shares (IN) Statutory Trust I, a trust formed by the
Company.
The Company filed a report on Form 8-K on June 28, 2004 reporting, under
Item 5, Mr. Wayne Estopinal joins board of directors of Community Bank
Shares of Indiana, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
COMMUNITY BANK SHARES OF INDIANA, INC.
(Registrant)
Dated: August 13, 2004 BY: /s/ James D. Rickard
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James D. Rickard
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: August 13, 2004 BY: /s/ Paul A. Chrisco
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Paul A. Chrisco
Senior Vice-President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
COMMUNITY BANK SHARES OF INDIANA, INC.
EXHIBIT INDEX
Exhibit No. Description
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11 Statement Regarding Computation of Per Share Earnings
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of Sarbanes-Oxley Act
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of Sarbanes-Oxley Act
32.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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