UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|X| Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 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)
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Indiana |
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35-1938254 |
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(State
or Other Jurisdiction of |
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(I.R.S.
Employer |
101 West Spring Street, New Albany, Indiana 47150
(Address of Principal
Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (812) 944-2224
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
(Title of Class)
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 twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES |_| NO |X|
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price of $21.10 per share of such stock as of March 15, 2005, was $55,344,372. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the Registrant.)
As of March 15, 2005, there were issued and outstanding 2,622,956 shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Proxy Statement for the Annual Meeting of Stockholders on May 17, 2005.
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2
PART I
General
Community Bank Shares of Indiana, Inc. (the “Company”) is a one 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 Company’s financial statements reflect the subordinated debt issued by the Company to the Trust.
The Company had total assets of $590.1 million, total deposits of $411.3 million, and stockholders’ equity of $42.8 million as of December 31, 2004. The Company’s principal executive office is located at 101 West Spring Street, New Albany, Indiana 47150, and the telephone number at that address is (812) 944-2224.
Business Strategy
The Company’s current business strategy is to operate a well-capitalized, profitable and independent community bank with a significant presence in its primary market areas. The Company’s growth strategy is focused on expansion through organic growth within its market areas. The Bank offers business and personal banking services through a full range of deposit products that include non-interest and interest-bearing checking accounts, ATM’s, debit cards, savings accounts, money market accounts, certificates of deposit and individual retirement accounts. The Bank’s loan products include: secured and unsecured business loans of various terms to local businesses and professional organizations; consumer loans including home equity lines of credit, automobile and recreational vehicle, construction, and loans secured by deposit accounts; and residential real estate loans. In addition, the Company also offers non-deposit investment products such as stocks, bonds, mutual funds, and annuities to customers within its banking market areas through a strategic alliance with Smith Barney.
Internal Growth. Management believes the optimum way to grow the Company is by attracting new loan and deposit customers within its existing markets through its extensive product offering and attentive customer service. Management believes the Bank’s customers seek a banking relationship with a service-oriented community banking institution and feels the Company’s banking centers have an atmosphere which facilitates personalized service and a broad range of product offerings to meet customers’ needs.
Branch Expansion. Management continues to consider opportunities for branch expansion and is focusing its current efforts within existing markets. Management considers a variety of criteria when evaluating potential branching opportunities. These include: the market location of the potential branch and demographics of the surrounding communities; the investment required and opportunity costs; staffing needs; and other criteria management deems of particular importance.
Lending Activities
Commercial Business Loans. The Company originates non-real estate related business loans to local small businesses and professional organizations. This type of commercial loan has been offered at both variable rates and fixed rates and can be unsecured or secured by general business assets such as equipment, accounts receivable or inventory. The Company has increased its origination of commercial business loans over the last few years. Such loans generally have shorter terms and higher interest rates than commercial real estate loans. However, commercial business loans also involve a higher level of credit risk because of the type and nature of the collateral.
Commercial Real Estate Loans. The Company’s commercial real estate loans are secured by improved property such as offices, small business facilities, apartment buildings, nursing homes, warehouses and other non-residential buildings, most of which are located in the Company’s primary market area and most of which are to be used or occupied by the borrowers. Commercial real estate loans have been offered at adjustable interest rates and at fixed rates with balloon provisions at the end of the term financing. The Company continues to originate commercial real estate loans, commercial real estate construction loans and land loans. Loans
3
secured by commercial real estate generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentrations of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multifamily and commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. The Company has increased its origination of multi-family residential or commercial real estate loans over the last few years, but attempts to protect itself against the increased credit risk associated with these loans through its underwriting standards and ongoing monitoring processes.
Residential Real Estate Loans. The Company originates one-to-four family, owner-occupied, residential mortgage loans secured by property located in the Company’s market area. While the Company currently sells most residential real estate loans into the secondary market, the Company occasionally originates and retains these loans in its own portfolio. The majority of the Company’s residential mortgage loans consist of loans secured by owner-occupied, single family residences. The Company currently offers residential mortgage loans for terms up to thirty years, with adjustable (“ARM”) or fixed interest rates. Origination of fixed-rate mortgage loans versus ARM loans is monitored continuously and is affected significantly by the level of market interest rates, customer preference, and loan products offered by the Company’s competitors. Therefore, even if management’s strategy is to emphasize ARM loans, market conditions may be such that there is greater demand for fixed-rate mortgage loans.
The primary purpose of offering ARM loans is to make the Company’s loan portfolio more interest rate sensitive. ARM loans, however, can carry increased credit risk because during a period of rising interest rates the risk of default on ARM loans may increase due to increases in borrowers’ monthly payments.
The Company’s fixed-rate mortgage loans are amortized on a monthly basis with principal and interest due each month. Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option.
After the initial fixed rate period, the Company’s ARM loans generally adjust annually with interest rate adjustment limitations of two percentage points per year and six percentage points over the life of the loan. The Company also makes ARM loans with interest rates that adjust every one, three or five years. Under the Company’s current practice, after the initial fixed rate period the interest rate on ARM loans adjusts to the applicable U.S. Treasury Constant Maturity Index plus a spread. The Company’s policy is to qualify borrowers for one-year ARM loans based on the initial interest rate plus the maximum annual rate increase.
The Company has used different indices for its ARM loans such as the National Average Median Cost of Funds, the Sixth District Net Cost of Funds Monthly Index, the National Average Contract Rate for Previously Occupied Homes, the average three year Treasury Bill Rate, and the Eleventh District Cost of Funds. Consequently, the adjustments in the Company’s portfolio of ARM loans tend not to reflect any one particular change in any specific interest rate index, but general interest rate trends overall.
Secondary market regulations limit the amount that a bank may lend based on the appraised value of real estate. Such regulations permit a maximum loan-to-value ratio of 95% percent for residential property and from 65-90% for all other real estate related loans.
The Company occasionally makes real estate loans with loan-to-value ratios in excess of 80%. For the loans sold into the secondary market, individual investor requirements pertaining to private mortgage insurance apply. For the mortgage real estate loans retained by the Company with loan-to-value ratios of 80-90%, the Company may require the first 20% of the loan to be covered by private mortgage insurance. For the mortgage real estate loans retained by the Company with loan-to-value ratios of 90-95%, the Company may require private mortgage insurance to cover the first 25-30% of the loan amount. The Company requires fire and casualty insurance, as well as title insurance or an opinion of counsel regarding good title, on all properties securing real estate loans made by the Company
Construction Loans. The Company originates loans to finance the construction of owner-occupied residential property. The Company makes construction loans to private individuals for the purpose of constructing a personal residence or to local real estate builders and developers. Construction loans generally are made with either adjustable or fixed-rate terms of up to 12 months. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction loans are structured to be converted to permanent loans at the end of the construction period or to be terminated upon receipt of permanent financing from another financial institution.
Consumer Loans. The principal types of consumer loans offered by the Company are home equity lines of credit, auto loans, home improvement loans, and loans secured by deposit accounts. Home equity lines of credit are predominately made at rates which adjust periodically and are indexed to the prime rate. Some consumer loans are offered on a fixed-rate basis depending upon the borrower’s preference. The Company’s home equity lines of credit are generally secured by the borrower’s principal residence and a personal guarantee.
The underwriting standards employed by the Company for consumer loans include a determination of the applicant’s credit history and an assessment of the prospective borrower’s ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment and from any verifiable secondary income. The underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.
Mortgage-Banking Operations. The Bank originates qualified government guaranteed loans and conventional secondary market loans which are generally sold with the servicing released. This arrangement provides necessary liquidity to the Bank while
4
providing additional loan products to the Bank’s customers.
Loan Solicitation and Processing. Loans are originated through a number of sources including loan sales staff, real estate broker referrals, existing customers, borrowers, builders, attorneys and walk-in customers. Processing procedures are affected by the type of loan requested and whether the loan will be funded by the Company or sold into the secondary market.
Mortgage loans that are sold into the secondary market are submitted, when possible, for Automated Underwriting, which allows for faster approval and an expedited closing. The Company’s responsibility on these loans is the fulfillment of the loan purchaser’s requirements. These loans often have reduced underwriting features and may be made without an appraisal or credit report at the option of the purchaser. Loans that are reviewed in a more traditional manner, which are mostly loans held for the Company’s own portfolio, require credit reports, appraisals, and income verification before they are approved or disapproved. Private mortgage insurance is generally required on loans with a ratio of loan to appraised value of greater than eighty percent. Property insurance and flood certifications are required on all real estate loans.
Installment loan documentation varies by the type of collateral offered to secure the loan. In general, an application and credit report is required before a loan is submitted for underwriting. The underwriter determines the necessity of any additional documentation, such as income verification or appraisal of collateral. An authorized loan officer approves or declines the loan after review of all applicable loan documentation collected during the underwriting process.
Commercial loans are underwritten by the commercial loan officer who makes the initial contact with the customer applying for credit. The underwriting of these loans is reviewed after the fact for compliance with the Company’s general underwriting standards. A loan exceeding the authority of the underwriting loan officer requires the approval of a loan committee or the Board of Directors of the Bank, depending on the loan amount.
Loan Commitments. The Company issues standby loan origination commitments to qualified borrowers primarily for the construction and purchase of residential real estate and commercial real estate. Such commitments are made with specified terms and conditions for periods of thirty days for commercial real estate loans and sixty days for residential real estate loans.
Employees
As of December 31, 2004, the Company employed 183 employees, 155 full-time and 28 part-time. None of these employees are represented by a collective bargaining group. Neither the Company nor any subsidiary has ever experienced a work stoppage.
Competition and Market Area Served
The banking business is highly competitive, and as such the Bank competes not only with other commercial banks, but also with savings and loan associations, trust companies and credit unions for deposits and loans, as well as stock brokerage firms, insurance companies, and other entities providing one or more of the services and products offered by the Bank. In addition to competition, the Company’s business and operating results are affected by the general economic conditions prevalent in its market.
The Bank’s primary market areas consist of Floyd and Clark counties in Southern Indiana and Jefferson and Nelson counties in Kentucky. These are four of the thirteen counties comprising the Louisville, Kentucky Standard Metropolitan Statistical Area, which has a population in excess of one million. The aggregate population of Floyd and Clark counties is approximately 171,000 and the populations of Jefferson and Nelson Counties are approximately 699,000 and 40,000, respectively. The Company’s headquarters are located in New Albany, Indiana, a city of 38,000 located approximately three miles from the center of Louisville.
Nature of Company’s Business
The business of the Company is not seasonal. The Company’s business does not depend upon a single customer, or a few customers, the loss of any one or more of which would have a material adverse effect on the Company. No material portion of the Company’s business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any governmental entity.
Regulation and Supervision
As a bank holding company, the Company is regulated under the Bank Holding Company Act of 1956, as amended (the “Act”). The Act limits the business of bank holding companies to banking, managing or controlling banks and other subsidiaries authorized under the Act, performing certain servicing activities for subsidiaries and engaging in such other activities as the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) may determine to be closely related to banking. The Company is registered with and is subject to regulation by the Federal Reserve Board. Among other things, applicable statutes and regulations require the Company to file an annual report and such additional information as the Federal Reserve Board may require pursuant to the Act and the regulations which implement the Act. The Federal Reserve Board also conducts examinations of the Company.
The Act provides that a bank holding company must obtain the prior approval of the Federal Reserve Board to acquire more than five percent of the voting stock or substantially all the assets of any bank or bank holding company. The Act also provides that, with certain exceptions, a bank holding company may not (i) engage in any activities other than those of banking or managing or controlling banks and other authorized subsidiaries, or (ii) own or control more than five percent of the voting shares of any company that is not a bank, including any foreign company. A bank holding company is permitted, however, to acquire shares of
5
any company, the activities of which the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A bank holding company may also acquire shares of a company which furnishes or performs services for a bank holding company and acquire shares of the kinds and in the amounts eligible for investment by national banking associations. In addition, the Federal Reserve Act restricts the Bank’s extension of credit to the Company.
On November 12, 1999, Congress enacted the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act permits bank holding companies to qualify as “financial holding companies” that may engage in a broad range of financial activities, including underwriting, dealing in and making a market in securities, insurance underwriting and agency activities and merchant banking. The Federal Reserve Board is authorized to expand the list of permissible financial activities. The Gramm-Leach-Bliley Act also authorizes banks to engage through financial subsidiaries in nearly all of the activities permitted for financial holding companies. The Company has not elected the status of financial holding company and at this time has no plans for these investments or broader financial activities.
As a state-chartered commercial bank, the Bank is subject to examination, supervision and extensive regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the Indiana Department of Financial Institutions (“DFI”). The Bank is a member of and owns stock in the Federal Home Loan Bank (“FHLB”) of Indianapolis. Additionally, the Bank also owns stock in the FHLB of Cincinnati acquired through the aforementioned CBKY subsidiary. The FHLB institutions located in Indianapolis and Cincinnati are two of the twelve regional banks in the FHLB system. The Bank is also subject to regulation by the Federal Reserve Board, which governs reserves to be maintained against deposits and regulates certain other matters. The extensive system of banking laws and regulations to which the Bank is subject is intended primarily for the protection of Bank customers and depositors, and not Company shareholders.
The FDIC and DFI regularly examine the Bank and prepare reports for the consideration of the Bank’s Board of Directors on any deficiencies that they may find in the Bank’s operations. The relationship of the Bank with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in such matters as the form and content of the Bank’s mortgage documents and communication of loan and deposit rates to both existing and prospective customers. Financial institutions in various regions of the United States have been called upon by examiners to write down assets to their fair market values and to establish increased levels of reserves, primarily as a result of perceived weaknesses in real estate values and a more restrictive regulatory climate.
The investment and lending authority of a state-chartered bank is prescribed by state and federal laws and regulations, and such banks are prohibited from engaging in any activities not permitted by such laws and regulations. These laws and regulations generally are applicable to all state chartered banks. The Bank may not lend to a single or related group of borrowers on an unsecured basis an amount in excess of the greater of $500,000 or fifteen percent of the Bank’s unimpaired capital and surplus. An additional amount may be lent, equal to ten percent of unimpaired capital and surplus, if such loan is secured by readily marketable collateral, which is defined to include certain securities, but generally does not include real estate.
Federal Regulations
Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than ten percent stockholder of a bank, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution’s loans to one borrower limit (15% of the Bank’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board of directors approval for certain loans. In addition, the aggregate amount of extensions of credit to all insiders cannot exceed the institution’s unimpaired capital and surplus. At December 31, 2004 the Bank was in compliance with the above restrictions.
Safety and Soundness. The Federal Deposit Insurance Act (“FDIA”), as amended by the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to the internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest-rate-risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits and such other operational and managerial standards as the agencies may deem appropriate. The federal bank regulatory agencies adopted, effective August 9, 1995, a set of guidelines prescribing safety and soundness standards pursuant to FDICIA, as amended. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.
The FDIC generally is authorized to take enforcement action against a financial institution that fails to meet its capital requirements; such action may include restrictions on operations and banking activities, the imposition of a capital directive, a cease and desist order, civil money penalties or harsher measures such as the appointment of a receiver or conservator or a forced merger into another institution. In addition, under current regulatory policy, an institution that fails to meet its capital requirements is prohibited from paying any dividends. Except under certain circumstances, further disclosure of final enforcement action by the FDIC is required.
Prompt Corrective Action. Under Section 38 of the FDIA, as amended by the FDICIA, each federal banking agency was required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies, including the FDIC, adopted substantially similar regulations to implement Section 38 of the FDIA, effective as of December 19, 1992. Under the regulations, an institution is deemed to be (i) “well-capitalized” if it has total risk-based capital of 10.0% or more, a Tier 1 risk-based
6
capital ratio of 6.0% or more, a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (ii) “adequately-capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well-capitalized,” (iii) “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% ( 3.0% under certain circumstances), (iv) “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier II average capital ratio that is less than 3.0%, and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Section 38 of the FDIA and the regulations promulgated thereunder also specify circumstances under which a federal banking agency may reclassify a well-capitalized institution as adequately-capitalized and may require an adequately-capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). At December 31, 2004, the Company and the Bank were deemed well-capitalized for purposes of the above regulations.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Indianapolis. The FHLB of Indianapolis is one of the 12 regional FHLB’s that, prior to the enactment of FIRREA, were regulated by the Federal Home Loan Bank Board (FHLBB). FIRREA separated the home financing credit function of the FHLB’s from the regulatory functions of the FHLB’s regarding savings institutions and their insured deposits by transferring oversight over the FHLB’s from the FHLBB to a new federal agency, the Federal Home Financing Board (“FHFB”).
As a member of the FHLB system, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to the greater of one percent of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year, or 1/20 (or such greater fraction as established by the FHLB) of outstanding FHLB advances. At December 31, 2004, $8.4 million of FHLB stock was outstanding for the Bank, which was in compliance with this requirement. In past years, the Bank has received dividends on its FHLB stock.
Insurance of Accounts. The Bank’s deposits are insured up to $100,000 per insured member (as defined by law and regulation) and, except for certain deposits assumed by the Bank upon the merger of Heritage Bank of Southern Indiana into the Bank in 2002, which are insured by the Bank Insurance Fund (BIF), are insured by the Savings Association Insurance Fund (SAIF). This insurance is backed by the full faith and credit of the United States Government. The SAIF and the BIF are both administered and managed by the FDIC. As insurer, the FDIC is authorized to conduct examinations of and to require reporting by SAIF and BIF insured institutions. It also may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to either fund. The FDIC also has the authority to initiate enforcement actions against financial institutions. The annual assessment for deposit insurance is based on a risk-related premium system. Each insured institution is assigned to one of three capital groups: well-capitalized, adequately-capitalized or undercapitalized. Within each capital group, institutions are assigned to one of three subgroups (A, B, or C) on the basis of supervisory evaluations by the institution’s primary federal supervisor and if applicable, state supervisor. Assignment to one of the three capital groups, coupled with assignment to one of three supervisory subgroups, will determine which of the nine risk classifications is appropriate for an institution. Institutions are assessed insurance rates based on their assigned risk classifications. The well-capitalized, subgroup “A” category institutions are assessed the lowest insurance rate, while institutions assigned to the undercapitalized subgroup “C” category are assessed the highest insurance rate. As of December 31, 2004 the Bank was assigned to the well-capitalized, subgroup “A” category and paid an annual insurance rate of 1.44 cents per $100 of deposits.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC.
The Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits. Cash on hand or on deposit with the Federal Reserve Bank of $3.2 million and $2.2 million was required to meet regulatory reserve and clearing requirements at year-end 2004 and 2003, respectively. These balances do not earn interest.
Banks are authorized to borrow from the Federal Reserve Bank “discount window,” but Federal Reserve Board regulations require banks to exhaust other reasonable alternative sources of funds, including FHLB advances, before borrowing from the Federal Reserve Bank.
Federal Taxation. For federal income tax purposes, the Company and its subsidiaries file a consolidated federal income tax return on a calendar year basis. Consolidated returns have the effect of eliminating intercompany distributions, including dividends, from the computation of consolidated taxable income for the taxable year in which the distributions occur.
The Company and its subsidiaries are subject to the rules of federal income taxation generally applicable to corporations under the Internal Revenue Code of 1986, as amended (the “Code”).
The Company has not been audited by the Internal Revenue Service for the past ten years.
Indiana Taxation. The Company is subject to a franchise tax imposed by the State of Indiana. The tax is imposed at the rate of 8.5 percent of the Company’s adjusted gross income. In computing adjusted gross income, no deductions are allowed for municipal interest, U.S. Government interest and pre-1990 net operating losses. In 2000, the Indiana financial institution tax law was amended to treat resident financial institutions the same as nonresident financial institutions by providing for apportionment of Indiana income
7
based on receipts in Indiana. This revision allowed for the exclusion of receipts from out of state sources and federal government and agency obligations.
Currently, income from the Bank’s subsidiaries CBSI Holdings, Inc., CBSI Investments, Inc. and CBSI Investment Portfolio Management, LLC is not subject to the Indiana franchise tax.
The Company’s state franchise tax returns have not been audited since 1997.
Kentucky Taxation. The Company is subject to a franchise tax imposed by the Commonwealth of Kentucky on its operations in Kentucky. The tax is imposed at a rate of 1.1% on taxable net capital, which equals capital stock paid in, surplus, undivided profits and capital reserves, net unrealized holding gains or losses on available for sale securities, and cumulative foreign currency translation adjustments less an amount equal to the same percentage of the total as the book value of United States obligations and Kentucky obligations bears to the book value of the total assets of the financial institution. A financial institution whose business activity is taxable within and without Kentucky must apportion its net capital based on the three factor apportionment formula of receipts, property and payroll unless the Kentucky Revenue Cabinet has granted written permission to use another method.
8
The Company conducts its business through its corporate headquarters located in New Albany, Indiana. The Bank operates a main office and ten branch offices in Clark and Floyd Counties, Indiana, and five branch offices in Jefferson and Nelson Counties, Kentucky. The following table sets forth certain information concerning the main offices and each branch office at December 31, 2004. The Company’s aggregate net book value of premises and equipment was $11.5 million at December 31, 2004.
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Location |
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Year Opened |
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Owned or Leased |
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Community Bank of Southern Indiana: |
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101 West Spring St. - Main
Office |
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1937 |
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Owned |
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401 East Spring St. - Drive
Thru for Main Office |
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2001 |
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Owned |
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2626 Charlestown Road |
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1995 |
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Owned |
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4328 Charlestown Road |
|
2004 |
|
Leased |
|
|
|
|
|
|
|
|
|
480 New Albany Plaza |
|
1974 |
|
Leased |
|
|
|
|
|
|
|
|
|
901 East Highway 131 |
|
1981 |
|
Owned |
|
|
|
|
|
|
|
|
|
701 Highlander Point Drive |
|
1990 |
|
Owned |
|
|
|
|
|
|
|
|
|
102 Heritage Square |
|
1992 |
|
Owned |
|
|
|
|
|
|
|
|
|
201 W. Court Ave. |
|
1996 |
|
Owned |
|
|
|
|
|
|
|
|
|
5112 Highway 62 |
|
1997 |
|
Owned |
|
|
|
|
|
|
|
|
|
2910 Grantline Rd. |
|
2002 |
|
Leased |
|
|
|
|
|
|
|
|
|
400 Blankenbaker Parkway,
Suite 100 |
|
2002 |
|
Leased |
|
|
|
|
|
|
|
|
|
106A West John Rowan Blvd.
- Main Office |
|
1997 |
|
Leased |
|
|
|
|
|
|
|
|
|
119 East Stephen Foster
Ave. |
|
1972 |
|
Owned |
|
|
|
|
|
|
|
|
|
7101 Cedar Springs |
|
2002 |
|
Leased |
|
|
|
|
|
|
|
|
|
4510 Shelbyville Rd. |
|
2003 |
|
Leased |
There are various claims and law suits in which the Company or its subsidiaries are periodically involved, such as claims to enforce liens, foreclosure or condemnation proceedings on properties in which the Bank holds mortgages or security interests, claims involving the making and servicing of real property loans and other issues incident to the Bank’s business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2004.
9
PART II
Market Information
The Company’s common stock is traded on the Nasdaq Small Cap market under the symbol of CBIN. The quarterly dividends paid by the Company, as well as the quarterly range of low and high trade prices per share of the Company’s common stock as reported by Nasdaq is shown below.
|
|
2004 |
|
2003 |
|
||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
|
|
QUARTER ENDED |
|
HIGH |
|
LOW |
|
DIVIDEND |
|
QUARTER ENDED |
|
HIGH |
|
LOW |
|
DIVIDEND |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
March 31 |
|
$ |
20.87 |
|
$ |
18.96 |
|
|
$ |
0.132 |
|
|
March 31 |
|
$ |
14.54 |
|
$ |
13.68 |
|
|
$ |
0.132 |
|
|
|
|
June 30 |
|
|
22.73 |
|
|
20.23 |
|
|
|
0.132 |
|
|
June 30 |
|
|
16.55 |
|
|
13.68 |
|
|
|
0.132 |
|
|
|
|
September 30 |
|
|
21.36 |
|
|
19.45 |
|
|
|
0.132 |
|
|
September 30 |
|
|
17.73 |
|
|
15.38 |
|
|
|
0.132 |
|
|
|
|
December 31 |
|
|
22.45 |
|
|
17.95 |
|
|
|
0.145 |
|
|
December 31 |
|
|
20.30 |
|
|
14.90 |
|
|
|
0.132 |
|
|
Holders
As of March 15, 2005 there were 734 holders of the Company’s common stock.
Dividends
The Company intends to continue its historical practice of paying quarterly cash dividends although there is no assurance that such dividends will continue to be paid in the future. The payment of dividends in the future is dependent on future income, financial position, capital requirements, the discretion and judgment of the Board of Directors, and other considerations. In addition, the payment of dividends is subject to the regulatory restrictions described in Note 11 to the Company’s consolidated financial statements.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth certain information regarding Company compensation plans under which equity securities of the Company are authorized for issuance.
|
Plan category
|
|
Number of securities |
|
Weighted –average |
|
Number of securities |
|
|||||||
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|||||||
|
Equity
compensation plans approved by security holders
|
|
|
126 |
|
|
|
$ |
16.27 |
|
|
|
289 |
* |
|
|
Equity
compensation plans not approved by security holders |
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
126 |
|
|
|
$ |
16.27 |
|
|
|
289 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Of the shares reflected, 13,750 shares are available to be awarded under the Company’s 1997 Stock Incentive Plan and 275,000 shares are available to be awarded under the Company’s 2003 Performance Units Plan. At the annual meeting of Company shareholders scheduled for May 17, 2005, Company shareholders will be asked to approve a stock award plan under which 400,000 shares of Company common stock may be awarded. If said Award Plan is adopted by Company shareholders, the Company’s 1997 Stock Incentive Plan will be terminated. |
10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the Company’s selected historical consolidated financial information from 2000 through 2004. This information should be read in conjunction with the Consolidated Financial Statements and the related Notes. Factors affecting the comparability of certain indicated periods are discussed in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”
|
|
|
|
Years Ended December 31, |
|
|||||||||||||
|
|
|
|
|
|
|||||||||||||
|
|
(dollars in thousands, except per share data) |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
27,786 |
|
$ |
25,252 |
|
$ |
25,052 |
|
$ |
29,295 |
|
$ |
30,488 |
|
|
|
Interest expense |
|
|
12,796 |
|
|
11,675 |
|
|
13,354 |
|
|
17,045 |
|
|
18,314 |
|
|
|
Net interest income |
|
|
14,990 |
|
|
13,577 |
|
|
11,698 |
|
|
12,250 |
|
|
12,174 |
|
|
|
Provision for loan losses |
|
|
1,105 |
|
|
1,274 |
|
|
1,144 |
|
|
520 |
|
|
1,197 |
|
|
|
Non-interest income |
|
|
3,271 |
|
|
3,684 |
|
|
3,160 |
|
|
2,186 |
|
|
1,974 |
|
|
|
Non-interest expense |
|
|
13,903 |
|
|
13,104 |
|
|
10,938 |
|
|
9,379 |
|
|
8,833 |
|
|
|
Income before taxes |
|
|
3,253 |
|
|
2,883 |
|
|
2,776 |
|
|
4,537 |
|
|
4,118 |
|
|
|
Cumulative effect of change in accounting principle |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(172 |
) |
|
|
Net income |
|
|
2,588 |
|
|
2,302 |
|
|
2,126 |
|
|
2,955 |
|
|
2,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
590,066 |
|
$ |
521,315 |
|
$ |
465,549 |
|
$ |
429,616 |
|
$ |
416,221 |
|
|
|
Total securities |
|
|
90,152 |
|
|
83,143 |
|
|
92,374 |
|
|
99,101 |
|
|
86,436 |
|
|
|
Total loans, net |
|
|
450,676 |
|
|
390,026 |
|
|
321,634 |
|
|
294,030 |
|
|
287,254 |
|
|
|
Allowance for loan losses |
|
|
4,523 |
|
|
4,034 |
|
|
3,814 |
|
|
3,030 |
|
|
2,869 |
|
|
|
Total deposits |
|
|
411,306 |
|
|
341,315 |
|
|
289,830 |
|
|
255,892 |
|
|
258,222 |
|
|
|
Short-term borrowings |
|
|
43,629 |
|
|
45,325 |
|
|
36,393 |
|
|
39,075 |
|
|
22,547 |
|
|
|
FHLB advances |
|
|
82,000 |
|
|
90,200 |
|
|
92,700 |
|
|
89,000 |
|
|
91,800 |
|
|
|
Subordinated debentures |
|
|
7,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
Total shareholders’ equity |
|
|
42,781 |
|
|
42,289 |
|
|
43,297 |
|
|
42,365 |
|
|
40,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share* |
|
$ |
0.98 |
|
$ |
0.88 |
|
$ |
0.79 |
|
$ |
1.07 |
|
$ |
0.95 |
|
|
|
Diluted earnings per share* |
|
|
0.97 |
|
|
0.87 |
|
|
0.79 |
|
|
1.07 |
|
|
0.95 |
|
|
|
Book value* |
|
|
16.27 |
|
|
16.13 |
|
|
16.44 |
|
|
15.55 |
|
|
14.76 |
|
|
|
Cash dividends per share* |
|
|
0.54 |
|
|
0.53 |
|
|
0.53 |
|
|
0.53 |
|
|
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.47 |
% |
|
0.47 |
% |
|
0.47 |
% |
|
0.71 |
% |
|
0.67 |
% |
|
|
Return on average equity |
|
|
6.10 |
|
|
5.37 |
|
|
4.91 |
|
|
6.90 |
|
|
6.43 |
|
|
|
Net interest margin |
|
|
2.89 |
|
|
2.95 |
|
|
2.78 |
|
|
3.07 |
|
|
3.17 |
|
|
|
Efficiency ratio |
|
|
76.13 |
|
|
75.92 |
|
|
73.62 |
|
|
64.97 |
|
|
62.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset quality ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total loans |
|
|
0.37 |
% |
|
0.61 |
% |
|
1.17 |
% |
|
0.74 |
% |
|
0.39 |
% |
|
|
Net loan charge-offs to average loans |
|
|
0.15 |
|
|
0.29 |
|
|
0.12 |
|
|
0.13 |
|
|
0.03 |
|
|
|
Allowance for loan losses to total loans |
|
|
0.99 |
|
|
1.02 |
|
|
1.17 |
|
|
1.02 |
|
|
0.99 |
|
|
|
Allowance for loan losses to non-performing loans |
|
|
285 |
|
|
223 |
|
|
120 |
|
|
186 |
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio |
|
|
8.7 |
% |
|
8.3 |
% |
|
9.0 |
% |
|
10.0 |
% |
|
9.9 |
% |
|
|
Average stockholders’ equity to average total assets |
|
|
7.7 |
|
|
8.7 |
|
|
9.6 |
|
|
10.2 |
|
|
10.4 |
|
|
|
Tier 1 risk-based capital ratio |
|
|
10.4 |
|
|
10.4 |
|
|
12.4 |
|
|
14.8 |
|
|
14.5 |
|
|
|
Total risk-based capital ratio |
|
|
11.3 |
|
|
11.4 |
|
|
13.6 |
|
|
15.9 |
|
|
15.5 |
|
|
|
Dividend payout ratio |
|
|
54.8 |
|
|
59.8 |
|
|
66.1 |
|
|
49.6 |
|
|
51.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other key data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End-of-period full-time equivalent employees |
|
|
169 |
|
|
154 |
|
|
145 |
|
|
131 |
|
|
114 |
|
|
|
Number of bank offices |
|
|
16 |
|
|
16 |
|
|
14 |
|
|
11 |
|
|
10 |
|
|
*
|
Years 2000-2003 have been restated to reflect 10% stock dividend paid on December 27, 2004 |
11
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This section presents an analysis of the consolidated financial condition of the Company and its wholly-owned subsidiary, the Bank, at December 31, 2004 and 2003, and the consolidated results of operations for each of the years in the three year period ended December 31, 2004. The information contained in this section should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other financial data presented elsewhere in this annual report on Form 10-K.
The Company conducts its primary business through the Bank, which is a community-oriented financial institution offering a variety of financial services to its local communities. The Bank is engaged primarily in the business of attracting deposits from the general public and using such funds for the origination of: 1) commercial business and real estate loans and 2) secured consumer loans such as home equity lines of credit, automobile loans, and recreational vehicle loans. Additionally, the Bank originates and sells into the secondary market mortgage loans for the purchase of single-family homes in Floyd and Clark counties, Indiana, and Jefferson and Nelson counties, Kentucky, including surrounding communities. The Bank invests excess liquidity balances in mortgage-backed, U.S. agency, state and municipal and corporate securities.
The operating results of the Company depend primarily upon the Bank’s net interest income, which is the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities. Interest-earning assets principally consist of loans, taxable and tax-exempt securities, and FHLB stock. Interest-bearing liabilities principally include deposits, retail repurchase agreements, federal funds purchased, and advances from the FHLB Indianapolis and the FHLB Cincinnati. The net income of the Bank is also affected by 1) provision for loan losses, 2) non-interest income (including gains on sales of loans and securities, deposit account service charges and commission-based income on non-deposit investment products), 3) non-interest expenses (including compensation and benefits, occupancy, equipment, data processing expenses, marketing and advertising, and other expenses, such as audit, postage, printing, and telephone expenses ), and 4) income tax expense.
Statements contained within this report that are not statements of historical fact constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. When used in this discussion the words “anticipate,” “project,” “expect,” “believe,” and similar expressions are intended to identify forward-looking statements. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which may change over time. Actual results could differ materially from forward-looking statements.
In addition to factors disclosed by the Company elsewhere in this annual report on Form 10-K, the following factors, among others, could cause actual results to differ materially from such forward-looking statements: 1) adverse changes in economic conditions affecting the banking industry in general and, more specifically, the market areas in which the Company and its subsidiary Bank operates, 2) adverse changes in the legislative and regulatory environment affecting the Company and its subsidiary Bank, 3) increased competition from other financial and non-financial institutions, 4) the impact of technological advances on the banking industry, and 5) other risks detailed at times in the Company’s filings with the Securities and Exchange Commission. The Company does not assume an obligation to update or revise any forward-looking statements subsequent to the date on which they are made.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies comply with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The accounting policy relating to the allowance for loan losses is critical to the understanding of our results of operations since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.
Allowance for Loan Losses. The Company maintains the allowance for loan losses at a level that is sufficient to absorb credit losses inherent in its loan portfolio. The allowance consists of specific and general components. The allowance is determined based on the application of loss estimates to graded loans by categories. Management determines the level of the allowance for loan losses based on its evaluation of the collectibility of the loan portfolio, including the composition of the portfolio, historical loan loss experience, specific impaired loans, and general economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated future cash flows. Allocation of the allowance may be made for specific loans or loan categories, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
The allowance for loan losses is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs of specific loans, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited directly to the provision for loan losses. Based on our calculation, an allowance of $4.5 million was the loss estimate within the loan portfolio as of December 31, 2004. This estimate resulted in a provision for loan losses on the income statement of $1.1 million during 2004.
12
HIGHLIGHTS
The Company reported net income of $2,588,000 during 2004 compared with $2,302,000 for 2003, an increase of 12.4%. The increase in earnings was driven by the continued growth of the Company’s interest earning assets, primarily from net growth in the loan portfolio, and principally supported by a 20.5% increase in total deposits. Additional funding was derived from the issuance of $7.0 million in convertible trust preferred securities during June of 2004. The Company’s book value per common share increased from $16.13 per share at December 31, 2003 to $ 16.27 per share at December 31, 2004.
The following table summarizes selected financial information regarding the Company’s financial performance:
Table 1 – Summary
|
|
|
For the Year Ended December 31, |
|
|||||||
|
(Dollars in thousands, except per share amounts) |
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,588 |
|
$ |
2,302 |
|
$ |
2,126 |
|
|
Basic earnings per share |
|
|
0.98 |
|
|
0.88 |
|
|
0.79 |
|
|
Diluted earnings per share |
|
|
0.97 |
|
|
0.87 |
|
|
0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.47 |
% |
|
0.47 |
% |
|
0.47 |
% |
|
Return on average equity |
|
|
6.10 |
|
|
5.37 |
|
|
4.91 |
|
Total assets grew 13.2% during 2004 to $590.1 million from $521.3 million at December 31, 2003. Total net loans grew 15.6% during 2004 to $450.7 million, mostly a result of growth in the commercial real estate, residential real estate and home equity loan portfolios. Total deposits increased $70.0 million during 2004 to $411.3 million as substantive growth occurred in non-interest and interest bearing demand deposits as well as time deposit accounts. The Company will continue to seek loans and deposits by focusing on and developing relationships with commercial and retail customers within its market areas. During the fourth quarter of 2005, the Company expects to open a new, full service banking office in Louisville, Kentucky. The Company expects that the new branch office will enhance its ability to increase its deposit market share within the Jefferson County, Kentucky market.
Results of Operations
Net Interest Income
The Company’s principal revenue source is net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and the interest expense on the liabilities used to fund those assets, such as interest-bearing deposits and borrowings. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities as well as changes in market interest rates.
Net interest income increased $1.4 million, or 10.4%, to $15.0 million for 2004 compared to $13.6 million in 2003. The increase in net interest income is attributable to the growth of the Company’s interest earning assets (primarily within the loan portfolio). The Company’s net interest rate spread decreased to 2.61% for 2004 from 2.66% in 2003, and its net interest margin decreased to 2.89% for 2004 from 2.95% in 2003. In addition, net interest income was significantly impacted by the $777,000 of interest income recognized on the Company’s interest rate swaps during 2004 (See Note 12 to the Consolidated Financial Statements).
Average interest-earning assets increased 12.5% during 2004 to $518.6 million , compared to a 9.7% increase during 2003. The increase in each of these periods primarily resulted from growth in average loans funded by increases in average deposits. The increase in loans is attributable to the Company’s continued focus on commercial business, commercial and residential real estate, and home equity lending. Average loans grew $48.8 million , or 13.3%, to $416.9 million for 2004 compared to $368.0 million in 2003, while the loan yield declined to 5.77% for 2004 from 6.02% in 2003 in response to sustained lower market interest rates. The Company attributes the growth in commercial loans to its local presence in the markets it serves and its ability to meet the needs of its commercial customers through local decision making and rapid responses to customer inquiries. Additionally, the Company continued to benefit from its expanded presence in the Jefferson County, Kentucky market.
Residential real estate demand continued to be strong as sustained lower interest rates continued to prevail throughout 2004. During 2004, residential mortgage loans retained by the Company increased $5.6 million, which includes the sale of $7.5 million in mortgage loans during March of 2004. Currently, the Company retains and services substantially all ten year, and some fifteen and thirty year mortgage loans , depending upon specific customer relationships. The demand for home equity loans continued to be high during 2004 as a low introductory rate coupled with an increased emphasis on retail cross-selling stimulated origination of home equity lines of credit, which increased $7.1 million, or 16.7%, from 2003.
Average interest-bearing liabilities grew $51.9 million to $465.9 million, an increase of 12.5% from 2003, while the cost of interest-bearing liabilities declined to 2.75% for 2004 from 2.82% in 2003. The increase in average interest-bearing liabilities was primarily attributable to the growth in average deposits , which increased 18.3% from 2003. The Company attributes the growth in average interest-bearing deposits to its experienced commercial sales staff and a focused commitment on improving customer service throughout its retail delivery systems.
While there can be no assurance as to the tangible long-term impact that the current interest rate environment will have on the Company’s future levels of net interest income and net interest margin, it is presently anticipated, assuming no growth in interest-
13
earning assets and interest-bearing liabilities and the pricing sensitivity and asset/liability mix of the Company’s balance sheet, that the Company’s net interest margin will remain stable for 2005 when compared with 2004.
For 2003, net interest income increased $1.9 million or 16.1% to $13.6 million compared to $11.7 million in 2002. The Company’s net interest rate spread rose 20 basis points to 2.66% for 2003 from 2.46% in 2002, and its net interest margin increased to 2.95% for 2003 from 2.78% in 2002. The increase in the Company’s net interest margin was primarily the result of the cost of interest bearing liabilities declining faster than the yield on interest-earning assets. In addition, net interest income was positively impacted by $771,000 of interest income recognized on the Company’s interest rate swaps.
Table 2 provides detailed information as to average balances, interest income/expense, and rates by major balance sheet category for 2002 through 2004.
Table 2 - Average Balance Sheets and Rates for Years Ended 2004, 2003 and 2002
|
|
|
2004 |
|
2003 |
|
2002 |
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
|
(Dollars in thousands) |
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest -bearing deposits
with banks |
|
$ |
3,398 |
|
$ |
42 |
|
|
1.24 |
% |
$ |
3,018 |
|
$ |
39 |
|
1.29 |
% |
$ |
5,821 |
|
$ |
124 |
|
|
2.13 |
% |
|
|
|
Taxable securities |
|
|
81,364 |
|
|
2,929 |
|
|
3.60 |
|
|
67,501 |
|
|
2,047 |
|
|
3.03 |
|
|
85,868 |
|
|
3,698 |
|
|
4.31 |
|
|
|
Tax-exempt securities |
|
|
8,742 |
|
|
376 |
|
|
4.30 |
|
|
14,441 |
|
|
630 |
|
|
4.36 |
|
|
10,804 |
|
|
500 |
|
|
4.63 |
|
|
|
Total loans and fees(1)(2) |
|
|
416,857 |
|
|
24,073 |
|
|
5.77 |
|
|
368,032 |
|
|
22,145 |
|
|
6.02 |
|
|
310,004 |
|
|
20,278 |
|
|
6.54 |
|
|
|
FHLB stock |
|
|
8,196 |
|
|
366 |
|
|
4.47 |
|
|
7,826 |
|
|
391 |
|
|
5.00 |
|
|
7,674 |
|
|
452 |
|
|
5.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
518,557 |
|
|
27,786 |
|
|
5.36 |
|
|
460,818 |
|
|
25,252 |
|
|
5.48 |
|
|
420,171 |
|
|
25,052 |
|
|
5.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan
losses |
|
|
(4,472 |
) |
|
|
|
|
|
|
|
(3,917 |
) |
|
|
|
|
|
|
|
(3,325 |
) |
|
|
|
|
|
|
|
|
Non-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
10,734 |
|
|
|
|
|
|
|
|
8,440 |
|
|
|
|
|
|
|
|
8,635 |
|
|
|
|
|
|
|
|
|
Bank premises and equipment,
net |
|
|
11,683 |
|
|
|
|
|
|
|
|
11,330 |
|
|
|
|
|
|
|
|
11,371 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
16,185 |
|
|
|
|
|
|
|
|
15,470 |
|
|
|
|
|
|
|
|
12,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
552,687 |
|
|
|
|
|
|
|
$ |
492,141 |
|
|
|
|
|
|
|
$ |
449,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and other |
|
$ |
172,722 |
|
$ |
1,999 |
|
|
1.16 |
% |
$ |
145,605 |
|
|
1,124 |
|
|
0.77 |
% |
$ |
128,140 |
|
$ |
1,805 |
|
|
1.41 |
% |
|
|
Time deposits |
|
|
169,355 |
|
|
5,241 |
|
|
3.09 |
|
|
143,590 |
|
|
5,019 |
|
|
3.50 |
|
|
129,351 |
|
|
5,734 |
|
|
4.43 |
|
|
|
Short-term borrowings |
|
|
36,572 |
|
|
409 |
|
|
1.12 |
|
|
36,206 |
|
|
311 |
|
|
0.86 |
|
|
31,319 |
|
|
354 |
|
|
1.13 |
|
|
|
FHLB advances |
|
|
83,340 |
|
|
4,979 |
|
|
5.97 |
|
|
88,538 |
|
|
5,221 |
|
|
5.90 |
|
|
92,709 |
|
|
5,461 |
|
|
5.89 |
|
|
|
Subordinated debentures |
|
|
3,893 |
|
|
168 |
|
|
4.32 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing
liabilities |
|
|
465,882 |
|
|
12,796 |
|
|
2.75 |
|
|
413,939 |
|
|
11,675 |
|
|
2.82 |
|
|
381,519 |
|
|
13,354 |
|
|
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
deposits |
|
|
40,631 |
|
|
|
|
|
|
|
|
32,414 |
|
|
|
|
|
|
|
|
23,089 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
3,737 |
|
|
|
|
|
|
|
|
2,900 |
|
|
|
|
|
|
|
|
1,502 |
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
42,437 |
|
|
|
|
|
|
|
|
42,888 |
|
|
|
|
|
|
|
|
43,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Total liabilities and
shareholders’ equity |
|
$ |
552,687 |
|
|
|
|
|
|
|
$ |
492,141 |
|
|
|
|
|
|
|
$ |
449,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
$ |
14,990 |
|
|
|
|
|
|
|
$ |
13,577 |
|
|
|
|
|
|
|
$ |
11,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Net interest spread |
|
|
|
|
|
|
|
|
2.61 |
% |
|
|
|
|
|
|
|
2.66 |
% |
|
|
|
|
|
|
|
2.46 |
% |
|
|
Net interest margin |
|
|
|
|
|
|
|
|
2.89 |
% |
|
|
|
|
|
|
|
2.95 |
% |
|
|
|
|
|
|
|
2.78 |
% |
|
|
(1)
|
The amount of fee income included in interest on loans was $610, $657, and $187 for the years ended December 31, 2004, 2003, and 2002, respectively. |
|
|
|
|
(2) |
Includes loans held for sale and non-accruing loans in the average loan amounts outstanding. |
Table 3 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.
14
Table 3 - Volume/Rate Variance Analysis
|
|
|
Year Ended December 31, 2004 |
|
Year Ended December 31, 2003 |
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
|
|
|
INCREASE/(DECREASE) |
|
INCREASE/(DECREASE) |
|
|||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
|
|
|
Total Net |
|
Volume |
|
Rate |
|
Total Net |
|
Volume |
|
Rate |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
(Dollars in thousands) |
|
|||||||||||||||||||||
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Interest-bearing deposits
with banks |
|
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
(2 |
) |
|
$ |
(85 |
) |
|
$ |
(47 |
) |
$ |
(38 |
) |
|
Taxable securities |
|
|
|
882 |
|
|
|
462 |
|
|
|
420 |
|
|
|
(1,651 |
) |
|
|
(693 |
) |
|
(958 |
) |
|
Tax-exempt securities |
|
|
|
(254 |
) |
|
|
(245 |
) |
|
|
(9 |
) |
|
|
130 |
|
|
|
160 |
|
|
(30 |
) |
|
Total loans and fees |
|
|
|
1,928 |
|
|
|
2,847 |
|
|
|
(919 |
) |
|
|
1,867 |
|
|
|
3,583 |
|
|
(1,716 |
) |
|
FHLB stock |
|
|
|
(25 |
) |
|
|
18 |
|
|
|
(43 |
) |
|
|
(61 |
) |
|
|
9 |
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease)
in interest income |
|
|
|
2,534 |
|
|
|
3,087 |
|
|
|
(553 |
) |
|
|
200 |
|
|
|
3,012 |
|
|
(2,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and other |
|
|
|
875 |
|
|
|
238 |
|
|
|
637 |
|
|
|
(681 |
) |
|
|
220 |
|
|
(901 |
) |
|
Time deposits |
|
|
|
222 |
|
|
|
838 |
|
|
|
(616 |
) |
|
|
(715 |
) |
|
|
586 |
|
|
(1,301 |
) |
|
Short-term borrowings |
|
|
|
98 |
|
|
|
3 |
|
|
|
95 |
|
|
|
(43 |
) |
|
|
50 |
|
|
(93 |
) |
|
FHLB advances |
|
|
|
(242 |
) |
|
|
(310 |
) |
|
|
68 |
|
|
|
(240 |
) |
|
|
(246 |
) |
|
6 |
|
|
Subordinated debentures |
|
|
|
168 |
|
|
|
168 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease)
in interest expense |
|
|
|
1,121 |
|
|
|
937 |
|
|
|
184 |
|
|
|
(1,679 |
) |
|
|
610 |
|
|
(2,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net
interest income |
|
|
$ |
1,413 |
|
|
$ |
2,150 |
|
|
$ |
(737 |
) |
|
$ |
1,879 |
|
|
$ |
2,402 |
|
$ |
(523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Income
Non-interest income was $3.3 million for 2004, $3.7 million for 2003, and $3.2 million for 2002. Non-interest income decreased during 2004 primarily because of a decrease in gains on the sales of available for sale securities and mortgage loans. Partially offsetting the decrease in the aforementioned gains was an increase in service charges on deposit accounts. The Company continues to emphasize the importance of exceptional customer service and believes this emphasis facilitated the opening of a significant number of new demand deposit accounts during 2004 and 2003, which helped contribute to a 18.4% and 55.2% increase in service charges on deposit accounts for 2004 and 2003, respectively.
Table 4 provides a breakdown of the Company’s non-interest income during the past three years.
Table 4 - Analysis of Non-interest Income
|
|
|
Year Ended December 31, |
|
Percent Increase/(Decrease) |
|
||||||||||||||
|
|
|
|
|
|
|
||||||||||||||
|
(Dollars in
thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2004/2003 |
|
2003/2002 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit
accounts |
|
$ |
2,021 |
|
$ |
1,707 |
|
$ |
1,100 |
|
|
18.4 |
% |
|
|
55.2 |
% |
|
|
|
Commission income |
|
|
64 |
|
|
109 |
|
|
330 |
|
|
(41.3 |
) |
|
|
(67.0 |
) |
|
|
|
Gain on sale of mortgage
loans |
|
|
322 |
|
|
592 |
|
|
457 |
|
|
(45.6 |
) |
|
|
29.5 |
|
|
|
|
Loan servicing income, net
of amortization |
|
|
49 |
|
|
(53 |
) |
|
96 |
|
|
192.5 |
|
|
|
(155.2 |
) |
|
|
|
Increase in cash surrender
value of life insurance |
|
|
493 |
|
|
543 |
|
|
514 |
|
|
(9.2 |
) |
|
|
5.6 |
|
|
|
|
Other |
|
|
184 |
|
|
133 |
|
|
152 |
|
|
38.3 |
|
|
|
(12.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
3,133 |
|
|
3,031 |
|
|
2,649 |
|
|
3.4 |
% |
|
|
14.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of available
for sale securities |
|
|
138 |
|
|
653 |
|
|
511 |
|
|
(78.9 |
) |
|
|
27.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,271 |
|
$ |
3,684 |
|
$ |
3,160 |
|
|
(11.2 |
)% |
|
|
16.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The market interest rate environment heavily influences revenue from mortgage banking activities. The decrease in net gain on sale of mortgage loans from 2003 to 2004 reflects decreased refinancing activity as mortgage interest rates were generally higher in 2004 than 2003. The increase in gain on sale of mortgage loans from 2002 to 2003 was due to the sustained lower interest rates of 2003 continuing to spur refinancing activity. Management expects gains on sales of mortgage loans to increase for 2005 due to the Company’s entrance into the wholesale mortgage lending market which will allow the Company to serve a broader range of customers by increasing its number of active loan originators.
Gain on sale of available for sale securities decreased $515,000 for 2004 from 2003 and increased $142,000 for 2003 from 2002. The Company sells securities during the year in response to specific cash needs as identified through its liquidity management process. The Company purchases securities during the year at times when cash on hand exceeds expected usage over a relatively short time horizon (30-90 days) or as deemed necessary by management.
Commission income for 2004 and 2003 was considerably lower when compared with 2002. Management attributes this decline in commission income to a major change in its business model related to non-deposit investment products. In an effort to better position this business line for future growth, on May 15, 2003 the Company announced the formation of a retail brokerage strategic alliance with Smith Barney. In June of 2003, a Smith Barney Investment Center opened at the Company’s headquarters in New Albany, Indiana. At that time, the investment and brokerage services operations of Heritage Financial Services was assumed by Smith Barney. Heritage Financial Services, a division of the Company, reported gross commission income as a component of non-interest income with the corresponding costs recorded as a component of non-interest expense. As a result of the Smith Barney strategic alliance, commissions are now recorded as a percentage of the revenues generated by Smith Barney; therefore the Bank does not incur costs under this arrangement.
15
Non-interest Expense
Total non-interest expense increased 6.1% to $13.9 million in 2004 when compared with 2003 as a result of increases in salaries and employee benefits and occupancy and equipment expenses. Total non-interest expense increased 19.8% to $13.1 million in 2003 when compared with 2002 as a result of increases in salaries and employee benefits, occupancy and equipment, data processing, and other expenses. The Company expects that non-interest expense will increase approximately 15% during 2005 as it continues to make infrastructure improvements to support the future growth of the Company. Additionally, the Company plans to open a new, full service banking facility during the fourth quarter of 2005.
Table 5 provides a breakdown of the Company’s non-interest expense for the past three years.
Table 5 - Analysis of Non-interest Expense
|
|
|
Year Ended in December 31, |
|
Percent Increase/(Decrease) |
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
(Dollars in thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2004/2003 |
|
2003/2002 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Salaries and employee
benefits |
|
$ |
7,679 |
|
$ |
7,097 |
|
$ |
5,967 |
|
8.2 |
% |
|
18.9 |
% |
|
|
Occupancy |
|
|
1,130 |
|
|
957 |
|
|
823 |
|
18.1 |
|
|
16.3 |
|
|
|
Equipment |
|
|
1,231 |
|
|
989 |
|
|
871 |
|
24.5 |
|
|
13.5 |
|
|
|
Data processing |
|
|
1,333 |
|
|
1,407 |
|
|
1,106 |
|
(5.3 |
) |
|
27.2 |
|
|
|
Marketing and advertising |
|
|
387 |
|
|
287 |
|
|
373 |
|
34.8 |
|
|
(23.1 |
) |
|
|
Other |
|
|
2,143 |
|
|
2,367 |
|
|
1,798 |
|
(9.5 |
) |
|
31.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,903 |
|
$ |
13,104 |
|
$ |
10,938 |
|
6.1 |
% |
|
19.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits, the largest component of non-interest expense, increased 8.2% to $7.7 million in 2004 compared with $7.1 million for 2003 due to the growth in the Company’s level of staffing to 169 full-time equivalent employees at December 31, 2004 from 154 full-time equivalent employees at December 31, 2003. In addition, the Company accrued bonuses during 2004 (paid in 2005) to key managers based on the achievement of certain corporate performance objectives. The Company attributes most of the increase between 2002 and 2003 to the additional employees that were required to staff the opening of new banking offices .
Occupancy and equipment expenses increased 21.3% to $2.4 million in 2004 compared with $1.9 million for 2003 due to increased facilities expenses, primarily rent expense, and increased depreciation expense related to the acquisition of fixed assets needed to support the growth of the Company. Occupancy and equipment expenses increased 14.9% for 2003 compared to 2002 primarily due to the same factors that affected the change for 2004.
Data processing expense decreased 5.3% to $1.3 million in 2004 compared with $1.4 million for 2003 due to the lower costs associated with the change in data processors that took place during 2003. Data processing expense increased 27.2% during 2003 compared to 2002 as the Company completed a data processor conversion and undertook infrastructure improvements related to the continued growth of the Company.
Marketing and advertising expense increased 34.8% to $387,000 in 2004 compared with $287,000 for 2003 due to an expansion in the marketing department undertaken to increase the Company’s presence in its primary market areas. Marketing and advertising expense decreased 23.1% during 2003 as the Company looked to limit non-interest expenses in an effort to offset historically low market interest rates and lower than anticipated net interest income.
Other operating expenses decreased 9.5% to $2.1 million in 2004 compared with $2.4 million for 2003 primarily because of one time expenses recorded in 2003 associated with a $163,000 loss on the sale of other real estate, a $150,000 accrual associated with a lawsuit settlement and expenses of approximately $76,000 related to the restructuring of its Heritage Financial Services division. Other operating expenses increased 31.6% for 2003 compared with 2002 primarily for the same aforementioned reasons.
Financial Condition
Loan Portfolio
The Company experienced loan growth of 15.6% during 2004 as total net loans increased $60.7 million to $450.7 million at December 31, 2004. Commercial real estate loans, which comprised 40.9% of the total gross loans at December 31, 2004, grew 15.4% and benefited from the addition of experienced commercial lenders and the Company’s continued expansion in the Louisville, Kentucky market.
Residential real estate loans increased 5.9% from $95.0 million at December 31, 2003 to $100.6 million at December 31, 2004. The increase in residential mortgage loans was the result of management’s decision to retain approximately $12.5 million in residential mortgage loans during the fourth quarter of 2004. These loans should have a positive impact on the Company’s 2005 net interest income but may negatively impact the Company’s net interest spread and net interest margin.
Home equity loans increased 16.7% from $42.6 million at December 31, 2003 to $49.7 million at December 31, 2004. Management attributes the increase to continued low market interest rates and an increased emphasis on cross-selling by the Company’s retail staff.
At the end of 2004, the Company was servicing $30.6 million in mortgage loans for other investors compared to $ 28.8 million in 2003. Loans serviced for others consist of loans the Company has sold to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation with servicing rights retained by the Company.
16
The Company’s lending activities remain primarily concentrated within its existing markets, and are principally comprised of loans secured by single-family residential housing developments, owner occupied manufacturing and retail facilities, general business assets, and single-family residential real estate. The Company emphasizes the acquisition of deposit relationships from new and existing commercial business and real estate loan clients.
Table 6 provides a breakdown of the Company’s loans by type during the past five years.
Table 6 - Loans by Type
|
|
|
As of December 31, |
|
|||||||||||||
|
(Dollars in
thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
100,553 |
|
$ |
94,975 |
|
$ |
81,618 |
|
$ |
81,249 |
|
$ |
91,310 |
|
|
Commercial |
|
|
186,175 |
|
|
161,343 |
|
|
119,196 |
|
|
90,291 |
|
|
87,577 |
|
|
Construction |
|
|
38,638 |
|
|
15,691 |
|
|
13,972 |
|
|
14,506 |
|
|
6,928 |
|
|
Commercial |
|
|
73,374 |
|
|
72,981 |
|
|
70,234 |
|
|
80,622 |
|
|
77,662 |
|
|
Home Equity |
|
|
49,677 |
|
|
42,562 |
|
|
29,595 |
|
|
19,818 |
|
|
14,017 |
|
|
Consumer |
|
|
6,095 |
|
|
5,962 |
|
|
10,488 |
|
|
10,011 |
|
|
11,630 |
|
|
Loans secured by deposit
accounts |
|
|
687 |
|
|
546 |
|
|
345 |
|
|
563 |
|
|
999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
455,199 |
|
$ |
394,060 |
|
$ |
325,448 |
|
$ |
297,060 |
|
$ |
290,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 7 illustrates the Company’s fixed rate maturities and repricing frequency for the loan portfolio.
Table 7 - Selected Loan Distribution
|
As of December 31, 2004 |
|
Total |
|
One |
|
Over One |
|
Over |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Fixed rate maturities
|
|
$ |
128,835 |
|
$ |
12,944 |
|
|
$ |
28,961 |
|
|
$ |
86,930 |
|
|
Variable rate repricing
frequency |
|
|
326,364 |
|
|
229,507 |
|
|
|
87,231 |
|
|
|
9,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
455,199 |
|
$ |
242,451 |
|
|
$ |
116,192 |
|
|
$ |
96,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance and Provision for Loan Losses
Federal regulations require insured institutions to classify their assets on a regular basis. The regulations provide for three categories of classified loans: substandard, doubtful and loss. The regulations also contain a special mention and a specific allowance category. Special mention is defined as loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management’s close attention. If an asset or portion thereof is classified as loss, the insured institution must either establish specified allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge off such amount.
The Company maintains the allowance for loan losses at a level that is sufficient to absorb credit losses inherent in its loan portfolio. The allowance is determined based on the application of loss estimates to graded loans by categories. Management determines the level of the allowance for loan losses based on its evaluation of the collectibility of the loan portfolio, including the composition of the portfolio, historical loan loss experience, specific impaired loans, and general economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated future cash flows. The allowance for loan losses is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs of specific loans, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited directly to the provision for loan losses. At December 31, 2004, the Company’s allowance for loan losses totaled $4.5 million as compared to $4.0 million and $3.8 million at December 31, 2003 and 2002, respectively.
Provisions for loan losses are charged against earnings to bring the total allowance for loan losses to a level considered adequate by management based on historical experience, the volume and type of lending conducted by the Bank, the status of past due principal and interest payments, general economic conditions, and inherent credit risk related to the collectibility of the Bank’s loan portfolio. The provision for loan losses was $1,105,000 for the year ended December 31, 2004 as compared to $1,274,000 for 2003 and $1,144,000 for 2002. Management attributes the decrease in the provision for loan losses for 2004 to a reduction in classified loan balances from $20.3 million at December 31, 2003 to $12.5 million at December 31, 2004. Net charge-offs were $616,000 during 2004 as compared to $1,054,000 and $360,000 for 2003 and 2002, respectively. Net charge-offs for 2004 decreased substantially from 2003 because of a decrease in commercial real estate loan charge-offs as the general improvement in the economy led to improved credit quality.
Statements made in this section regarding the adequacy of the allowance for loan losses are forward-looking statements that may or may not be accurate due to the impossibility of predicting future events. Because of uncertainties intrinsic in the estimation process, management’s estimate of credit losses inherent in the loan portfolio and the related allowance may differ from actual results.
Table 8 provides the Company’s loan charge-off and recovery activity during the past five years.
17
Table 8 - Summary of Loan Loss Experience
|
|
|
Year Ended in December 31, |
|
|||||||||||||||
|
|
|
|
|
|||||||||||||||
|
(Dollars in
thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Allowance for loan losses
at beginning of year |
|
$ |
4,034 |
|
$ |
3,814 |
|
$ |
3,030 |
|
$ |
2,869 |
|
$ |
1,741 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Residential real estate |
|
|
(22 |
) |
|
(24 |
) |
|
(24 |
) |
|
(10 |
) |
|
— |
|
|
|
|
Commercial real estate |
|
|
(339 |
) |
|
(815 |
) |
|
(297 |
) |
|
(254 |
) |
|
— |
|
|
|
|
Construction |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
Commercial business |
|
|
(245 |
) |
|
(158 |
) |
|
(189 |
) |
|
(45 |
) |
|
(52 |
) |
|
|
|
Home equity |
|
|
(22 |
) |
|
(23 |
) |
|
— |
|
|
(15 |
) |
|
— |
|
|
|
|
Consumer |
|
|
(52 |
) |
|
(55 |
) |
|
(48 |
) |
|
(48 |
) |
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Total |
|
|
(680 |
) |
|
(1,075 |
) |
|
(558 |
) |
|
(372 |
) |
|
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Residential real estate |
|
|
1 |
|
|
— |
|
|
— |
|
|
2 |
|
|
— |
|
|
|
|
Commercial real estate |
|
|
24 |
|
|
13 |
|
|
192 |
|
|
3 |
|
|
— |
|
|
|
|
Construction |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
Commercial business |
|
|
18 |
|
|
2 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
Home equity |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
Consumer |
|
|
21 |
|
|
6 |
|
|
6 |
|
|
8 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Total |
|
|
64 |
|
|
21 |
|
|
198 |
|
|
13 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Net loan charge-offs |
|
|
(616 |
) |
|
(1,054 |
) |
|
(360 |
) |
|
(359 |
) |
|
(69 |
) |
||
|
Provision for loan losses |
|
|
1,105 |
|
|
1,274 |
|
|
1,144 |
|
|
520 |
|
|
1,197 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Allowance for loan losses
at end of year |
|
$ |
4,523 |
|
$ |
4,034 |
|
$ |
3,814 |
|
$ |
3,030 |
|
$ |
2,869 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Allowance for loan losses
to total loans |
|
|
0.99 |
% |
|
1.02 |
% |
|
1.17 |
% |
|
1.02 |
% |
|
0.99 |
% |
|
|
|
Net loan charge-offs to average
loans |
|
|
0.15 |
|
|
0.29 |
|
|
0.12 |
|
|
0.13 |
|
|
0.03 |
|
|
|
|
Allowance for loan losses
to non-performing loans |
|
|
285 |
|
|
223 |
|
|
120 |
|
|
186 |
|
|
252 |
|
|
The following table depicts management’s allocation of the allowance for loan losses by loan type during the last five years. Allowance funding and allocation is based on management’s assessment of economic conditions, past loss experience, loan volume, past-due history and other factors. Since these factors and management’s assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance. Allocations of the allowance may be made for specific loans or loan categories, but the entire allowance is available for any loan that may be charged off. Loan losses are charged against the allowance when management deems a loan uncollectible.
Table 9 - Management’s Allocation of the Allowance for Loan Losses
|
|
|
As of December 31, |
|
||||||||||||||||||||||
|
|
|
|
|
||||||||||||||||||||||
|
|
|
2004 |
|
2003 |
|
2002 |
|
||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
(Dollars in
thousands)
|
|
Allowance |
|
Percent of Loans |
|
Allowance |
|
Percent of Loans |
|
Allowance |
|
Percent of Loans |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Residential Real Estate
|
|
|
$ |
325 |
|
|
22.1 |
% |
|
|
$ |
342 |
|
|
24.3 |
% |
|
|
$ |
319 |
|
|
25.2 |
% |
|
|
Commercial Real Estate |
|
|
|
2,162 |
|
|
40.9 |
% |
|
|
|
1,769 |
|
|
40.9 |
% |
|
|
|
1,321 |
|
|
36.6 |
% |
|
|
Construction |
|
|
|
17 |
|
|
8.5 |
% |
|
|
|
5 |
|
|
4.0 |
% |
|
|
|
80 |
|
|
4.3 |
% |
|
|
Commercial Business |
|
|
|
1,533 |
|
|
16.1 |
% |
|
|
|
1,436 |
|
|
18.5 |
% |
|
|
|
1,764 |
|
|
21.6 |
% |
|
|
Home Equity |
|
|
|
389 |
|
|
10.9 |
% |
|
|
|
371 |
|
|
10.8 |
% |
|
|
|
224 |
|
|
9.1 |
% |
|
|
Consumer |
|
|
|
97 |
|
|
1.5 |
% |
|
|
|
111 |
|
|
1.5 |
% |
|
|
|
106 |
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$ |
4,523 |
|
|
100.0 |
% |
|
|
$ |
4,034 |
|
|
100.0 |
% |
|
|
$ |
3,814 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
||||||||||||||
|
|
|
|
|
||||||||||||||
|
|
|
2001 |
|
2000 |
|
||||||||||||
|
|
|
|
|
|
|
||||||||||||
|
(Dollars in
thousands) |
|
Allowance |
|
Percent of Loans |
|
Allowance |
|
Percent of Loans |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Residential Real Estate |
|
|
$ |
260 |
|
|
27.5 |
% |
|
|
$ |
217 |
|
|
31.8 |
% |
|
|
Commercial Real Estate |
|
|
|
1,138 |
|
|
30.4 |
% |
|
|
|
933 |
|
|
30.2 |
% |
|
|
Construction |
|
|
|
55 |
|
|
4.9 |
% |
|
|
|
— |
|
|
2.4 |
% |
|
|
Commercial Business |
|
|
|
1,301 |
|
|
27.1 |
% |
|
|
|
1,472 |
|
|
26.8 |
% |
|
|
Home Equity |
|
|
|
150 |
|
|
6.7 |
% |
|
|
|
122 |
|
|
4.8 |
% |
|
|
Consumer |
|
|
|
126 |
|
|
3.4 |
% |
|
|
|
125 |
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$ |
3,030 |
|
|
100.0 |
% |
|
|
$ |
2,869 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality
Loans (including impaired loans under Statements of Financial Accounting Standards 114 and 118) are placed on non-accrual status when they become past due 90 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). Loans individually classified as impaired decreased from $805,000 at December 31, 2003 to $780,000 at December 31, 2004. Non-performing assets also include foreclosed real estate that has been acquired through foreclosure or acceptance of a deed in lieu of foreclosure. Foreclosed real estate is carried at the lower of cost or fair value less estimated selling costs, and is actively marketed for sale.
Total non-performing loans decreased from $1.8 million at December 31, 2003 to $1.6 million at December 31, 2004. These non-performing loans are primarily secured by real estate and, historically, the Company’s interest in the real estate securing these loans has generally been adequate to limit the Company’s exposure to significant loss. Management’s estimate of future credit losses (as evidenced by the current level of the Company’s allowance for loan losses) is inherently uncertain and may differ from actual results.
Table 10 provides the Company’s non-performing loan experience during the past five years.
18
Table 10 - Non-Performing Assets
|
|
|
As of December 31, |
|
|||||||||||||
|
|
|
|
|
|||||||||||||
|
(Dollars in
thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans on non-accrual status
(1) |
|
$ |
1,588 |
|
$ |
1,788 |
|
$ |
3,171 |
|
$ |
1,588 |
|
$ |
1,052 |
|
|
Loans past due 90 days or
more and still accruing |
|
|
— |
|
|
25 |
|
|
— |
|
|
39 |
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
|
1,588 |
|
|
1,813 |
|
|
3,171 |
|
|
1,627 |
|
|
1,138 |
|
|
Other real estate owned |
|
|
106 |
|
|
610 |
|
|
630 |
|
|
560 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
1,694 |
|
$ |
2,423 |
|
$ |
3,801 |
|
$ |
2,187 |
|
$ |
1,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of non
-performing loans to total loans |
|
|
0.35 |
% |
|
0.46 |
% |
|
0.97 |
% |
|
0.55 |
% |
|
0.39 |
% |
|
Percentage of non
-performing assets to total loans |
|
|
0.37 |
|
|
0.61 |
|
|
1.17 |
|
|
0.74 |
|
|
0.39 |
|
(1) Impaired loans on non-accrual status are included in loans. See Note 3 to the Consolidated Financial Statements for additional discussion on impaired loans.
Investment Securities
Table 11 sets forth the breakdown of the Company’s securities portfolio for the past five years.
Table 11 - Securities Portfolio
|
|
|
December 31, |
|
||||||||||||||
|
|
|
|
|
||||||||||||||
|
(Dollars in
thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Securities Available for
Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal
agency |
|
$ |
4,739 |
|
$ |
— |
|
$ |
8,756 |
|
$ |
27,089 |
|
$ |
54,572 |
|
|
|
State and municipal |
|
|
6,613 |
|
|
15,246 |
|
|
13,040 |
|
|
10,707 |
|
|
7,219 |
|
|
|
Mortgage-backed |
|
|
63,943 |
|
|
52,657 |
|
|
61,295 |
|
|
54,354 |
|
|
23,651 |
|
|
|
Corporate bonds |
|
|
14,611 |
|
|
14,990 |
|
|
9,283 |
|
|
6,951 |
|
|
994 |
|
|
|
Mutual Funds |
|
|
246 |
|
|
250 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available
for sale |
|
$ |
90,152 |
|
$ |
83,143 |
|
$ |
92,374 |
|
$ |
99,101 |
|
$ |
86,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 12 sets forth the breakdown of the Company’s investment securities available for sale by type and maturity as of December 31, 2004.
Table 12 - Investment Securities Available for Sale
|
|
|
As of December 31, 2004 |
|
|||||||||||||
|
|
|
|
|
|||||||||||||
|
(Dollars in
thousands)
|
|
Amortized |
|
Fair Value |
|
Weighted |
|
|||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
U.S. Government and federal
agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over one through five years |
|
|
$ |
4,803 |
|
|
|
$ |
4,739 |
|
|
|
2.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over one through five years |
|
|
|
533 |
|
|
|
|
553 |
|
|
|
4.08 |
% |
|
|
|
Over five through ten years |
|
|
|
2,570 |
|
|
|
|
2,702 |
|
|
|
4.73 |
|
|
|
|
Over ten years |
|
|
|
3,254 |
|
|
|
|
3,358 |
|
|
|
5.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total state and municipal |
|
|
|
6,357 |
|
|
|
|
6,613 |
|
|
|
4.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over one through five years |
|
|
|
4,257 |
|
|
|
|
4,177 |
|
|
|
2.75 |
% |
|
|
|
Over ten years |
|
|
|
10,388 |
|
|
|
|
10,434 |
|
|
|
4.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total corporate bonds |
|
|
|
14,645 |
|
|
|
|
14,611 |
|
|
|
3.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mutual funds |
|
|
|
250 |
|
|
|
|
246 |
|
|
|
3.63 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed
securities |
|
|
|
64,348 |
|
|
|
|
63,943 |
|
|
|
3.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
securities |
|
|
$ |
90,403 |
|
|
|
$ |
90,152 |
|
|
|
3.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Not tax equivalent basis for tax-exempt securities.
Securities available for sale increased from $83.1 million at December 31, 2003 to $90.2 million at December 31, 2004. The increase in available for sale securities was funded primarily by deposit growth and proceeds from the issuance of subordinated debentures. The current strategy for the securities portfolio is to maintain a short to intermediate average life that remains relatively stable in a changing interest rate environment, thus minimizing exposure to sustained increases in interest rates. The investment portfolio primarily consists of mortgage-backed securities, securities issued by the United States government and its agencies, securities issued by states and municipalities, and corporate bonds. Mortgage-backed securities consist primarily of obligations insured or guaranteed by Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, or Government National Mortgage Association.
Deposits
The Bank attracts deposits from the market areas it serves by offering a wide range of deposit accounts with a variety of rate structures and terms. The Bank uses interest rate risk simulations to assist management in monitoring the Bank’s deposit pricing,
19
and periodically may offer special rates on certificates of deposits and money market accounts to maintain sufficient liquidity levels. The Bank relies primarily on its retail and commercial sales staff and current customer relationships to attract and retain deposits. Market interest rates and competitive pressures can significantly affect the Bank’s ability to attract and retain deposits. The Bank’s strategic plan includes continuing to grow non-interest bearing accounts which contribute to higher levels of non-interest income and net interest margin.
Total deposits increased 20.5% to $411.3 million at December 31, 2004 compared to $341.3 million at December 31, 2003, primarily as a result of growth in money market accounts, non-interest bearing deposits, and certificates of deposit. Money market deposits increased 38.5% to $114.3 million and non-interest bearing deposits increased 27.5% to $43.8 million during 2004. Management attributes the growth in transaction accounts to its experienced commercial sales staff and a focused commitment on improving customer service throughout its retail delivery systems.
The Company anticipates that it will continue to attract a significant amount of both non-interest and interest-bearing deposits as it expands its banking operations and continues to promote its retail product offerings. Management attributes the 18.0% increase in certificates of deposit during 2004 to the Company’s use of $30.0 million in brokered certificates of deposit to fund loan growth.
Table 13 provides a profile of the Company’s deposits during the past five years.
Table 13 - Deposits
|
|
|
December 31, |
|
|||||||||||||
|
|
|
|
|
|||||||||||||
|
(Dollars in
thousands) |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand (NOW) |
|
$ |
38,243 |
|
$ |
35,973 |
|
$ |
38,008 |
|
$ |
43,378 |
|
$ |
46,945 |
|
|
Money market accounts |
|
|
114,332 |
|
|
82,546 |
|
|
74,448 |
|
|
10,782 |
|
|
— |
|
|
Savings |
|
|
26,159 |
|
|
28,456 |
|
|
30,656 |
|
|
45,897 |
|
|
41,853 |
|
|
Individual retirement
accounts-savings |
|
|
— |
|
|
— |
|
|
338 |
|
|
377 |
|
|
379 |
|
|
Individual retirement
accounts-certificates of deposit |
|
|
18,771 |
|
|
17,841 |
|
|
16,173 |
|
|
15,035 |
|
|
13,636 |
|
|
Certificates of deposit,
$100,000 and over |
|
|
65,705 |
|
|
41,028 |
|
|
28,048 |
|
|
39,030 |
|
|
45,870 |
|
|
Other certificates of
deposit |
|
|
104,259 |
|
|
101,085 |
|
|
76,369 |
|
|
81,277 |
|
|
86,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing
deposits |
|
|
367,469 |
|
|
306,929 |
|
|
264,040 |
|
|
235,776 |
|
|
234,919 |
|
|
Total non-interest bearing
deposits |
|
|
43,837 |
|
|
34,386 |
|
|
25,790 |
|
|
20,116 |
|
|
23,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
411,306 |
|
$ |
341,315 |
|
$ |
289,830 |
|
$ |
255,892 |
|
$ |
258,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Borrowings
The Company’s short-term borrowings consist of repurchase agreements, lines of credit with other financial institutions and federal funds purchased, which represent overnight liabilities to non-affiliated financial institutions. While repurchase agreements are effectively deposit equivalents, these arrangements consist of securities that are sold to commercial customers under agreements to repurchase. As presented in Note 6 of the Consolidated Financial Statements, short-term borrowings decreased $1.7 million from $45.3 million at December 31, 2003 to $43.6 million at December 31, 2004 as repurchase agreements balances increased $16.5 million, offset by an $18.2 million decrease in federal funds purchased.
Federal Home Loan Bank Advances
FHLB advances decreased from $90.2 million at December 31, 2003 to $ 82.0 million at December 31, 2004 as the Bank reduced its reliance on this type of funding in response to strong deposit growth. These advances principally consist of putable (or convertible) instruments that give the FHLB the option quarterly to put the advance back to the Bank, at which time the Bank can prepay the advance without penalty or can allow the advance to become variable adjusting to three-month Libor (London Interbank Offer Rate). However, there is a substantial penalty if the Company prepays the advances prior to the FHLB exercising its option. In calculations provided by the FHLB to the Company, three month Libor would have to rise by more than 300 basis points from December 31, 2004 levels before the FHLB would exercise its put option. These advances have various maturities through 2010 (see Note 7 to the Consolidated Financial Statements for additional information). The Company does not anticipate that it will enter into putable advances for the foreseeable future, but instead may use fixed or variable rate advances to fund balance sheet growth as needed.
Liquidity
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 Bank’s primary sources of funds are deposits; repayment of loans and mortgage-backed securities; Federal Home Loan Bank advances; maturities of investment securities and other short-term investments; and income from operations. While scheduled loan and mortgage-backed security repayments are a relatively predictable source of funds, deposit flows and loan and mortgage-backed security prepayments are greatly influenced by general interest rates, economic conditions and competition. Liquidity management is both a daily and long term function of business management. If the Bank requires funds beyond those generated internally, as of December 31, 2004 the Bank had $25.2 million in additional capacity under its borrowing agreements with the FHLB and approximately $39.0 million in federal funds purchased lines of credit with other financial institutions. The Company anticipates it will have sufficient funds available to meet current loan commitments and other credit commitments.
20
Capital
Total capital of the Company increased $492,000 during 2004 to $42.8 million as a decrease in accumulated other comprehensive income, related to the decrease in the fair values of available for sale securities and interest rate swaps, was offset by net income less dividends paid on common stock.
The Company has actively been repurchasing shares of its common stock since May 21, 1999. A net total of 371,198 shares at an aggregate cost of $5.4 million have been repurchased since that time under both the current and prior repurchase plans, with 22,864 shares at a cost of $533,000 purchased in 2004. 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 could be purchased. Through December 31, 2004, a total of $2.8 million had been expended to purchase 181,398 shares under this plan. Subsequently, the Company’s Board of Directors authorized a share repurchase plan in October 2004 under which a maximum of $5.0 million of the Company’s common stock may be purchased. Through December 31, 2004, a total of $92,000 had been expended to purchase 4,602 shares under this repurchase plan.
Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the risk inherent in the balance sheets of individual financial institutions. The Company and the Bank continue to exceed the regulatory requirements for Tier I, Tier I leverage and total risk-based capital ratios (see Note 11 to the Consolidated Financial Statements).
Off Balance Sheet Arrangements
The Company uses off balance sheet financial instruments such as commitments to make loans, credit lines and letters of credit to meet customer financing needs. These agreements provide credit or support the credit of others and usually have expiration dates but may expire without being used. In addition to credit risk, the Company also has liquidity risk associated with these commitments as funding for these obligations could be required immediately. The contractual amount of these financial instruments with off balance sheet risk was as follows at December 31, 2004:
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to make loans |
|
$ |
8,980 |
|
|
|
|
Unused lines
of credit |
|
|
142,787 |
|
|
|
|
Standby
letters of credit |
|
|
4,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
156,353 |
|
|
|
|
|
|
|
|
|
The Company also utilizes interest rate swap arrangements with a notional amount of $50 million to exchange variable payments of interest tied to the prime interest rate for receipt of fixed rate payments. 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 rate-based commercial loans to in effect convert the loans from variable interest to weighted average fixed interest rates (See Note 12 to the Consolidated Financial Statements).
Aggregate Contractual Obligations
As of December 31, 2004
|
(Dollars
in thousands) |
|
Total |
|
Less than |
|
1-3 years |
|
3-5 years |
|
More than |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
411,306 |
|
$ |
328,693 |
|
$ |
74,886 |
|
$ |
7,006 |
|
$ |
721 |
|
|
FHLB Borrowings |
|
|
82,000 |
|
|
12,000 |
|
|
— |
|
|
23,000 |
|
|
47,000 |
|
|
Lease commitments |
|
|
4,613 |
|
|
327 |
|
|
897 |
|
|
746 |
|
|
2,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
497,919 |
|
$ |
341,020 |
|
$ |
75,783 |
|
$ |
30,752 |
|
$ |
50,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits represent non-interest bearing, interest bearing, money market, savings, certificates of deposit and all other deposits held by the Company. Deposits that have an undetermined maturity period are included in the less than one-year category above.
FHLB advances represent the amounts that are due the FHLB and consist of $72.0 million in convertible fixed rate advances and $10.0 million in variable rate advances. With respect to the convertible fixed rate advances, the FHLB has the quarterly right to require the Company to choose either conversion of the fixed rate to a variable rate tied to the three month LIBOR index or prepayment of the advance without penalty. There is a substantial penalty if the Company prepays the advances before FHLB exercises its right. Management does not expect these advances to be converted in the near term.
Lease commitments represent the total minimum lease payments under noncancelable operating leases, before considering renewal options that generally are present.
21
ITEM 7A. 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 one of the Company’s most significant ongoing business risk considerations.
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 December 31, 2004 the Company’s net interest income would decrease by an estimated 1.0%, or $170,000, over the one year forecast horizon. However, considering reasonable growth assumptions, the Company expects that net interest income will grow over the forecast horizon. As of December 31, 2003, in the Up 200 Scenario the Company estimated that net interest income would decrease 4.5%, or $669,000, over a one year forecast horizon ending December 31, 2004. 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 December 31, 2004 the Company’s net interest income would decrease by an estimated 0.8%, or $123,000, over the one year forecast horizon. As of December 31, 2003, in the Down 100 Scenario the Company estimated that net interest income would increase 0.5%, or $76,000, over a one year forecast horizon ending December 31, 2004.
The projected results are within the Company’s asset/liability management policy limits, which states that 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 curtail 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. Such profile is also influenced by market interest rates, deposit growth, loan growth, and other factors.
22
The following tables, which 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, illustrate the Company’s estimated one year net interest income sensitivity profile based on the above referenced asset/liability model as of December 31, 2004 and 2003, respectively:
Interest Rate Sensitivity For 2004
|
(Dollars in thousands) |
|
Gradual |
|
BASE |
|
Gradual |
|
||||||||||
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
$ |
25,845 |
|
|
|
$ |
26,660 |
|
|
|
$ |
28,361 |
|
|
|
|
Investments |
|
|
|
3,606 |
|
|
|
|
3,681 |
|
|
|
|
3,837 |
|
|
|
|
FHLB stock |
|
|
|
355 |
|
|
|
|
355 |
|
|
|
|
355 |
|
|
|
|
Interest -bearing deposits
in other financial institutions |
|
|
|
32 |
|
|
|
|
42 |
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
|
29,838 |
|
|
|
|
30,738 |
|
|
|
|
32,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
7,990 |
|
|
|
|
8,457 |
|
|
|
|
9,887 |
|
|
|
|
Federal funds purchased and
repurchase agreements |
|
|
|
570 |
|
|
|
|
811 |
|
|
|
|
1,292 |
|
|
|
|
FHLB advances |
|
|
|
4,598 |
|
|
|
|
4,637 |
|
|
|
|
4,713 |
|
|
|
|
Subordinated debentures |
|
|
|
344 |
|
|
|
|
374 |
|
|
|
|
434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
|
13,502 |
|
|
|
|
14,279 |
|
|
|
|
16,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
$ |
16,336 |
|
|
|
$ |
16,459 |
|
|
|
$ |
16,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from base |
|
|
$ |
(123 |
) |
|
|
|
|
|
|
|
$ |
(170 |
) |
|
|
|
% Change from base |
|
|
|
(0.75 |
)% |
|
|
|
|
|
|
|
|
(1.03 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Sensitivity For 2003
|
(Dollars in thousands)
|
|
Gradual |
|
BASE |
|
Gradual |
|
||||||||||
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
$ |
22,244 |
|
|
|
$ |
22,654 |
|
|
|
$ |
23,538 |
|
|
|
|
Investments |
|
|
|
2,987 |
|
|
|
|
3,064 |
|
|
|
|
3,196 |
|
|
|
|
FHLB stock |
|
|
|
400 |
|
|
|
|
400 |
|
|
|
|
400 |
|
|
|
|
Interest -bearing deposits
in other financial institutions |
|
|
|
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 |
) |
|
|
|
% Change from base |
|
|
|
0.50 |
% |
|
|
|
|
|
|
|
|
(4.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMMUNITY BANK SHARES OF INDIANA, INC.
New Albany, Indiana
FINANCIAL STATEMENTS
December 31, 2004, 2003, and 2002
CONTENTS
|
|
|
|
|
|
|
|
25 |
|
||
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
|
|
24 |
Report of Independent Registered Public Accounting Firm
Board
of Directors and Shareholders
Community Bank Shares of Indiana, Inc.
New Albany, Indiana
We have audited the accompanying consolidated balance sheets of Community Bank Shares of Indiana, Inc as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Community Bank Shares of Indiana, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with United States generally accepted accounting principles.
|
|
|
Crowe Chizek and Company LLC |
|
Louisville, Kentucky |
|
|
|
February 21, 2005 |
|
|
|
|
|
25 |
|
|
|||||||||
|
|
|
2004 |
|
2003 |
|
||||
|
|
|
|
|
|
|
||||
|
ASSETS |
|
|
|
|
|
|
|
||
|
Cash and due from
financial institutions |
|
$ |
10,473 |
|
$ |
10,164 |
|
||
|
Interest-bearing deposits
in other financial institutions |
|
|
1,859 |
|
|
2,217 |
|
||
|
Securities available for
sale |
|
|
90,152 |
|
|
83,143 |
|
||
|
Loans held for sale |
|
|
1,348 |
|
|
1,173 |
|
||
|
Loans, net of allowance
for loan losses of $4,523 and $4,034 |
|
|
450,676 |
|
|
390,026 |
|
||
|
Federal Home Loan Bank
stock |
|
|
8,365 |
|
|
7,999 |
|
||
|
Accrued interest
receivable |
|
|
1,859 |
|
|
1,849 |
|
||
|
Premises and equipment,
net |
|
|
11,548 |
|
|
11,331 |
|
||
|
Cash surrender value life
insurance |
|
|
11,550 |
|
|
11,057 |
|
||
|
Other assets |
|
|
2,236 |
|
|
2,356 |
|
||
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
|
|
|
$ |
590,066 |
|
$ |
521,315 |
|
||
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
||
|
Deposits |
|
|
|
|
|
|
|
||
|
|
Non
interest-bearing |
|
$ |
43,837 |
|
$ |
34,386 |
|
|
|
|
Interest-bearing |
|
|
367,469 |
|
|
306,929 |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Total deposits |
|
|
411,306 |
|
|
341,315 |
|
|
|
Short-term borrowings |
|
|
43,629 |
|
|
45,325 |
|
||
|
Federal Home Loan Bank
advances |
|
|
82,000 |
|
|
90,200 |
|
||
|
Subordinated debentures |
|
|
7,000 |
|
|
— |
|
||
|
Accrued interest payable |
|
|
729 |
|
|
351 |
|
||
|
Other liabilities |
|
|
2,621 |
|
|
1,835 |
|
||
|
|
|
|
|
|
|
|
|
||
|
|
Total liabilities |
|
|
547,285 |
|
|
479,026 |
|
|
|
|
|
|
|
|
|
|
|
||
|
Shareholders’ 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; 3,001,067 shares issued and
2,629,654 shares outstanding; 2,728,298 issued and 2,383,696 shares
outstanding |
|
|
300 |
|
|
273 |
|
|
|
|
Additional paid-in capital |
|
|
24,845 |
|
|
19,497 |
|
|
|
|
Retained earnings |
|
|
24,098 |
|
|
28,299 |
|
|
|
|
Accumulated other
comprehensive income (loss) |
|
|
(1,024 |
) |
|
(400 |
) |
|
|
|
Unearned ESOP and
performance share awards (2004 – 215 shares, 2003 – 3,627 shares) |
|
|
(2 |
) |
|
(39 |
) |
|
|
|
Treasury stock, at cost
(2004 – 371,198 shares, 2003 – 340,975 shares) |
|
|
(5,436 |
) |
|
(5,341 |
) |
|
|
|
|
|
|
|
|
|
|
||
|
|
Total shareholders’ equity |
|
|
42,781 |
|
|
42,289 |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
|
|
|
$ |
590,066 |
|
$ |
521,315 |
|
||
|
|
|
|
|
|
|
|
|
||
|
|
|
See accompanying notes. |
|
26 |
|
CONSOLIDATED STATEMENTS OF INCOME |
|
Years ended December 31 |
|
(In thousands, except per share amounts) |
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
||||
|
|
|
|
|
|
|
|
|
||||
|
Interest and dividend
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
|
$ |
24,073 |
|
$ |
22,145 |
|
$ |
20,278 |
|
|
|
Taxable securities |
|
|
2,929 |
|
|
2,047 |
|
|
3,698 |
|
|
|
Tax-exempt securities |
|
|
376 |
|
|
630 |
|
|
500 |
|
|
|
Federal Home Loan Bank
dividends |
|
|
366 |
|
|
391 |
|
|
452 |
|
|
|
Interest-bearing deposits
in other financial institutions |
|
|
42 |
|
|
39 |
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,786 |
|
|
25,252 |
|
|
25,052 |
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
7,240 |
|
|
6,143 |
|
|
7,539 |
|
|
|
Federal Home Loan Bank
advances |
|
|
4,979 |
|
|
5,221 |
|
|
5,461 |
|
|
|
Short-term borrowings |
|
|
577 |
|
|
311 |
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,796 |
|
|
11,675 |
|
|
13,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
14,990 |
|
|
13,577 |
|
|
11,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
1,105 |
|
|
1,274 |
|
|
1,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
13,885 |
|
|
12,303 |
|
|
10,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit
accounts |
|
|
2,021 |
|
|
1,707 |
|
|
1,100 |
|
|
|
Commission income |
|
|
64 |
|
|
109 |
|
|
330 |
|
|
|
Net gain on sales of
available for sale securities |
|
|
138 |
|
|
653 |
|
|
511 |
|
|
|
Net gain on sales of
mortgage loans |
|
|
322 |
|
|
592 |
|
|
457 |
|
|
|
Loan servicing income, net
of amortization |
|
|
49 |
|
|
(53 |
) |
|
96 |
|
|
|
Increase in cash surrender
value of life insurance |
|
|
493 |
|
|
543 |
|
|
514 |
|
|
|
Other income |
|
|
184 |
|
|
133 |
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,271 |
|
|
3,684 |
|
|
3,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits |
|
|
7,679 |
|
|
7,097 |
|
|
5,967 |
|
|
|
Occupancy |
|
|
1,130 |
|
|
957 |
|
|
823 |
|
|
|
Equipment |
|
|
1,231 |
|
|
989 |
|
|
871 |
|
|
|
Data processing |
|
|
1,333 |
|
|
1,407 |
|
|
1,106 |
|
|
|
Marketing and advertising |
|
|
387 |
|
|
287 |
|
|
373 |
|
|
|
Other expense |
|
|
2,143 |
|
|
2,367 |
|
|
1,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,903 |
|
|
13,104 |
|
|
10,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
3,253 |
|
|
2,883 |
|
|
2,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
665 |
|
|
581 |
|
|
650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,588 |
|
$ |
2,302 |
|
$ |
2,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.98 |
|
$ |
0.88 |
* |
$ |
0.79 |
* |
|
|
Diluted |
|
$ |
0.97 |
|
$ |
0.87 |
* |
$ |
0.79 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.54 |
|
$ |
0.53 |
* |
$ |
0.53 |
* |
|
|
* Restated to reflect 10% stock dividend paid on December 27, 2004 |
|
|
|
See accompanying notes. |
|
27 |
|
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY |
|
Years ended December 31 |
|
(In thousands except share amounts) |
|
|
|
|
|
Common Stock |
|
Additional |
|
Retained |
|
Accumulated |
|
Unearned |
|
Treasury |
|
Total |
|
|||||||||||||||||||||||||||
|
Shares |
|
Amount |
||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Balance at January 1, 2002 |
|
|
2,476,401 |
|
|
|
$ |
273 |
|
|
|
$ |
19,513 |
|
|
|
$ |
26,653 |
|
|
|
$ |
(259 |
) |
|
|
$ |
(143 |
) |
|
|
$ |
(3,672 |
) |
|
|
$ |
42,365 |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Net income |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
2,126 |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
2,126 |
|
|
|
|
|
Change in net unrealized
gains (losses), securities available for sale, net of reclassification and
tax effects |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
1,213 |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
1,213 |
|
|
|
|
|
Change in unrealized gains
(losses), interest rate swap net of reclassification and tax effects |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
455 |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
455 |
|
|
|
|
|
Change in minimum pension
liability, net of tax effects |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(77 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash dividends declared
($.53 per share) |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(1,406 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(1,406 |
) |
|
||
|
Purchase of treasury stock |
|
|
(96,007 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(1,596 |
) |
|
|
|
(1,596 |
) |
|
||
|
Vesting of performance share
awards |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
2 |
|
|
|
|
— |
|
|
|
|
2 |
|
|
||
|
Stock options exercised |
|
|
8,602 |
|
|
|
|
— |
|
|
|
|
(14 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
134 |
|
|
|
|
120 |
|
|
||
|
Commitment of shares to be
released under ESOP |
|
|
5,756 |
|
|
|
|
— |
|
|
|
|
34 |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
61 |
|
|
|
|
— |
|
|
|
|
95 |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Balance at December 31, 2002 |
|
|
2,394,752 |
|
|
|
|
273 |
|
|
|
|
19,533 |
|
|
|
|
27,373 |
|
|
|
|
1,332 |
|
|
|
|
(80 |
) |
|
|
|
(5,134 |
) |
|
|
|
43,297 |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Net income |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
2,302 |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
2,302 |
|
|
|
|
|
Change in net unrealized
gains (losses), securities available for sale, net of reclassification and
tax effects |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(1,041 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(1,041 |
) |
|
|
|
|
|
See accompanying notes. |
|
28 |
|
COMMUNITY BANK SHARES OF INDIANA, INC. |
|
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY |
|
Years ended December 31 |
|
(In thousands except share amounts) |
|
|
|
|
|
Common Stock |
|
Additional |
|
Retained |
|
Accumulated |
|
Unearned |
|
Treasury |
|
Total |
|
||||||||||||||||||||||||||||
|
Shares |
|
Amount |
|||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
|
|
Change in unrealized gains
(losses), interest rate swap net of reclassification and tax effects |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(708 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(708 |
) |
|
||
|
|
Change in minimum pension
liability, net of tax effects |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
17 |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
17 |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
570 |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Cash dividends declared
($.53per share) |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(1,376 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(1,376 |
) |
|
|||
|
Purchase of treasury stock |
|
|
(29,629 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(475 |
) |
|
|
|
(475 |
) |
|
|||
|
Stock options exercised |
|
|
14,750 |
|
|
|
|
— |
|
|
|
|
(60 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
268 |
|
|
|
|
208 |
|
|
|||
|
Commitment of shares to be
released under ESOP |
|
|
3,823 |
|
|
|
|
— |
|
|
|
|
24 |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
41 |
|
|
|
|
— |
|
|
|
|
65 |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance at December 31, 2003 |
|
|
2,383,696 |
|
|
|
$ |
273 |
|
|
|
$ |
19,497 |
|
|
|
$ |
28,299 |
|
|
|
$ |
(400 |
) |
|
|
$ |
(39 |
) |
|
|
$ |
(5,341 |
) |
|
|
$ |
42,289 |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Net income |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
2,588 |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
2,588 |
|
|
||
|
|
Change in net unrealized gains
(losses), securities available for sale, net of reclassification and tax
effects |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(230 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(230 |
) |
|
||
|
|
Change in unrealized gains
(losses), interest rate swap net of reclassification and tax effects |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(361 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(361 |
) |
|
||
|
|
Change in minimum pension
liability, net of tax effects |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(33 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(33 |
) |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,964 |
|
|
||
|
|
|
See accompanying notes. |
|
29 |
|
COMMUNITY BANK SHARES OF INDIANA, INC. |
|
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY |
|
Years ended December 31 |
|
(In thousands except share amounts) |
|
|
|
|
|
Common Stock |
|
Additional |
|
Retained |
|
Accumulated |
|
Unearned |
|
Treasury |
|
Total |
|
|||||||||||||||||||||||||
|
Shares |
|
Amount |
||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Stock dividend on common
stock (10%) |
|
|
238,661 |
|
|
|
|
27 |
|
|
|
|
5,339 |
|
|
|
|
(5,370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
Cash dividends declared
($.54 per share) |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(1,419 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(1,419 |
) |
|
|
Purchase of treasury stock |
|
|
(22,864 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
(533 |
) |
|
|
|
(533 |
) |
|
|
Stock options exercised |
|
|
26,386 |
|
|
|
|
— |
|
|
|
|
(31 |
) |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
438 |
|
|
|
|
407 |
|
|
|
Commitment of to be released
under ESOP |
|
|
3,775 |
|
|
|
|
— |
|
|
|
|
40 |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
37 |
|
|
|
|
— |
|
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
2,629,654 |
|
|
|
$ |
300 |
|
|
|
$ |
24,845 |
|
|
|
$ |
24,098 |
|
|
|
$ |
(1,024 |
) |
|
|
$ |
(2 |
) |
|
|
$ |
(5,436 |
) |
|
|
$ |
42,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes. |
|
30 |
COMMUNITY BANK SHARES OF INDIANA, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Years ended December 31
(In thousands)
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|||||||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Net income |
|
$ |
2,588 |
|
$ |
2,302 |
|
$ |
2,126 |
|
|
|||
|
|
Adjustments
to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Provision
for loan losses |
|
|
1,105 |
|
|
1,274 |
|
|
1,144 |
|
|
|||
|
|
Depreciation |
|
|
1,256 |
|
|
1,109 |
|
|
1,008 |
|
|
|||
|
|
Net
amortization of securities |
|
|
387 |
|
|
1,019 |
|
|
825 |
|
|
|||
|
|
Net gain on
sales of available for sale securities |
|
|
(138 |
) |
|
(653 |
) |
|
(511 |
) |
|
|||
|
|
Mortgage
loans originated for sale |
|
|
(20,227 |
) |
|
(28,595 |
) |
|
(26,512 |
) |
|
|||
|
|
Proceeds
from mortgage loan sales |
|
|
27,887 |
|
|
37,244 |
|
|
35,174 |
|
|
|||
|
|
Net gain on
sales of mortgage loans |
|
|
(322 |
) |
|
(592 |
) |
|
(457 |
) |
|
|||
|
|
Increase in
cash surrender value of life insurance |
|
|
(493 |
) |
|
(543 |
) |
|
(514 |
) |
|
|||
|
|
Federal Home
Loan Bank stock dividends |
|
|
(366 |
) |
|
(299 |
) |
|
(42 |
) |
|
|||
|
|
ESOP and
performance share award expense |
|
|
77 |
|
|
65 |
|
|
95 |
|
|
|||
|
|
Net change
in |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Accrued
interest receivable |
|
|
(10 |
) |
|
118 |
|
|
408 |
|
|
|||
|
|
Accrued
interest payable |
|
|
378 |
|
|
14 |
|
|
(1 |
) |
|
|||
|
|
Other assets |
|
|
(280 |
) |
|
727 |
|
|
864 |
|
|
|||
|
|
Other
liabilities |
|
|
1,081 |
|
|
(139 |
) |
|
(943 |
) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Net cash
from operating activities |
|
|
12,923 |
|
|
13,051 |
|
|
12,664 |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Net change
in interest-bearing deposits |
|
|
358 |
|
|
(1,267 |
) |
|
1,707 |
|
|
|||
|
|
Available
for sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Sales |
|
|
8,596 |
|
|
26,323 |
|
|
33,994 |
|
|
|||
|
|
Purchases |
|
|
(28,455 |
) |
|
(65,318 |
) |
|
(52,066 |
) |
|
|||
|
|
Maturities,
prepayments and calls |
|
|
12,253 |
|
|
46,280 |
|
|
26,339 |
|
|
|||
|
|
Loan
originations and payments, net |
|
|
(69,443 |
) |
|
(70,694 |
) |
|
(45,047 |
) |
|
|||
|
|
Purchase of
premises and equipment, net |
|
|
(1,473 |
) |
|
(1,116 |
) |
|
(1,116 |
) |
|
|||
|
|
Investment
in cash surrender value of life insurance |
|
|
— |
|
|
— |
|
|
(10,000 |
) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Net cash from
investing activities |
|
|
(78,164 |
) |
|
(65,792 |
) |
|
(46,189 |
) |
|
|||
|
|
|
See accompanying notes. |
|
31 |
COMMUNITY BANK SHARES OF INDIANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
(In thousands)
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Net change
in deposits |
|
$ |
69,991 |
|
$ |
51,485 |
|
$ |
33,938 |
|
|
|
|
|
Net change
in short-term borrowings |
|
|
(1,696 |
) |
|
8,932 |
|
|
(2,682 |
) |
|
|
|
|
Proceeds
from Federal Home Loan Bank advances |
|
|
10,000 |
|
|
46,340 |
|
|
15,700 |
|
|
|
|
|
Repayment of
advances from Federal Home Loan
Bank |
|
|
(18,200 |
) |
|
(48,840 |
) |
|
(12,000 |
) |
|
|
|
|
Proceeds
from issuance of subordinated debentures |
|
|
7,000 |
|
|
— |
|
|
— |
|
|
|
|
|
Exercise of
stock options |
|
|
407 |
|
|
208 |
|
|
120 |
|
|
|
|
|
Purchase of
treasury stock |
|
|
(533 |
) |
|
(475 |
) |
|
(1,596 |
) |
|
|
|
|
Cash dividends
paid |
|
|
(1,419 |
) |
|
(1,376 |
) |
|
(1,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Net cash
from financing activities |
|
|
65,550 |
|
|
56,274 |
|
|
31,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net change
in cash and due from banks |
|
|
309 |
|
|
3,533 |
|
|
(1,811 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash and due
from banks at beginning of year |
|
|
10,164 |
|
|
6,631 |
|
|
8,442 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash and due from banks at end of year |
|
$ |
10,473 |
|
$ |
10,164 |
|
$ |
6,631 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Supplemental
cash flow information: |
|
|
|
|
|
|
|
|
|
|
|||
|
|
Interest
paid |
|
$ |
12,418 |
|
$ |
11,661 |
|
$ |
13,355 |
|
|
|
|
|
Income taxes
paid, net of refunds |
|
|
368 |
|
|
471 |
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Supplemental
noncash disclosures: |
|
|
|
|
|
|
|
|
|
|
|||
|
|
Transfers
from loans to loans held for sale |
|
|
7,513 |
|
|
— |
|
|
16,034 |
|
|
|
|
|
Transfers
from loans to foreclosed real estate |
|
|
175 |
|
|
1,025 |
|
|
215 |
|
|
|
|
|
Transfers
from loans to repossessed assets |
|
|
— |
|
|
3 |
|
|
50 |
|
|
|
|
|
|
See accompanying notes. |
|
32 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The Company provides financial services through its offices in Floyd and Clark counties in Indiana, and Jefferson and Nelson counties in Kentucky. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area.
The consolidated financial statements include Community Bank Shares of Indiana, Inc. and its wholly owned subsidiary, Community Bank of Southern Indiana (Community Bank), collectively referred to as “the Company”. The Bank utilizes three wholly-owned subsidiaries to manage its investment portfolio. CBSI Holdings, Inc. and CBSI Investments, Inc. are Nevada corporations which jointly own CBSI Investment Portfolio Management, LLC, a Nevada limited liability corporation which holds and manages the Bank’s investment securities. 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. Effective November 14, 2003, Community Bank of Kentucky dissolved its charter and all accounts were combined with Community Bank of Southern Indiana, having no effect on the consolidated entity. Intercompany balances and transactions are eliminated in consolidation.
Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.
Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with maturities less than 90 days, and federal funds sold. Net cash flows are reported for interest-bearing deposits in other financial institutions, loans, deposits, and short-term borrowings.
Interest-bearing Deposits in Other Financial Institutions: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.
Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Trading securities are carried at fair value, with changes in unrealized holding gains and losses included in income. Other securities, such as Federal Home Loan Bank stock, are carried at cost.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has
|
|
|
33 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.
Mortgage Banking Activities: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market value. To deliver closed loans to the secondary market and to control its interest rate risk prior to sale, the Company enters agreements to sell loans. The aggregate market value of mortgage loans held for sale considers the price of the sales contracts. Loan commitments related to the origination of mortgage loans held for sale and the corresponding sales contracts are considered derivative instruments. The Company’s commitments are for fixed rate mortgage loans, generally lasting 60 days and are at market rates when initiated. The Company had commitments to originate $350,000 and $624,000 in loans and an equal amount of corresponding sales contracts at December 31, 2004 and 2003. The impact of accounting for these instruments as derivatives was not material and substantially all of the gain on sale generated from mortgage banking activities continues to be recorded when closed loans are delivered into the sales contracts.
The Company sells loans on a servicing retained and also on a released basis. Servicing assets are recorded on loans sold with servicing retained and are capitalized in other assets and expensed into other income against service fee income in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to loan type, interest rates and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses.
Interest income is accrued on the unpaid principal balance. Mortgage loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Interest income on commercial, mortgage and consumer loans is discontinued at the time the loan is 90 days delinquent. Consumer loans are typically charged-off no later than 120 days past due. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard, doubtful, or loss. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.
A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Smaller balance homogenous loans, such as consumer and residential real estate, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosure.
|
|
|
34 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 7 to 40 years. Furniture, fixtures, and equipment are depreciated using the straight-line method with useful lives ranging from 2 to 10 years.
Cash Surrender Value of Life Insurance: The Company has purchased life insurance policies on certain key executives. The life insurance is recorded at the amount that can be realized, which is referred to as the cash surrender value.
Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Foreclosed assets amounted to $106,000 and $610,000 at year-end 2004 and 2003 and are included in other assets in the consolidated balance sheets.
Repurchase Agreements: Repurchase agreement liabilities, included in short-term borrowings, represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.
Equity: Stock dividends of 20% or less are reported by transferring the fair value, as of the ex-dividend date, of the stock issued from retained earnings to common stock and additional paid-in capital. Fractional share amounts are paid in cash with a reduction in retained earnings.
Benefit Plans: Pension expense is the net of service and interest cost, return on plan assets, and amortization of gains and losses not immediately recognized. A minimum pension liability is separately recorded with an offset to other comprehensive income to the extent the plan’s current liability, if in excess of the plan’s assets, is not otherwise recorded. Profit sharing and 401k plan expense is the amount contributed determined by formula.
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 FASB Statement No. 123, Accounting for Stock-Based Compensation.
|
|
|
35 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
|
|
2003 |
|
2002 |
|
2004 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
(In thousands, except per share amounts) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income as reported |
|
|
$ |
2,588 |
|
|
|
$ |
2,302 |
|
|
|
$ |
2,126 |
|
|
|
Less: Stock-based compensation expense
determined under fair value based method |
|
|
|
46 |
|
|
|
|
57 |
|
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
|
$ |
2,542 |
|
|
|
$ |
2,245 |
|
|
|
$ |
2,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share as reported |
|
|
$ |
0.98 |
|
|
|
$ |
0.88 |
|
|
|
$ |
0.79 |
|
|
|
Pro forma basic earnings per share |
|
|
|
0.97 |
|
|
|
|
0.86 |
|
|
|
|
0.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share as reported |
|
|
|
0.97 |
|
|
|
|
0.87 |
|
|
|
|
0.79 |
|
|
|
Pro forma diluted earnings per share |
|
|
|
0.96 |
|
|
|
|
0.85 |
|
|
|
|
0.76 |
|
|
The weighted-average assumptions for options granted during the year and the resulting estimated weighted average fair values per share used in computing pro forma disclosures are as follows:
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
Risk-free interest rate |
|
|
3.97 |
% |
|
* |
|
|
4.21 |
% |
|
|
Expected option life |
|
|
9.1 years |
|
|
* |
|
|
10 years |
|
|
|
Expected stock price volatility |
|
|
15.92 |
% |
|
* |
|
|
24.67 |
% |
|
|
Expected dividend yield |
|
|
2.61 |
% |
|
* |
|
|
3.60 |
% |
|
|
Weighted-average fair value of options
granted during the year |
|
$ |
4.18 |
|
|
* |
|
$ |
3.65 |
|
* No stock options were granted during 2003
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but not yet committed to be released or allocated to participants, is shown as a reduction of shareholders’ equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest. Participants may put their ESOP shares back to the Company upon termination. If the Company repurchases the ESOP shares, an amount equal to these shares times current market price is reclassified out of shareholders’ equity.
Off Balance Sheet Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer-financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Derivatives: All derivative instruments are recorded at their fair values. If derivative instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in earnings as they occur.
|
|
|
36 |
COMMUNITY
BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unallocated. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock dividends through the date of issue of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income, recognized as separate components of equity, includes changes in the following items: unrealized gains and losses on securities available for sale, unrealized gains and losses on interest rate swaps, and a minimum pension liability.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are currently such matters that will have a material effect on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $3.2 million and $2.2 million was required to meet regulatory reserve and clearing requirements at year-end 2004 and 2003. These balances do not earn interest.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders, as more fully described in a separate note.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Effect of Newly Issued But Not Yet Effective Accounting Standard: FASB Statement 123 (revised 2004), Share-Based Payment, becomes effective for the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company estimates that the initial impact of adoption of this standard, precluding any additional grants of stock options on common shares, will not be materially different from the pro forma effect disclosed previously in the Note under the heading “Stock Compensation.”
Reclassifications: Some items in the prior years’ financial statements were reclassified to conform to the current presentation.
|
|
|
37 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SECURITIES
The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows.
|
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
(In thousands) |
|
||||||||||||||||
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
U. S. Government and
federal agency |
|
$ |
4,803 |
|
|
$ |
— |
|
|
|
$ |
(64 |
) |
|
$ |
4,739 |
|
|
|
|
State and municipal |
|
|
6,357 |
|
|
|
256 |
|
|
|
|
— |
|
|
|
6,613 |
|
|
|
|
Mortgaged-backed |
|
|
64,348 |
|
|
|
256 |
|
|
|
|
(661 |
) |
|
|
63,943 |
|
|
|
|
Corporate bonds |
|
|
14,645 |
|
|
|
57 |
|
|
|
|
(91 |
) |
|
|
14,611 |
|
|
|
|
Mutual funds |
|
|
250 |
|
|
|
— |
|
|
|
|
(4 |
) |
|
|
246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Total |
|
$ |
90,403 |
|
|
$ |
569 |
|
|
|
$ |
(820 |
) |
|
$ |
90,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
||||||||||||||||
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
State and municipal |
|
$ |
14,849 |
|
|
$ |
407 |
|
|
|
$ |
(10 |
) |
|
$ |
15,246 |
|
|
|
|
Mortgaged-backed |
|
|
52,947 |
|
|
|
252 |
|
|
|
|
(542 |
) |
|
|
52,657 |
|
|
|
|
Corporate bonds |
|
|
15,000 |
|
|
|
48 |
|
|
|
|
(58 |
) |
|
|
14,990 |
|
|
|
|
Mutual funds |
|
|
250 |
|
|
|
— |
|
|
|
|
— |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Total |
|
$ |
83,046 |
|
|
$ |
707 |
|
|
|
$ |
(610 |
) |
|
$ |
83,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Sales of available for sale securities were as follows.
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
(In thousands) |
|
|||||||
|
|
|
|
|
|
|||||||
|
|
Proceeds |
|
$ |
8,596 |
|
$ |
26,323 |
|
$ |
33,994 |
|
|
|
Gross gains |
|
|
141 |
|
|
653 |
|
|
540 |
|
|
|
Gross losses |
|
|
(3 |
) |
|
— |
|
|
(29 |
) |
The tax provision applicable to these net realized gains amounted to $47,000, $222,000 and $174,000, respectively.
Contractual maturities of available for sale securities at year-end 2004 were as follows. Mortgage-backed securities and mutual funds which do not have a single maturity date are shown separately.
|
|
|
Amortized |
|
Fair |
|
||||
|
|
|
|
|
|
|
|
|||
|
|
|
|
(In thousands) |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
— |
|
$ |
— |
|
|
|
|
Due from one to five years |
|
|
9,593 |
|
|
9,469 |
|
|
|
|
Due from five to ten years |
|
|
2,570 |
|
|
2,702 |
|
|
|
|
Due after ten years |
|
|
13,642 |
|
|
13,792 |
|
|
|
|
Mortgage-backed |
|
|
64,348 |
|
|
63,943 |
|
|
|
|
Mutual Funds |
|
|
250 |
|
|
246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
90,403 |
|
$ |
90,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SECURITIES (Continued)
Securities pledged at year-end 2004 and 2003 had a carrying amount of $ 86.4 million and $71.4 million to secure public deposits, repurchase agreements and Federal Home Loan Bank advances.
At year end 2004 and 2003, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.
Securities with unrealized losses at year end 2004 and 2003 (in thousands), aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
2004 |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
U. S. Government and
federal agency |
|
$ |
4,739 |
|
|
$ |
64 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,739 |
|
|
$ |
64 |
|
|
|
|
Mortgage-backed |
|
|
34,296 |
|
|
|
317 |
|
|
|
12,845 |
|
|
|
344 |
|
|
|
47,141 |
|
|
|
661 |
|
|
|
|
Corporate bonds |
|
|
5,167 |
|
|
|
77 |
|
|
|
500 |
|
|
|
14 |
|
|
|
5,667 |
|
|
|
91 |
|
|
|
|
Mutual funds |
|
|
250 |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
250 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired |
|
$ |
44,452 |
|
|
$ |
462 |
|
|
$ |
13,345 |
|
|
$ |
358 |
|
|
$ |
57,797 |
|
|
$ |
820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
2003 |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
State and municipal |
|
$ |
3,144 |
|
|
$ |
10 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,144 |
|
|
$ |
10 |
|
|
|
|
Mortgage-backed |
|
|
30,178 |
|
|
|
542 |
|
|
|
— |
|
|
|
— |
|
|
|
30,178 |
|
|
|
542 |
|
|
|
|
Corporate bonds |
|
|
4,359 |
|
|
|
58 |
|
|
|
— |
|
|
|
— |
|
|
|
4,359 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired |
|
$ |
37,681 |
|
|
$ |
610 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
37,681 |
|
|
$ |
610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All unrealized losses are reviewed at least on a quarterly basis to determine whether the losses are other than temporary and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. While it’s likely that we will hold the securities to maturity, we believe the unrealized losses are market driven and full principal will be recovered.
|
|
|
39 |
COMMUNITY BANK SHARES OF INDIANA, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – LOANS
Loans at year-end were as follows.
|
|
|
|
2004 |
|
2003 |
|
||||
|
|
|
|
|
|
|
|
||||
|
|
|
|
(In thousands) |
|
||||||
|
|
|
|
|
|
|
|
|
|
||
|
|
Commercial |
|
$ |
73,374 |
|
$ |
72,981 |
|
||
|
|
Mortgage loans on real
estate |
|
|
|
|
|
|
|
||
|
|
|
Residential |
|
|
100,553 |
|
|
94,975 |
|
|
|
|
|
Commercial |
|
|
186,175 |
|
|
161,343 |
|
|
|
|
|
Construction |
|
|
38,638 |
|
|
15,691 |
|
|
|
|
Home equity |
|
|
49,677 |
|
|
42,562 |
|
||
|
|
Loans secured by deposit
accounts |
|
|
687 |
|
|
546 |
|
||
|
|
Consumer |
|
|
6,095 |
|
|
5,962 |
|
||
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Subtotal |
|
|
455,199 |
|
|
394,060 |
|
|
|
|
Less: Allowance
for loan losses |
|
|
(4,523 |
) |
|
(4,034 |
) |
||
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
|
|
Loans, net |
|
$ |
450,676 |
|
$ |
390,026 |
|
||
|
|
|
|
|
|
|
|
|
|
||
During 2004 and 2003, substantially all of the Company’s residential and commercial real estate loans were pledged as collateral to the Federal Home Loan Bank to secure advances.
Activity in the allowance for loan losses was as follows.
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
(In thousands) |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
4,034 |
|
|
$ |
3,814 |
|
|
$ |
3,030 |
|
|
|
Provision for loan losses |
|
|
1,105 |
|
|
|
1,274 |
|
|
|
1,144 |
|
|
|
Loans charged-off |
|
|
(680 |
) |
|
|
(1,075 |
) |
|
|
(558 |
) |
|
|
Recoveries |
|
|
64 |
|
|
|
21 |
|
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
4,523 |
|
|
$ |
4,034 |
|
|
$ |
3,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about impaired loans is presented below. There were no impaired loans for the periods presented without an allowance allocation.
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
(In thousands) |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans at year-end |
|
$ |
780 |
|
|
$ |
805 |
|
|
$ |
1,682 |
|
|
|
Amount of the allowance for
loan losses allocated |
|
|
288 |
|
|
|
276 |
|
|
|
527 |
|
|
|
Average of impaired loans
during the year |
|
|
1,171 |
|
|
|
1,691 |
|
|
|
2,227 |
|
|
|
Interest income recognized
during impairment |
|
|
8 |
|
|
|
30 |
|
|
|
26 |
|
|
Nonperforming loans at
year-end were as follows. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due over 90 days
still on accrual |
|
$ |
— |
|
|
$ |
25 |
|
|
$ |
— |
|
|
|
Non -accrual loans |
|
|
1,588 |
|
|
|
1,788 |
|
|
|
3,171 |
|
|
|
|
40 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – LOANS (Continued)
Nonperforming loans includes both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.
Related-Party Transactions: Loans and off-balance-sheet commitments (including commitments to make loans, unused lines of credit, and letters of credit) to principal officers, directors, and their affiliates were as follows.
|
|
|
|
2004 |
|
|||
|
|
|
|
|
|
|||
|
|
|
|
(In thousands) |
|
|||
|
|
|
|
|
|
|||
|
|
Beginning loans |
|
|
$ |
25,957 |
|
|
|
|
New loans |
|
|
|
16,808 |
|
|
|
|
Effect of changes in
related parties |
|
|
|
(3,953 |
) |
|
|
|
Repayments |
|
|
|
(15,530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending loans |
|
|
$ |
23,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
(In thousands) |
|
||||
|
|
|
|
|
|
||||
|
|
Off-balance-sheet
commitments |
|
$ |
8,061 |
|
$ |
8,416 |
|
Mortgage Banking Activities: Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were approximately $30.6 million and $28.8 million at year-end 2004 and 2003. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in non-interest bearing deposits, were approximately $214,000 and $340,000 at year-end 2004 and 2003. Servicing assets related to these loans, included in other assets, were $212,000 and $195,000 at year-end 2004 and 2003.
NOTE 4- PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows.
|
|
|
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
(In thousands) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
Land and land improvements |
|
$ |
1,262 |
|
$ |
1,263 |
|
|
|
Buildings |
|
|
9,878 |
|
|
9,623 |
|
|
|
Furniture, fixtures and
equipment |
|
|
6,494 |
|
|
5,436 |
|
|
|
Leasehold improvements |
|
|
539 |
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,173 |
|
|
16,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated
depreciation |
|
|
(6,625 |
) |
|
(5,381 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,548 |
|
$ |
11,331 |
|
|
|
|
|
|
|
|
|
|
|
Rent expense was $305,000, $195,000 and $83,000 for 2004, 2003, and 2002, respectively. Rent commitments under noncancelable operating leases (in thousands) were as follows, before considering renewal options that generally are present.
|
2005
|
|
$ |
327 |
|
|
2006 |
|
|
461 |
|
|
2007 |
|
|
436 |
|
|
2008 |
|
|
369 |
|
|
2009 |
|
|
377 |
|
|
Thereafter |
|
|
2,643 |
|
|
|
|
41 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - DEPOSITS
Time deposits of $100,000 or more were $70.1 million and $44.6 million at year-end 2004 and 2003.
Scheduled maturities of time deposits for the next five years (in thousands) were as follows.
|
2005 |
|
$ |
106,122 |
|
|
2006 |
|
|
59,571 |
|
|
2007 |
|
|
15,315 |
|
|
2008 |
|
|
4,784 |
|
|
2009 |
|
|
2,222 |
|
|
Thereafter |
|
|
721 |
|
Deposits from principal officers, directors and their affiliates at year-end 2004 and 2003 were approximately $7.7 million and $9.2 million.
NOTE 6 – SHORT-TERM BORROWINGS
Short-term borrowings consist of, retail repurchase agreements representing overnight borrowings from deposit customers, effectively deposit equivalents, federal funds purchased representing overnight borrowings from other financial institutions, and lines of credit with other financial institutions. The debt securities sold under the repurchase agreements were under the control of the subsidiary bank during 2004 and 2003.
Information concerning 2004 and 2003 short-term borrowings is summarized as follows.
|
|
|
|
2004 |
|
2003 |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
|
|
(Dollars in thousands) |
|
|||||
|
|
Repurchase agreements at
year-end |
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
$ |
42,640 |
|
$ |
26,182 |
|
|
|
|
Weighted average interest rate |
|
|
1.82 |
% |
|
0.50 |
% |
|
|
Repurchase agreements
during the year |
|
|
|
|
|
|
|
|
|
|
|
Average daily balance |
|
$ |
27,384 |
|
$ |
25,438 |
|
|
|
|
Maximum month-end balance |
|
|
42,640 |
|
|
29,227 |
|
|
|
|
Weighted average interest rate |
|
|
0.86 |
% |
|
0.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and
lines of credit at year-end |
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
$ |
989 |
|
$ |
19,143 |
|
|
|
|
Weighted average interest rate |
|
|
2.44 |
% |
|
1.25 |
% |
|
|
Federal funds purchased and
lines of credit during the year |
|
|
|
|
|
|
|
|
|
|
|
Average daily balance |
|
$ |
9,188 |
|
$ |
10,768 |
|
|
|
|
Maximum month-end balance |
|
|
22,680 |
|
|
19,143 |
|
|
|
|
Weighted average interest rate |
|
|
1.88 |
% |
|
1.48 |
% |
|
|
|
42 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At year-end, advances from the Federal Home Loan Bank (FHLB) were as follows.
|
|
|
|
2004 |
|
2003 |
|
||||||||
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
Weighted |
|
Amount |
|
Weighted |
|
Amount |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
(Dollars in thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
5.86 |
% |
$ |
72,000 |
|
|
5.89 |
% |
$ |
85,000 |
|
|
|
Variable rate |
|
|
2.53 |
|
|
10,000 |
|
|
1.31 |
|
|
5,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
82,000 |
|
|
|
|
$ |
90,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The advances were collateralized by first mortgage loans and commercial loans under a blanket lien agreement and available for sale securities which were pledged as security under the agreement.
The contractual maturities of advances outstanding as of December 31, 2004 are as follows.
|
|
|
|
Fixed |
|
Variable |
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
(In thousands) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
2,000 |
|
$ |
10,000 |
|
|
|
2008 |
|
|
2,000 |
|
|
— |
|
|
|
2009 |
|
|
21,000 |
|
|
— |
|
|
|
2010 |
|
|
47,000 |
|
|
— |
|
The fixed rate advances consisted of $70.0 million in convertible advances . The FHLB has the quarterly right to require the Company to choose either conversion of the fixed rate to a variable rate tied to the three month LIBOR index or prepayment of the advance without penalty. There is a substantial penalty if the Company prepays the advances before FHLB exercises its right.
NOTE 8 – SUBORDINATED DEBENTURES
On June 17, 2004, a trust formed by the Company, Community Bank Shares (IN) Statutory Trust I (Trust), issued $7.0 million of floating rate trust preferred securities as part of a pooled offering of such securities. The Company issued subordinated debentures to the Trust in exchange for the proceeds of the offering; the debentures and related debt issuance costs represent the sole assets of the Trust. Distributions on the trust preferred securities are payable quarterly in arrears at the annual rate (adjusted quarterly) of three-month LIBOR plus 2.65% (5.15% as of the last adjustment), and are included in interest expense.
The subordinated debentures, which mature June 17, 2034, may be redeemed by the Company, in whole or in part, at any distribution payment date on or after the distribution payment date in June 2009, at the redemption price. In addition, the subordinated debentures are redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust debenture.
Trust Preferred Securities are considered as Tier I capital for the Company under current regulatory guidelines.
|
|
|
43 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – BENEFIT PLANS
Defined 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.
A reconciliation of the projected benefit obligation and the value of plan assets follow.
|
|
|
2004 |
|
2003 |
|
||||
|
|
|
|
|
|
|
||||
|
|
|
(In thousands) |
|
||||||
|
|
|
|
|
|
|
|
|
||
|
Change in projected benefit
obligation |
|
|
|
|
|
|
|
||
|
|
Balance, beginning of year |
|
$ |
775 |
|
$ |
747 |
|
|
|
|
Interest cost |
|
|
47 |
|
|
49 |
|
|
|
|
Actuarial (gain) loss |
|
|
82 |
|
|
95 |
|
|
|
|
Benefits paid to
participants |
|
|
(34 |
) |
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
||
|
|
Ending benefit obligation |
|
|
870 |
|
|
775 |
|
|
|
|
|
|
|
|
|
|
|
||
|
Change in plan assets |
|
|
|
|
|
|
|
||
|
|
Fair value, beginning of
year |
|
|
516 |
|
|
406 |
|
|
|
|
Actual return on plan
assets |
|
|
34 |
|
|
75 |
|
|
|
|
Employer contributions |
|
|
40 |
|
|
151 |
|
|
|
|
Benefits paid to
participants |
|
|
(34 |
) |
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of year |
|
|
556 |
|
|
516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
|
(314 |
) |
|
(259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial
loss |
|
|
402 |
|
|
348 |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
|
|
Prepaid benefit cost |
|
$ |
88 |
|
$ |
89 |
|
|
|
|
|
|
|
|
|
|
|
||
The components of pension expense and related actuarial assumptions were as follows.
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
(Dollars in thousands) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
48 |
|
$ |
50 |
|
$ |
47 |
|
|
|
|
Expected return on plan
assets |
|
|
(42 |
) |
|
(34 |
) |
|
(44 |
) |
|
|
|
Amortization of unrecognized
loss |
|
|
35 |
|
|
82 |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension expense (income) |
|
$ |
41 |
|
$ |
98 |
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate on benefit
obligation |
|
|
5.75 |
% |
|
6.25 |
% |
|
6.75 |
% |
|
|
|
Rate of expected return on
plan assets |
|
|
8.00 |
% |
|
8.00 |
% |
|
9.00 |
% |
|
A minimum pension liability is separately recorded with an offset to other comprehensive income to the extent the plan’s accumulated benefit obligation, if in excess of the plan’s assets, is not otherwise recorded. As a result of the 1997 amendment discussed previously, the plan’s projected benefit obligation also represents its accumulated benefit obligation. At year-end 2004 and 2003, the plan’s accumulated benefit obligation exceeded the assets by $314,000 and $259,000. Accordingly, the Company’s 2004 and 2003 balance sheets include a minimum pension liability of $402,000 and $348,000 which is in addition to the prepaid benefit cost otherwise recorded. Among other events, the amount carried in accumulated other comprehensive income will be reclassified to earnings should management elect to terminate the plan (or the respective portion if a retired employee elects a lump sum distribution).
|
|
|
44 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – BENEFIT PLANS (Continued)
Plan Assets: The Company’s target allocation for 2005, pension plan asset allocation at year-end 2004 and 2003, and expected long-term rate of return by asset category are as follows:
|
|
|
Target |
|
Percentage of Plan |
|
Weighted-Average |
|
||||||||||||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
Rate of Return 2004 |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Asset Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Mutual funds |
|
|
|
85 |
% |
|
|
|
85 |
% |
|
|
|
85 |
% |
|
|
|
9.0 |
% |
|
|
|
|
Money market |
|
|
|
15 |
|
|
|
|
15 |
|
|
|
|
15 |
|
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Total |
|
|
|
|
|
|
|
|
100 |
% |
|
|
|
100 |
% |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Estimated Future Benefit Payments: The following benefit payments (in thousands), which reflect expected future service cost, as appropriate, are expected to be paid:
|
2005
|
|
$ |
26 |
|
|
2006 |
|
|
24 |
|
|
2007 |
|
|
22 |
|
|
2008 |
|
|
21 |
|
|
2009 |
|
|
19 |
|
|
2010-2014 |
|
|
86 |
|
The Company expects to contribute $41,000 to its pension plan in 2005.
Community Bank is a participant in the Financial Institutions Retirement Fund, a multi-employer defined benefit pension plan covering two of its employees. Employees are fully vested at the completion of five years of participation in the plan. No contributions were required during the three-year period ended December 31, 2004. There have been no new enrollments since 1998.
Employee Stock Ownership Plan: Employees participate in an Employee Stock Ownership Plan (ESOP). The ESOP borrowed from the Company to purchase 62,359 shares of Company stock at $9.16 per share. The Company makes discretionary contributions to the ESOP, as well as paying dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated shares increase participant accounts. Participants receive the shares at the end of employment.
Contributions to the ESOP during 2004, 2003 and 2002 were $37,000, $41,000 and $61,000. Expense for 2004, 2003 and 2002 was $77,000, $65,000 and $95,000.
Shares held by the ESOP trust were as follows.
|
|
|
|
2004 |
|
2003 |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
|
|
(In thousands) |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to participants |
|
|
43 |
|
|
37 |
|
|
|
|
Unearned |
|
|
— |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP shares |
|
|
43 |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of unearned shares |
|
$ |
4 |
|
$ |
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – BENEFIT PLANS (Continued)
Deferred Compensation Arrangements: The Company has entered into deferred compensation arrangements with certain directors and officers. The liability for such arrangements is fully accrued during the service period, with benefits paid monthly upon retirement until death, or date specified by the agreement. The liability was $500,000 and $544,000 at December 31, 2004 and 2003, respectively. Expense related to these arrangements for 2004, 2003 and 2002 was $19,000, $84,000 and $29,000.
Defined Contribution Plans: The 401(k) benefit plan matches employee contributions equal to 100% of the first 3% of the compensation contributed. Expense for 2004, 2003 and 2002 was $111,000, $132,000 and $96,000.
NOTE 10 – STOCK-BASED COMPENSATION PLANS
Stock Options: The Company’s stock option plan provides for the granting of both incentive and nonqualified stock options at exercise prices not less than the fair market value of the common stock on the date of grant and expiration dates of up to ten years. Terms of the options are determined by the Board of Directors at the date of grant and generally vest over periods of three to four years. Payment of the option price may be in cash or shares of common stock at fair market value on the exercise date. Non-employee directors are eligible to receive only nonqualified stock options. As of December 31, 2004, the plan allows for additional option grants of up to 47,627 shares.
A summary of the activity in the plan follows.
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
|
|
|
Shares |
|
Weighted |
|
Shares |
|
Weighted |
|
Shares |
|
Weighted |
|
||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
|
|
|
(In thousands, except per share amounts) |
|
||||||||||||||||||||||||||||
|
|
Outstanding at beginning of
year |
|
|
|
131 |
|
|
|
$ |
14.86 |
|
|
|
|
185 |
|
|
|
$ |
15.46 |
|
|
|
|
203 |
|
|
|
$ |
15.34 |
|
|
|
|
Granted |
|
|
|
31 |
|
|
|
|
20.17 |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
4 |
|
|
|
|
14.64 |
|
|
|
|
Exercised |
|
|
|
(29 |
) |
|
|
|
14.08 |
|
|
|
|
(17 |
) |
|
|
|
12.78 |
|
|
|
|
(10 |
) |
|
|
|
12.80 |
|
|
|
|
Forfeited |
|
|
|
(7 |
) |
|
|
|
16.23 |
|
|
|
|
(37 |
) |
|
|
|
18.78 |
|
|
|
|
(12 |
) |
|
|
|
17.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
|
126 |
|
|
|
$ |
16.27 |
|
|
|
|
131 |
|
|
|
$ |
14.86 |
|
|
|
|
185 |
|
|
|
$ |
15.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
year-end |
|
|
|
104 |
|
|
|
$ |
15.43 |
|
|
|
|
125 |
|
|
|
$ |
14.90 |
|
|
|
|
169 |
|
|
|
$ |
15.56 |
|
|
For options outstanding at December 31, 2004, the option price per share ranged from $12.27 to $20.45 and the weighted average remaining contractual life on the options was 6.0 years. Information pertaining to options (in thousands) outstanding at December 31, 2004 is as follows.
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
|
Range of Exercise Prices |
|
Shares |
|
Weighted |
|
Weighted |
|
Shares |
|
Weighted |
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
(In thousands, except per share amounts) |
|
|||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$12.27 - $14.09 |
|
|
|
57 |
|
|
|
|
5.7 years |
|
|
|
$ |
13.00 |
|
|
|
|
57 |
|
|
|
$ |
13.00 |
|
|
|
|
$14.64 - $16.82 |
|
|
|
10 |
|
|
|
|
5.8 years |
|
|
|
|
15.14 |
|
|
|
|
10 |
|
|
|
|
15.14 |
|
|
|
|
$18.96 - $20.45 |
|
|
|
59 |
|
|
|
|
6.3 years |
|
|
|
|
19.60 |
|
|
|
|
37 |
|
|
|
|
19.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
|
126 |
|
|
|
|
6.0 years |
|
|
|
$ |
16.27 |
|
|
|
|
104 |
|
|
|
$ |
15.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – STOCK-BASED COMPENSATION PLANS (Continued)
Performance Share Awards: The Company may grant performance share awards to employees for up to 20,000 shares of common stock. The level of performance shares eventually distributed is contingent upon the achievement of specific performance criteria within a specified award period set at the grant date.
The compensation cost attributable to these restricted stock awards is based on the fair market value of the shares at the grant date. In lieu of shares of common stock, the Company may distribute cash in an amount equal to the fair market value of the common stock award. The compensation expense is recognized over the specified performance period. During 1999, the Company granted 8,700 shares of common stock as performance share awards and compensation expense of $2,000 and $15,000 was recognized for the years ended 2002 and 2001, respectively. Compensation expense has been fully recognized for the shares granted in 1999.
NOTE 11 - INCOME TAXES
Income tax expense (benefit) was as follows.
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
(In thousands) |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
599 |
|
$ |
419 |
|
$ |
632 |
|
|
|
Deferred |
|
|
3 |
|
|
21 |
|
|
(41 |
) |
|
|
Valuation allowance |
|
|
63 |
|
|
141 |
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
665 |
|
$ |
581 |
|
$ |
650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rates differ from federal statutory rates applied to financial statement income due to the following.
|
|
|
2004 |
|
2003 |
|
2002 |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||
|
|
|
(Dollars in thousands) |
|
||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Federal statutory rate
times financial statement income |
|
$ |
1,106 |
|
|
34.0 |
% |
$ |
980 |
|
|
34.0 |
% |
$ |
944 |
|
|
34.0 |
% |
||
|
Effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Tax-exempt income |
|
|
(156 |
) |
|
(4.8 |
) |
|
(222 |
) |
|
(7.7 |
) |
|
(190 |
) |
|
(6.8 |
) |
|
|
|
State taxes, net of federal
benefit |
|
|
(63 |
) |
|
(2.1 |
) |
|
(141 |
) |
|
(4.9 |
) |
|
(59 |
) |
|
(2.1 |
) |
|
|
|
Change in valuation
allowance |
|
|
63 |
|
|
2.1 |
|
|
141 |
|
|
4.9 |
|
|
59 |
|
|
2.1 |
|
|
|
|
Change in cash surrender
value of life insurance policies |
|
|
(168 |
) |
|
(5.2 |
) |
|
(185 |
) |
|
(6.4 |
) |
|
(175 |
) |
|
(6.3 |
) |
|
|
|
New markets tax credit |
|
|
(150 |
) |
|
(4.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net |
|
|
33 |
|
|
0.8 |
|
|
8 |
|
|
0.3 |
|
|
71 |
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Total |
|
$ |
665 |
|
|
20.2 |
% |
$ |
581 |
|
|
20.2 |
% |
$ |
650 |
|
|
23.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
47 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities were due to the following.
|
|
|
|
2004 |
|
2003 |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
|
|
(In thousands) |
|
|||||
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
1,716 |
|
$ |
1,539 |
|
|
|
|
Employee benefit plans |
|
|
159 |
|
|
188 |
|
|
|
|
Minimum pension liability |
|
|
157 |
|
|
136 |
|
|
|
|
Net unrealized loss on securities available for sale |
|
|
85 |
|
|
— |
|
|
|
|
Net unrealized depreciation on interest rate swap |
|
|
392 |
|
|
161 |
|
|
|
|
Net operating loss carryforward |
|
|
263 |
|
|
200 |
|
|
|
|
Unused tax credits |
|
|
37 |
|
|
20 |
|
|
|
|
Other |
|
|
12 |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,821 |
|
|
2,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
(520 |
) |
|
(425 |
) |
|
|
|
FHLB stock |
|
|
(466 |
) |
|
(329 |
) |
|
|
|
Deferred loan fees and costs |
|
|
(149 |
) |
|
(173 |
) |
|
|
|
Mortgage Servicing Rights |
|
|
(80 |
) |
|
(74 |
) |
|
|
|
Net unrealized appreciation on securities available for sale |
|
|
— |
|
|
(33 |
) |
|
|
|
Other |
|
|
(61 |
) |
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,276 |
) |
|
(1,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance on net
deferred tax assets |
|
|
(263 |
) |
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
1,282 |
|
$ |
978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company incurred net operating losses for state income taxes during 2004 and 2003 which will be carried forward and applied to future state taxable income. Due to the uncertainty of the Company’s ability to use this benefit, a valuation allowance has been recorded. The cumulative state net operating loss is $3.2 million and can be carried forward for 15 years.
Community Bank qualified under provisions of the Internal Revenue Code which through 1987 permitted them to deduct from taxable income a provision for bad debts that exceeded the provision for loan losses charged to income on the financial statements. Retained earnings at December 31, 2004 and 2003 includes this benefit of approximately $3.7 million for which accounting standards do not require a deferred federal income tax liability to be recorded. If the banks were liquidated or otherwise ceased to be banks or if tax laws were to change, this liability would be recorded with an offset to income tax expense.
NOTE 12 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
|
|
|
48 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of December 31, 2004 and 2003, the most recent regulatory notifications categorized the Company and Banks as well capitalized under the regulatory framework for prompt corrective action. There are no considerations or events since December 31, 2004 that management believes have changed the institutions classification as well capitalized.
Actual and required capital amounts and ratios are presented below at year-end.
|
|
|
Actual |
|
For Capital |
|
To Be Well |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
2004 |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
(Dollars in millions) |
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total Capital (to Risk
Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
55.1 |
|
|
11.3 |
% |
$ |
39.0 |
|
|
|
8 |
% |
|
$ |
48.7 |
|
|
|
10 |
% |
|
|
|
Community Bank |
|
|
54.4 |
|
|
11.2 |
% |
|
39.0 |
|
|
|
8 |
|
|
|
48.7 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to Risk
Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
50.5 |
|
|
10.4 |
% |
$ |
19.5 |
|
|
|
4 |
% |
|
$ |
29.2 |
|
|
|
6 |
% |
|
|
|
Community Bank |
|
|
49.9 |
|
|
10.3 |
% |
|
19.5 |
|
|
|
4 |
|
|
|
29.2 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to Average
Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
50.5 |
|
|
8.7 |
% |
$ |
23.2 |
|
|
|
4 |
% |
|
$ |
29.0 |
|
|
|
5 |
% |
|
|
|
Community Bank |
|
|
49.9 |
|
|
8.6 |
% |
|
23.1 |
|
|
|
4 |
|
|
|
28.9 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk
Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
46.5 |
|
|
11.4 |
% |
$ |
32.6 |
|
|
|
8 |
% |
|
$ |
40.8 |
|
|
|
10 |
% |
|
|
|
Community Bank |
|
|
46.5 |
|
|
11.4 |
% |
|
32.6 |
|
|
|
8 |
|
|
|
40.8 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to Risk
Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
42.5 |
|
|
10.4 |
% |
$ |
16.3 |
|
|
|
4 |
% |
|
$ |
24.5 |
|
|
|
6 |
% |
|
|
|
Community Bank |
|
|
42.5 |
|
|
10.4 |
% |
|
16.3 |
|
|
|
4 |
|
|
|
24.5 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to Average
Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
42.5 |
|
|
8.3 |
% |
$ |
20.4 |
|
|
|
4 |
% |
|
$ |
25.4 |
|
|
|
5 |
% |
|
|
|
Community Bank |
|
|
42.5 |
|
|
8.3 |
% |
|
19.1 |
|
|
|
4 |
|
|
|
23.9 |
|
|
|
5 |
|
|
Dividend Restrictions: The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s retained net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. During 2005, the Bank could, without prior approval, declare dividends of approximately $1.6 million plus any 2005 net profits retained to the date of the dividend declaration.
|
|
|
49 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13– INTEREST RATE SWAPS
On August 30, 2002, the Company entered into a $25 million 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 million 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 2004 and 2003, $777,000 and $771,000 was transferred out of other comprehensive income as an increase to interest income on loans. Based on current rates, $308,000 is expected to be transferred out of other comprehensive income as an increase to interest income on loans during 2005. The fair value of the swaps were liabilities of $1.0 million and $413,000 as of year-end 2004 and 2003 and are reported in other liabilities in the Company’s consolidated financial statements.
NOTE 14 - OFF-BALANCE-SHEET ACTIVITIES
Some financial instruments, such as commitments to make loans for the Company’s portfolio, credit lines and letters of credit, are issued to meet customer-financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk was as follows at year-end.
|
|
|
2004 |
|
2003 |
|
||||||||
|
|
|
|
|
|
|
||||||||
|
|
|
Fixed |
|
Variable |
|
Fixed |
|
Variable |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
(In thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to make loans |
|
$ |
808 |
|
$ |
8,172 |
|
$ |
307 |
|
$ |
8,382 |
|
|
Unused lines
of credit |
|
|
— |
|
|
142,787 |
|
|
— |
|
|
78,961 |
|
|
Letters of
credit |
|
|
— |
|
|
4,586 |
|
|
— |
|
|
3,832 |
|
Commitments to make loans are generally made for periods of 30 days or less and are at market rates. The fixed rate loan commitments have interest rates ranging from approximately 6.75% to 7.50% and maturities ranging from 5 years to 20 years.
|
|
|
50 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as follows at year-end.
|
|
|
|
2004 |
|
2003 |
|
|||||||||
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
(In thousands) |
|
|||||||||||
|
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from financial financial institutions |
|
$ |
10,473 |
|
$ |
10,473 |
|
$ |
10,164 |
|
$ |
10,164 |
|
|
|
|
Interest-bearing deposits in other financial institutions |
|
|
1,859 |
|
|
1,859 |
|
|
2,217 |
|
|
2,217 |
|
|
|
|
Securities available for sale |
|
|
90,152 |
|
|
90,152 |
|
|
83,143 |
|
|
83,143 |
|
|
|
|
Loans held for sale |
|
|
1,348 |
|
|
1,366 |
|
|
1,173 |
|
|
1,188 |
|
|
|
|
Loans, net |
|
|
450,676 |
|
|
451,732 |
|
|
390,026 |
|
|
392,501 |
|
|
|
|
Federal Home Loan Bank stock |
|
|
8,365 |
|
|
8,365 |
|
|
7,999 |
|
|
7,999 |
|
|
|
|
Accrued interest receivable |
|
|
1,859 |
|
|
1,859 |
|
|
1,849 |
|
|
1,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
411,306 |
|
|
411,586 |
|
|
341,315 |
|
|
344,253 |
|
|
|
|
Short-term borrowings |
|
|
43,629 |
|
|
43,629 |
|
|
45,325 |
|
|
45,325 |
|
|
|
|
Advances from Federal Home Loan Bank |
|
|
82,000 |
|
|
88,726 |
|
|
90,200 |
|
|
99,838 |
|
|
|
|
Subordinated debentures |
|
|
7,000 |
|
|
7,000 |
|
|
— |
|
|
— |
|
|
|
|
Accrued interest payable |
|
|
729 |
|
|
729 |
|
|
351 |
|
|
351 |
|
|
|
|
Interest rate swaps |
|
|
1,005 |
|
|
1,005 |
|
|
413 |
|
|
413 |
|
The methods and assumptions used to estimate fair value are described as follows.
The estimated fair value equals the carrying amount for cash and due from banks, interest-bearing deposits in other financial institutions, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short-term borrowings, subordinated debentures, and variable rate loans or deposits that reprice frequently and fully. Security and interest rate swap fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the instrument and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is based on current fees or costs that would be charged to enter into or terminate such arrangements and is not material.
|
|
|
51 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16- PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information for Community Bank Shares of Indiana, Inc. is as follows:
CONDENSED BALANCE SHEETS
|
|
|
December 31 |
|
|||||
|
|
|
2004 |
|
2003 |
|
|||
|
|
|
|
|
|
|
|||
|
|
|
(In thousands) |
|
|||||
|
ASSETS |
|
|
|
|
|
|
|
|
|
Cash and due from financial
institutions |
|
$ |
657 |
|
$ |
— |
|
|
|
Interest-bearing deposits
in other financial institutions |
|
|
— |
|
|
1 |
|
|
|
Premises and equipment, net |
|
|
— |
|
|
802 |
|
|
|
Receivables from
subsidiaries |
|
|
— |
|
|
12 |
|
|
|
Investment in subsidiaries |
|
|
49,145 |
|
|
42,293 |
|
|
|
Other assets |
|
|
516 |
|
|
1,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
50,318 |
|
$ |
44,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
Short–term borrowings |
|
$ |
— |
|
$ |
1,200 |
|
|
|
Subordinated debentures |
|
|
7,000 |
|
|
— |
|
|
|
Accrued expenses and other
liabilities |
|
|
537 |
|
|
734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
7,537 |
|
|
1,934 |
|
|
Total shareholders’ equity |
|
|
42,781 |
|
|
42,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
50,318 |
|
$ |
44,223 |
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF INCOME
|
|
|
Years ended December 31 |
|
|||||||||
|
|
|
2004 |
|
2003 |
|
2002 |
|
|||||
|
|
|
|
|
|
|
|
|
|||||
|
|
|
(In thousands) |
|
|||||||||
|
Income |
|
|
|
|
|
|
|
|
|
|
||
|
|
Dividends from subsidiaries |
|
$ |
2,600 |
|
$ |
2,700 |
|
$ |
4,300 |
|
|
|
|
Management and other fees
from subsidiaries |
|
|
1,955 |
|
|
2,409 |
|
|
2,269 |
|
|
|
|
Interest and dividend
income |
|
|
— |
|
|
2 |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Total income |
|
|
4,555 |
|
|
5,111 |
|
|
6,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Expense |
|
|
|
|
|
|
|
|
|
|
||
|
|
Operating expenses |
|
|
2,724 |
|
|
5,151 |
|
|
4,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Income (loss) before income
taxes and equity in undistributed net income of subsidiaries |
|
|
1,831 |
|
|
(40 |
) |
|
1,913 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Income tax benefit |
|
|
525 |
|
|
982 |
|
|
814 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Income before equity in
undistributed net income of subsidiaries |
|
|
2,356 |
|
|
942 |
|
|
2,727 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Equity in undistributed
(distributions in excess) of net income of subsidiaries |
|
|
232 |
|
|
1,360 |
|
|
(601 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Net income |
|
$ |
2,588 |
|
$ |
2,302 |
|
$ |
2,126 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
52 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
Years ended December 31 |
|
||||||||||
|
|
|
2004 |
|
2003 |
|
2002 |
|
||||||
|
|
|
|
|
|
|
|
|
||||||
|
|
|
(In thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash flows
from operating activities |
|
|
|
|
|
|
|
|
|
|
|||
|
|
Net income |
|
$ |
2,588 |
|
$ |
2,302 |
|
$ |
2,126 |
|
||
|
|
Adjustments to reconcile
net income to net cash from operating activities |
|
|
|
|
|
|
|
|
|
|
||
|
|
Equity (in undistributed)
distributions in excess of net income of subsidiaries |
|
|
(232 |
) |
|
(1,360 |
) |
|
601 |
|
||
|
|
Depreciation |
|
|
— |
|
|
395 |
|
|
418 |
|
||
|
|
(Increase) decrease in
other assets and liabilities, net |
|
|
(6,753 |
) |
|
295 |
|
|
(469 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Net cash from operating
activities |
|
|
(4,397 |
) |
|
1,632 |
|
|
2,676 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash flows
from investing activities |
|
|
|
|
|
|
|
|
|
|
|||
|
|
Net change in
interest-bearing deposits in other financial institutions |
|
|
1 |
|
|
— |
|
|
85 |
|
||
|
|
Purchase of premises and
equipment, net |
|
|
802 |
|
|
(259 |
) |
|
(449 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Net cash from investing
activities |
|
|
803 |
|
|
(259 |
) |
|
(364 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash flows
from financing activities |
|
|
|
|
|
|
|
|
|
|
|||
|
|
Net change in short-term
borrowings |
|
|
(1,200 |
) |
|
270 |
|
|
930 |
|
||
|
|
Proceeds from issuance of
subordinated debentures |
|
|
7,000 |
|
|
— |
|
|
— |
|
||
|
|
Exercise of stock options |
|
|
407 |
|
|
208 |
|
|
120 |
|
||
|
|
Purchase of treasury stock |
|
|
(533 |
) |
|
(475 |
) |
|
(1,596 |
) |
||
|
|
Stock dividend declared
(10%) |
|
|
(4 |
) |
|
— |
|
|
— |
|
||
|
|
Cash dividends paid |
|
|
(1,419 |
) |
|
(1,376 |
) |
|
(1,766 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
Net cash from financing
activities |
|
|
4,251 |
|
|
(1,373 |
) |
|
(2,312 |
) |
||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net change in cash |
|
|
657 |
|
|
— |
|
|
— |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash at beginning of year |
|
|
— |
|
|
— |
|
|
— |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash at
end of year |
|
$ |
657 |
|
$ |
— |
|
$ |
— |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
53 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 – EARNINGS PER SHARE
The factors used in the earnings per share computation follows.
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
(In thousands, except per share amounts) |
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
$ |
2,588 |
|
|
$ |
2,302 |
|
|
$ |
2,126 |
|
|
||||
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Common shares issued |
|
|
|
3,001 |
|
|
|
3,001 |
|
|
|
3,001 |
|
|
|||
|
|
|
Less: |
Unallocated ESOP shares |
|
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(9 |
) |
|
||
|
|
|
Treasury stock |
|
|
|
(371 |
) |
|
|
(380 |
) |
|
|
(312 |
) |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Average shares outstanding |
|
|
|
2,628 |
|
|
|
2,617 |
|
|
|
2,680 |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Net income per common
share, basic |
|
|
$ |
0.98 |
|
|
$ |
0.88 |
|
|
$ |
0.79 |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Diluted |
|
|
$ |
2,588 |
|
|
$ |
2,302 |
|
|
$ |
2,126 |
|
|
||||
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Average shares: |
|
|
|
2,628 |
|
|
|
2,617 |
|
|
|
2,680 |
|
|
|||
|
|
|
Common shares outstanding for basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Add: Dilutive effects of outstanding options |
|
|
|
30 |
|
|
|
17 |
|
|
|
18 |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Average shares and dilutive potential common shares |
|
|
$ |
2,658 |
|
|
$ |
2,634 |
|
|
$ |
2,698 |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Net income per common
share, diluted |
|
|
$ |
0.97 |
|
|
$ |
0.87 |
|
|
$ |
0.79 |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
There were no anti-dilutive stock options on common shares for 2004. Stock options for 31,100 and 69,700 common shares were excluded from 2003 and 2002 diluted earnings per share because they were antidilutive.
|
|
|
54 |
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 – OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income components and related taxes were as follows.
|
|
|
2004 |
|
2003 |
|
2002 |
|
||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
(In thousands) |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain
(loss) on available for sale securities |
|
$ |
(210 |
) |
$ |
(927 |
) |
$ |
2,365 |
|
|
|
Less reclassification
adjustments for gains recognized in income |
|
|
(138 |
) |
|
(653 |
) |
|
(511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss)
on securities available for sale, net of reclassifications |
|
|
(348 |
) |
|
(1,580 |
) |
|
1,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain
(loss) on interest rate swaps |
|
|
185 |
|
|
(388 |
) |
|
915 |
|
|
|
Amounts reclassified to
interest income |
|
|
(777 |
) |
|
(771 |
) |
|
(169 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss)
on interest rate swaps, net of reclassifications |
|
|
(592 |
) |
|
(1,159 |
) |
|
746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in minimum pension
liability |
|
|
(54 |
) |
|
28 |
|
|
(127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss) before tax effects and cumulative effect of change in accounting
principle |
|
|
(994 |
) |
|
(2,711 |
) |
|
2,473 |
|
|
|
Tax effect |
|
|
370 |
|
|
979 |
|
|
(882 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(loss) |
|
$ |
(624 |
) |
$ |
(1,732 |
) |
$ |
1,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 19 – QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
Earnings Per Share |
|
||||||||||
|
|
|
Interest |
|
Net Interest |
|
Net |
|
|
|
||||||||||
|
|
|
|
|
|
Basic |
|
Diluted |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
(In thousands, except per share amounts) |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
6,522 |
|
|
$ |
3,462 |
|
|
$ |
607 |
|
$ |
0.23 |
|
$ |
0.23 |
|
|
|
Second quarter |
|
|
6,692 |
|
|
|
3,624 |
|
|
|
605 |
|
|
0.23 |
|
|
0.23 |
|
|
|
Third quarter |
|
|
7,027 |
|
|
|
3,790 |
|
|
|
657 |
|
|
0.25 |
|
|
0.25 |
|
|
|
Fourth quarter |
|
|
7,545 |
|
|
|
4,114 |
|
|
|
719 |
|
|
0.27 |
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
6,250 |
|
|
$ |
3,443 |
|
|
$ |
746 |
|
$ |
0.29 |
|
$ |
0.28 |
|
|
|
Second quarter |
|
|
6,260 |
|
|
|
3,275 |
|
|
|
542 |
|
|
0.21 |
|
|
0.21 |
|
|
|
Third quarter |
|
|
6,297 |
|
|
|
3,328 |
|
|
|
509 |
|
|
0.19 |
|
|
0.19 |
|
|
|
Fourth quarter |
|
|
6,445 |
|
|
|
3,531 |
|
|
|
505 |
|
|
0.19 |
|
|
0.19 |
|
|
|
|
55 |
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
There has been no change in the Company’s principal independent accountant during the Company’s two most recent fiscal years.
ITEM 9A. 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 annual 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.
There was no information to be disclosed by the Company on a Form 8-K during the fourth quarter of 2004 but not reported.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors and executive officers of the Registrant and reporting under Section 16 of the Securities Exchange Act of 1934 is incorporated herein by reference to information under the headings “ELECTION OF DIRECTORS: Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 2005.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by reference to the information under the headings “ELECTION OF DIRECTORS: Executive Compensation-Summary Compensation Table”, -”Compensation of Directors”, -”Defined Benefit Pension Plan”, -”Employment and Retirement Agreements”, and -”Compensation Committee Interlocks and Insider Participation in Compensation Decisions” in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 2005.
Information concerning security ownership of management is incorporated herein by reference to the information under the heading “ELECTION OF DIRECTORS: Stock Ownership by Directors and Executive Officers”, “Information About Our Other Stock Compensation Plans”, “Executive Compensation-Summary Compensation Table” and “Approval of Stock Award Plan” in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and transactions is incorporated herein by reference to the information under the headings “ELECTION OF DIRECTORS: Compensation Committee Interlocks and Insider Participation in Compensation Decisions”, “Indebtedness of Management”, and “Other Transactions with Management and Related Parties” in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services is incorporated herein by reference to the information under the headings “RATIFICATION OF APPOINTMENT OF AUDITORS: Report of Audit Committee” in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 2005.
|
|
|
56 |
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a)(1)
Financial Statements
|
|
|
|
The
following financial statements are included in Item 8 of this Form 10-K: |
|
|
|
Report
of Independent Registered Public Accounting Firm |
|
Consolidated
Balance Sheets |
|
Consolidated
Statements of Income |
|
Consolidated
Statements of Changes in Shareholders’ Equity |
|
Consolidated
Statements of Cash Flows |
|
Notes
to Consolidated Financial Statements |
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or the required information has been included in the Consolidated Financial Statements or notes thereto.
|
(a)
(3) Exhibits |
|
|
|
The
following exhibits are filed herein: |
|
Exhibit |
|
Document |
|
|
|
|
|
3.1 |
|
Articles of Incorporation (1) |
|
3.2 |
|
Bylaws (1) |
|
4.0 |
|
Common Stock Certificate (1) |
|
10.1 |
|
Employment Agreement with Dale L. Orem * (2) |
|
10.2 |
|
Retirement Agreement with Robert E. Yates * (2) |
|
10.3 |
|
Employment Agreement with James D. Rickard * (3) |
|
10.4 |
|
Community Bank Shares of Indiana, Inc. 1997 Stock Incentive Plan * (4) |
|
10.5 |
|
Community Bank Shares of Indiana, Inc. Dividend Reinvestment Plan * (5) |
|
10.6 |
|
Employment Agreement with Patrick J. Daily * (6) |
|
10.7 |
|
Employment Agreement with Christopher L. Bottorff * (6) |
|
10.8 |
|
Data Processing Services Agreement with Jack Henry and Associates, Inc. (6) |
|
10.9 |
|
Electronic Funds Transfer Agreement with Jack Henry and Associates, Inc. (6) |
|
10.10 |
|
Employment Agreement with Kevin J. Cecil * (7) |
|
10.11 |
|
Employment Agreement with Paul A. Chrisco * (7) |
|
10.12 |
|
Consulting Agreement with Dale L. Orem * (7) |
|
10.13 |
|
Community Bank Shares of Indiana, Inc. and Affiliates Business Ethics Policy (7) |
|
10.14 |
|
Lease Agreement with Al Josam Dixieland, LLC (7) |
|
10.15 |
|
Lease Agreement with JWL Properties, LLC (7) |
|
11.1 |
|
Computation of Earnings Per Share |
|
21.0 |
|
Subsidiaries of Registrant |
|
23.1 |
|
Consent of Crowe Chizek and Company LLC |
|
31.1 |
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
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Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report pursuant to Item 601 of Regulation S-K.
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(1) Incorporated
herein by reference to Registration Statement on Form S-1 filed December 9,
1994 (File No. 33-87228). |
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(2) Incorporated
by reference to the Annual Report on Form 10-K filed April 2, 2002. |
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(3) Incorporated
by reference to the Quarterly Report on Form 10-Q filed November 14, 2000. |
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(4) Incorporated
by reference from the exhibits filed with the Registration Statement on Form
S-8, filed July 29, 1998, and any amendments thereto, Registration statement
No. 333- 60089. |
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(5) Incorporated
by reference from the exhibits filed with the Registration Statement on Form
S-3, filed November 14, 1997, and any amendments thereto, Registration
Statement No. 333-40211. |
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(6) Incorporated
by reference to the Annual Report on Form 10-K filed March 31, 2003. |
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(7) Incorporated
by reference to the Annual Report on Form 10-K filed March 30, 2004. |
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(b) |
Exhibits |
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See response to
Item 15(a)(3). |
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(c) |
Financial
Statement Schedules |
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See response to
Item 15(a)(2). |
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57 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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COMMUNITY BANK SHARES |
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March 30, 2005 |
By: /s/ James D. Rickard |
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James D. Rickard |
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President and Chief Executive Officer |
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Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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/s/ James D. Rickard |
President, Chief Executive Officer, and Director |
March 30, 2005 |
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(Principal Executive Officer) |
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James D. Rickard |
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/s/ Paul A. Chrisco |
Senior Vice-President and Chief Financial Officer |
March 30, 2005 |
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(Principal Financial and Accounting Officer) |
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Paul A. Chrisco |
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/s/ Timothy T. Shea |
Chairman of the Board of Directors and Director |
March 30, 2005 |
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Timothy T. Shea |
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/s/ Gary L. Libs |
Director |
March 30, 2005 |
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Gary L. Libs |
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/s/ R. Wayne Estopinal |
Director |
March 30, 2005 |
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R. Wayne Estopinal |
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/s/ George M. Ballard |
Director |
March 30, 2005 |
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George M. Ballard |
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/s/ Gordon L. Huncilman |
Director |
March 30, 2005 |
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Gordon L. Huncilman |
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/s/ Kerry M. Stemler |
Director |
March 30, 2005 |
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Kerry M. Stemler |
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/s/ Steven R. Stemler |
Director |
March 30, 2005 |
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Steven R. Stemler |
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/s/ Dale L. Orem |
Director |
March 30, 2005 |
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Dale L. Orem |
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58 |
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Exhibit |
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Document |
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3.1 |
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Articles of Incorporation (1) |
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3.2 |
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Bylaws (1) |
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4.0 |
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Common Stock Certificate (1) |
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10.1 |
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Employment Agreement with Dale L. Orem * (2) |
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10.2 |
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Retirement Agreement with Robert E. Yates * (2) |
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10.3 |
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Employment Agreement with James D. Rickard * (3) |
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10.4 |
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Community Bank Shares of Indiana, Inc. 1997 Stock Incentive Plan * (4) |
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10.5 |
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Community Bank Shares of Indiana, Inc. Dividend Reinvestment Plan * (5) |
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10.6 |
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Employment Agreement with Patrick J. Daily * (6) |
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10.7 |
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Employment Agreement with Christopher L. Bottorff * (6) |
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10.8 |
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Data Processing Services Agreement with Jack Henry and Associates, Inc. (6) |
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10.9 |
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Electronic Funds Transfer Agreement with Jack Henry and Associates, Inc. (6) |
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10.10 |
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Employment Agreement with Kevin J. Cecil * (7) |
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10.11 |
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Employment Agreement with Paul A. Chrisco * (7) |
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10.12 |
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Consulting Agreement with Dale L. Orem * (7) |
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10.13 |
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Community Bank Shares of Indiana, Inc. and Affiliates Business Ethics Policy (7) |
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10.14 |
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Lease Agreement with Al Josam Dixieland, LLC (7) |
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10.15 |
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Lease Agreement with JWL Properties, LLC (7) |
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11.1 |
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Computation of Earnings Per Share |
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21.0 |
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Subsidiaries of Registrant |
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23.1 |
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Consent of Crowe Chizek and Company LLC |
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31.1 |
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Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 of the Sarbanes -Oxley Act of 2002 |
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31.2 |
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Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 of the Sarbanes -Oxley Act of2002 |
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32.1 |
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Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes -Oxley Act of 2002 |
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32.2 |
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Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report pursuant to Item 601 of Regulation S-K.
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(1) Incorporated herein by reference to Registration Statement on Form S-1 filed December 9, 1994 (File No. 33-87228). |
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(2) Incorporated by reference to the Annual Report on Form 10-K filed
April 2, 2002. |
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(3) Incorporated by reference to the
Quarterly Report on Form 10-Q filed November 14, 2000. |
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(4) Incorporated by reference from the exhibits filed with the Registration Statement on Form S-8, filed July 29, 1998, and any amendments thereto, Registration statement No. 333- 60089. |
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(5) Incorporated by reference from the exhibits filed with the Registration Statement on Form S-3, filed November 14, 1997, and any amendments thereto, Registration Statement No. 333-40211. |
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(6) Incorporated by reference to the Annual Report on Form 10-K filed
March 31, 2003. |
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(7) Incorporated by reference to the
Annual Report on Form 10-K filed March 30, 2004. |
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59 |