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| CBIN > SEC Filings for CBIN > Form 10-Q on 14-Aug-2012 | All Recent SEC Filings |
14-Aug-2012
Quarterly Report
Safe Harbor Statement for Forward-Looking Statements
This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on our current expectations regarding our business strategies and their intended results and our future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to our actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; competitive conditions in the banking markets served by our subsidiaries; the adequacy of the allowance for losses on loans and the level of future provisions for losses on loans; and other factors disclosed periodically in our filings with the Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by us or on our behalf. We assume no obligation to update any forward-looking statements.
Financial Condition
Total assets increased by $29.5 million to $826.9 million as of June 30, 2012 from $797.4 million at December 31, 2011. The increase was mostly attributable to increases in interest-bearing deposits in other financial institutions of $12.6 million and $24.6 million in securities available for sale. Total deposits increased by $28.0 million as non interest-bearing deposits increased by $21.6 million to $149.4 million and interest-bearing deposits increased to $459.9 million as of June 30, 2012. During the first six months of 2012, the Company utilized the net cash inflows from the growth in deposits to increase interest bearing deposits in other financial institutions and securities available for sale.
Net loans decreased to $487.4 million as of June 30, 2012 from $489.7 million as of December 31, 2011. The decrease in net loans was due to soft loan demand in the Company's market area as loan originations have not kept pace with repayments. In addition, the Company charged-off $1.7 million in loans, recorded provision for loan losses of $2.5, and transferred $3.0 million in loans to foreclosed assets during the first half of 2012 (see the "Allowance and Provision for Loan Losses" section of management's discussion and analysis for further information on charge-off activity and credit quality).
Securities available for sale increased from December 31, 2011 to $223.3 million as of June 30, 2012 as purchases totaled $77.2 million for the first six months of 2012 while sales equaled $40.2 million and maturities, prepayments and calls were $14.2 million. The securities portfolio serves as a source of liquidity and earnings and plays an important part in the management of interest rate risk. The current strategy for the investment portfolio is to maintain an overall average repricing term between 3.0 and 3.5 years to limit exposure to rising interest rates.
Net Income. Net income available to common shareholders was $1.7 million for the three months ended June 30, 2012 as compared to $1.6 million for the equivalent period in 2011. Basic and diluted earnings per common share increased to $0.51 per common share for the second quarter of 2012 from $0.48 and $0.46 per common share in the same period in 2011, respectively. The increase in net income available to common shareholders was due to an increase in net interest income of $216,000 and a decrease in income tax expense of $165,000 offset primarily by an increase in non-interest expense of $290,000. The annualized return on average assets and average shareholders' equity were 0.96% and 9.47% for the three months ended June 30, 2012, respectively.
Net income available to common shareholders for the six month period ended June 30, 2012 increased to $3.3 million from $3.1 million in the equivalent period in 2011. Basic and diluted earnings per common share were $0.99 in 2012, an increase from $0.94 and $0.90 in 2011. The increase in earnings was due to an increase in net interest income of $552,000 and non-interest income of $391,000 and a decrease in income tax expense $257,000, offset by increases in provision for loan losses of $729,000 and non-interest expense of $325,000. The annualized return on average assets and shareholders' equity were 0.95% and 9.27% for the six months ended June, 2012.
Net interest income. Net interest income for the second quarter of 2012 increased to $7.3 million from $7.1 million in 2011 while the Company's net interest margin on a fully taxable equivalent basis increased to 4.09% from 4.08%. The increase in net interest income was achieved through a reduction on the average cost of interest-bearing liabilities to 0.75% in 2012 from 1.06% in 2011 while the yield on interest earning assets decreased to 4.68% from 4.95% for the same periods. The Company's yield on loans increased slightly in 2012 to 5.44% from 5.42% in 2011 due to measures taken to maintain loan yield in a low rate environment including rate floors and pricing discipline on new credits. The yield on taxable securities declined from 3.00% in 2011 to 2.12%in 2012 while the average balances increased to $153.4 million in 2012 from $147.3 million in 2011. The Company sold securities throughout 2012 and 20112 resulting in gains of $438,000 in the second quarter of 2012 and $469,000 in 2011 to augment income and reinvested the proceeds in securities. The result has been a compression of the yield in the taxable security portfolio as higher-yielding taxable securities have been replaced with lower securities. The most significant reason for the increase in the Company's net interest income and margin was the reduction in cost of interest-bearing, specifically the cost of time deposits and savings and other deposit costs. The cost of time deposits decreased from 1.39% for the second quarter of 2011 to 0.81% in 2012 as the Company lowered its offering rates for new and maturing accounts while the cost of savings and other deposit accounts decreased to 0.31% from 0.48% over the same period. Due to net loan repayments and positive cash flows from operations, management has been able to lower its offering rates on all deposit products while maintaining the average balance at relatively consistent levels.
Net interest income for the six months ended June 30, 2012 increased to $14.6 million from $14.0 million in 2011 while the net interest margin on a fully taxable equivalent basis increased to 4.17% in 2012 from 4.04% in 2011. The increase in net interest margin was the result of a decrease in the cost of interest-bearing liabilities to 0.76% for the first six months of 2012 from 1.11% in 2011, offset by a decrease in the yield on interest earning assets from 4.94% to 4.77% over the same period. The largest component of the Company's interest earning assets, loans, had an average balance of $499.9 million and an average yield of 5.46% for 2012 as compared to an average balance and yield of $507.4 million and 5.47% in 2011. The yield on taxable investment securities declined to 2.23% for the six months ended 2012 from 3.03% in 2011 due to sales of higher yielding securities that were replaced by lower yielding purchases. During the first half of 2012, the Company sold $40.2 million of securities, realizing gains of $1.2 million and purchased $77.2 million of securities during the same period. The cost of interest bearing liabilities declined during the same period as most categories were lower in 2012 as compared to 2011, most significant of which were time deposits and savings and other. The cost of time deposits declined to 0.83% on an average balance of $197.5 million in 2012 from 1.45% and $219.5 million in 2011. The Company has lowered its offering rates for time deposits which has resulted in a lower average cost, but has also led to a reduction in accounts.
Average Balance Sheets. The following tables set forth certain information relating to our average balance sheets and reflect the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are computed on daily average balances. For analytical purposes, net interest margin and net interest spread are adjusted to a taxable equivalent adjustment basis to recognize the income tax savings on tax-exempt assets, such as state and municipal securities. A tax rate of 34% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent ("FTE") basis. Loans held for sale and loans no longer accruing interest are included in total loans.
Three Months Ended June 30,
2012 2011
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(In thousands) (In thousands)
ASSETS
Earning assets:
Interest-bearing deposits in other
financial institutions $ 18,756 $ 14 0.29 % $ 5,815 $ 6 0.40 %
Taxable securities 153,384 812 2.12 147,270 1,102 3.00
Tax-exempt securities 71,094 1,091 6.16 57,519 930 6.48
Total loans and fees (1) (2) 499,216 6,774 5.44 507,224 6,849 5.42
FHLB and Federal Reserve stock 6,003 50 3.31 6,642 46 2.76
Total earning assets 748,453 8,741 4.68 724,470 8,933 4.95
Less: Allowance for loan losses (10,863 ) (11,022 )
Non-earning assets:
Cash and due from banks 15,630 15,481
Bank premises and equipment, net 13,759 13,616
Other assets 45,608 38,950
Total assets $ 812,587 $ 781,495
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LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings and other $ 258,838 $ 202 0.31 % $ 266,606 $ 322 0.48 % Time deposits 201,045 406 0.81 210,613 729 1.39 Other borrowings 54,634 170 1.25 51,797 194 1.50 FHLB advances 55,000 215 1.57 45,055 219 1.95 Subordinated debentures 17,000 110 2.60 17,000 102 2.41 Total interest-bearing liabilities 586,517 1,103 0.75 591,071 1,566 1.06 Non-interest bearing liabilities: Non-interest demand deposits 137,577 120,096 Accrued interest payable and other liabilities 5,767 3,664 Stockholders' equity 82,726 66,664 Total liabilities and stockholders' equity $ 812,587 $ 781,495 Net interest income (taxable equivalent basis) $ 7,638 $ 7,367 Less: taxable equivalent adjustment (371 ) (316 ) Net interest income $ 7,267 $ 7,051 Net interest spread 3.93 % 3.88 % Net interest margin 4.09 4.08 |
(1) The amount of direct loan origination cost included in interest on loans was $72 and $182 for the three months ended June 30, 2012 and 2011.
(2) Calculations include non-accruing loans in the average loan amounts outstanding.
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
Six Months Ended June 30,
2012 2011
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
(In thousands) (In thousands)
ASSETS
Earning assets:
Interest-bearing deposits in
other financial institutions $ 16,484 $ 25 0.30 % $ 11,719 $ 15 0.26 %
Taxable securities 144,427 1,609 2.23 149,892 2,255 3.03
Tax-exempt securities 70,757 2,183 6.19 56,181 1,821 6.54
Total loans and fees (1) (2) 499,945 13,620 5.46 507,429 13,762 5.47
FHLB and Federal Reserve stock 5,978 98 3.28 6,724 95 2.84
Total earning assets 737,591 17,535 4.77 731,945 17,948 4.94
Less: Allowance for loan losses (10,660 ) (10,894 )
Non-earning assets:
Cash and due from banks 14,563 13,764
Bank premises and equipment, net 13,730 13,625
Other assets 44,495 38,592
Total assets $ 799,720 $ 787,032
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LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings and other $ 258,158 $ 392 0.30 % $ 265,893 $ 644 0.49 % Time deposits 197,534 816 0.83 219,525 1,578 1.45 Other borrowings 53,260 343 1.29 50,749 390 1.55 FHLB advances 54,835 435 1.59 45,884 481 2.11 Subordinated debentures 17,000 223 2.63 17,000 204 2.42 Total interest-bearing liabilities 580,787 2,209 0.76 599,051 3,297 1.11 Non-interest bearing liabilities: Non-interest demand deposits 130,983 120,147 Accrued interest payable and other liabilities 5,956 2,578 Stockholders' equity 81,994 65,256 Total liabilities and stockholders' equity $ 799,720 $ 787,032 Net interest income (taxable equivalent basis) $ 15,326 $ 14,651 Less: taxable equivalent adjustment (742 ) (619 ) Net interest income $ 14,584 $ 14,032 Net interest spread 4.00 % 3.83 % Net interest margin 4.17 4.04 |
(1) The amount of direct loan origination cost included in interest on loans was $146 and $377 for the six months ended June 30, 2012 and 2011.
(2) Calculations include non-accruing loans in the average loan amounts outstanding.
Rate/Volume Analysis. The table below illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and interest expense on a fully taxable equivalent basis during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Three Months Ended June 30, 2012 Six Months Ended June 30, 2012
compared to compared to
Three Months Ended June 30, 2011 Six Months Ended June 30, 2011
Increase/(Decrease) Due to Increase/(Decrease) Due to
Total Net Total Net
Change Volume Rate Change Volume Rate
(In thousands) (In thousands)
Interest income:
Interest-bearing deposits in
other financial institutions $ 8 $ 10 $ (2 ) $ 10 $ 7 $ 3
Taxable securities (290 ) 44 (334 ) (646 ) (80 ) (566 )
Tax-exempt securities 161 210 (49 ) 362 453 (91 )
Total loans and fees (75 ) (109 ) 34 (142 ) (204 ) 62
FHLB and Federal Reserve
stock 4 (5 ) 9 3 (11 ) 14
Total increase (decrease) in
interest income (192 ) 150 (342 ) (413 ) 165 (578 )
Interest expense:
Savings and other (120 ) (9 ) (111 ) (252 ) (18 ) (234 )
Time Deposits (323 ) (32 ) (291 ) (762 ) (145 ) (617 )
Other borrowings (24 ) 10 (34 ) (47 ) 19 (66 )
FHLB advances (4 ) 43 (47 ) (46 ) 84 (130 )
Subordinated debentures 8 - 8 19 - 19
Total increase (decrease) in
interest expense (463 ) 12 (475 ) (1,088 ) (60 ) (1,028 )
Increase (decrease) in net
interest income $ 271 $ 138 $ 133 $ 675 $ 225 $ 450
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Allowance and Provision for Loan Losses. Our financial performance depends on the quality of the loans we originate and management's ability to assess the degree of risk in existing loans when it determines the allowance for loan losses. An increase in loan charge-offs or non-performing loans or an inadequate allowance for loan losses could have an adverse effect on net income. The allowance is determined based on the application of loss estimates to graded loans by categories.
Summary of Loan Loss Experience:
Three Months Ended Six Months Ended
June 30, June 30,
Activity for the period ended: 2012 2011 2012 2011
(In thousands)
Beginning balance $ 10,841 $ 10,881 $ 10,234 $ 10,864
Charge-offs:
Residential real estate (128 ) (282 ) (183 ) (364 )
Commercial real estate (198 ) - (198 ) (16 )
Construction (110 ) - (443 ) (19 )
Commercial business (164 ) (615 ) (506 ) (1,197 )
Home equity (73 ) - (283 ) (99 )
Consumer (49 ) (75 ) (116 ) (186 )
Total (722 ) (972 ) (1,729 ) (1,881 )
Recoveries:
Residential real estate - 6 - 7
Commercial real estate 9 6 26 12
Construction - - - 2
Commercial business 19 38 52 75
Home equity - 11 25 12
Consumer 18 32 51 101
Total 46 93 154 209
Net loan charge-offs (676 ) (879 ) (1,575 ) (1,672 )
Provision for loan losses 944 911 2,450 1,721
Ending balance $ 11,109 $ 10,913 $ 11,109 $ 10,913
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Provision for loan losses increased to $944,000 for the second quarter of 2012 from $911,000 in 2011 and to $2.5 million from $1.7 million for the first six weeks of 2012. Net charge-offs for the three month period ended June 30, 2012 decreased to $676,000 from $879,000 in 2011 and decreased to $1.6 million for the six month period in 2012 from $1.7 million in 2011. The Company's provision for loan losses for the three and six month periods continues to be impacted by elevated levels of non-performing loans of $15.5 million other problem loan credits and changes in loss exposure for specific credits. In addition, the previously mentioned levels of non-performing and problem loans have all remained at elevated levels as compared to December 31, 2011 resulting in added provision to cover the probable incurred credit losses. As of June 30, 2012 and December 31, 2011, the Company had a total of $71.3 million in classified loans, with a large increase in the amount of loans classified as "doubtful", the Company's most severe loan classification (see Note 3 to the Company's consolidated financial statements for a description of loan classifications and other loan information). The increase in doubtful loans was primarily due to the migration of a large commercial real estate relationship of $8.7 million to doubtful during the period which contributed the majority of the $1.8 million in provision for loan losses in the commercial real estate portfolio. The relationship is classified as a troubled debt restructuring and was current as of June 30, 2012. Non-accrual loans have decreased slightly to $15.5 million as of June 30, 2012 from $15.8 million at December 31, 2011. Non-accrual construction loans continue to have the highest rate of delinquency as compared to the Company's other classes of loans, with $8.4 million of the $15.5 million loans on non-accrual, or 54.8% of the total. The Company has allocated $1.1 million as of June 30, 2012 for probable incurred losses on construction loans. As of June 30, 2012, the Company had allocated $6.5 million for loans collectively evaluated for impairment and $4.6 million for loans individually evaluated for impairment as compared to $6.6 million and $3.7 million at December 31, 2011, respectively. The increase in the allocation for loans individually evaluated for impairment from December 31, 2011 to June 30, 2012 was primarily attributable to the aforementioned commercial real estate relationship.
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. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. 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 continues to closely monitor its loan portfolio to
. . .
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