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| CBIN > SEC Filings for CBIN > Form 10-Q on 14-Nov-2012 | All Recent SEC Filings |
14-Nov-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 $14.0 million to $811.3 million as of September 30, 2012 from $797.4 million at December 31, 2011. The increase was mostly attributable to increases in securities available for sale of $51.3 million and foreclosed and repossessed assets of $6.0 million, offset by decreases in interest-bearing deposits in other financial institutions of $19.4 million and net loans by $25.4 million. Total deposits increased by $21.2 million as non-interest-bearing deposits increased by $19.9 million to $147.7 million and interest-bearing deposits increased to $454.8 million as of September 30, 2012.
Net loans decreased to $464.3 million as of September 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 $5.6 million in loans, recorded provision for loan losses of $3.3, and transferred $10.0 million in loans to foreclosed assets during the first nine months 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). During the first nine months of 2012, the Company utilized the net cash inflows from the growth in deposits to pay down $15 million in Federal Home Loan Bank advances.
Securities available for sale increased from December 31, 2011 to $250.1 million as of September 30, 2012 as purchases totaled $120.1 million for the first nine months of 2012 while sales equaled $43.8 million and maturities, prepayments and calls were $24.4 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 $1.8 million for the three months ended September 30, 2012 as compared to $1.3 million for the equivalent period in 2011. Basic and diluted earnings per common share increased to $0.53 per common share for the second quarter of 2012 from $0.40 and $0.38 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 $156,000 and a decrease in preferred stock dividend and discount accretion by $398,000 offset primarily by a decrease in non-interest income of $229,000. The annualized return on average assets and average shareholders' equity were 0.94% and 9.06% for the three months ended September 30, 2012, respectively.
Net income available to common shareholders for the nine month period ended September 30, 2012 increased to $5.1 million from $4.4 million in the equivalent period in 2011. Basic and diluted earnings per common share were $1.52 in 2012, an increase from $1.34 and $1.29 in 2011. The increase in earnings was due to an increase in net interest income of $708,000 and non-interest income of $162,000 and decreases in preferred dividends and discount accretion of $461,000 and income tax expense of $331,000, offset by increases in provision for loan losses of $609,000 and non-interest expense of $382,000. The annualized return on average assets and shareholders' equity were 0.95% and 9.19% for the nine months ended September 30, 2012.
Net interest income. Net interest income for the third quarter of 2012 increased to $7.1 million from $7.0 million in 2011 while the Company's net interest margin on a fully taxable equivalent basis decreased to 3.96% from 4.06%. The increase in net interest income was achieved through a reduction on the average cost of interest-bearing liabilities to 0.69% in 2012 from 0.97% in 2011 while the yield on interest earning assets decreased to 4.49% from 4.86% for the same periods. The Company's yield on loans decreased slightly in 2012 to 5.40% from 5.46% in 2011 as loans that are repaid are replaced with new and renewed loans at lower rates. The yield on taxable securities declined from 2.82% in 2011 to 1.77% in 2012 while the average balances increased to $154.0 million in 2012 from $118.2 million in 2011. In the third quarters of 2012 and 2011 the Company sold securities resulting in gains of $250,000 in 2012, down from $552,000 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-yielding securities. The most significant reason for the increase in the Company's net interest income was the reduction in costs of interest-bearing deposits, specifically the costs of time deposits, savings and other, and Federal Home Loan Bank advances. The cost of time deposits decreased from 1.26% for the third quarter of 2011 to 0.70% 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 0.25% from 0.42% over the same period. The cost of Federal Home Loan Bank advances decreased to 1.70% for the third quarter of 2012 from 2.14% over the same period in 2011 as the company was able to pay down existing advances and borrow at lower rates. 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. Despite the increase in net interest income, the net interest margin decreased due to the net increase in average earning assets and lower interest rates earned by those assets compared to the same period for 2011.
Net interest income for the nine months ended September 30, 2012 increased to $21.7 million from $21.0 million in 2011 while the net interest margin on a fully taxable equivalent basis increased to 4.10% 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 0.74% for the first nine months of 2012 from 1.06% in 2011, offset by a decrease in the yield on interest earning assets from 4.92% to 4.67% over the same period. The loan portfolio represents the largest component of the Company's interest earning assets with an average balance of $496.2 million and an average yield of 5.44% for 2012 as compared to an average balance and yield of $505.2 million and 5.47% in 2011. The yield on taxable investment securities declined from 2.97% for the nine months ended 2011 to 2.07% in 2012 due to sales of higher yielding securities that were replaced by lower yielding purchases. During the first nine months of 2012, the Company sold securities, realizing gains of $1.4 million. 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, savings and other and Federal Home Loan Bank advances. The cost of time deposits declined to 0.79% on an average balance of $195.8 million in 2012 from 1.39% and $214.0 million in 2011 as higher cost time deposits mature and replaced by lower costing deposits. The Company has continued to lower its offering rates for savings and other which has resulted in an average cost of 0.29% in 2012 compared to 0.46% for the same period in 2011. The cost of Federal Home Loan Bank advances decreased from 2.12% for the first nine months in 2011 to 1.63% for 2012 due to the maturity of $25.0 million in advances with an average rate of 1.28% which were partially replaced with an advance of $10.0 million with a rate of 0.76%.
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 $ 31,562 $ 32 0.40 % $ 31,239 $ 14 0.18 %
Taxable securities 153,981 687 1.77 118,214 841 2.82
Tax-exempt securities 72,400 1,096 6.01 58,294 951 6.47
Total loans and fees (1)
(2) 488,806 6,653 5.40 500,870 6,896 5.46
FHLB and Federal Reserve
stock 6,011 49 3.22 5,925 45 3.01
Total earning assets 752,760 8,517 4.49 714,542 8,747 4.86
Less: Allowance for loan
losses (10,866 ) (10,062 )
Non-earning assets:
Cash and due from banks 13,757 20,715
Bank premises and
equipment, net 13,796 13,630
Other assets 46,023 40,263
Total assets $ 815,470 $ 779,088
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LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings and other $ 262,024 $ 168 0.25 % $ 277,985 $ 293 0.42 % Time deposits 192,484 338 0.70 203,255 646 1.26 Other borrowings 53,386 164 1.22 49,021 178 1.44 FHLB advances 51,087 219 1.70 40,000 216 2.14 Subordinated debentures 17,000 111 2.58 17,000 103 2.40 Total interest-bearing liabilities 575,981 1,000 0.69 587,261 1,436 0.97 Non-interest bearing liabilities: Non-interest demand deposits 148,467 116,436 Accrued interest payable and other liabilities 5,982 4,559 Stockholders' equity 85,041 70,832 Total liabilities and stockholders' equity $ 815,470 $ 779,088 Net interest income (taxable equivalent basis) $ 7,517 $ 7,311 Less: taxable equivalent adjustment (373 ) (323 ) Net interest income $ 7,144 $ 6,988 Net interest spread 3.80 % 3.89 % Net interest margin 3.96 4.06 |
(1) The amount of direct loan origination cost included in interest on loans was $71 and $141 for the three months ended September 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
Nine Months Ended September 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 $ 21,547 $ 57 0.35 % $ 18,297 $ 29 0.21 %
Taxable securities 147,635 2,296 2.07 139,217 3,096 2.97
Tax-exempt securities 71,308 3,279 6.13 56,893 2,773 6.52
Total loans and fees (1)
(2) 496,205 20,273 5.44 505,217 20,658 5.47
FHLB and Federal Reserve
stock 5,989 147 3.26 6,455 140 2.90
Total earning assets 742,684 26,052 4.67 726,079 26,696 4.92
Less: Allowance for loan
losses (10,729 ) (10,612 )
Non-earning assets:
Cash and due from banks 14,292 16,107
Bank premises and
equipment, net 13,752 13,627
Other assets 45,006 38,926
Total assets $ 805,005 $ 784,127
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LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings and other $ 259,456 $ 560 0.29 % $ 269,968 $ 937 0.46 % Time deposits 195,838 1,154 0.79 214,042 2,224 1.39 Other borrowings 53,302 507 1.27 50,167 568 1.51 FHLB advances 53,577 654 1.63 43,901 697 2.12 Subordinated debentures 17,000 334 2.62 17,000 307 2.41 Total interest-bearing liabilities 579,173 3,209 0.74 595,078 4,733 1.06 Non-interest bearing liabilities: Non-interest demand deposits 136,853 118,897 Accrued interest payable and other liabilities 5,962 3,166 Stockholders' equity 83,017 66,986 Total liabilities and stockholders' equity $ 805,005 $ 784,127 Net interest income (taxable equivalent basis) $ 22,843 $ 21,963 Less: taxable equivalent adjustment (1,115 ) (943 ) Net interest income $ 21,728 $ 21,020 Net interest spread 3.94 % 3.85 % Net interest margin 4.10 4.04 |
(1) The amount of direct loan origination cost included in interest on loans was $217 and $518 for the nine months ended September 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 September 30, 2012 Nine Months Ended September 30, 2012
compared to compared to
Three Months Ended September 30, 2011 Nine Months Ended September 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 $ 18 $ - $ 18 $ 28 $ 6 $ 22
Taxable securities (154 ) 212 (366 ) (800 ) 178 (978 )
Tax-exempt securities 145 217 (72 ) 506 670 (164 )
Total loans and fees (243 ) (165 ) (78 ) (385 ) (368 ) (17 )
FHLB and Federal Reserve stock 4 1 3 7 (11 ) 18
Total increase (decrease) in
interest income (230 ) 265 (495 ) (644 ) 475 (1,119 )
Interest expense:
Savings and other (125 ) (16 ) (109 ) (377 ) (35 ) (342 )
Time Deposits (308 ) (33 ) (275 ) (1,070 ) (176 ) (894 )
Other borrowings (14 ) 15 (29 ) (61 ) 34 (95 )
FHLB advances 3 53 (50 ) (43 ) 136 (179 )
Subordinated debentures 8 - 8 27 - 27
Total increase (decrease) in
interest expense (436 ) 19 (455 ) (1,524 ) (41 ) (1,483 )
Increase (decrease) in net
interest income $ 206 $ 246 $ 40 $ 880 $ 516 $ 364
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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 Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
(In thousands)
Activity for the period ended:
Beginning balance $ 11,109 $ 10,913 $ 10,234 $ 10,864
Charge-offs:
Residential real estate (173 ) (120 ) (356 ) (483 )
Commercial real estate (2,845 ) (210 ) (3,043 ) (226 )
Construction (223 ) (866 ) (666 ) (885 )
Commercial business (470 ) (1,520 ) (976 ) (2,717 )
Home equity (63 ) (53 ) (346 ) (153 )
Consumer (52 ) (71 ) (168 ) (257 )
Total (3,826 ) (2,840 ) (5,555 ) (4,721 )
Recoveries:
Residential real estate - - - 6
Commercial real estate 16 7 42 19
Construction 53 - 53 2
Commercial business 17 26 69 101
Home equity 12 8 37 21
Consumer 23 30 74 131
Total 121 71 275 280
Net loan charge-offs (3,705 ) (2,769 ) (5,280 ) (4,441 )
Provision for loan losses 851 971 3,301 2,692
Ending balance $ 8,255 $ 9,115 $ 8,255 $ 9,115
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Provision for loan losses decreased to $851,000 for the third quarter of 2012 from $971,000 in 2011 and increased to $3.3 million from $2.7 million for the first nine months of 2012. Net charge-offs for the three month period ended September 30, 2012 increased to $3.7 million from $2.8 million in 2011 and to $5.3 million for the nine month period in 2012 from $4.4 million in 2011. The Company's provision for loan losses for the three and nine month periods continues to be impacted by elevated levels of non-performing loans of $14.5 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 September 30, 2012 and December 31, 2011, the Company had a total of $57.2 million in classified loans, as loans classified as "watch", "substandard", and "doubtful" decreased from the end of the year (see Note 3 to the Company's consolidated financial statements for a description of loan classifications and other loan information). The decrease in classified loans was primarily due to a charge-off of $2.5 million and the associated transfer to foreclosed assets of $6.2 million for one credit relationship during the third quarter of 2012. The transfer to foreclosed assets was the primary factor in the increase in foreclosed assets from December 31, 2011 to September 30, 2012. As a result of the charge-off, the Company's allowance to loan losses as a percentage of loans decreases substantially from the previous quarter and the end of the year. The Company had previously provided for the charge-off and did not record provision in the third quarter associated with the credit. Provision did remain elevated due to elevated levels of non-accrual loans which decreased to $14.5 million as of September 30, 2012 from $15.8 million at December 31, 2011. Construction loans continue to have the highest rate of delinquency as compared to the Company's other classes of loans, with $7.4 million of the $14.5 million loans . . .
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