Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CBIN > SEC Filings for CBIN > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for COMMUNITY BANK SHARES OF INDIANA INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for COMMUNITY BANK SHARES OF INDIANA INC


1-Apr-2013

Annual Report


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 subsidiaries, the Banks, at December 31, 2012 and 2011, and the consolidated results of operations for each of the years in the three year period ended December 31, 2012. 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 Banks, which are community-oriented financial institutions offering a variety of financial services to its local communities. The Banks are 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 Banks originate and sell into the secondary market mortgage loans for the purchase of single-family homes in Floyd, Clark, and Scott counties, Indiana, and Jefferson and Nelson counties, Kentucky, including surrounding communities. The Banks invest 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 Banks' 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, advances from the FHLB Indianapolis, and subordinated debentures. The earnings of the Banks are also affected by 1) provision for loan losses, 2) non-interest income (including mortgage banking income, net gains on sales of securities, deposit account service charges, earnings on company owned life insurance, interchange income, 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, legal and professional fees, FDIC insurance premiums, net foreclosed and repossessed asset expense, and other expenses, such as postage, printing, and telephone expenses), and 4) income tax expense.

Forward Looking Information

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 Banks operate, 2) adverse changes in the legislative and regulatory environment affecting the Company and its subsidiary Banks, 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 (see Item 1A of this annual report on Form 10-K for more risk factors). 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

The Company's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and follow general practices within the financial services industry. The most significant accounting policies followed by the Company are presented in Note 1 to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, fair value of investment securities and deferred tax assets to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

Allowance for Loan Losses

The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated fair value of collateral securing the loans, estimated losses on loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the allowance for loan losses, and a discussion of the factors driving changes in the amount of the allowance for loan losses is included under "Asset Quality" below.

Loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, amounts of allowances are allocated to individual loans based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Company. Included in the review of individual loans are those that are impaired. The Company evaluates the collectability of both principal and interest when assessing the need for a loss accrual. Historical loss rates are applied to other loans not subject to allowance allocations. These historical loss rates may be adjusted for significant factors that, in management's judgment, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs and nonaccrual loans), changes in mix, asset quality trends, risk management and loan administration, changes in internal lending policies and credit standards, and examination results from bank regulatory agencies and the Company's internal credit examiners.

The Company has not substantively changed any aspect to its overall approach in the determination of the allowance for loan losses. There have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance.

Based on the procedures discussed above, management is of the opinion that the allowance of $8.8 million was adequate to address probable incurred credit losses associated with the loan portfolio at December 31, 2012.

Fair Value of Trust Preferred Securities

The Company had six trust preferred securities in its investment portfolio as of December 31, 2012 with a combined amortized cost of $4.0 million and a fair value of $1.2 million as of the same date. Beginning in 2008, the market for these types of securities effectively froze as market participants were unwilling to conduct transactions unless forced to do so. As a result, the fair value of these securities began deteriorating significantly in 2008 and remained depressed through 2012. In 2009 and 2010, the Company recorded aggregate other-than-temporary impairment ("OTTI") charges to earnings of $1.5 million related to five of the six securities in its portfolio due to continued weakening of the underlying issuers. Management evaluates these investments for OTTI by estimating the anticipated discounted cash flows from each security. The determination of the anticipated cash flows and the discount rate are both significant estimates requiring management's judgment. Also, the estimated fair value of these securities is more difficult to determine due to the current market volatility and illiquidity. The valuation model to determine fair value utilizes discounted cash flow models with significant unobservable inputs. In management's estimation, the valuation method provided a more relevant and accurate representation of the fair value of these securities as of December 31, 2012.

Carrying Value of Foreclosed and Repossessed Assets

Foreclosed and repossessed assets are acquired through or instead of loan foreclosure and are initially measured at fair value less estimated costs to sell. The Company obtains appraisals to determine the initial fair value and then makes any adjustments deemed necessary based on prevailing market conditions and length the asset remains in the Company's inventory. Determining the carrying value requires significant management judgment as foreclosed and repossessed assets are typically acquired in distressed situations which may materially impact the valuation compared to similar assets in non-distressed sales transactions. Also, if foreclosed and repossessed assets are not sold in a timely manner, they can deteriorate in value significantly as there may be volatility in the market. At December 31, 2012, the Company had foreclosed and repossessed assets of $6.3 million which, in management's estimation, were reported at the appropriate carrying value.

Deferred Tax Assets

The Company has a net deferred tax asset of approximately $2.4 million. The Company evaluates this asset on a quarterly basis. To the extent the Company believes it is more likely than not that it will not be utilized, the Company will establish a valuation allowance to reduce its carrying amount to the amount it expects to be realized. At December 31, 2012, a valuation allowance of $1.6 million has been established against the outstanding deferred tax asset due to incurred net operating losses for state income taxes. The net operating loss is partially due to YCB's Nevada subsidiaries that hold and manage YCB's investments and for the results of 2009 including elevated provision for loan losses. There is uncertainty the Company will be able to utilize this benefit, thus a valuation allowance has been established against the state net operating loss. Note 11 to the Consolidated Financial Statements describes the net deferred tax asset. The Company was profitable in 2010, 2011, and 2012 and has a positive earnings outlook for 2013. The net loss for 2009 was primarily attributable to a goodwill and other intangible asset impairment of $16.2 million and an elevated provision for loan losses of $15.9 million which were not repeated in 2010, 2011, and 2012 and are not expected to be repeated in 2013. As of December 31, 2012, the Company has $638,000 of remaining other intangible assets subject to impairment and has an allowance for loan losses to total loans ratio of 1.92% which management believes is sufficient to cover probable incurred losses as of that date. The estimate of the realizable amount of this asset is a critical accounting policy.

Highlights

The Company had net income available to common shareholders of $6.9 million for the year ended December 31, 2012 compared to $6.0 million for 2011. The increase in earnings in 2012 was attributable to an increase in net interest income of $523,000 and decreases in income tax expense of $406,000 and preferred dividends of $615,000. Earnings per basic and diluted common shares increased to $2.06 for the year ended December 31, 2012 compared to basic and diluted earnings per common share of $1.82 and $1.79 in 2011. The Company's book value per common share increased to $17.15 per share at December 31, 2012 from $15.47 at December 31, 2011.

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)      2012              2011          2010
Net income available to common shareholders        $     6,921       $     6,031     $ 5,923
Basic earnings per common share                           2.06              1.82        1.80
Diluted earnings per common share                         2.06              1.79        1.77
Return on average assets                                  0.95 %            0.94 %      0.85 %
Return on average equity                                  9.16             10.58       10.95

The Company's total assets increased to $819.5 million at December 31, 2012 from $797.4 million at December 31, 2011 primarily due to an increase in securities available for sale of $52.5 million, offset by decreases in net loans and settlement receivable for security sales of $32.9 million and $3.4 million, respectively. Total deposits increased by $43.3 million to $624.7 million at December 31, 2012, primarily attributed to non-interest deposits increasing by $41.5 million from 2011. Other borrowings and FHLB advances decreased by $5.4 million and $15.0 million, respectively, to $45.5 million and $40.0 million, and settlement liability for security purchases decreased by $6.9 million, as of December 31, 2012. Total shareholders' equity increased by $7.0 million to $86.4 million at December 31, 2012 as the Company achieved net income available to common shareholders of $6.9 million, and declared and paid dividends on common shares of $1.3 million.

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.

For the year ended December 31, 2012, net interest income increased to $28.8 million from $28.3 million in 2011 while the net interest margin on a taxable equivalent basis was 4.07% for both 2012 and 2011. The increase in net interest income from 2011 to 2012 can be attributed mostly to a decrease in the Company's cost of interest bearing liabilities of 31 basis points, primarily time deposits and savings and other. The decrease in the cost of interest bearing liabilities was partially offset by a decrease in the yield on interest earning assets of 27 basis points which was mostly attributable to the decline in the yield on the Company's investment securities portfolio during 2012. Also, the Company's average non-interest bearing deposits increased during 2012 to $141.3 million from $119.9 million in 2011 which partially offset the decrease in the yield on interest earning assets.

Average interest earning assets increased from $726.6 million for 2011 to $741.3 million in 2012, mostly due to increases in average taxable securities. The average balance of taxable securities has increased to $152.4 million in 2012 from $139.7 million in 2011, while the yield has declined to 1.94% from 2011 as the Company sold a significant portion of the portfolio during 2012 which, along with proceeds from maturities and prepayments, were reinvested at lower yields. The Company's average balance in tax-exempt securities increased to $72.0 million from $58.3 million in 2011, while the yield on a fully taxable equivalent basis declined from 6.48% in 2011 to 6.09% in 2012. The decrease in the yield on tax-exempt securities was due to additional purchases of municipal securities during 2012. The Company's yield on loans remained relatively flat at 5.43% on an average balance of $490.0 million for 2012. The decrease in the average balance was due to net loan payments of $19.3 million, transfers to foreclosed and repossessed assets of $12.1 million, and charge-offs during 2012 of $6.0 million. The decline in yield was due to new loans and renewals being originated at lower rates as the result of competition from other lending institutions and a historically low rate environment. The markets in which the Company operates continue to be extremely competitive for loans to qualified borrowers which adds downward pressure on the yield on loans.

Average interest bearing liabilities decreased to $574.8 million for 2012 as compared to $591.7 million in 2011 with average costs of 0.70% and 1.01%, respectively. The decrease in average balance and cost in 2012 was the result of a decline in time deposits. The Company has a strong liquidity position which has allowed management to lower its offering rates on deposits. In doing so, the average balance and cost of time deposits decreased to $191.7 million and 0.74% for 2012 from $208.6 million and 1.31% in 2011. Other contributions to the decrease in cost of funds in 2012 were lower average cost of savings and other deposits, which decreased to 0.27%, other borrowings of 1.15%, and FHLB advances which declined to 1.69%. During 2012, the Company was able to continue to lower interest rates which resulted in interest expense declines in savings and other of $434,000 and other borrowings of $139,000. In addition, the Company lowered its interest expense associated with FHLB advances by $72,000 due to the renewal of a $10.0 million advance at a lower rate and repayment of $15.0 million in advances.

For the year ended December 31, 2011, net interest income increased to $28.3 million from $27.7 million in 2010 while the net interest margin on a taxable equivalent basis increased to 4.07% in 2011 as compared to 3.90% in 2010. The increase in net interest income and margin from 2010 to 2011 was achieved mostly through a decrease in the Company's cost of interest bearing liabilities of 32 basis points, primarily time deposits and FHLB advances. The decrease in the cost of interest bearing liabilities was partially offset by a decrease in the yield on interest earning assets of 12 basis points which was mostly attributable to the decline in the yield on the Company's loan portfolio during 2011. Also, the Company's average non-interest bearing deposits decreased during 2011 to $119.9 million from $135.8 million in 2010 which also offset the decline in the cost of interest bearing liabilities.

Average interest earning assets decreased from $739.8 million for 2010 to $726.6 million in 2011, mostly due to decreases in average loans and interest-bearing deposits in other financial institutions while the yield decreased from 5.01% in 2010 to 4.89% in 2011. The Company's yield on loans declined to 5.46% on an average balance of $505.1 million for 2011. The decrease in the average balance was due to net loan payments of $4.7 million and charge-offs during 2011 of $5.6 million while the reduction in yield was attributable to new loans and renewals being originated at lower rates due to the current rate environment and competition from other lending institutions. The markets in which the Company operates are extremely competitive for qualified loan customers which results in downward pressure on the loan portfolio yield. Also impacting the yield on loans are non-accrual loans of $15.8 million and troubled debt restructurings of $13.5 million, which are at below market rates for the associated risk, as of December 31, 2011. The average balance of taxable securities has increased to $139.7 million for 2011 while the yield as declined to 2.81% from 2010 as the Company sold a significant portion of the portfolio during 2011 which, along with proceeds from maturities and prepayments, were reinvested at lower yields. The Company's average balance in tax-exempt securities increased to $58.3 million in 2011 from $47.1 million in 2010 while the yield on a fully taxable equivalent basis declined to 6.48% from 6.74% over the respective periods. The decrease in the yield on tax-exempt securities was due to additional purchases of municipal securities during 2011.

Average interest bearing liabilities decreased to $591.7 million for 2011 as compared to $614.5 million in 2010 with average costs of 1.01% and 1.33%, respectively. The decrease in average balance and cost in 2011 was mostly attributable to a decline in time deposits. Due to the Company's liquidity position, management was able to lower its offering rates on deposits. As a result, the average balance and cost of time deposits decreased to $208.6 million and 1.31% for 2011 from $242.9 million and 1.76% in 2010. Also contributing to the decrease in cost of funds, were lower average balances and average cost of FHLB advances which declined to $45.6 million and 2.03% in 2011. During 2011, the Company was able to renew maturing advances at lower rates which resulted in interest expense on FHLB advances declining by $527,000.

Table 2 provides detailed information as to average balances, interest income/expense, and rates by major balance sheet category for 2010 through 2012.

Table 2 - Average Balance Sheets and Rates for Years Ended 2012, 2011 and 2010

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.

                                                  2012                                      2011                                      2010
                                   Average                     Average       Average                     Average       Average                     Average
(Dollars in thousands)             Balance      Interest        Rate         Balance      Interest        Rate         Balance      Interest        Rate
ASSETS

Earning assets:
Interest-bearing deposits in
other financial institutions      $  20,908     $      71          0.34 %   $  17,253     $      44          0.25 %   $  40,879     $      84          0.21 %
Taxable securities                  152,409         2,965          1.94       139,695         3,930          2.81       120,390         3,971          3.31
Tax-exempt securities                72,004         4,394          6.09        58,274         3,778          6.48        47,068         3,164          6.74
Total loans and fees (1)(2)         489,956        26,688          5.43       505,067        27,591          5.46       523,982        29,589          5.66
FHLB and Federal Reserve stock        5,992           202          3.36         6,327           182          2.87         7,489           162          2.17
Total earning assets                741,269        34,320          4.62       726,616        35,525          4.89       739,808        36,970          5.01

Non-interest earning assets:
Less: Allowance for loan losses     (10,181 )                                 (10,321 )                                 (13,794 )
Non-earning assets:
Cash and due from banks              15,041                                    15,805                                    36,081
Bank premises and equipment,
net                                  13,795                                    13,667                                    14,093
Other assets                         46,064                                    39,572                                    44,255
Total assets                      $ 805,988                                 $ 785,340                                 $ 820,443

LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest bearing liabilities:
Savings and other                 $ 263,355     $     710          0.27 %   $ 268,647     $   1,144          0.43 %   $ 245,431     $   1,213          0.50 %
Time deposits                       191,723         1,421          0.74       208,595         2,741          1.31       242,907         4,269          1.76
Other borrowings                     52,600           606          1.15        51,855           745          1.44        54,567           828          1.52
FHLB advances                        50,164           852          1.69        45,595           924          2.03        54,626         1,451          2.66
Subordinated debenture               17,000           441          2.59        17,000           414          2.44        17,000           419          2.47
Total interest bearing
liabilities                         574,842         4,030          0.70       591,691         5,968          1.01       614,531         8,180          1.33

Non-interest bearing
liabilities:
Non-interest bearing deposits       141,320                                   119,854                                   135,843
Other liabilities                     5,898                                     3,775                                     6,261
Shareholders' equity                 83,928                                    70,020                                    63,808
Total liabilities and
shareholders' equity              $ 805,988                                 $ 785,340                                 $ 820,443

Net interest income (taxable
equivalent basis)                                  30,290                                    29,557                                    28,790
Less: taxable equivalent
adjustment                                         (1,494 )                                  (1,284 )                                  (1,076 )
Net interest income                             $  28,796                                 $  28,273                                 $  27,714
Net interest spread                                                3.92 %                                    3.88 %                                    3.68 %
Net interest margin                                                4.07 %                                    4.07 %                                    3.90 %

(1) The amount of direct loan origination cost included in interest on loans was $308, $658, and $591 for the years ended December 31, 2012, 2011, and 2010, 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 on a fully taxable equivalent basis 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. A tax rate of 34% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent ("FTE") basis.

Table 3 - Volume/Rate Variance Analysis



                                         Year Ended December 31,2012                Year Ended December 31,2011
                                                 compared to                                compared to
                                        Year Ended December 31, 2011               Year Ended December 31, 2010
. . .
  Add CBIN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CBIN - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.