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CBIN > SEC Filings for CBIN > Form 10-Q on 15-May-2013All Recent SEC Filings

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

Form 10-Q for COMMUNITY BANK SHARES OF INDIANA INC


15-May-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMMUNITY BANK SHARES OF INDIANA, INC.

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 decreased by $9.8 million to $809.7 million as of March 31, 2013 from $819.5 million as of December 31, 2012. The decline was attributable mostly to decreases in interest-bearing deposits in other financial institutions of $13.5 million and cash and due from financial institutions of $5.5 million as the Company utilized available liquidity to increase its securities available for sale by $3.1 million and increase net loans by $6.8 million.

Net loans increased by $6.8 million from $456.8 million as of December 31, 2012 to $463.6 million at March 31, 2013. The increase was attributable to net growth in the Company's commercial real estate portfolio, specifically construction and owner occupied credits as well as reduction in the allowance for loan losses.

Securities available for sale increased by $3.1 million to $254.3 million as of March 31, 2013 from $251.2 million at December 31, 2012 primarily due to purchases of $17.0 million, offset by sales of $3.4 million and maturities, prepayments and calls of $8.6 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.

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMMUNITY BANK SHARES OF INDIANA, INC.

Total deposits decreased by $2.2 million to $622.5 million as of March 31, 2013 from $624.7 million at December 31, 2012. Non-interest bearing deposits remained flat with interest-bearing deposits decreasing during the period by $2.1 million. The Company continued its funding strategy by emphasizing growth in non-interest bearing deposits and pricing its interest bearing deposits at an appropriate level given on-balance sheet liquidity and the amount of unpledged securities in its investment portfolio.

Net Income Available to Common Shareholders. Net income available to common shareholders increased to $1.7 million for the three months ended March 31, 2013 from $1.6 million for the same period in 2012. Basic and diluted earnings per common share increased to $0.50 per share for the first quarter of 2013 as compared to $0.48 per common share for the first quarter of 2012. The increase in net income available to common shareholders was attributable to decreases in provision for loan losses of $1.3 million and income tax expense of $132,000, offset by decreases in net interest income of $231,000, non-interest income of $884,000, and an increase in non-interest expense of $204,000. The annualized return on average assets and average shareholders' equity were 0.95% and 8.87% for the three months ended March 31, 2013, respectively, compared to 0.93% and 9.06% for the equivalent period in 2012.

Net interest income. Net interest income decreased from $7.3 million for the three months ended March 31, 2012 to $7.1 million in 2013, and the Company's net interest margin on a fully taxable equivalent basis decreased to 4.06% from 4.24%. The decrease in the net interest margin and income was primarily due to reduction in the average yield of interest bearing assets from 4.85% on $734.8 million for the first quarter in 2012 to 4.40% on $747.4 million for 2013 mostly due to a decrease in the yield on taxable securities. Over the previous two years, the Company has reinvested proceeds from the sale and maturity of investment securities back into the portfolio due to weak loan demand and at lower rates given the current environment. The decrease in the cost of funds was mostly achieved through the reduction the cost of savings and other accounts and time deposits to 0.19% and 0.47% in 2013, respectively from 0.30% and 0.85%. The Company has been lowering offering rates for its deposit products given the level of on-balance sheet liquidity which has resulted in some deposit runoff with average balance for time deposits decreasing to $164.8 million in 2013 from $196.2 million in 2012. Given the current average cost of the Company's interest-bearing deposits, it is unlikely they will be able to be lowered significantly again without a corresponding decrease in balances.

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMMUNITY BANK SHARES OF INDIANA, INC.

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 March 31,
                                                2013                                         2012
                               Average                       Average        Average                       Average
                               Balance       Interest      Yield/Cost       Balance       Interest      Yield/Cost
                                           (In thousands)                               (In thousands)
ASSETS
Earning assets:
Interest-bearing deposits
with banks                    $  24,725     $       28            0.45 %   $  14,370     $       11            0.31 %
Taxable securities              172,377            729            1.72       136,975            797            2.36
Tax-exempt securities            78,125          1,144            5.94        71,202          1,092            6.22
Total loans and fees (1)
(2)                             466,133          6,156            5.36       506,237          6,846            5.48
FHLB and Federal Reserve
stock                             5,998             56            3.77         6,018             48            3.25
Total earning assets            747,358          8,113            4.40       734,802          8,794            4.85

Less: Allowance for loan
losses                           (8,752 )                                    (10,573 )
Non-earning assets:
Cash and due from banks          16,129                                       13,647
Bank premises and
equipment, net                   14,043                                       13,852
Other assets                     46,225                                       44,260
Total assets                  $ 815,003                                    $ 795,988

LIABILITIES AND
STOCKHOLDERS' EQUITY

Interest-bearing
liabilities:
Savings and other             $ 289,523     $      137            0.19 %   $ 260,340     $      190            0.30 %
Time deposits                   164,756            192            0.47       196,179            410            0.85
Other borrowings                 46,440             29            0.25        52,462            173            1.34
FHLB advances                    36,222            178            1.99        55,278            220            1.61
Subordinated debentures          17,000            102            2.43        17,189            113            2.67
Total interest-bearing
liabilities                     553,941            638            0.47       581,448          1,106            0.77

Non-interest bearing
liabilities:
Non-interest demand
deposits                        167,140                                      125,772
Accrued interest payable
and other liabilities             6,726                                        6,605
Stockholders' equity             87,196                                       82,163
Total liabilities and
stockholders' equity          $ 815,003                                    $ 795,988

Net interest income
(taxable equivalent basis)                  $    7,475                                   $    7,688
Less: taxable equivalent
adjustment                                        (389 )                                       (371 )
Net interest income                         $    7,086                                   $    7,317
Net interest spread                                               3.94 %                                       4.08 %
Net interest margin                                               4.06                                         4.24

(1) The amount of direct loan origination cost included in interest on loans was $91 and $74 for the three months ended March 31, 2013 and 2012.

(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.

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 FTE 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
                                                     March 31, 2013 compared to
                                                         Three Months Ended
                                                           March 31, 2012
                                                     Increase/(Decrease) Due to
                                                Total Net
                                                  Change          Volume        Rate
                                                           (In thousands)
Interest income:
Interest-bearing deposits with banks            $       17       $      10     $    7
Taxable securities                                     (68 )           179       (247 )
Tax-exempt securities                                   52             103        (51 )
Total loans and fees                                  (690 )          (533 )     (157 )
FHLB and Federal Reserve stock                           8               -          8
Total increase (decrease) in interest income          (681 )          (241 )     (440 )
Interest expense:
Savings and other                                      (53 )            19        (72 )
Time deposits                                         (218 )           (58 )     (160 )
Other borrowings                                      (144 )           (18 )     (126 )
FHLB advances                                          (42 )           (86 )       44
Subordinated debentures                                (11 )             -        (11 )
Total increase (decrease) in interest expense         (468 )          (143 )     (325 )
Increase (decrease) in net interest income      $     (213 )     $     (98 )   $ (115 )

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMMUNITY BANK SHARES OF INDIANA, INC.

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
                                        March 31,
Activity for the period ended:      2013          2012
                                     (In thousands)
Beginning balance                $    8,762     $ 10,234
Charge-offs:
Residential real estate                (170 )        (87 )
Commercial real estate               (1,208 )          -
Construction                              -         (333 )
Commercial business                       -         (342 )
Home equity                              (5 )       (210 )
Consumer                                (51 )        (67 )
Total                                (1,434 )     (1,039 )

Recoveries:
Residential real estate                   7           43
Commercial real estate                   31           17
Construction                              2            -
Commercial business                      30           33
Home equity                               2           14
Consumer                                 22           33
Total                                    94          140
Net loan charge-offs                 (1,340 )       (899 )

Provision                               247        1,506

Ending balance                   $    7,669     $ 10,841

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMMUNITY BANK SHARES OF INDIANA, INC.

Provision for loan losses decreased by $1.3 million for the first three months of 2013 to $247,000 compared to $1.5 million for the same period in 2012 while net charge-offs increased over the same periods from $899,000 in 2012 to $1.3 million in 2013. The Company's non-performing loans increased to $15.2 million as of March 31, 2013 from $8.7 million as of December 31, 2012. The increase in non-accrual loans and charge-offs for the three month period in 2013 was attributable to one credit relationship with a balance of $6.9 million as of March 31, 2013. During the first quarter of 2013, the Company charged off $1.2 million, or the full amount of allocated reserves, and placed the loan on non-accrual due to the maturity of the loan. The addition of this relationship to non-accrual status was the primary cause for the increase in the Company's non-performing assets from December 31, 2012. The Company did not record additional provision for loan losses related to this credit in the first quarter of 2013.

The decrease in the Company's provision for loan losses was due to improving trends in the Company's loan portfolio. Loans classified substandard or doubtful, the two most severe ratings, decreased by $3.0 million to $25.0 million at March 31, 2013 from $28.0 at December 31, 2012 while total past due loans decreased by $4.5 million to $10.8 million over the same period (see Footnote 3 to the Company's consolidated financial statements for a description of the rating classifications and more loan detail). During the quarter, the Company did not identify any new, significant impaired loan relationships or large write-downs of collateral securing impaired loans. Due to the aforementioned decrease in provision and charge-off activity, the allowance for loan losses as a percentage of loans also decreased to 1.63% of loans as of March 31, 2013 from 1.88% at December 31, 2012.

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 identify any additional problem credits, deterioration in underlying collateral values, and credits requiring further downgrades in accordance with the Company's internal policies. As of March 31, 2013, management has provided for probable incurred losses within the loan portfolio based on information currently available to the Company.

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMMUNITY BANK SHARES OF INDIANA, INC.

Asset Quality. Loans, including impaired loans, are placed on non-accrual status when they become past due ninety days or more as to principal or interest, unless they are adequately secured and in the process of collection. When these loans are placed on non-accrual status, all unpaid accrued interest is reversed and the loans remain on non-accrual status until the loan becomes current or the loan is deemed uncollectible and is charged off. Impaired loans are those loans for which it is probable that all scheduled interest and principal payments will not be received based on the contractual terms of the loan agreement. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. TDR's totaled $13.2 million and $13.8 million at March 31, 2013 and December 31, 2012, while $7.5 million and $319,000 were included in the Company's non-accrual loans as of the same dates, respectively.

The Company's non-performing assets as of March 31, 2013 and December 31, 2012 were as

                                                  March 31,       December 31,
                                                    2013              2012
                                                         (In thousands)

Loans on non-accrual status                      $    15,160     $        8,718
Loans past due over 90 days still on accrual               -                  -
Total non-performing loans                            15,160              8,718
Foreclosed and repossessed assets                      6,242              6,345
Total non-performing assets                      $    21,402     $       15,063

Non-performing loans to total loans                     3.22 %             1.88 %
Non-performing assets to total loans                    4.54               3.24
Allowance as a percent of non-performing loans         50.59             100.50
Allowance as a percent of total loans                   1.63               1.88

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMMUNITY BANK SHARES OF INDIANA, INC.

Non-interest income. Non-interest income decreased by $884,000 to $1.4 million for the quarter ended March 31, 2013 from $2.3 million for the same period in 2012 mostly due to decreases in gains on sales of available for sale securities of $721,000 and service charges on deposit accounts of $123,000. The decrease in gains on sales of available for sale securities was due to lower sales volume during 2013 as compared to 2012 as the Company sold $3.4 million in 2013 versus $24.3 million 2012. Service charge income on deposit accounts decreased to $747,000 in 2013 from $870,000 in 2012 due mostly lower non-sufficient funds fees, which declined by $85,000 from the previous quarter.

Non-interest expense. Non-interest expense increased by $204,000 to $6.1 million in 2013 from $5.9 million in 2012 due to increases in salaries and employee benefits, legal and professional service fees, and other expenses, offset by a decrease in foreclosed and repossessed assets, net, and FDIC insurance premiums. Salaries and employee benefits increased to $3.3 million in 2013 from $3.2 million while the number of full time equivalent employees increased to 200 from 198 over the same period. The increase in expense is attributable to higher accrued incentive compensation and the Company's portion of health insurance expense which increased the average expense per FTE to $16,490 in 2013 from $15,949 in 2012, or 3.4%. Legal and professional service fees increased $47,000 to $413,000 for the first quarter of 2013 from $366,000 in 2012. Most of the increase is attributed to legal fees associated with collections and consulting fees related to YCB's acquisition of the failed First Federal Bank in Lexington, Kentucky (see Footnote 9 to the Consolidated Financial Statements). Other expenses increased by $135,000 to $751,000 in the first quarter of 2013 from $616,000 in 2012 due to a $100,000 loss incurred on the disposal of land previously held for future development. Expense for foreclosed and repossessed assets, net was $(18,000) in 2013 compared to $132,000 in 2012 as the Company recognized a net gain on disposals in 2013 of $75,000 as compared a net loss of $46,000 in 2012 while net expenses associated with maintaining foreclosed and repossessed assets declined by $29,000 over the same period. FDIC insurance premiums decreased to $144,000 for the quarter ended March 31, 2013 as compared to $177,000 in the equivalent period in 2012 due to a decrease in the Company's assessment base as average assets have remained consistent while average tangible equity as increased.

Income tax expense. Income tax expense for the three months ended March 31, 2013 was $270,000 as compared to $402,000 for the equivalent period in 2012 while the effective tax rate for the respective periods declined to 12.4% in 2013 from 18.0% in 2012. The decrease in income tax expense was due to the formation of CBIN Insurance, Inc., a captive insurance subsidiary based in Nevada. CBIN Insurance, Inc. issued insurance policies to the Company's subsidiaries for certain gaps in coverage and insurable risks that may not be cost effectively obtained through third parties. From an income tax perspective, CBIN Insurance, Inc.'s revenue is exempt from federal income taxes up to $1.2 million while the expense at the subsidiaries is deductible.

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMMUNITY BANK SHARES OF INDIANA, INC.

Liquidity and Capital Resources Liquidity levels are adjusted in order to meet funding needs for deposit outflows, repayment of borrowings, and loan commitments and to meet asset/liability objectives. Our primary sources of funds are customer deposits, customer repurchase agreements, proceeds from loan repayments, maturing securities and FHLB advances. While loan repayments and maturities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. At March 31, 2013, we had cash and interest-bearing deposits with banks of $32.2 million and securities available-for-sale with a fair value of $254.3 million. If we require funds beyond the funds we are able to generate internally, we have $80.0 million in additional aggregate borrowing capacity with the Federal Home Loan Bank of Indianapolis based on our current FHLB stock holdings, unused federal funds lines of credit with various nonaffiliated financial institutions of $31.5 million. Management believes the Company's liquidity sources are adequate to meet its operational needs.

The Banks are required to maintain specific amounts of capital pursuant to regulatory requirements. As of March 31, 2013, Your Community Bank and Scott County State Bank were each considered well capitalized under regulatory capital requirements and were in compliance with all regulatory capital requirements that were effective as of such date with capital ratios as follows:

March 31, 2013:

                                                    Total              Tier 1             Tier 1
                                                 Capital To          Capital To         Capital To
                                                Risk-weighted       Risk-weighted        Average
                                                   Assets              Assets             Assets
Consolidated                                              19.4 %              18.1 %           12.3 %
Your Community Bank                                       18.7 %              17.5 %           12.2 %
Scott County State Bank                                   18.7 %              17.4 %           10.7 %

Minimum for banks to be well capitalized
under regulatory capital requirements:                    10.0 %               6.0 %            5.0 %

December 31, 2012:

                                                    Total              Tier 1             Tier 1
. . .
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