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CBIN > SEC Filings for CBIN > Form 8-K/A on 3-Jul-2013All Recent SEC Filings

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

Form 8-K/A for COMMUNITY BANK SHARES OF INDIANA INC


3-Jul-2013

Completion of Acquisition or Disposition of Assets, Financ


ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSTION OF ASSETS

The following discussion of assets acquired and liabilities assumed are presented at estimated fair value on the date of the Agreement. The fair values of the assets acquired and liabilities assumed were determined as described in Note 2 to the Statement of Assets Acquired and Liabilities Assumed, dated as of April 19, 2013, and the accompanying notes thereto, which is attached hereto as Exhibit 99.1 and incorporated herein by reference (the "Audited Statement"). These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. The Bank and the FDIC are engaged in on-going discussions that may impact which assets and liabilities are ultimately acquired or assumed by the Bank and the purchase price. In addition, the tax treatment of FDIC assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date. The disclosure set forth in this Item 2.01 reflects the status of these items to the best of management's knowledge as of July 2, 2013.

Under the terms of the Agreement, effective as of April 19, 2013, the Bank acquired assets and assumed liabilities as presented in the following table:

                                                   Contractual       Fair Value
                                                     Amount          Adjustments       Fair Value
                                                                  (In thousands)
ASSETS ACQUIRED
Cash and due from financial institutions         $       4,800                 -     $      4,800
Interest-bearing deposits in other financial
institutions                                             4,094                (5 )          4,089
Investment securities                                    1,034                (2 )          1,032
Loans                                                   67,781            (4,186 )         63,595
Federal Home Loan Bank stock                             4,024                 -            4,024
Accrued interest receivable                                192                 -              192
FDIC settlement receivable                              14,913                 -           14,913
Discount from FDIC                                      (5,850 )           5,850                -
Core deposit intangible                                      -               668              668
Foreclosed assets                                          174                 -              174
Other assets                                               133                 -              133
Total assets acquired                            $      91,295     $       2,325     $     93,620

LIABILITIES ASSUMED AND STOCKHOLDERS' EQUITY
Deposits                                         $      87,025                 -     $     87,025
Federal Home Loan Bank advances                          4,221               223            4,444
Deferred income taxes                                        -               639              639
Accrued interest payable                                    31                 -               31
Other liabilities                                           18               223              241
Total liabilities assumed                               91,295             1,085           92,380

Shareholders' Equity
Bargain purchase gain, net of taxes                          -             1,240            1,240
Total Liabilities Assumed and Stockholders'
Equity                                           $      91,295     $       2,325     $     93,620

The foregoing summary of the Agreement is not complete and is qualified in its entirety by reference to the full text of the Agreement and certain exhibits attached thereto and incorporated by reference herein.



Item 9.01. Financial Statements and Exhibits.

(a) Financial Statements of Businesses Acquired

Discussion

As set forth in Item 2.01 above, on April 19, 2013, the Bank acquired certain assets and assumed all of the deposits and certain liabilities of First Federal pursuant to the Purchase and Assumption Agreement with the FDIC. A narrative description of the anticipated effects of the First Federal acquisition on the Company's financial condition, liquidity, capital resources and operating results is presented below. This discussion should be read in conjunction with the historical financial statements and the related notes of the Company, which were filed with the Commission on Form 10-K on April 1, 2013, Form 10-Q on May 15, 2013, and the Audited Statement, which is attached hereto as Exhibit 99.1.

The Company has determined that the acquisition of the net assets of First Federal constitutes a business acquisition as defined by the Business Combinations topic of the FASB ASC. Accordingly, the assets acquired and liabilities assumed as of April 19, 2013, are presented at their fair values in the table below as required by that topic. In many cases, the determination of these fair values required management to make estimates about discount rates, expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. The amount the Company realizes on these assets could differ materially from the carrying value reflected in the attached Audited Statement primarily as a result of changes in the timing and amount of collections on the acquired loans in future periods. The acquisition was completed without a loss sharing agreement. Additionally, the Bank and the FDIC are engaged in ongoing discussions that may impact the purchase price and which assets and liabilities are ultimately acquired or assumed by the Bank and/or the purchase price.

The First Federal acquisition increased the Bank's total assets and total deposits, which are expected to positively affect the Bank's operating results, as the Bank earns more from interest earned on its loans and investments than it pays in interest on deposits and other borrowings. The ability of the Bank to successfully collect interest and principal on loans acquired will also impact the Bank's cash flows and operating results.

First Federal's 5 branches initially re-opened as branches of the Bank, however, the Bank has elected to close two of the branches and has notified customers and the applicable regulatory agencies of its plans.

The Company expects to incur acquisition and integration costs of approximately $800,000 to $1.3 million related to this transaction with approximately $950,000 expected incurred during the quarter ended June 30, 2013. Included in this amount are $32,000 of retention bonuses, $70,000 of professional fees, and $800,000 of expenses associated with converting First Federal's data to Your Community Bank's system. Management believes that subsequent to the branch closures and the systems conversion scheduled for August 2013, the Bank will achieve an 75% reduction in operating expenses associated with First Federal.

Financial Condition

In the First Federal acquisition, the Bank purchased $67.8 million in loans with a fair value of $63.6 million. This amount represents approximately 13.5% of the Company's total loans (net of the allowance for loan losses) at March 31, 2013. Other real estate acquired was $174,000 at fair value.

The Bank acquired $4.8 million in cash and cash equivalents, $4.1 million of interest-bearing deposits in other financial institutions, and $1.0 million in securities at fair value. Subsequent to closing, the securities have been sold and while the outstanding FHLB advances have been repaid.

The following table presents information with respect to the carrying value of certain earning assets acquired, as well as their principal amount and average effective yield and term, and the amounts of acquired loans with credit-related impairment that are accounted for in accordance with the provisions of the FASB Codification Topic 310-30: Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.

                                                          Schedule of Earnings Assets Acquired
                                                                     April 19, 2013
                                       Contractual                           Average Months           Effective
                                          Amount            Fair Value        to Maturity           Interest Rate
                                               (In thousands)
Earning Assets
Interest-bearing deposits in other
financial institutions                $        4,094       $      4,089                  N/A                  1.07 %

Investment securities                          1,034              1,032                  N/A (1)               N/A (1)

Non-impaired loans:
Commercial                                     2,460              2,411                   56                  6.06 %
Construction                                     305                278                  378                  5.24 %
Commercial real estate:                        9,187              9,255                  221                  5.28 %
Residential real estate                       37,839             37,368                  427                  4.71 %
Consumer                                          49                 48                   43                  8.79 %
Total non-impaired loans                      49,840             49,360                  402                  4.83 %

Impaired loans (ASC 310-30):
Commercial                                       425                372                   28                 14.63 %
Construction                                     125                100                  369                  5.95 %
Commercial real estate:                        6,497              4,911                   22                 15.09 %
Residential real estate                       10,894              8,852                  469                  6.76 %
Consumer                                           -                  -                    -                     -
Total Impaired loans                          17,941             14,235                  382                  7.05 %

Total loans                                   67,781             63,595                  399                  5.47 %

Total earning assets                  $       72,909       $     68,716

(1) Investment security was sold subsequent to acquisition at a loss of $2,000

The following table reflects the contractual maturities of the acquired loans, gross of their fair value adjustment:

                                                    Commercial        Residential
                 Commercial      Construction       Real Estate       Real Estate        Consumer         Total
                                                          (In thousands)
Contractual
Maturities:

One year or
less            $      1,411     $         150     $       4,134     $       6,055     $         15     $   11,765
One to five
years                  1,426               106             7,328             4,922               34         13,816
Over five
years                     48               174             4,222            37,756                -         42,200
Total           $      2,885     $         430     $      15,684     $      48,733     $         49     $   67,781

Rate
Sensitivity:

Fixed           $      1,838     $          90     $      10,002     $      20,575     $         49     $   32,554
Variable               1,047               340             5,682            28,158                -         35,227
Total           $      2,885     $         430     $      15,684     $      48,733     $         49     $   67,781

In the First Federal acquisition, the Bank assumed $87.0 million in deposits at estimated fair value. This amount represents an increase of approximately 14.0% to the Company's total deposits of $622.5 million at March 31, 2013. Demand and savings deposit accounts make up $36.0 million of these assumed deposits. The Bank also assumed $4.4 million in FHLB advances at estimated fair value.

In its assumption of the deposit liabilities, the Bank believed that the customer relationships associated with these deposits have intangible value. The Bank applied ASC Topic 805, which prescribes the accounting for intangible assets such as core deposit intangibles, in a business combination. The Bank determined the estimated fair value of the core deposit intangible asset totaled $668,000, which will be amortized utilizing an accelerated amortization method over an estimated economic life of six years. In determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates, age of deposit relationships, and the maturities of time deposits.

Future amortization of this core deposit intangible asset over the estimated life will decrease results of operations. Since amortization in a noncash item, it will have no effect upon future liquidity and cash flows. For the calculation of regulatory capital, this core deposit intangible asset is disallowed and is a reduction to equity capital. The Company expects that disallowing this intangible asset will not materially adversely affect the Company's or the Bank's regulatory capital ratios.

The core deposit intangible asset is subject to significant estimates by management of the Company related to the value and the life of the asset. These estimates could change over time. The Company will review the valuation of this asset periodically to ensure that no material impairment has occurred. If any impairment is subsequently determined, the Bank will record the impairment as an expense in its consolidated statement of operations.

Operating Results and Cash Flows

The Company's management has from time to time become aware of acquisition opportunities and has performed various levels of review related to potential acquisitions in the past. This acquisition was attractive to the Bank for a variety of reasons, including the:

attractiveness in the pricing of the acquired loan portfolios;

opportunity to enter the Lexington, Kentucky market ; and

opportunities to enhance income and improve efficiency.

The Company expects that the acquisition will positively affect its operating results in the second quarter of 2013 due to the bargain purchase gain recorded. Third quarter results will be negatively impacted as the Company incurs costs associated with converting First Federal's core system to the Bank's and other expenditures. The Company believes that the transaction will improve net interest income as it earns more interest on its loans and investments than it pays in interest on deposits and borrowings.

Liquidity and Capital Resources

The Bank believes that its liquidity position was not changed significantly as a result of this transaction. The Bank acquired $4.8 million in cash and cash equivalents, $4.1 million in interest-bearing deposits in other financial institutions, as well as $1.0 million of investment securities. The investment security was sold subsequent to the acquisition.

Deposits in the amount of $87.0 million were also assumed. Of this amount, $36.0 million were in the form of highly liquid transaction accounts while certificates of deposit comprised $51.0 million of total deposits.

As permitted by the FDIC, the Bank had the option to re-price the acquired deposit portfolios to current market rates within seven days of the acquisition date. In addition, depositors had the option to withdraw funds without penalty. The Bank chose to re-price the deposits assumed in the transaction to the Bank's current offering rates for the same accounts. This re-pricing triggered deposit run-off in-line with management's expectations. Through July 2, 2013, deposits at First Federal had decreased by approximately $35.8 million due primarily to redemption of certificates of deposit without penalty.

The Bank assumed $4.4 million in FHLB advances, at fair value, which were re-paid in April 2013.

A core deposit intangible of $668,000 was recorded in conjunction with the First Federal acquisition. Such intangibles are excluded from regulatory capital as calculated under regulatory accounting practices. This exclusion generally results in a reduction to the Company's regulatory capital. The Bank remains "well-capitalized" under the regulatory framework after taking into consideration the results of the First Federal acquisition.

Financial Statements

Attached hereto as Exhibit 99.1 and incorporated by reference into this Item 9.01(a) is the Audited Statement and the accompanying notes thereto.

Report of Independent Registered Public Accounting Firm Statement of Assets Acquired and Liabilities Assumed at April 19, 2013 Notes to Statement of Assets Acquired and Liabilities Assumed

The Company has omitted certain financial information of First Federal required by Rule 3-05 of Regulation S-X and the related pro forma financial information under Article 11 of Regulation S-X in accordance with a request for relief granted by the Commission in accordance with the guidance provided in SAB 1:K. SAB 1:K provides relief from the requirements of Rule 3-05 of Regulation S-X and the related pro forma financial information required under Article 11 of Regulation S-X under certain circumstances, including a transaction such as the one set forth in the Agreement, in which the Company engages in an acquisition of a troubled financial institution for which historical financial statements are not reasonably available.

(b) Pro forma financial information

The Company has omitted certain financial information of First Federal required by Rule 3-05 of Regulation S-X and the related pro forma financial information under Article 11 of Regulation S-X in accordance with a request for relief granted by the Commission in accordance with the guidance provided in SAB 1:K. SAB 1:K provides relief from the requirements of Rule 3-05 of Regulation S-X and the related pro forma financial information required under Article 11 of Regulation S-X under certain circumstances, including a transaction such as the one set forth in the Agreement, in which the Company engages in an acquisition of a troubled financial institution for which historical financial statements are not reasonably available.

(c) Not applicable.

(d) Exhibits

  Exhibit No.      Description
         2.1       Purchase and Assumption Agreement - Whole Bank; All Deposits, among
                   Federal Deposit Insurance Corporation, receiver of First Federal Bank,
                   Lexington, Kentucky, the Federal Deposit Insurance Corporation and
                   Your Community Bank, dated as of April 19, 2013 (incorporated herein
                   by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by
                   the Company on April 25, 2013)


        23.1       Consent of Crowe Horwath LLP, Independent Registered Public Accounting
                   Firm


        99.1       Report of Independent Registered Public Accounting Firm Statement of
                   Assets Acquired and Liabilities Assumed at April 19, 2013;

                   Notes to Statement of Assets Acquired and Liabilities Assumed

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