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CBIN > SEC Filings for CBIN > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for COMMUNITY BANK SHARES OF INDIANA INC

Form 10-Q for COMMUNITY BANK SHARES OF INDIANA INC


14-Aug-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 increased by $18.9 million to $838.4 million as of June 30, 2013 from $819.5 million as of December 31, 2012. The increase in total assets was primarily due to the FDIC-assisted acquisition of the First Federal Bank in Lexington, Kentucky on April 19, 2013 which accounted for $73.1 million of the Company's total assets as of June 30, 2013. Net loans increased by $84.4 million to $541.2 million as of June 30, 2013, $55.7 million of which were loans acquired in the First Federal transaction. The increase in net loans was offset by decreases in securities available for sale of $51.7 million, cash and due from banks of $6.6 million, and interest-bearing deposits in other financial institutions of $8.1 million. Total deposits increased by $49.7 million to $674.3 million as of June 30, 2013 while other borrowings and FHLB advances decreased to $38.2 million and $20.0 million, respectively.

Net loans increased to $541.2 million as of June 30, 2013, with the majority of the increase attributable to residential real estate secured by first liens, or $46.6 million. The acquisition of First Federal contributed the majority of the growth in the residential real estate portfolio, or $36.6 million, while the remaining increase was due adding loans to the portfolio rather than selling into the secondary market. During the first half of 2013, the Company elected to change its strategy of selling all one-to-four family conforming mortgages into the secondary to retaining some of the loans as a measure to offset reductions in the loan portfolio and improve yield on earning assets. In addition, the Company experienced loan growth in all loan categories as a result of the First Federal acquisition and organic loan growth (see Footnote 2 "Acquisition" for further information).

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMMUNITY BANK SHARES OF INDIANA, INC.

Securities available for sale decreased by $51.7 million to $199.5 million as of June 30, 2013 from $251.2 million at December 31, 2012 primarily due to sales of $49.7 million and maturities of $15.0 million, offset by purchases of $21.0 million. During the period, the Company sold securities to fund deposit reductions associated with the First Federal transaction as well as maturities of FHLB advances of $20.0 million and a decrease in other borrowings of $7.3 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.

Total deposits increased by $49.7 million to $674.3 million as of June 30, 2013 from $624.7 million at December 31, 2012. Over the same period, non-interest bearing deposits increased by $10.7 million while interest-bearing deposits also increased by $39.0 million. The increase in total deposits was due to the First Federal acquisition which had total deposits of $49.9 million as of June 30, 2013. At the date of acquisition, the Company assumed $87.0 million of deposits from First Federal which declined due to the election to reduce time deposit and other existing deposits rates to current offering rates for similar products. Customers were given the option to withdraw their deposits without penalty or accept the lower rates.

Net Income Available to Common Shareholders. Net income available to common shareholders increased to $1.9 million for the three months ended June 30, 2013 from $1.7 million for the same period in 2012. Basic and diluted earnings per common share increased to $0.57 per share for the second quarter of 2013 as compared to $0.51 per common share for the second quarter of 2012. The increase in net income available to common shareholders was attributable to increases in net interest income of $569,000 and non-interest income of $2.0 million offset by increases in provision for loan losses of $1.5 million and non-interest expense of $734,000. The second quarter earnings were impacted by the acquisition of First Federal, primarily non-interest income, as the Company recognized a bargain purchase gain on the transaction of $1.9 million (see further discussion in "Non-Interest Income"). The annualized return on average assets and average shareholders' equity were 1.04% and 10.05% for the three months ended June 30, 2013, respectively, compared to 0.96% and 9.47% for the equivalent period in 2012.

Net income available to common shareholders for the six month period ended June 30, 2013 increased to $3.6 million from $3.3 million in the equivalent period in 2012. Basic and diluted earnings per common share were $1.06 in 2013, an increase from $0.99 in 2012. The increase in earnings was due to an increase in non interest income of $1.1 million and net interest income of $338,000, offset by increases in provision for loan losses of $267,000 and non-interest expense of $938,000. The annualized return on average assets and shareholders' equity were 1.00% and 9.47% for the six months ended June, 2013.

PART I - ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMMUNITY BANK SHARES OF INDIANA, INC.

Net interest income. Net interest income increased from $7.3 million for the three months ended June 30, 2013 to $7.8 million in 2013, while the Company's net interest margin on a fully taxable equivalent basis increased to 4.23% from 4.09%. The increase in the net interest margin and income was primarily due to a reduction in the average cost of funds and average balance of interest-bearing liabilities coupled with flat interest income due to a declining yield on assets offset by an increase in the average balance of interest earning assets. The yield on interest-earning assets decreased to 4.50% for the second quarter of 2013 from 4.68% while the average balance of interest-earning assets increased to $780.7 million in 2013 from $748.5 million in 2012. The increase in balance is attributable to the acquisition of First Federal during the second quarter which increased the average balance of loans to $528.6 million for the second quarter of 2013 from $499.2 million in 2012. The yield on loans declined during the same period to 5.25% in 2013 from 5.44% in 2012 due to downward pressure from the current rate environment. The yield on earning assets was also impacted by a reduction in the average yield on tax-exempt and taxable securities. As securities mature or are sold, they are replaced with lower-yielding securities. The average cost of funds declined to 0.37% for the second quarter of 2013 from 0.75% in 2012 as the Company has lowered and repriced its offering rates on all deposit products. The Company's deposit mix has also changed from the second quarter of 2012 to lower cost deposits, shifting to savings and other accounts, an increase in the average balance to $321.1 million from $258.8 million, from time deposits, a decrease to $170.9 million from $201.0 million. In addition, the Company's non-interest bearing deposits increased to an average balance $173.3 million for the second quarter of 2013 from $137.6 million in 2012 which further bolstered net interest margin for the quarter.

Net interest income for the six months ended June 30, 2013 increased to $14.9 million from $14.6 million in 2012 while the net interest margin on a fully taxable equivalent basis decreased to 4.14% in 2013 from 4.17% in 2012. The decrease in net interest margin was the result of a decline in the yield on interest earning assets from 4.77% to 4.45%, offset by a decrease in the cost of interest-bearing liabilities to 0.42% for the first six months of 2013 from 0.76% in 2012. The largest component of the Company's interest earning assets, loans, had an average balance of $497.6 million and an average yield of 5.30% for 2013 as compared to an average balance and yield of $499.9 million and 5.46% in 2012. The yield on taxable investment securities declined to 1.68% for the six months ended 2013 from 2.23% in 2012 due to sales of higher yielding securities that were replaced by lower yielding purchases. During the first half of 2013, the Company sold $49.7 million of securities, realizing gains of $515,000 and purchased $21.0 million of securities during the same period. The cost of interest bearing liabilities declined during the same period as most categories were lower in 2013 as compared to 2012, most significant of which were time deposits and savings and other. The cost of time deposits declined to 0.42% on an average balance of $167.8 million in 2013 from 0.83% and $197.5 million in 2012. The Company has lowered its offering rates for time deposits which has resulted in a lower average cost, but has also led to a reduction in accounts.

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 June 30,
                                                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                    $  10,325     $       16            0.63 %   $  18,756     $       14            0.29 %
Taxable securities              154,220            629            1.64       153,384            812            2.12
Tax-exempt securities            79,778          1,148            5.77        71,094          1,091            6.16
Total loans and fees (1)
(2)                             528,635          6,924            5.25       499,216          6,774            5.44
FHLB and Federal Reserve
stock                             7,749             48            2.46         6,003             50            3.31
Total earning assets            780,707          8,765            4.50       748,453          8,741            4.68

Less: Allowance for loan
losses                           (7,768 )                                    (10,863 )
Non-earning assets:
Cash and due from banks          18,876                                       15,630
Bank premises and
equipment, net                   13,684                                       13,759
Other assets                     45,488                                       45,608
Total assets                  $ 850,987                                    $ 812,587

LIABILITIES AND
STOCKHOLDERS' EQUITY

Interest-bearing
liabilities:
Savings and other             $ 321,149     $      147            0.18 %   $ 258,838     $      202            0.31 %
Time deposits                   170,854            155            0.36       201,045            406            0.81
Other borrowings                 46,432             28            0.24        54,634            170            1.25
FHLB advances                    26,940            107            1.59        55,000            215            1.57
Subordinated debentures          17,000            102            2.40        17,000            110            2.60
Total interest-bearing
liabilities                     582,375            539            0.37       586,517          1,103            0.75

Non-interest bearing
liabilities:
  Non-interest demand
deposits                        173,330                                      137,577
  Accrued interest payable
and other liabilities             7,362                                        5,767
  Stockholders' equity           87,920                                       82,726
Total liabilities and
stockholders' equity          $ 850,987                                    $ 812,587

Net interest income
(taxable equivalent basis)                  $    8,226                                   $    7,638
Less: taxable equivalent
adjustment                                        (390 )                                       (371 )
Net interest income                         $    7,836                                   $    7,267
Net interest spread                                               4.13 %                                       3.93 %
Net interest margin                                               4.23                                         4.09

(1) The amount of direct loan origination cost included in interest on loans was $90 and $72 for the three months ended June 30, 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.



                                                           Six Months Ended June 30,
                                               2013                                        2012
                               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                  $  17,485     $      44            0.50 %   $  16,484     $      25            0.30 %
Taxable securities              163,248         1,358            1.68       144,427         1,609            2.23
Tax-exempt securities            78,956         2,292            5.85        70,757         2,183            6.19
Total loans and fees (1)
(2)                             497,558        13,080            5.30       499,945        13,620            5.46
FHLB and Federal Reserve
stock                             6,878           104            3.06         5,978            98            3.28
Total earning assets            764,125        16,878            4.45       737,591        17,535            4.77

Less: Allowance for loan
losses                           (8,257 )                                   (10,660 )
Non-earning assets:
Cash and due from banks          17,510                                      14,563
Bank premises and
equipment, net                   13,863                                      13,730
Other assets                     45,840                                      44,495
Total assets                  $ 833,081                                   $ 799,720

LIABILITIES AND
STOCKHOLDERS' EQUITY

Interest-bearing
liabilities:
Savings and other             $ 305,423     $     284            0.19 %   $ 258,158     $     392            0.30 %
Time deposits                   167,821           347            0.42       197,534           816            0.83
Other borrowings                 46,436            57            0.25        53,260           343            1.29
FHLB advances                    31,555           285            1.82        54,835           435            1.59
Subordinated debentures          17,000           204            2.42        17,000           223            2.63
Total interest-bearing
liabilities                     568,235         1,177            0.42       580,787         2,209            0.76

Non-interest bearing
liabilities:
  Non-interest demand
deposits                        170,252                                     130,983
  Accrued interest payable
and other liabilities             7,034                                       5,956
  Stockholders' equity           87,560                                      81,994
Total liabilities and
stockholders' equity          $ 833,081                                   $ 799,720

Net interest income
(taxable equivalent basis)                  $  15,701                                   $  15,326
Less: taxable equivalent
adjustment                                       (779 )                                      (742 )
Net interest income                         $  14,922                                   $  14,584
Net interest spread                                              4.03 %                                      4.01 %
Net interest margin                                              4.14                                        4.17

(1) The amount of direct loan origination cost included in interest on loans was $181 and $146 for the six months ended June 30, 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. AND SUBSIDIARIES

Rate/Volume Analysis. The table below illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and interest expense on a fully taxable equivalent basis during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

                                    Three Months Ended June 30, 2013                Six Months Ended June 30, 2013
                                               compared to                                   compared to
                                    Three Months Ended June 30, 2012                Six Months Ended June 30, 2012
                                       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   $        2       $       (8 )     $      10     $        19       $       2     $     17
Taxable securities                   (183 )              4            (187 )          (251 )           192         (443 )
Tax-exempt securities                  57              128             (71 )           109             243         (134 )
Total loans and fees                  150              390            (240 )          (540 )           (65 )       (475 )
FHLB and Federal Reserve
stock                                  (2 )             13             (15 )             6              14           (8 )
Total increase (decrease) in
interest income                        24              527            (503 )          (657 )           386       (1,043 )
Interest expense:
Savings and other                     (55 )             41             (96 )          (108 )            63         (171 )
Time Deposits                        (251 )            (54 )          (197 )          (469 )          (109 )       (360 )
Other borrowings                     (142 )            (22 )          (120 )          (286 )           (39 )       (247 )
FHLB advances                        (108 )           (111 )             3            (150 )          (204 )         54
Subordinated debentures                (8 )              -              (8 )           (19 )             -          (19 )
Total increase (decrease) in
interest expense                     (564 )           (146 )          (418 )        (1,032 )          (289 )       (743 )
Increase (decrease) in net
interest income                $      588       $      673       $     (85 )   $       375       $     675     $   (300 )

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          Six Months Ended
                                        June 30,                   June 30,
Activity for the period ended:     2013           2012         2013         2012
                                                  (In thousands)
Beginning balance                $   7,669      $ 10,841     $  8,762     $ 10,234
Charge-offs:
Residential real estate               (202 )        (128 )       (372 )       (183 )
Commercial real estate                   -          (198 )     (1,208 )       (198 )
Construction                          (156 )        (110 )       (156 )       (443 )
Commercial business                    (39 )        (164 )        (39 )       (506 )
Home equity                            (27 )         (73 )        (32 )       (283 )
Consumer                               (44 )         (49 )        (95 )       (116 )
Total                                 (468 )        (722 )     (1,902 )     (1,729 )

Recoveries:
Residential real estate                  3             -           10            -
Commercial real estate                   3             9           34           26
Construction                             2             -            4            -
Commercial business                     20            19           50           52
Home equity                              2             -            4           25
Consumer                                21            18           43           51
Total                                   51            46          145          154
Net loan charge-offs                  (417 )        (676 )     (1,757 )     (1,575 )
Provision for loan losses            2,470           944        2,717        2,450

Ending balance                   $   9,722      $ 11,109     $  9,722     $ 11,109

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 increased to $2.5 million and $2.7 million for the three and six months ending June30, 2013 from $944,000 and $2.5 million for the same periods in 2012. Net charge-offs for the three and six months ended June 30, 2013 were $417,000 and $1.8 million compared to $676,000 and $1.6 million in 2012. The Company's non-performing loans increased to $13.0 million as of June 30, 2013 from $8.7 million as of December 31, 2012. The increase in non-accrual loans was due to the acquisition of First Federal Bank during the second quarter of 2013 which added $4.6 million to the total at the end of the quarter. Net-charge-offs for the six months ended June 30, 2013 increased from 2012 as the Company charged off $1.2 million for one credit relationship, or the full amount of allocated reserves. In addition, the Company transferred $4.1 million to foreclosed and repossessed assets related to this credit during the quarter. The Company did not record additional provision for loan losses related to this credit in the first quarter of 2013.

The increase in the Company's provision for loan losses for the three and six months ended June 30, 2013, was primarily due to the downgrade of one construction real estate credit relationship during the quarter. During the quarter, the Company determined the loan was impaired as the borrower was almost 60 days past due as of the end of the quarter. The Company allocated $2.0 million for the credit during the second quarter against its recorded investment of $2.8 million.

The Company's classified loans increased to $58.5 million as of June 30, 2013 from $50.8 million as of December 31, 2012 due to the aforementioned acquisition of First Federal, which had $15.9 million of classified credits as of the end of the quarter. In accordance with FASB ASC 310-30, the Company did not establish an allowance for loan losses for purchased credit impaired loans. Loans acquired with deteriorated credit quality were recorded at their fair value which included an adjustment for the estimated difference between the loans . . .

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