UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------------------------
FORM 10-Q
(Mark One)
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30,1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 0-25766
Community Bank Shares of Indiana, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1938254
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
202 East Spring St., PO Box 939, New Albany, Indiana 47150
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 1-812-944-2224
-------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check (X) whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS; Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date 2,728,402.
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC.
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page
---------
<S> <C>
Item 1. Financial Statements
Condensed consolidated statement of financial condition,
September 30, 1998 and December 31, 1997 3
Condensed consolidated statement of operations,
three- and nine-months ended September 30, 1998 and 1997 4-5
Condensed consolidated statement of cash flows,
nine-months ended September 30, 1998 and 1997 6-7
Notes to condensed consolidated financial statements 8-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11-13
Part II. Other Information 14-15
Signatures 16
</TABLE>
<PAGE>
PART I - ITEM 1
CONSOLIDATED BALANCE SHEETS
COMMUNITY BANK SHARES OF INDIANA, INC.
In Thousands
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 5,353 $ 5,545
Interest bearing deposits with banks 14,685 11,919
Securities available for sale, at market:
Mortgage-backed securities 0 883
Other debt securities 0 0
Securities held to maturity:
Mortgage-backed securities 28,404 23,498
Other debt securities 59,144 66,669
Mortgage loans held for sale
Loans receivable, net 194,041 171,874
Federal Home Loan Bank stock, at cost 3,279 2,033
Foreclosed real estate 394 269
Premises and equipment, net 6,974 4,269
Accrued interest receivable:
Loans 1,218 1,128
Mortgage-backed securities 170 130
Other debt securities 814 1,249
Other assets 411 684
=========================== ==========================
Total Assets $ 314,887 $ 290,150
=========================== ==========================
LIABILITIES
Deposits $ 203,837 $ 209,005
Advances from Federal Home Loan Bank 52,500 27,000
Borrowings - repurchase agreements 15,853 12,142
Other borrowings 80 83
Advance payments by borrowers for
taxes and insurance 628 186
Accrued interest payable on deposits 175 112
Other liabilities 982 1,676
--------------------------- --------------------------
Total Liabilities 274,055 250,204
--------------------------- --------------------------
STOCKHOLDERS' EQUITY
Common stock of $.10 par value per share,
Authorized 10,000,000 shares; issued
1,983,722 shares 272 272
Additional paid in capital 19,415 19,388
Retained earnings - substantially restricted 21,567 20,730
Net unrealized gain/(loss) on assets
available for sale, net of tax 0 3
Unearned ESOP shares (422) (447)
Total Stockholders' Equity 40,832 39,946
=========================== ==========================
Total Liabilities and Stockholders' Equity $ 314,887 $ 290,150
=========================== ==========================
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
(Unaudited)
In Thousands
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 31, SEPTEMBER 31,
1998 1997 1998 1997
INTEREST INCOME:
Loans receivable
<S> <C> <C> <C> <C>
Mortgage loans $ 2,060 $ 2,236 $ 6,220 $ 6,595
Commercial loans 1,576 1,166 4,235 3,093
Consumer and other loans 330 278 936 762
Securities:
Mortgage-backed securities 427 378 1,173 1,176
Other debt securities 832 1,046 2,656 2,933
Federal Home Loan Bank stock 60 40 144 104
Interest bearing deposits with banks 235 271 810 672
-------------- ------------- ------------- -------------
TOTAL INTEREST INCOME 5,520 5,415 16,174 15,335
-------------- ------------- ------------- -------------
INTEREST EXPENSE:
Deposits 2,315 2,536 7,018 7,087
Advances from Federal Home Loan Bank
and other borrowings 755 515 1,948 1,509
-------------- ------------- ------------- -------------
TOTAL INTEREST EXPENSE 3,070 3,051 8,966 8,596
-------------- ------------- ------------- -------------
NET INTEREST INCOME 2,450 2,364 7,208 6,739
Provision for loan losses 52 72 242 167
-------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,398 2,292 6,966 6,572
-------------- ------------- ------------- -------------
NON-INTEREST INCOME:
Loan fees and service charges 197 137 568 451
Net gain on sale of loans 71 55 171 149
Income (loss) from REO operations (6) 0 (8) 0
Deposit account service charges 122 110 320 294
Commission income 138 76 369 218
Other income 14 16 47 46
-------------- ------------- ------------- -------------
TOTAL NON-INTEREST INCOME 536 394 1,467 1,158
-------------- ------------- ------------- -------------
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
(Unaudited)
In Thousands
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 31, SEPTEMBER 31,
1998 1997 1998 1997
NON-INTEREST EXPENSE
<S> <C> <C> <C> <C>
Compensation and benefits $ 1,051 $ 929 $ 3,888 $ 2,734
Occupancy and equipment 150 110 403 330
Deposit insurance premiums 27 30 86 91
Data processing service 129 119 381 354
(Gain)/loss on sale of REO (10) 0 (7) 1
Other 306 250 985 747
-------------- ------------- ------------- -------------
TOTAL NON-INTEREST EXPENSE 1,653 1,438 5,736 4,257
-------------- ------------- ------------- -------------
Income before income taxes 1,281 1,248 2,697 3,473
Income tax expense 512 460 1,102 1,294
-------------- ------------- ------------- -------------
NET INCOME $ 769 $ 788 $ 1,595 $ 2,179
============== ============= ============= =============
Basic earnings per share * $ 0.29 $ 0.29 $ 0.59 $ 0.81
============== ============= ============= =============
Dilutive earnings per share * $ 0.28 $ 0.29 $ 0.59 $ 0.81
============== ============= ============= =============
Dividends per share $ 0.120 $ 0.076 $ 0.330 $ 0.273
============== ============= ============= =============
*(See note 4)
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANK SHARES OF INDIANA, INC.
(Unaudited)
In Thousands
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITES:
<S> <C> <C>
Net income $ 1,595 $ 2,179
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums and accretion of discounts
on investment and mortgage-backed securities, net 33 (45)
Net realized securities gain - -
Provision (credit) for losses on loans 242 167
Proceeds from mortgage loan sales 11,059 9,159
Mortgage loans originated for resale (13,409) (8,999)
Net gain on sales of mortgage loans (171) (149)
Loss on foreclosed real estate - -
Depreciation expense 175 132
Deferred income taxes (675) (151)
(Increase) decrease in accrued interest receivable 306 46
Increase (decrease) in accrued interest payable 63 34
Increase (decrease) in income taxes payable (315) 343
Increase (decrease) in other assets & other liabilities 947 636
------------ -------------
Net cash flows provided by operating activities $ (150) $ 3,352
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits $(2,766) $(13,896)
Proceeds from the sale of securities available for sale - -
Proceeds from maturities of securities available for sale - 1,500
Purchases of securities available for sale - -
Proceeds from maturities of securities held to maturity 58,182 17,200
Purchases of securities held to maturity (63,770) (25,136)
Principal collected on securities available for sale 96 237
Principal collected on securities held to maturity 8,961 2,571
Purchase of Federal Home Loan Bank stock (1,246) (24)
Loan originations and principal payments on loans, net (19,888) (7,762)
Proceeds from sale of foreclosed real estate - 664
Net increase in premises and equipment (2,880) (669)
------------ -------------
Net cash flows used by investing activities $(23,311) $(25,315)
------------ -------------
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANK SHARES OF INDIANA, INC.
(Unaudited)
In Thousands
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES 1998 1997
------------ ------------
<S> <C> <C>
Net increase (decrease) in demand accounts and savings accounts $ 4,560 $ (954)
Net increase (decrease) in certificates of deposits (9,728) 17,675
Repayment of advances from Federal Home Loan bank (13,500) (8,000)
Advances from Federal Home Loan bank 39,000 13,000
Net increase (decrease) in repurchase borrowings 3,711 1,951
Net increase (decrease) in other borrowings (3) 0
Sale of stock 0 0
Dividends paid (771) (699)
------------ ------------
Net cash flows provided by financing activities $ 23,269 $ 22,973
------------ ------------
Net increase ( decrease) in cash and due from banks (192) 1,010
Cash and due from banks at beginning of period 5,545 3,849
------------ ------------
Cash and due from banks at end of period $ 5,353 $ 4,859
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payment for:
Interest $ 8,903 $ 8,533
Income taxes $ 1,417 $ 1,158
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES
Proceeds from sales of foreclosed real estate
financed through loans $ 187 $ 101
Transfers from loans to real estate acquired through foreclosure $ 312 $ 841
</TABLE>
<PAGE>
PART I - ITEM 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANK SHARES OF INDIANA, INC.
1. BASIS OF PRESENTATION OF INTERIM INFORMATION
Community Bank Shares of Indiana, Inc. (the Holding Company) was
formally established on April 7, 1995. The data contained in the financial
statements reflect consolidated Holding Company information. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principals have been omitted.
In the opinion of the management of the Company, the unaudited
consolidated financial statements include all normal adjustments considered
necessary to present fairly the financial position as of September 30, 1998, the
results of operations for the three- and nine-months ended September 30, 1998
and 1997 and cash flows for the nine months ended September 30, 1998 and
September 30, 1997. Interim results are not necessarily indicative of the
results that will be achieved for a full year.
2. PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statement data presented for the current
year and at December 31, 1997 include the accounts of Community Bank Shares of
Indiana, Inc., its subsidiaries Community Bank of Southern Indiana, Heritage
Bank of Southern Indiana, NCF Bank & Trust Co., and First Community Service
Corp., a wholly owned subsidiary of Community Bank of Southern Indiana. All
material intercompany balances and transactions have been eliminated.
3. ACQUISITION OF NCF FINANCIAL CORPORATION
On May 6, 1998, Community Bank Shares acquired NCF Financial
Corporation in a tax-free exchange accounted for under the pooling-of-interests
method of accounting. Under the terms of the merger agreement, NCF Financial
Corporation shareholders received 0.935 shares of the Company's common stock for
each of the 792,609 shares of NCF common stock outstanding. Based upon the
market price of the Company's stock on May 6, 1998, the transaction had a value
of approximately $18.3 million. The results of operations for the three- and
nine-month periods ended September 30, 1998 and 1997 include the operations of
NCF Bank & Trust Co., the wholly-owned bank subsidiary of NCF Financial
Corporation, as appropriate in a pooling-of-interests transaction. NCF Financial
Corporation was dissolved in the merger transaction. Accordingly, any operations
of NCF Financial Corporation are presented as a part of Community Bank Shares of
Indiana, Inc.
The Agreement and Plan of Reorganization, including a related Agreement
of Merger, dated December 17, 1997 between Community Bank Shares of Indiana,
Inc. and NCF Financial Corporation was previously filed as Appendix A to the
Registrant's Joint Proxy Statement/ Prospectus on Form S-4 originally dated
February 20, 1998 and amended on March 25, 1998.
<PAGE>
PART I - ITEM 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANK SHARES OF INDIANA, INC.
(Continued)
4. EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
In thousands, except for share and per share amounts 1998 1997 1998 1997
- ----------------------------------------------------
-------------- --------------- -------------- ---------------
Basic:
Earnings:
<S> <C> <C> <C> <C>
Net income $ 769 $ 788 $ 1,595 $ 2,179
============== =============== ============== ===============
Shares:
Weighted average
common shares outstanding 2,684,284 2,678,412 2,683,843 2,678,306
============== =============== ============== ===============
Net income per share, basic $ 0.29 $ 0.29 $ 0.59 $ 0.81
============== =============== ============== ===============
Diluted:
Earnings:
Net income $ 769 $ 788 $ 1,595 $ 2,179
============== =============== ============== ===============
Shares:
Weighted average
common shares outstanding 2,684,284 2,678,412 2,683,843 2,678,306
Add: Dilutive effect of
outstanding options 35,874 728 26,140 588
-------------- --------------- -------------- ---------------
Weighted average shares
outstanding, as adjusted 2,720,158 2,679,140 2,709,983 2,678,894
============== =============== ============== ===============
Net income per share, diluted $ 0.28 $ 0.29 $ 0.59 $ 0.81
============== =============== ============== ===============
</TABLE>
<PAGE>
PART I - ITEM 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANK SHARES OF INDIANA, INC.
(Continued)
5. COMPREHENSIVE INCOME
FASB Statement No. 130, "Reporting Comprehensive Income", effective for
fiscal years beginning on or after January 1, 1998, establishes standards for
reporting and displaying comprehensive income and its components. Comprehensive
income is defined as "the change in equity (net assets) of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners."
Comprehensive income for Community Bank Shares includes net income and
unrealized gains and losses on securities available for sale. The following
tables set forth the components of comprehensive income for the three- and
nine-months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------------------------
1998 1997
----------------------------- --------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Net income $ 769 $ 788
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period 1
1
Less: Reclassification adjustment for gains (losses)
included in net income
- 1 - 1
-------------- ------------ ------------ ------------
COMPREHENSIVE INCOME $ 770 $ 789
============ ============
Nine Months Ended September 30,
---------------------------------------------------------
1998 1997
----------------------------- --------------------------
(Amounts in thousands)
Net income $1,595 $2,179
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (2)
4
Less: Reclassification adjustment for gains (losses)
included in net income
- (2) - 4
-------------- ------------ ------------ ------------
COMPREHENSIVE INCOME $1,593 $2,183
============ ============
</TABLE>
6. REGULATORY CAPITAL REQUIREMENTS
The Company's subsidiary banks are required by federal regulations to
maintain minimum amounts of capital. At September 30, 1998, each of the
Company's subsidiary banks had capital that substantially exceeded each of the
regulatory capital requirements.
<PAGE>
PART I - ITEM 2
MANAGEMENT DISCUSSION AND
ANALYSIS OF CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION AND OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC
FINANCIAL CONDITION
Total assets of $314.9 million increased $24.7 million or 8.53% from
the December 31, 1997 ending balance of $290.2 million. The Company increased
short-term liquidity in response to actual and potential funding needs over the
nine-month period ending September 30, 1998. Accordingly, cash and due from
banks and interest-bearing deposits with banks increased by $2.6 million to
$23.5 million at September 30, 1998. Community Bank Shares continued to
restructure its balance sheet, with total loans up $22.2 million, or 12.90%,
from $171.9 million to $194.0 million. At the same time, total investment
securities decreased $3.5 million to $87.5 million. This strategy has
contributed to an increase in net interest margin of 8 basis points from 3.30%
to 3.38% from the nine months ended September 30, 1997 to the nine months ended
September 30, 1998. The interest income to average earning assets ratio rose 6
basis points to 7.58% when comparing the same periods, while the interest
expense to average interest bearing liabilities ratio decreased 4 basis points
to 4.75%.
Total liabilities increased $23.9 million, from $250.2 million to
$274.1, which was driven by a net increase in Federal Home Loan Bank advances of
$29.2 million or 74.46%. Total deposits decreased $5.2 million to $203.8 million
from December 31, 1997 to September 30, 1998, with certificates of deposits
decreasing by $9.4 million and transaction accounts increasing by $4.2 million
over the same period. Certificates of deposits decreased because the Company
allowed higher cost public funds certificates of deposit to mature, replacing
them with lower cost Federal Home Loan Bank advances.
CAPITAL
Consolidated total equity was $40.8 million as of September 30, 1998,
increasing $887,000 from $39.9 million as of December 31, 1997. This increase
was due primarily to periodic net income less dividends paid to shareholders.
The banking affiliates are required to maintain acceptable levels of
capital in three categories: 1) total capital to risk weighted assets, 2) Tier I
capital to risk weighted assets, and 3) Tier I capital to average assets. To be
well capitalized, each financial institution must maintain a minimum of 10%
capital to risk weighted assets, 6% Tier I capital to risk weighted assets and
5% Tier I capital to average assets. Each of the Company's bank subsidiaries
exceeded these requirements as of September 30, 1998.
LIQUIDITY
The Company's primary sources of funds are deposits; principal and
interest payments on loans and mortgage-backed securities; proceeds from
maturing debt securities; advances from the Federal Home Loan Bank; and the sale
of stock. The mortgage banking operations also generate funds in the form of
proceeds from the sale of loans and loan servicing fees. Regulations require
that each of the Company's subsidiaries maintain sufficient liquidity to fund
ongoing operations. At September 30, 1998, each of the Company's subsidiaries
was in compliance with the minimum liquidity required by law.
RESULTS OF OPERATIONS
Net income for the three-month period ending September 30, 1998 was
$768,000, as compared to $788,000 for the quarter ended September 30, 1997. For
the nine months ended September 30, 1998 net income was $1,594,000 as compared
to $2,179,000 for the same nine-month period in 1997. The reduction in net
income from one nine-month period to the next was primarily attributable to
one-time merger-related expenses involved in the acquisition of NCF Bank & Trust
Co. and non-recurring employee benefit charges.
<PAGE>
PART I - ITEM 2
MANAGEMENT DISCUSSION AND
ANALYSIS OF CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION AND OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC
(Continued)
These charges amounted to $647,000 after application of appropriate federal and
state tax credits. Net income for the nine months ended September 30, 1998
excluding these non-recurring charges was $2,242,000, or $0.83 per basic share,
as compared to $2,179,000, or $0.81 per basic share, for the same period in
1997. Net income for the third quarter of 1998 was largely unaffected by these
non-recurring charges as the greatest part of these were charged against second
quarter 1998 earnings. Net interest income increased by $85,000, or 3.62%, for
the quarter ended September 30, 1998 when measured against the same quarter in
1997. Between the nine-month periods ended September 30, 1998 and 1997, net
interest income increased $469,000, or 6.95%, from $6,739,000 in 1997 to
$7,208,000 in 1998. This increase reflected growth in total interest income of
$839,000, or 5.47%, from the first three quarters of 1997 to the same period in
1998. This growth came primarily from three areas: (1) commercial loan interest
increased $1,142,000, or 36.93%, due primarily to a $18.0 million increase in
average balances of commercial loans for the nine months ended September 30,
1998 compared to the same period last year, (2) interest income from interest
bearing deposits with banks increased $138,000, or 20.52%, on the basis of a
$3.3 million increase in average balances from the first three quarters of 1997
to the same period in 1998, and (3) consumer loan interest grew $175,000, or
22.93%, due to an increase in average consumer loans outstanding of $2.4 million
from the first nine months of 1997 to the same period in 1998. These increases
are a direct result of management's intent to restructure the balance sheet so
that it is more heavily weighted with commercial and consumer loans, thereby
placing less reliance on mortgage loans. In response to this restructuring,
interest on mortgage loans in the first nine months of 1998 fell $374,000 from
the same period in 1997 as the average balances decreased $7.0 million. The
Company continues to actively originate mortgage loans, selling many of these
loans into the secondary market and thereby earning non-interest income in the
form of gains on loan sales and loan servicing income. At the current time,
however, mortgage loan payments substantially exceed the originations of
mortgage loans the Company intends to retain in its own portfolio. From the
first nine months of 1997 to the same period in 1998, interest on
mortgage-backed securities and other investment securities decreased $281,000 as
the average balances of these securities fell $4.8 million between the periods.
Interest expense, the other component of net interest income, reflected
a smaller increase than interest income, rising $371,000, or 4.32%, from the
first nine months of 1997 to the same period in 1998. Interest expense rose
$20,000 between the third quarters of 1997 and 1998, from $3,051,000 to
$3,071,000. Interest on deposits, which comprised 78.27% of total interest
expense for the first nine months of 1998, fell $69,000, or -0.97%, between the
nine-month periods ended September 30, 1997 and 1998. The decrease in interest
expense on deposits is primarily due to negligible growth in average deposits of
$48,000 from the first three quarters of 1997 to the same quarters in 1998 while
the cost of these deposits fell by 5 basis points to 4.61%. In addition,
interest expense on Federal Home Loan Bank (FHLB) advances and other borrowings
increased $440,000 from one nine-month period to the next as average balances
rose $12.4 million. The Company allowed higher-costing certificates of deposit
held by public entities to run off over the nine-month period, replacing this
funding with lower-cost FHLB advances. These changes represent the continuance
of management's plan to restructure the balance sheet by replacing
higher-costing CD's with lower-cost transaction accounts and FHLB advances.
During the nine-month period ended September 30, 1998, an addition of
$242,000 was made to the general loan loss reserve, as compared to $167,000 for
the same period in 1997. For the third quarter 1998, an addition of $52,000 was
made to the general loan loss reserve, as compared to $72,000 in the same
quarter of last year. In conjunction with the findings of the internal asset
review committee, the allowance for loan losses is based on the subsidiary
Banks' past loan loss experience and other factors which, in management's
judgment, deserve current recognition in estimating possible losses. At
September 30, 1998, each subsidiary Bank's general loan loss reserve met or
exceeded the minimum loan loss reserve standard established by the internal
asset review committee for each Bank.
<PAGE>
PART I - ITEM 2
MANAGEMENT DISCUSSION AND
ANALYSIS OF CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION AND OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC
(Continued)
Net non-interest expense increased $1,170,000, from $3,099,000 in the
first nine months of 1997 to $4,269,000 in the same period in 1998. Net
non-interest expense increased by $73,000 from the third quarter of 1997 to the
same 1998 quarter. Non interest income increased $309,000, or 26.71%, for the
nine months ended September 30, 1998 over the same period in 1997. Two areas of
non-interest income were primarily responsible for the growth. Commission income
grew $151,000, from $218,000 for the first nine months of 1997 to $369,000
during the same period of the current year. Loan fees, other loan service
charges, and gains on sale of loans increased $139,000, or 23.09%, from the nine
months ended September 30, 1997 to the same period in 1998. These factors were
also primarily responsible for the quarter-over-quarter increase. As the Company
restructures its balance sheet as discussed above, non-interest income is earned
on the sale and servicing of mortgage loans sold into the secondary market.
Non interest expense increased $1,479,000, or 34.75%, for the
nine-month period ended September 30, 1998 as compared to the same period ended
September 30, 1997. This increase was primarily attributable to the
non-recurring merger and employee benefit charges discussed above. Between the
third quarter 1997 and 1998, non-interest expense rose $215,000, from $1,438,000
in 1997 to $1,653,000 in 1998. The quarterly increase was primarily attributable
to an increase in compensation and benefits resulting from additional personnel
in the following areas: 1) loan and deposit processing, 2) business services, 3)
a new Heritage Bank branch, and 4) mortgage origination personnel. The Company
has increased its loan- and deposit-processing capabilities based on both
internal and external growth projections. To further implement the balance sheet
restructuring referenced above, additional personnel have been added to the
business services staff to accelerate the increase in commercial loans relative
to total assets. Management has also increased the staffing of the mortgage loan
origination function to take advantage of increased processing capabilities and
increase fee income.In addition, increased variable compensation was incurred
because of a substantial increase in sales through Heritage Financial Services,
a department of Heritage Bank offering various investment products such as
mutual funds and annuities.
Income before income taxes in the first nine months of 1998 decreased
to $2,697,000 from $3,473,000 in the same period in 1997. After federal and
state income taxes of $1,102,000 were applied, the Company netted a year-to-date
after tax profit of $1,595,000 through September 30, 1998. The Holding Company's
effective tax rate was 40.86% for the nine months ended September 30, 1998, as
compared to 37.28% for the same period in 1997. This difference is primarily
attributable to the non-deductibility of certain non-recurring merger-related
expenses discussed above.
YEAR 2000 COMPLIANCE
The Year 2000 issue arises from the design of computer operating
systems and computer software programs which recognize dates as only two digits.
As a result, these operating systems and software programs may interpret "00"
incorrectly as the Year 1900 instead of as the Year 2000, causing failure of the
underlying operating and software programs. The Company has formed a Year 2000
Committee representing all functional areas of the organization to ensure that
the Company is Year 2000 compliant. The Committee has developed a plan of action
to ensure that its operational and financial systems will not be adversely
affected by software or hardware failures caused by the inability of such
software and hardware to handle calculations involving dates after December 31,
1999. While the Company believes that it is doing everything possible to ensure
Year 2000 compliance, it is to some extent dependent upon vendor cooperation.
The Company is requiring its computer hardware and software vendors to represent
that their products are or will be Year 2000 compliant. At this time the Company
estimates that it will incur $300,000 in expenses related to ensuring Year 2000
compliance. Any hardware or software failures due to Year 2000 noncompliance
could result in additional, inestimable expenses to the Company. At worst, the
Company would be unable to operate for some indefinite period of time, resulting
in potentially large but currently incalculable monetary damages to the company.
Computer operations are a crucial part of the Company's daily operating
processes and a comprehensive program has been implemented (described below) to
verify that all internal software will operate properly. The Company does not
internally program any major operating system of the Company, and as such has
been working with its outside vendors to ensure Year 2000 Compliance within its
major operating systems.
<PAGE>
PART I - ITEM 2
MANAGEMENT DISCUSSION AND
ANALYSIS OF CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION AND OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC
(Continued)
The Company uses these systems provided by outside suppliers to maintain
customer deposit and borrowing information, including transaction processing,
and the Company's internal financial information. The Company does internally
program a link between operating systems of the company in the form of the
proof-of-deposit machines that encode daily teller transactions for transmission
to the Company's third party data processor and correspondent banks. This link
is not currently Year 2000 compliant but will be upgraded through either
software revisions within the existing machines or the purchase of new machines.
At this time, the Company is unsure of which option will be adopted and will
make the decision after all risks have been weighed.
The Company's exposure to embedded microchip technology is of little or
no consequence. Unlike companies that operate in manufacturing environments and
may use computerized robots, process controllers, and assembly lines, the
Company has only to assess its existing HVAC systems. All such systems have been
evaluated and were determined to be free of embedded microchip technology. The
Company is currently constructing a new corporate headquarters building in which
all systems with the potential for embedded microchip technology (HVAC,
elevator, and telephone system) will be certified Year 2000 compliant.
The Year 2000 Committee adopted a five-step plan based on the Federal Financial
Institutions Council (FFIEC) to ensure readiness in dealing with the Year 2000
Compliance issue:
1. Awareness Phase - Formation of the Year 2000 Committee with the
goal of representing all functional areas of the Company.
Formation of the Year 2000 Plan, including the outlining of the
following four steps. This step is complete.
2. Assessment Phase - Identification of all systems affected by the
Year 2000 issue, such as hardware, software, networks,
ATMs, processing platforms (operating systems), electronic data
interchange (EDI), telephones and telephone systems, HVAC,
security, operations and general office machines. Once identified,
the systems were prioritized for testing purposes within the
following groups: A) Mission critical - vital to daily bank
operation. Goal: All mission critical systems to be tested and
corrected/updated by December 31, 1998, B) Important - difficult
or costly to function without. Goal: All important systems to be
tested and corrected/updated prior to June 30, 1999. C) Non-
critical - no significant impact to daily operations. Goal:
non-critical systems will be tested as time allows, potentially
not being tested prior to January 1, 2000. This step is complete.
3. Validation Phase - Comprises identifying any necessary changes,
upgrades, replacement, correction, or testing of systems
identified in Step 2. This step is substantially complete and
should be completely accomplished by December 31, 1998.
4. Implementation Phase - Comprises placing any corrective action
identified during the Validation Phase into action (e.g.,
upgrading or replacing software or operating systems to Year 2000
compliant versions). These corrective actions will take place
throughout the project, following user acceptance testing and
normal change control procedures. This phase should be
substantially complete by March 31, 1999.
5. Contingency Planning Phase - By June 30, 1999, the Year 2000
committee will have developed a system contingency manual based
partially on a standard, bank disaster recovery format. The plan
will also incorporate solutions developed by PC, data, and network
vendors. This manual will address mission-critical functions only
and will be written with "worst case scenarios" in mind.
From a customer standpoint, the problem could affect the ability of the
subsidiary banks' borrowers to service debts if their direct operations,
vendors, or customers are adversely impacted by the Year 2000 Compliance issue.
The FFIEC instituted a Year 2000 examination process to which the Company is
subject. As a part of that process, the Company was required to identify those
commercial customers (borrowers and depositors) which exceeded a set threshold
and prepare written Year 2000 assessment work sheets. As of September 30, 1998,
all such assessments have been completed at the Company's subsidiaries. The Year
2000 risk assessment for the Company's borrowers will be a factor when
determining the provision for loan losses charged to expense throughout 1999.
<PAGE>
PART II
OTHER INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
Item 1. Legal proceedings
The Holding company is not engaged in any legal proceedings of a
material nature at the present time. From time to time, the Holding Company's
subsidiaries, Community Bank of Southern Indiana, Heritage Bank of Southern
Indiana, and NCF Bank and Trust Co., are a party to legal proceedings wherein
they enforce their security interest in mortgage loans made by them.
Item 2. Changes in Securities
No material changes in securities occurred during the quarter.
Item 3. Defaults upon Senior Securities
No defaults on senior securities occurred.
Item 4. Submission of Matters to a vote of Security Holders
No matters were brought to the Security Holders for a vote.
Item 5. Other Information
Additional items of substantive nature did not occur.
Item 6. Exhibits and Reports on Form 8-K
Community Bank Shares of Indiana, Inc. has filed no form 8-K reports
during the three months ended September 30, 1998.
Exhibit Number Description
27 Financial Data Schedule
<PAGE>
PART II
OTHER INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized
COMMUNITY BANK SHARES
OF INDIANA, INC.
(Registrant)
Dated November 15, 1998 BY: /s/ Michael Douglas
-------------------------- -------------------------
Michael Douglas
President and CEO
Dated November 15, 1998 BY: /s/ James M. Stutsman
-------------------------- -------------------------
James M. Stutsman
Chief Financial
Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000933590
<NAME> COMMUNITY BANK SHARES OF INDIANA, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,353
<INT-BEARING-DEPOSITS> 14,685
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 701
<INVESTMENTS-CARRYING> 86,847
<INVESTMENTS-MARKET> 87,431
<LOANS> 194,041
<ALLOWANCE> 1,197
<TOTAL-ASSETS> 314,887
<DEPOSITS> 203,837
<SHORT-TERM> 23,355
<LIABILITIES-OTHER> 1,785
<LONG-TERM> 45,078
0
0
<COMMON> 272
<OTHER-SE> 40,560
<TOTAL-LIABILITIES-AND-EQUITY> 314,887
<INTEREST-LOAN> 11,391
<INTEREST-INVEST> 4,783
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,174
<INTEREST-DEPOSIT> 7,018
<INTEREST-EXPENSE> 8,966
<INTEREST-INCOME-NET> 7,208
<LOAN-LOSSES> 242
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,736
<INCOME-PRETAX> 2,697
<INCOME-PRE-EXTRAORDINARY> 2,697
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1595
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
<YIELD-ACTUAL> 3.38
<LOANS-NON> 142
<LOANS-PAST> 934
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,022
<CHARGE-OFFS> 68
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,197
<ALLOWANCE-DOMESTIC> 1,197
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
