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 JUNE 30,1999
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)
101 West 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: 2,728,298 shares of common stock were outstanding as of July 30, 1999.
<PAGE>
Page 17
COMMUNITY BANK SHARES OF INDIANA, INC.
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page
--------
Item 1. Consolidated Financial Statements
<S> <C>
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income for the
three months ended June 30, 1999 and 1998 4-5
Consolidated Statements of Cash Flows for the
three months ended June 30, 1999 and 1998 6-7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11-15
Part II. Other Information 16
Signatures 17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - ITEM 1
CONSOLIDATED BALANCE SHEETS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
In Thousands
June 30, 1999 December 31, 1998
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 11,094 $ 14,051
Interest bearing deposits with banks
3,130 7,589
Securities available for sale, at market:
Mortgage-backed securities
626 916
Other debt securities
- -
Securities held to maturity:
Mortgage-backed securities
38,329 29,194
Other debt securities
73,978 62,588
Mortgage loans held for sale
311 3,522
Loans receivable, net
221,500 199,575
Federal Home Loan Bank stock, at cost
4,479 3,346
Foreclosed real estate
- 200
Premises and equipment, net
8,599 7,869
Accrued interest receivable
2,612 2,137
Other assets
1,053 958
=========================== ==========================
Total Assets $ 365,711 $ 331,945
=========================== ==========================
LIABILITIES
Deposits:
Non-interest-bearing demand deposits $ 12,904 $ 18,655
Savings and interest-bearing demand deposits 74,267 68,684
Time deposits 124,792 125,528
Total deposits
211,963 212,867
Advances from Federal Home Loan Bank 83,000 56,000
Borrowings - repurchase agreements 26,051 19,499
Advance payments by borrowers for
taxes and insurance 262 210
Accrued interest payable on deposits 142 60
Other liabilities 2,374 1,923
--------------------------- --------------------------
Total Liabilities 323,791 290,559
--------------------------- --------------------------
STOCKHOLDERS' EQUITY
Preferred stock without par value,
Authorized 5,000,000 shares; none issued
- -
Common stock of $.10 par value per share,
Authorized 10,000,000 shares; issued
2,728,298 shares
273 273
Additional paid in capital
19,477 19,500
Retained earnings - substantially restricted
22,891 21,950
Accumulated other comprehensive income:
Unrealized gain/(loss) on securities
available for sale, net of tax
10 -
Unearned compensation
(372) (337)
Treasury shares
(359) -
--------------------------- --------------------------
Total Stockholders' Equity 41,920 41,386
--------------------------- --------------------------
Total Liabilities and Stockholders' Equity $ 365,711 $ 331,945
=========================== ==========================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
INTEREST INCOME:
Loans receivable
<S> <C> <C> <C> <C>
Mortgage loans $ 1,818 $ 2,055 $ 3,756 $ 4,160
Commercial loans 2,231 1,424 4,164 2,659
Consumer and other loans 320 314 621 606
Securities:
Mortgage-backed securities 507 359 937 745
Other debt securities 1,117 804 2,170 1,824
Federal Home Loan Bank stock 72 43 137 84
Interest bearing deposits with banks 85 320 226 576
---------------- ---------------- ---------------- ----------------
TOTAL INTEREST INCOME 6,150 5,319 12,011 10,654
---------------- ---------------- ---------------- ----------------
INTEREST EXPENSE:
Deposits 2,206 2,322 4,429 4,703
Advances from Federal Home Loan Bank
and other borrowings 1,123 606 2,088 1,193
---------------- ---------------- ---------------- ----------------
TOTAL INTEREST EXPENSE 3,329 2,928 6,517 5,896
---------------- ---------------- ---------------- ----------------
NET INTEREST INCOME 2,821 2,391 5,494 4,758
Provision for loan losses 156 102 292 190
---------------- ---------------- ---------------- ----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,665 2,289 5,202 4,568
---------------- ---------------- ---------------- ----------------
NON-INTEREST INCOME:
Loan fees and service charges 195 207 391 372
Net gain on sale of loans 49 48 157 99
Deposit account service charges 115 104 231 197
Commission income 135 117 261 231
Other income 15 13 34 32
---------------- ---------------- ---------------- ----------------
TOTAL NON-INTEREST INCOME 509 489 1,074 931
---------------- ---------------- ---------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
NON-INTEREST EXPENSE
<S> <C> <C> <C> <C>
Compensation and benefits $ 1,174 $ 1,836 $ 2,247 $ 2,838
Occupancy and equipment 161 133 304 254
Deposit insurance premiums 26 29 53 59
Data processing service 150 129 290 252
Other 326 395 634 680
--------------- --------------- --------------- ---------------
TOTAL NON-INTEREST EXPENSE 1,837 2,522 3,528 4,083
--------------- --------------- --------------- ---------------
Income before income taxes 1,337 256 2,748 1,416
--------------- --------------- --------------- ---------------
Income tax expense 529 143 1,079 590
--------------- --------------- --------------- ---------------
NET INCOME $ 808 $ 113 $ 1,669 $ 826
=============== =============== =============== ===============
Net income per share, basic $ 0.30 $ 0.04 $ 0.62 $ 0.31
=============== =============== =============== ===============
Net income per share, diluted $ 0.30 $ 0.04 $ 0.62 $ 0.31
=============== =============== =============== ===============
Dividends per share $ 0.135 $ 0.120 $ 0.270 $ 0.240
=============== =============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
FOR THE SIX
MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITES:
<S> <C> <C>
Net income $ 1,669 $ 826
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 (40) (1)
Provision (credit) for losses on loans 292 190
Proceeds from mortgage loan sales 28,973 6,776
Mortgage loans originated for resale (23,751) (6,999)
Net gain on sales of mortgage loans (157) (100)
Depreciation expense 112 113
ESOP and stock compensation plan expense 166 175
Federal Home Loan Bank Stock dividends (17) (17)
(Increase) decrease in accrued interest receivable (475) 381
Increase (decrease) in accrued interest payable 82 89
(Increase) decrease in other assets (95) (298)
Increase (decrease) in other liabilities 451 66
------------ -------------
Net cash flows provided by operating activities $ 7,210 $ 1,201
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits with banks $ 4,459 $(4,403)
Proceeds from maturities of securities held to maturity 12,340 46,000
Purchases of securities held to maturity (39,133) (40,476)
Principal collected on securities available for sale 33 96
Principal collected on securities held to maturity 6,565 6,281
Purchase of Federal Home Loan Bank Stock (1,116) (541)
Loan originations and principal payments on loans, net (24,071) (12,406)
Proceeds from sale of foreclosed real estate 200 183
Acquisition of premises and equipment (842) (2,047)
------------ -------------
Net cash flows used by investing activities $(41,565) $(7,313)
------------ -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
FOR THE SIX
MONTHS ENDED
JUNE 30,
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES 1999 1998
------------ ------------
<S> <C> <C>
Net increase (decrease) in demand accounts and savings accounts $ (168) $ 4,556
Net increase (decrease) in certificates of deposits (736) (8,888)
Net increase (decrease) in advance payments by borrowers
for taxes and insurance 51 108
Net increase (decrease) in retail repurchase agreements 6,552 (48)
Repayment of advances from Federal Home Loan bank (1,500) (6,000)
Advances from Federal Home Loan bank 28,500 19,000
Repurchase of common stock (604) -
Dividends paid (697) (565)
Adjustment to conform pooled affiliate's fiscal year end 0 250
------------ ------------
Net cash flows provided by financing activities $ 31,398 $ 8,413
------------ ------------
Net increase ( decrease) in cash and due from banks (2,957) 2,301
Cash and due from banks at beginning of period 14,051 5,295
------------ ------------
Cash and due from banks at end of period $ 11,094 $ 7,596
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payment for:
Interest $ 6,435 $ 5,807
Income taxes $ 966 $ 722
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES
Proceeds from sales of foreclosed real estate
financed through loans $ 200 $ 183
Transfers from loans to real estate acquired through foreclosure $ - $ -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PART I - ITEM 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
1. BASIS OF PRESENTATION OF INTERIM INFORMATION
Community Bank Shares of Indiana, Inc. (the Company) was formally
established on April 7, 1995. The data contained in the financial statements
reflect consolidated Company information. The consolidated financial statements
and notes are presented as permitted by Form 10-Q, and do not contain certain
information included in the Company's audited consolidated financial statements
and notes for the year ended December 31, 1998.
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 June 30, 1999, the
results of operations for the three- and six-months ended June 30, 1999 and 1998
and cash flows for the three- and six-months ended June 30, 1999 and 1998.
Interim results are not necessarily indicative of the results that may be
achieved for a full year.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements 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.; First
Community Service Corp., a wholly owned subsidiary of Community Bank of Southern
Indiana, and Nelson Service Corporation, a wholly owned subsidiary of NCF Bank &
Trust Co. All material intercompany balances and transactions have been
eliminated.
3. ACQUISITION OF NCF FINANCIAL CORPORATION
On May 6, 1998, the Company 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 six-month period ended June 30,
1998 include the operations of NCF Financial Corporation and its subsidiaries,
as appropriate in a pooling-of-interests transaction. NCF Financial Corporation
was dissolved in the merger transaction.
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. AND SUBSIDIARIES
(Continued)
4. EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended Six months ended
In thousands, except for share June 30, June 30,
---------------------------------- ----------------------------------
And per share amounts 1999 1998 1999 1998
---------------------
---------------- ---------------- ---------------- ----------------
Basic:
Earnings:
<S> <C> <C> <C> <C>
Net income $ 808 $ 113 $ 1,669 $ 826
================ ================ ================ ================
Shares:
Weighted average
common shares outstanding 2,694,834 2,682,961 2,695,806 2,685,364
================ ================ ================ ================
Net income per share, basic $ 0.30 $ 0.04 $ 0.62 $ 0.31
================ ================ ================ ================
Diluted:
Earnings:
Net income $ 808 $ 113 $ 1,669 $ 826
================ ================ ================ ================
Shares:
Weighted average
common shares outstanding 2,694,834 2,682,961 2,695,806 2,685,364
Add: Dilutive effect of
outstanding options 21,323
5,357 6,671 4,754
---------------- ---------------- ---------------- ----------------
Weighted average shares
outstanding, as adjusted 2,700,191 2,689,632 2,700,560 2,706,687
================ ================ ================ ================
Net income per share, diluted $ 0.30 $ 0.04 $ 0.62 $ 0.31
================ ================ ================ ================
</TABLE>
<PAGE>
PART I - ITEM 1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(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
six-months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------
----------------------- ------------------------
1999 1998
----------------------- ------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Net income $ 808 $ 113
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized net holding gains (losses) arising during period
18 -
Less: Reclassification adjustment for net gains (losses)
included in net income 11
7 - -
---------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 819 $ 113
=========== ===========
Six Months Ended June 30,
---------------------------------------------------
1999 1998
----------------------- ------------------------
(Amounts in thousands)
Net income $1,669 $ 826
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized net holding gains (losses) arising during period
17 (5)
Less: Reclassification adjustment for net gains (losses)
included in net income 10
7 (2) (3)
---------- ----------- ----------- -----------
COMPREHENSIVE INCOME $1,679 $ 823
=========== ===========
</TABLE>
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
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,
rather statements based on the Company's current expectations regarding its
business strategies and their intended results and its 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 the Company's
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; the Company's ability to remedy any computer malfunctions
that may result from the advent of the Year 2000; and other factors disclosed
periodically in the Company's 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 the Company or on
its behalf. The Company assumes no obligation to update any forward-looking
statements.
FINANCIAL CONDITION
Total assets were $365.7 million at June 30, 1999, an increase of $33.8
million or 10.17% from the December 31, 1998 ending balance of $331.9 million.
The Company decreased short-term liquidity in order to take advantage of
attractive investment opportunities in both its loan and investment securities
portfolios. Accordingly, cash and due from banks and interest-bearing deposits
with banks decreased by $7.4 million to $14.2 million at June 30, 1999. The
Company continued to restructure its balance sheet, with total net loans up
$21.9 million, or 10.99%, from $199.6 million to $221.5 million. At the same
time, total investment securities increased $20.2 million to $112.9 million.
This strategy has contributed to an increase in net interest margin of 2 basis
point from 3.42% for the six months ended June 30, 1998 to 3.44% for the six
months ended June 30, 1999. The average yield on earning assets decreased 15
basis points to 7.52% when comparing these same periods, attributable to a
general decline in market interest rates between the two periods under
consideration. The Company was able to decrease its funding costs at a more
rapid rate, with the average cost of interest bearing liabilities decreasing 32
basis points to 4.46% for the six months ended June 30, 1999.
Total liabilities increased $33.2 million, from $290.6 million at
December 31, 1998 to $323.8 at June 30, 1999, as a result of increases in
Federal Home Loan Bank (FHLB) advances of $27.0 million, or 48.21%, and retail
repurchase agreements of $6.6 million, or 33.60%. Total deposits decreased $0.9
million from $212.9 million at December 31, 1998 to $212.0 million at June 30,
1999, with interest-bearing transaction accounts increasing by $5.6 million, and
non-interest-bearing demand deposits and certificates of deposit (CD's)
decreasing by $5.8 million and $0.7 million, respectively, over the same period.
The large decrease in non-interest-bearing demand deposits was attributable to a
local government entity withdrawing approximately $2 million and transferring
the balance (approximately $4 million) to retail repurchase agreements. The
Company used lower cost FHLB advances and retail repurchase agreements to fund
growth over the six-month period ending June 30, 1999 rather than higher cost
CD's.
CAPITAL
Consolidated total equity was $41.9 million as of June 30, 1999, an
increase of $534,000 from $41.4 million as of December 31, 1998. This increase
was due primarily to periodic net income less dividends paid to shareholders and
repurchases of common shares.
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 June 30, 1999.
LIQUIDITY
The Company's primary sources of funds are deposits and retail
repurchase agreements; 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 June
30, 1999, each of the Company's subsidiaries was in compliance with the minimum
liquidity required by law.
RESULTS OF OPERATIONS
Net income for the six-month period ending June 30, 1999 was
$1,669,000, as compared to $826,000 for the six months ended June 30, 1998. Net
income was $808,000 for the second quarter 1999, up from $113,000 for the same
quarter in 1998. The substantial increase in net income from one 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. These charges amounted to $634,000 after application of appropriate
federal and state tax credits. Net income for the six months ended June 30, 1998
excluding these non-recurring charges (net of tax) was $1,428,000 as compared to
net income of $1,669,000 for the first six months of 1999. Net income for the
second quarter of 1998 excluding these non-recurring charges was $715,000 as
compared to $808,000 for the same quarter in 1999. Net interest income increased
by $736,000, or 15.47%, for the six months ended June 30, 1999 when measured
against the same period in 1998. This increase reflected growth in total
interest income of $1,357,000, or 12.74%, from the first six months of 1999
compared to the same period in 1998. This growth resulted primarily from three
areas: (1) commercial loan interest increased $1,505,000, or 56.60%, due
primarily to a $37.4 million increase in average balances of commercial loans
for the six months ended June 30, 1999 compared to the same period in the
previous year, (2) interest income on securities, both mortgage-backed and other
debt securities, increased $538,000, or 20.90%, on the basis of a $20.7 million
increase in average balances from the first six months of 1999 to the same
period in 1998, and (3) dividends on Federal Home Loan Bank stock increased
$29,000, or 63.10%, as average stock outstanding increased $1.4 million for 1999
compared to the same period in 1998. Net interest income increased $430,000
between the second quarter of 1998 and the same period in 1999 because of
similar factors (rising commercial and investment security average balances),
with interest income increasing $831,000 between the two periods. The increases
in average balances discussed above 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 six
months of 1999 fell $404,000 from the same period in 1998 as the average
balances decreased $6.9 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 that the Company intends
to retain in its portfolio.
Interest expense, the other component of net interest income, reflected
a smaller increase than interest income, rising $621,000, or 10.53%, from the
first six months of 1999 compared to the same period in 1998. Interest expense
for the second quarter of 1999 was $3,329,000, an increase of $401,000 over the
same quarter last year. Interest on deposits, which comprised 67.96% of total
interest expense for the first six months of 1999, decreased $274,000, or 5.83%.
Interest on deposits decreased $116,000 between the second quarter of 1998 and
the same period in 1999. Interest expense on Federal Home Loan Bank (FHLB)
advances and other borrowings increased $895,000 from the first six months of
1998 to the first six months of 1999 as average balances rose $42.3 million. The
Company has not pursued higher-costing certificates of deposit held by public
entities, instead opting to obtain funding through lower-cost FHLB advances and
retail repurchase agreements. The changes discussed above represent the results
of management's continuing plan to restructure the balance sheet by replacing
higher-costing CD's with lower-cost transaction accounts, retail repurchase
agreements, and FHLB advances. Consequently, funding costs relating to deposits
have continued to decrease while funding costs from other sources has been
increasing.
During the six-month period ended June 30, 1999, a provision for loan
losses of $292,000 was made to the general loan loss reserve, as compared to
$190,000 for the same period in 1998. Provision for loan losses for the second
quarter 1999 were $156,000 versus $102,000 for the same quarter in 1998. The
increase in the provision is a direct result of management's balance sheet
restructuring strategy and the resulting growth in commercial loans. Commercial
loans are judged to be inherently more risky than residential real estate loans.
Consequently, as the proportion of commercial loans to total loans increases
more provision for loan loss is required to ensure that the allowance for loan
losses is adequately funded. Provisions for loan losses are charged against
earnings to bring the total allowance for loan losses to a level considered
reasonable by management based on historical experience, the volume and type of
lending conducted by the subsidiary banks, the status of past due principal and
interest payments, general economic conditions and inherent credit risk related
to the collectibility of the each bank's loan portfolio.
Non interest income increased $143,000, or 15.365%, for the six months
ended June 30, 1999 compared to the same period in 1998. Three areas of
non-interest income were primarily responsible for the increase: 1) loan fees,
other loan service charges, and gains on sale of loans increased $77,000, or
16.35%, 2) service fees on deposit accounts increased $34,000, or 17.26%, and 3)
commission income grew $30,000, or 12.99%. As the Company restructures its
balance sheet, non-interest income is earned on the sale and servicing of
mortgage loans sold into the secondary market. Non interest income increased
$20,000 from the second quarter of 1999 to the same quarter in 1998. Increases
in commission income and deposit account service charges accounted for most of
the increase, which was partially offset by a decrease in loan fees, other loan
service charges, and gains on sale of loans.
Non interest expense decreased $555,000, or 13.59%, for the six month
period ended June 30, 1999 as compared to the same period in 1998. This decrease
was primarily attributable to a $591,000 decrease in compensation and benefits
related to acquisition of NCF Bank & Trust Co. and non-recurring employee
benefit charges. Excluding these one-time charges, non interest expense would
have been $3,010,000 for the first two quarters of 1998, or $518,000 lower than
the same period in 1999. The major reason for the $518,000 increase from one
period to the next was a $382,000 increase in compensation and benefit expenses
(excluding non-recurring charges) as the Company added staff to handle increased
loan and deposit volumes. In addition, 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 to increase fee income.
The remaining increase is attributable to a variety of immaterial factors. Non
interest expense decreased $685,000 between the second quarter of 1998 and the
same period in 1999 because of the same factors that apply to the six month
periods discussed above. Excluding the non-recurring charges, non-interest
expense increased $388,000 from the second quarter of 1998 to the same period in
1999, largely because of an increase in compensation and benefits expenses
related to the factors previously discussed.
Income before income taxes in the first six months of 1999 increased to
$2,748,000 from $1,416,000 for the same period in 1998, an increase of
$1,332,000 or 94.07%. Between the second quarter of 1998 and the same quarter
1999, income before income taxes increased from $256,000 to $1,337,000. These
substantial increases were largely due to the impact of the non-recurring
charges discussed previously. The Company's effective tax rate was 39.26% for
the six months ended June 30, 1999, as compared to 41.67% for the same period in
1998.
YEAR 2000 COMPLIANCE
The Year 2000 issue arises from the design of computer operating
systems and computer software programs that 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.
The Company has identified the following potential risks to its operational and
financial systems as a result of this issue:
1. Customer banking transactions are processed by one or more computer systems
provided by a third-party data processing provider. The failure of one or
more of those systems as a result of the Y2K issue could result in the
subsidiary banks' inability to properly process customer transactions. This
could lead to a loss of customers by the subsidiary banks to other
financial institutions.
2. A number of the subsidiary banks' borrowers utilize computer hardware and
software to varying degrees in the operation of their businesses. The
customers and suppliers of those businesses may utilize computer hardware
and software as well. Should the borrowers or businesses on which they
depend experience Y2K related operational or financial problems, those
borrowers could experience cash flow disruptions that could adversely
affect their ability to repay loans to the subsidiary banks.
3. Deposit outflows prior to December 31, 1999 could occur, as depositors
perceive that the Y2K issue will impair access to their accounts after that
date.
4. The Company could incur increased personnel costs if additional staff is
required to perform functions that normally are performed by systems
rendered inoperative by Y2K related problems.
5. Certain utility services, such as electrical power and telecommunications
services, could be disrupted if those services experience Y2K related
problems. These disruptions, depending on their duration, could hamper the
ability of the bank to service its customer base.
Management believes that it is not possible to estimate potential lost
revenue associated with the Y2K issue because the duration and severity of Y2K
related problems can not be predicted.
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 has been
working with its outside vendors to ensure Year 2000 Compliance within its major
operating systems. 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'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 has just moved into a new corporate headquarters building in which all
systems with the potential for embedded microchip technology (HVAC, elevator,
and telephone system) have been certified Year 2000 compliant.
The Year 2000 Committee adopted a five-phase plan based on the Federal
Financial Institutions Examination 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 phases. This phase
is complete.
2) Assessment Phase - Identification of all systems affected by the Year 2000
issue, such as hardware, software, networks, ATM's, 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 phase is
complete.
3) Validation Phase - Comprises identifying any necessary changes, upgrades,
replacement, correction, or testing of systems identified in Phase 2. This
phase was complete as of March 31, 1999. Both third-party data processing
providers the Company relies on for customer processing have completed the
necessary upgrades to ensure Year 2000 compliance. The Company had tested
these systems by February 28, 1999 for Year 2000 compliance, and all major
systems passed.
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 have taken place throughout the project, following user
acceptance testing and normal change control procedures. This phase is
complete.
5) Contingency Planning Phase - The Year 2000 committee has developed a system
contingency manual based partially on a standard, bank disaster recovery
format. The plan also incorporates solutions developed by PC, data, and
network vendors. This manual addresses mission-critical functions only and
has been devised 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 borrowers that exceeded a set threshold and prepare written Year 2000
assessment work sheets. As of December 31, 1998, all such assessments had 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 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
The Annual Meeting of the Shareholders of the Company was held on April
20, 1999. At this meeting proxies were solicited under Regulation 14a of the
Securities and Exchange Act of 1934. Total shares issued and outstanding
entitled to vote at the meeting was 2,715,445. A total of 1,743,474 shares were
represented by shareholders in attendance or by proxy, representing a quorum.
Shareholders approved the following directors for the indicated term and by the
indicated votes for or against:
<TABLE>
<CAPTION>
Director Term Votes For Votes Withheld or Against
-------- ---- --------- -------------------------
<S> <C> <C> <C>
Dale Orem 3 Years 1,578,091 165,383
Steven Stemler 3 Years 1,575,839 167,635
Michael L. Douglas 3 Years 1,577,881 165,593
</TABLE>
In addition, at the same April 20, 1999 meeting shareholders also
approved the ratification of Monroe Shine and Company, Inc. as the Company's
independent auditors for the year ended December 31, 1999 by a vote of 1,579,100
for, 161,553 against, and 2,821 abstaining.
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 two forms 8-K reports
during the three months ended June 30, 1999. A form 8-K was filed May 5, 1999
announcing the retirement of director Robert E. Yates. A second form 8-K was
filed May 24, 1999 announcing the authorization by the Board of Directors for
the repurchase of up to 140,000 shares of common stock subject to a purchase
limit of $3,500,000.
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 August 14, 1999 BY: /s/ Michael Douglas
---------------------------- -------------------------
Michael Douglas
President and CEO
Dated August 14, 1999 BY: /s/ James M. Stutsman
---------------------------- -------------------------
James M. Stutsman
Chief Financial Officer
<PAGE>
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