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 30,1999
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
November 10, 1999.
<PAGE>
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
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income for the
three months ended September 30, 1999 and 1998 4-5
Consolidated Statements of Cash Flows for the
three months ended September 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 2
<PAGE>
PART I - ITEM 1
CONSOLIDATED BALANCE SHEETS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
In Thousands
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks ....................... $ 7,327 $ 14,051
Interest bearing deposits with banks .......... 9,694 7,589
Securities available for sale, at market:
Mortgage-backed securities ................. 626 916
Other debt securities ...................... -- --
Securities held to maturity:
Mortgage-backed securities ................. 32,504 29,194
Other debt securities ...................... 73,709 62,588
Mortgage loans held for sale .................. -- 3,522
Loans receivable, net ......................... 236,781 199,575
Federal Home Loan Bank stock, at cost ......... 4,646 3,346
Foreclosed real estate ........................ -- 200
Premises and equipment, net ................... 9,536 7,869
Accrued interest receivable ................... 2,077 2,137
Other assets .................................. 361 958
========= =========
Total Assets ............................. $ 377,261 $ 331,945
========= =========
LIABILITIES
Deposits:
Non-interest-bearing demand deposits ....... $ 10,235 $ 18,655
Savings and interest-bearing demand deposits 77,862
Time deposits .............................. 126,848 125,528
Total deposits ................................ 214,945 212,867
Advances from Federal Home Loan Bank .......... 87,750 56,000
Borrowings - repurchase agreements ............ 30,276 19,499
Advance payments by borrowers for
taxes and insurance ........................ 561 210
Accrued interest payable on deposits .......... 195 60
Other liabilities ............................. 1,671 1,923
--------- ---------
Total Liabilities ........................ 335,398 290,559
--------- ---------
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
and outstanding 2,728,298 shares ........... 273 273
Additional paid in capital .................... 19,436 19,500
Retained earnings - substantially restricted .. 23,396 21,950
Accumulated other comprehensive income:
Unrealized gain/(loss) on securities
available for sale, net of tax ............. (140) --
Unearned compensation ......................... (342) (337)
Treasury shares - 41,791 shares ............... (760) --
--------- ---------
Total Stockholders' Equity ............... 41,863 41,386
--------- ---------
Total Liabilities and Stockholders' Equity $ 377,261 $ 331,945
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
Page 3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
INTEREST INCOME:
Loans receivable
<S> <C> <C> <C> <C>
Mortgage loans .................. $ 1,920 $ 2,060 $ 5,676 $ 6,220
Commercial loans ................ 2,573 1,576 6,737 4,235
Consumer and other loans ........ 352 330 973 936
Securities:
Mortgage-backed securities ...... 556 427 1,493 1,173
Other debt securities ........... 1,173 832 3,343 2,656
Federal Home Loan Bank stock ....... 90 60 227 144
Interest bearing deposits with banks 84 235 310 810
------- ------- ------- -------
TOTAL INTEREST INCOME ............ 6,748 5,520 18,759 16,174
------- ------- ------- -------
INTEREST EXPENSE:
Deposits ........................... 2,269 2,315 6,698 7,018
Advances from Federal Home Loan Bank
and other borrowings ............. 1,385 755 3,473 1,948
------- ------- ------- -------
TOTAL INTEREST EXPENSE ........... 3,654 3,070 10,171 8,966
------- ------- ------- -------
NET INTEREST INCOME .............. 3,094 2,450 8,588 7,208
Provision for loan losses .......... 183 52 475 242
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ..... 2,911 2,398 8,113 6,966
------- ------- ------- -------
NON-INTEREST INCOME:
Loan fees and service charges ...... 181 197 571 568
Net gain on sale of loans .......... 36 71 193 171
Deposit account service charges .... 129 122 360 320
Commission income .................. 172 138 433 369
Other income ....................... 13 17 100 47
------- ------- ------- -------
TOTAL NON-INTEREST INCOME ....... 531 545 1,657 1,475
------- ------- ------- -------
</TABLE>
Page 4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
NON-INTEREST EXPENSE
<S> <C> <C> <C> <C>
Compensation and benefits ... $1,206 $1,050 $3,505 $3,888
Occupancy and equipment ..... 234 150 538 403
Deposit insurance premiums .. 26 27 79 86
Data processing service ..... 156 129 446 381
Other ....................... 394 306 1,028 986
------ ------ ------ ------
TOTAL NON-INTEREST EXPENSE 2,016 1,662 5,596 5,744
------ ------ ------ ------
Income before income taxes .. 1,426 1,281 4,174 2,697
------ ------ ------ ------
Income tax expense .......... 563 512 1,642 1,102
------ ------ ------ ------
NET INCOME .................. $ 863 $ 769 $2,532 $1,595
====== ====== ====== ======
Net income per share, basic . $ 0.32 $ 0.29 $ 0.94 $ 0.59
====== ====== ====== ======
Net income per share, diluted $ 0.32 $ 0.28 $ 0.94 $ 0.59
====== ====== ====== ======
Dividends per share ......... $0.135 $0.120 $0.405 $0.330
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITES:
<S> <C> <C>
Net income .................................................... $ 2,532 $ 1,595
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 .......... (30) 33
Provision (credit) for losses on loans ...................... 475 242
Proceeds from mortgage loan sales ........................... 32,752 11,059
Mortgage loans originated for resale ........................ (27,219) (13,409)
Net gain on sales of mortgage loans ......................... (193) (171)
Depreciation expense ........................................ 320 175
ESOP and stock compensation plan expense .................... 208 97
Federal Home Loan Bank Stock dividends ...................... (28) (25)
(Increase) decrease in accrued interest receivable .......... 60 305
Increase (decrease) in accrued interest payable ............. 135 63
(Increase) decrease in other assets ......................... 597 273
Increase (decrease) in other liabilities .................... (252) (631)
-------- --------
Net cash flows provided by operating activities .......... $ 9,357 $ (394)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits with banks $ (2,105) $ (2,766)
Proceeds from sales of securities available for sale .......... 3,724 --
Proceeds from maturities of securities held to maturity ...... 12,340 58,182
Purchases of securities held to maturity ...................... (39,133) (63,770)
Principal collected on securities available for sale .......... 96 96
Principal collected on securities held to maturity ............ 8,862 8,961
Purchase of Federal Home Loan Bank Stock ...................... (1,272) (1,246)
Loan originations and principal payments on loans, net ........ (39,499) (20,049)
Proceeds from sale of foreclosed real estate .................. 200 --
Acquisition of premises and equipment ......................... (1,987) (2,880)
-------- --------
Net cash flows used by investing activities ................. $(58,774) $(23,472)
-------- --------
</TABLE>
Page 6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
---------------------
CASH FLOWS FROM FINANCING ACTIVITIES 1999 1998
--------- ----------
<S> <C> <C>
Net increase (decrease) in demand accounts and savings accounts $ 758 $ 4,560
Net increase (decrease) in certificates of deposits ........... 1,320 (9,728)
Net increase (decrease) in advance payments by borrowers
for taxes and insurance ..................................... 351 441
Net increase (decrease) in retail repurchase agreements ....... 10,777 3,711
Repayment of advances from Federal Home Loan bank ............. (21,000) (13,500)
Advances from Federal Home Loan bank .......................... 52,750 39,000
Repurchase of common stock .................................... (1,201) --
Dividends paid ................................................ (1,062) (1,060)
Adjustment to conform pooled affiliate's fiscal year end ...... 0 250
-------- --------
Net cash flows provided by financing activities ............. $ 42,693 $ 23,674
-------- --------
Net increase ( decrease) in cash and due from banks ........... (6,724) (192)
Cash and due from banks at beginning of period ................ 14,051 5,545
-------- --------
Cash and due from banks at end of period ...................... $ 7,327 $ 5,353
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payment for:
Interest $ 10,036 $ 8,903
Income taxes $ 1,529 $ 1,417
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES
Proceeds from sales of foreclosed real estate
financed through loans $ 200 $ 187
Transfers from loans to real estate
acquired through foreclosure $ - $ 312
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<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 September 30, 1999, the
results of operations for the three- and nine-months ended September 30, 1999
and 1998 and cash flows for the three- and nine-months ended September 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
September 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 8
<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 Nine months ended
In thousands, except for share September 30, September 30,
---------------------------------- ----------------------------------
and per share amounts 1999 1998 1999 1998
---------------------
---------------- ---------------- ---------------- ----------------
Basic:
Earnings:
<S> <C> <C> <C> <C>
Net income $ 863 $ 769 $ 2,532 $ 1,595
================ ================ ================ ================
Shares:
Weighted average
common shares outstanding 2,661,460 2,684,284 2,684,159 2,683,843
================ ================ ================ ================
Net income per share, basic $ 0.32 $ 0.29 $ 0.94 $ 0.59
================ ================ ================ ================
Diluted:
Earnings:
Net income $ 863 $ 769 $ 2,532 $ 1,595
================ ================ ================ ================
Shares:
Weighted average
common shares outstanding 2,661,460 2,684,284 2,684,159 2,683,843
Add: Dilutive effect of
outstanding options 6,486 35,874 5,380 26,140
Add: Dilutive effect of
of restricted shares 543 - 313 -
---------------- ---------------- ---------------- ----------------
Weighted average shares
outstanding, as adjusted 2,668,489 2,720,158 2,689,852 2,709,983
================ ================ ================ ================
Net income per share, diluted $ 0.32 $ 0.28 $ 0.94 $ 0.59
================ ================ ================ ================
</TABLE>
Page 9
<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 September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended September 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
=========== ===========
Nine Months Ended September 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 10
<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 $377.3 million at September 30, 1999, an increase of
$45.3 million or 13.7% 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 $4.6 million to $17.0 million at September 30,
1999. The Company continued to restructure its balance sheet, with total net
loans up $37.2 million, or 18.6%, from $199.6 million to $236.8 million. At the
same time, total investment securities increased $14.1 million to $106.8
million. This strategy has contributed to an increase in net interest margin of
16 basis point from 3.37% for the nine months ended September 30, 1998 to 3.51%
for the nine months ended September 30, 1999. The average yield on earning
assets increased 14 basis points to 7.78% when comparing these same periods,
attributable primarily to a $34.1 million increase in the average balance in
commercial loans in the last twelve months. The Company was able to decrease its
funding costs due to a general decline in market rates and also a reliance on
funding through Federal Home Loan Bank (FHLB) advances. The average cost of
interest bearing liabilities decreased 29 basis points to 4.46% for the nine
months ended September 30, 1999.
Total liabilities increased $44.8 million, from $290.6 million at
December 31, 1998 to $335.4 at September 30, 1999, as a result of increases in
FHLB advances of $31.8 million, or 56.7%, and retail repurchase agreements of
$10.8 million, or 55.3%. Total deposits changed only slightly increasing $2.0
million from $212.9 million at December 31, 1998 to $214.9 million at September
30, 1999. Savings and interest bearing demand deposits grew by $9.2 million
while non-interest-bearing demand deposits declined by $9.2 million. The large
decrease in non-interest-bearing demand deposits was attributable to a local
government entity withdrawing approximately $2 million and transferring
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 September 30, 1999 rather than higher cost CD's.
Page 11
<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
(Continued)
CAPITAL
Consolidated total equity was $41.9 million as of September 30, 1999,
an increase of $477,000 from $41.4 million as of December 31, 1998. This
increase was due primarily to periodic net income less dividends paid to
shareholders and the repurchase of $760,000 in common stock through the
Company's share repurchase program (Form 8-K filed May 24, 1999).
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, 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
September 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 nine-month period ending September 30, 1999 was
$2,532,000, as compared to $1,595,000 for the nine months ended September 30,
1998. Net income was $863,000 for the third quarter 1999, up from $769,000 for
the same quarter in 1998. The substantial increase in net income from the nine
month period in 1999 versus the same nine month period in 1998 was primarily
attributable to one-time merger-related and non-recurring employee benefit
expenses resulting from the of NCF Bank & Trust Co. in the second quarter of
1998.
Net interest income increased by $1,380,000, or 19.2%, for the nine
months ended September 30, 1999 when measured against the same period in 1998.
This increase reflected growth in total interest income of $2,585,000, or 16.0%,
from the first nine months of 1999 compared to the same period in 1998. This
growth resulted primarily from three areas: (1) commercial loan interest
increased $2,502,000 due primarily to a $34.1 million increase in average
balances of commercial loans for the nine months ended September 30, 1999
compared to the same period in the previous year, (2) interest income on
securities, both mortgage-backed and other debt securities, increased $1,007,000
on the basis of a $20.4 million increase in average balances from the first nine
months of 1999 to the same period in 1998, and (3) dividends on Federal Home
Loan Bank stock increased $83,000 as average stock outstanding increased $1.4
million for 1999 compared to the same period in 1998. Net interest income
increased $644,000 between the third quarter of 1998 and the same period in 1999
because of similar factors (rising commercial and investment security average
balances), with interest income increasing $1,228,000 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 nine months of 1999 fell $544,000 from the same period in 1998 as the
average balances decreased $6.4 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
exceed the origination of mortgage loans that the Company intends to retain in
its portfolio.
Page 12
<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
(Continued)
Interest expense, the other component of net interest income, reflected
a smaller increase than interest income, rising $1,205,000, or 13.4%, for the
first nine months of 1999 compared to the same period in 1998. Interest expense
for the third quarter of 1999 was $3,654,000, an increase of $584,000 over the
same quarter last year. Interest on deposits, which comprised 65.9% of total
interest expense for the first nine months of 1999, decreased $320,000. Interest
on deposits decreased $46,000 between the third quarter of 1998 and the same
period in 1999. Interest expense on FHLB advances and other borrowings increased
$1,525,000 from the first nine months of 1998 to the first nine months of 1999
as average balances rose $44.7 million. The Company has limited the utilization
of higher-costing certificates of deposit, instead opting primarily 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 reducing it's reliance on higher-costing CD's
and concentrating on the acquisition of 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
have been increasing.
During the nine month period ended September 30, 1999, a provision for
loan loss of $475,000 was made to the general loan loss reserve, as compared to
$242,000 for the same period in 1998. Provision for loan losses for the third
quarter 1999 were $183,000 versus $52,000 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 payments,
general economic conditions and inherent credit risk related to the
collectibility of each of the bank's loan portfolio.
Non interest income increased $182,000, or 12.3%, for the nine months
ended September 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 $25,000 2)
service fees on deposit accounts increased $40,000 and 3) commission income grew
$64,000. Non interest income decreased slightly from the third quarter of 1999
to the same quarter in 1998. Total third quarter non interest income of $531,000
declined $14,000 from the prior year third quarter. General increases in
interest rates over the year reduced the ability to generate mortgage loans,
which reduced loan origination fees and fees from the sale of loans in the
secondary market.
Non interest expense decreased $148,000, or 2.6%, for the nine month
period ended September 30, 1999 as compared to the same period in 1998. This
decrease was primarily attributable to one-time charges of $1,092,000 related to
the acquisition of NCF Bank & Trust Co. and non-recurring employee benefit
charges that were charged in the second quarter of 1998. Excluding these
one-time charges, non-interest expense would have been $4,652,000 for the first
three quarters of 1998, or $944,000 lower than the same period in 1999. The
major reason for the increase from one nine month 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 volumes. In
addition, the Company has increased its loan and deposit processing and back
office support capacity based on both existing volumes and internal growth
projections. To further implement the balance sheet restructuring referenced
above, additional personnel has 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.
Occupancy expense increased by $135,000, almost all of which was related to the
depreciation of and initial expenses related to the construction and occupancy
of a new five-story headquarters facility and the installation of six automated
teller machines. Non interest expense increased $354,000 or 21.3% between the
third quarter of 1998 and the same period in 1999. The quarter to quarter
increase was primarily attributable to an increase of $156,000 in compensation
expense for reasons previously mentioned and an increase of $84,000 in occupancy
and equipment expense related to the construction and subsequent occupancy of
the new headquarters facility and the installation of the automated tellers
machines.
Page 13
<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
(Continued)
Income before income taxes in the first nine months of 1999 increased
to $4,174,000 from $2,697,000 for the same period in 1998, an increase of
$1,477,000 or 54.8%. Between the third quarter of 1998 and the same quarter
1999, income before income taxes increased from $1,281,000 to $1,426,000. The
Company's effective tax rate was 39.3% for the nine months ended September 30,
1999, as compared to 40.9% 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 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.
Page 14
<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
(Continued)
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. This phase is complete.
b) Important - difficult or costly to function without. Goal: All
important systems to be tested and corrected/updated prior to June 30,
1999. This phase is complete.
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 that 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 15
<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
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, 1999.
Exhibit Number Description
27 Financial Data Schedule
Page 16
<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 10, 1999 BY: /s/ Michael Douglas
Michael Douglas
President and CEO
Dated November 10, 1999 BY: /s/ Paul A. Chrisco
Paul A. Chrisco
Acting Chief Accounting Officer
Page 17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 933590
<NAME> COMMUNITY BANK SHARES OF INDIANA, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,327
<INT-BEARING-DEPOSITS> 9,694
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 626
<INVESTMENTS-CARRYING> 106,213
<INVESTMENTS-MARKET> 102,034
<LOANS> 236,781
<ALLOWANCE> 1,642
<TOTAL-ASSETS> 377,261
<DEPOSITS> 214,945
<SHORT-TERM> 30,276
<LIABILITIES-OTHER> 2,427
<LONG-TERM> 30,276
0
0
<COMMON> 273
<OTHER-SE> 41,590
<TOTAL-LIABILITIES-AND-EQUITY> 377,261
<INTEREST-LOAN> 13,386
<INTEREST-INVEST> 4,836
<INTEREST-OTHER> 537
<INTEREST-TOTAL> 18,759
<INTEREST-DEPOSIT> 6,698
<INTEREST-EXPENSE> 10,171
<INTEREST-INCOME-NET> 8,588
<LOAN-LOSSES> 475
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,596
<INCOME-PRETAX> 1,426
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,532
<EPS-BASIC> 0.94
<EPS-DILUTED> 0.94
<YIELD-ACTUAL> 3.56
<LOANS-NON> 234
<LOANS-PAST> 138
<LOANS-TROUBLED> 230
<LOANS-PROBLEM> 310
<ALLOWANCE-OPEN> 1,276
<CHARGE-OFFS> 110
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,642
<ALLOWANCE-DOMESTIC> 1,642
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
