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 MARCH 31,1999
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)
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: 2,728,298 shares of common stock were outstanding as of March
31, 1999.
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SHARES OF INDIANA, INC.
INDEX
<S> <C>
Part I Financial Information Page
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income for the
three-months ended March 31, 1999 and 1998 4-5
Consolidated Statements of Cash Flows for the
three-months ended March 31, 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>
PART I - ITEM 1
<TABLE>
CONSOLIDATED BALANCE SHEETS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
In Thousands
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 4,718 $ 14,051
Interest bearing deposits with banks 4,769 7,589
Securities available for sale, at market:
Mortgage-backed securities 648 916
Securities held to maturity:
Mortgage-backed securities 31,038 29,194
Other debt securities 69,669 62,588
Mortgage loans held for sale 1,152 3,522
Loans receivable, net 208,270 199,575
Federal Home Loan Bank stock, at cost 3,396 3,346
Foreclosed real estate - 200
Premises and equipment, net 8,182 7,869
Accrued interest receivable:
Loans 1,266 1,171
Mortgage-backed securities 185 167
Other debt securities 999 799
Other assets 491 958
=========================== ==========================
Total Assets $ 334,783 $ 331,945
=========================== ==========================
LIABILITIES
Deposits:
Non-interest-bearing demand deposits $ 12,644 $ 18,655
Savings and interest-bearing demand deposits 69,725 68,684
Time deposits 126,053 125,528
Total deposits 208,422 212,867
Advances from Federal Home Loan Bank 58,000 56,000
Borrowings - repurchase agreements 23,971 19,499
Advance payments by borrowers for
taxes and insurance 461 210
Accrued interest payable on deposits 109 60
Other liabilities 1,913 1,923
--------------------------- --------------------------
Total Liabilities 292,876 290,559
--------------------------- --------------------------
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
1,983,722 shares 273 273
Additional paid in capital 19,510 19,500
Retained earnings - substantially restricted 22,444 21,950
Accumulated other comprehensive income:
Unrealized gain/(loss) on securities available for sale (1) -
Unearned ESOP shares (319) (337)
--------------------------- --------------------------
Total Stockholders' Equity 41,907 41,386
--------------------------- --------------------------
Total Liabilities and Stockholders' Equity $ 334,783 $ 331,945
=========================== ==========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
INTEREST INCOME:
Loans receivable
<S> <C> <C>
Mortgage loans $ 1,938 $ 2,106
Commercial loans 1,932 1,235
Consumer and other loans 301 292
Securities:
Mortgage-backed securities 431 386
Other debt securities 1,053 1,020
Federal Home Loan Bank stock 65 40
Interest bearing deposits with banks 141 256
------------------- -------------------
TOTAL INTEREST INCOME 5,861 5,335
------------------- -------------------
INTEREST EXPENSE:
Deposits 2,223 2,381
Advances from Federal Home Loan Bank
and other borrowings 965 587
------------------- -------------------
TOTAL INTEREST EXPENSE 3,188 2,968
------------------- -------------------
NET INTEREST INCOME 2,673 2,367
Provision for loan losses 136 88
------------------- -------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,537 2,279
------------------- -------------------
NON-INTEREST INCOME:
Loan fees and service charges 195 165
Net gain on sale of loans 110 51
Deposit account service charges 116 94
Commission income 126 114
Other income 19 18
------------------- -------------------
TOTAL NON-INTEREST INCOME 566 442
------------------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
NON-INTEREST EXPENSE
<S> <C> <C>
Compensation and benefits $ 1,073 $ 1,002
Occupancy and equipment 143 121
Deposit insurance premiums 27 30
Data processing service 140 123
Other 308 285
------------------- -------------------
TOTAL NON-INTEREST EXPENSE 1,691 1,561
------------------- -------------------
Income before income taxes 1,412 1,160
------------------- -------------------
Income tax expense 550 447
------------------- -------------------
NET INCOME $ 862 $ 713
=================== ===================
Net income per share, basic $ 0.32 $ 0.27
=================== ===================
Net income per share, diluted $ 0.32 $ 0.27
=================== ===================
Dividends per share $ 0.135 $ 0.120
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITES:
<S> <C> <C>
Net income $ 862 $ 713
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 (54) (7)
Provision for losses on loans 136 88
Proceeds from mortgage loan sales 8,759 3,485
Mortgage loans originated for resale (4,379) (3,485)
Net gain on sales of mortgage loans (110) (51)
Depreciation expense 54 86
ESOP and stock compensation plan expense (credit) 25 (13)
Federal Home Loan Bank Stock dividends (8) (8)
(Increase) decrease in accrued interest receivable (313) 416
Increase in accrued interest payable 49 39
(Increase) decrease in other assets 467 (284)
Increase in other liabilities 168 661
------------ -------------
Net cash flows provided by operating activities $ 5,656 $ 1,640
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits with banks $ 2,820 $(12,273)
Proceeds from maturities of securities held to maturity 11,529 24,500
Purchases of securities held to maturity (24,427) (15,667)
Principal collected on securities available for sale 41 77
Principal collected on securities held to maturity 4,254 2,632
Purchase of Federal Home Loan Bank Stock (58) (99)
Loan originations and principal payments on loans, net (10,732) (3,113)
Proceeds from sale of foreclosed real estate - 1
Acquisition of premises and equipment (367) (767)
------------ -------------
Net cash flows used by investing activities $(16,940) $(4,709)
------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
(Unaudited)
In Thousands
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES 1999 1998
------------ ------------
<S> <C> <C>
Net increase (decrease) in demand accounts and savings accounts $(4,970) $ 4,627
Net increase (decrease) in certificates of deposits 525 (6,609)
Net increase in advance payments by borrowers
for taxes and insurance 251 334
Net increase in retail repurchase agreements 4,472 1,686
Repayment of advances from Federal Home Loan bank - (2,000)
Advances from Federal Home Loan bank 2,000 6,000
Dividends paid (327) (235)
Adjustment to conform pooled affiliate's fiscal year end - 250
------------ ------------
Net cash flows provided by financing activities $ 1,951 $ 4,053
------------ ------------
Net increase ( decrease) in cash and due from banks (9,333) 984
Cash and due from banks at beginning of period 14,051 5,295
------------ ------------
Cash and due from banks at end of period $ 4,718 $ 6,279
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payment for:
Interest $ 3,139 $ 8,533
Income taxes $ 865 $ 1,158
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES
Proceeds from sales of foreclosed real estate
financed through loans $ 200 $ -
Transfers from loans to real estate acquired through foreclosure $ - $ 17
</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 March 31, 1999, the
results of operations for the three-months ended March 31, 1999 and 1998 and
cash flows for the three months ended March 31, 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 three-month period ended March
31, 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
<TABLE>
4. EARNINGS PER SHARE
<CAPTION>
Three months ended
March 31,
------------------------------------------
In thousands, except for share and per share amounts 1999 1998
- ----------------------------------------------------
-------------------- --------------------
Basic:
Earnings:
<S> <C> <C>
Net income $ 862 $ 713
==================== ====================
Shares:
Weighted average
common shares outstanding 2,696,788 2,682,961
==================== ====================
Net income per share, basic $ 0.32 $ 0.27
==================== ====================
Diluted:
Earnings:
Net income $ 862 $ 713
==================== ====================
Shares:
Weighted average
common shares outstanding 2,696,788 2,682,961
Add: Dilutive effect of
outstanding options
3,963 6,671
-------------------- --------------------
Weighted average shares
outstanding, as adjusted 2,700,751 2,689,632
==================== ====================
Net income per share, diluted $ 0.32 $ 0.27
==================== ====================
</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-months
ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------
1999 1998
----------------------- -------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Net income $ 862 $ 713
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period
(1) (3)
Less: Reclassification adjustment for gains (losses)
included in net income (3)
- (1) -
----------- ---------- ---------- ------------
COMPREHENSIVE INCOME $ 861 $ 710
========== ============
</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 meaining
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 of $334.8 million increased $2.8 million or .85% 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 $12.2 million to $9.5 million at March 31, 1999. The Company
continued to restructure its balance sheet, with total net loans up $8.7
million, or 4.36%, from $199.6 million to $208.3 million. At the same time,
total investment securities increased $8.7 million to $101.4 million. This
strategy has contributed to an increase in net interest margin of 2 basis points
from 3.42% from the three months ended March 31, 1998 to 3.44% for the three
months ended March 31, 1999. The average yield on earning assets decreased 17
basis points to 7.54% when comparing these same periods, attributable to a
general decline in market interest rates between the two periods under
consideration. Consequently, 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 from 4.82% for 1998 to 4.50% for 1999.
Total liabilities increased $2.3 million, from $290.6 million at
December 31, 1998 to $292.9 at March 31, 1999, as a result of increases in
retail repurchase agreements of $4.5 million, or 22.93%, and Federal Home Loan
Bank (FHLB) advances of $2.0 million, or 3.57%. Total deposits decreased $4.4
million from $212.9 million at December 31, 1998 to $208.4 million at March 31,
1999, with certificates of deposit (CD's) and interest-bearing transaction
accounts increasing by $0.5 million and $1.0 million, respectively, and
non-interest-bearing demand deposits decreasing by $6.0 million 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. Management made the conscious decision to let higher-priced maturing
CD's run-off rather than offer above market rates to keep those CD's. Retention
of these maturing CD's was better than management had projected, and
consequently the CD portfolio experienced low growth rather than the moderate
decrease that had been expected. In addition, the Company in general retained
maturing CD's at rates substantially below the rates they were paying prior to
maturity. The Company used lower cost FHLB advances and retail repurchase
agreements rather than higher cost CD's to fund growth over the three-month
period ending March 31, 1999.
CAPITAL
Consolidated total equity was $41.9 million as of March 31, 1999,
increasing $521,000 from $41.4 million as of December 31, 1998. 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 March 31, 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
<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)
Company's subsidiaries maintain sufficient liquidity to fund ongoing operations.
At March 31, 1999, 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 March 31, 1999 was $862,000, as
compared to $713,000 for the quarter ended March 31, 1998. Net interest income
increased by $306,000, or 12.93%, for the quarter ended March 31, 1999 when
measured against the same quarter in 1998. This increase reflected growth in
total interest income of $526,000, or 9.86%, from the first quarter of 1999
compared to the same period in 1998. This growth resulted primarily from three
areas: (1) commercial loan interest increased $697,000, or 56.44%, due primarily
to a $34.8 million increase in average balances of commercial loans for the
three months ended March 31, 1999 compared to the same period in the previous
year, (2) interest income on securities, both mortgage-backed and other debt
securities, increased $78,000, or 14.89%, on the basis of a $10.0 million
increase in average balances from the first quarter of 1999 to the same period
in 1998, and (3) dividends on Federal Home Loan Bank stock increased $25,000, or
62.50%, as average stock outstanding increased $1.3 million for 1999 compared 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 three
months of 1999 fell $168,000 from the same period in 1998 as the average
balances decreased $5.8 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 which 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 $220,000, or 7.41%, from the first
three months of 1999 compared to the same period in 1998. Interest on deposits,
which comprised 78.27% of total interest expense for the first three months of
1999, decreased $158,000, or 6.64%. Interest expense on Federal Home Loan Bank
(FHLB) advances and other borrowings increased $378,000 as average balances rose
$38.0 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.
During the three-month period ended March 31, 1999, a provision for loan losses
of $136,000 was made to the general loan loss reserve, as compared to $88,000
for the same period 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.
<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)
Non interest income increased $124,000, or 28..05%, for the three months ended
March 31, 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 $89,000, or 41.20%, 2)
service fees on deposit accounts increased $22,000, or 23.40%, and 3)commission
income grew $12,000, or 10.53%. 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 expense increased $130,000, or 8.33%, for the three-month period
ended March 31, 1999 as compared to the same period ended March 31, 1998. This
increase was primarily attributable to a $71,000 increase in compensation and
benefits 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 increase fee income. The remaining
increase is attributable to a variety of immaterial factors.
Income before income taxes in the first three months of 1999 increased to
$1,412,000 from $1,160,000 for the same period in 1998, an increase of $252,000
or 21.72%. The Company's effective tax rate was 38.95% for the three months
ended March 31, 1999, as compared to 38.53% 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.
<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)
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 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-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 is substantially complete and should be completely accomplished by
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.
<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)
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 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
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 March 31, 1999.
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 May 15, 1999 BY: /s/ Michael Douglas
-------------------------- -------------------------
Michael Douglas
President and CEO
Dated May 15, 1999 BY: /s/ James M. Stutsman
-------------------------- -------------------------
James M. Stutsman
Chief Financial Officer
<PAGE>
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