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, 2000
------------------
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
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number)
101 W. Spring Street, New Albany, Indiana 47150
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
1-812-944-2224
--------------
Not applicable
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Former name, former address and former fiscal year,
if changed since last report
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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: 2,543,907 shares of common stock were outstanding as of
October 31, 2000.
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COMMUNITY BANK SHARES OF INDIANA, INC.
INDEX
Part I Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 (unaudited) .......................... 3
Consolidated Statements of Income for the three and nine months
ended September 30, 2000 and 1999 (unaudited) .............. 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 (unaudited) .............. 5
Notes to consolidated financial statements (unaudited) ........ 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 9-14
Item 2. Quantitative and Qualitative Disclosures
About Market Risk..................................... 15
Part II Other Information.............................................. 16
Signatures ............................................................. 17
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PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
---- ----
ASSETS (In thousands)
<S> <C> <C>
Cash and due from banks $ 10,597 $ 7,248
Interest bearing deposits with banks 996 5,767
Securities available for sale, at fair value 6,347 6,428
Securities-held to maturity:
Mortgage-backed securities 21,759 26,388
Other debt securities 70,460 71,521
Loans receivable, net 280,229 246,018
Federal Home Loan Bank stock, at cost 7,586 7,362
Foreclosed real estate - 13
Premises and equipment 10,058 9,754
Accrued interest receivable 3,061 2,795
Other assets 870 1,149
--------------------------------------------
Total Assets $ 411,963 $ 384,443
============================================
LIABILITIES
Deposits $ 244,113 $ 226,473
Borrowed funds 124,136 114,432
Accrued interest payable 488 305
Accrued expenses and other liabilities 1,765 1,603
--------------------------------------------
Total Liabilities 370,502 342,813
--------------------------------------------
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 19,487 19,472
Retained earnings-substantially restricted 24,964 23,859
Unearned ESOP and stock compensation (244) (339)
Accumulated other comprehensive income-net
unrealized gain on securities available for sale (126) (232)
Less treasury stock, at cost - 184,391 shares
(80,391 shares at December 31, 1999) (2,893) (1,403)
--------------------------------------------
Total Stockholders' Equity 41,461 41,630
--------------------------------------------
Total Liabilities and Stockholders' Equity $ 411,963 $ 384,443
============================================
See accompanying notes to consolidated financial statements.
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PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME (In thousands, except per share data)
<S> <C> <C> <C> <C>
Loans receivable, including fees $6,001 $4,988 $16,984 $13,844
Securities:
Mortgage-backed securities 435 556 1,390 1,493
Other debt securities 1,177 1,173 3,529 3,343
Federal Home Loan Bank dividends 159 90 453 227
Interest bearing deposits with banks 58 84 199 311
------------------------- -------------------------
Total interest income 7,830 6,891 22,555 19,218
INTEREST EXPENSE
Deposits 2,991 2,270 8,263 6,699
Advances from Federal Home Loan Bank and other borrowings 1,817 1,384 5,033 3,472
------------------------- -------------------------
Total interest expense 4,808 3,654 13,296 10,171
Net interest income 3,022 3,237 9,259 9,047
Provision for loan losses 381 183 783 475
------------------------- -------------------------
Net interest income after provision for
loan losses 2,641 3,054 8,476 8,572
NON-INTEREST INCOME
Service charges on deposit accounts 199 129 473 360
Commission income 232 172 557 433
Gain on sale of loans 53 36 131 194
Gain on sale of premises and equipment - - 86 -
Other income 15 3 50 13
------------------------- -------------------------
Total non-interest income 499 340 1,297 1,000
------------------------- -------------------------
NON-INTEREST EXPENSE
Compensation and benefits 1,195 1,190 3,602 3,414
Occupancy and equipment 344 277 954 581
Deposit insurance premiums 11 26 34 79
Data processing service 183 157 551 447
Other operating expenses 398 338 1,208 934
------------------------- -------------------------
Total non-interest expense 2,131 1,988 6,349 5,455
------------------------- -------------------------
Income before income taxes 1,009 1,406 3,424 4,117
Income tax expense 364 543 1,287 1,584
------------------------- -------------------------
Net Income 645 863 2,137 2,533
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized gain on securities:
Unrealized holding gains (losses) arising during the period 55 (150) 106 (140)
Less: reclassification adjustment - - - -
------------------------- -------------------------
Other comprehensive income (loss) 55 (150) 106 (140)
------------------------- -------------------------
Comprehensive Income $ 700 $ 713 $2,243 $2,393
========================= =========================
Net income per common share, basic $ 0.26 $ 0.32 $ 0.83 $ 0.94
========================= =========================
Net income per common share, diluted $ 0.26 $ 0.32 $ 0.83 $ 0.94
========================= =========================
See accompanying notes to consolidated financial statements.
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PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES (In thousands)
<S> <C> <C>
Net income $ 2,137 $ 2,533
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of premiums and accretion of discounts 15 (30)
Provision for loan losses 783 475
Proceeds from sales of mortgage loans 12,485 32,752
Mortgage loans originated for sale (12,354) (27,219)
Net gain on sale of mortgage loans (131) (193)
Net gain on sale of foreclosed real estate (3) -
Depreciation expense 491 320
Gain on sale of premises and equipment (86) -
ESOP and stock compensation plan expense 92 208
Federal Home Loan Bank stock dividends (41) (28)
(Increase) decrease in accrued interest receivable (266) 60
Increase in accrued interest payable 183 135
Net change in other assets/liabilities 408 695
------------------------------
Net Cash Provided By Operating Activities 3,713 9,708
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits with banks 4,771 (2,105)
Proceeds from sales of securities available for sale - 3,724
Proceeds from maturities of securities held to maturity 1,025 12,340
Purchase of securities held to maturity - (39,133)
Principal collected on securities available for sale 255 96
Principal collected on securities held to maturity 4,651 8,862
Loan originations and principal payments on loans, net (34,994) (39,499)
Purchase of Federal Home Loan Bank stock (183) (1,272)
Proceeds from sale of foreclosed real estate 16 200
Proceeds from sale of premises and equipment 50 -
Acquisition of premises and equipment (759) (1,987)
------------------------------
Net Cash Used By Investing Activities (25,168) (58,774)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 17,640 2,078
Net increase (decrease) in retail repurchase agreements (2,546) 10,777
Repayment of advances from Federal Home Loan Bank (46,650) (21,000)
Advances from Federal Home Loan Bank 58,900 52,750
Purchase of treasury stock (1,472) (1,201)
Dividends paid (1,068) (1,062)
------------------------------
Net Cash Provided By Financing Activities 24,804 42,342
------------------------------
Net Increase (Decrease) in Cash and Due From Banks 3,349 (6,724)
Cash and due from banks at beginning of period 7,248 14,051
------------------------------
Cash and Due From Banks at End of Period $ 10,597 $ 7,327
==============================
See accompanying notes to consolidated financial statements.
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COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Presentation of Interim Information
Community Bank Shares of Indiana, Inc. (the Company) was formally
established on April 7, 1995. Community Bank Shares of Indiana, Inc.
(the Company) is a multi-bank holding company headquartered in New
Albany, Indiana. The Company's wholly-owned banking subsidiaries (the
Banks) are Community Bank of Southern Indiana (Community), Heritage
Bank of Southern Indiana (Heritage), and Community Bank of Kentucky,
formerly NCF Bank and Trust Company (Community of Kentucky). Community,
Heritage, and Community of Kentucky are state-chartered stock
commercial banks headquartered in New Albany, Indiana, Jeffersonville,
Indiana, and Bardstown, Kentucky, respectively.
In the opinion of management, the unaudited consolidated financial
statements include all normal adjustments considered necessary to
present fairly the financial position as of September 30, 2000, and the
results of operations for the three and nine months ended September 30,
2000 and 1999 and cash flows for the nine months ended September 30,
2000 and 1999. All of these adjustments are of a normal, recurring
nature. Interim results are not necessarily indicative of results for a
full year.
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 annual audited consolidated financial statements.
The consolidated financial statements include the accounts of the
Company and the Banks. All material intercompany balances and
transactions have been eliminated in consolidation.
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2. Supplemental Disclosures of Cash Flow Information
Nine Months Ended
September 30,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Cash payments for:
Interest $13,113 $10,036
Taxes 1,512 1,529
Noncash investing activities:
Proceeds from sales of foreclosed real estate
financed through loans - 200
Proceeds from sales of premises and equipment
financed through loans 300 -
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COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. Comprehensive Income
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 the Company includes net income and other comprehensive income
representing the net unrealized gains and losses on securities
available for sale. The following tables set forth the components of
other comprehensive income and the allocated income tax amounts for the
three and nine months ended September 30, 2000 and 1999:
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<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(In thousands) Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
<S> <C> <C> <C> <C>
arising during the period $ 91 $ (248) $ 175 $ (232)
Income tax expense (benefit) 36 (92)
(98) 69
--------------------------- ---------------------------
Net of tax amount 55 (150) 106 (140)
--------------------------- ---------------------------
Less: reclassification adjustment
adjustment for (gains) losses
included in net income
- - - -
Income tax expense (benefit)
- - - -
--------------------------- ---------------------------
- - - -
--------------------------- ---------------------------
Other comprehensive
income (loss) $ 55 $ (150) $ 106 $ (140)
=========================== ===========================
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<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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4. Supplemental Disclosure for Earnings Per Share
Three months ended Nine months ended
In thousands, except for share September 30, September 30,
------------------------------- --------------------------------
and per share amounts 2000 1999 2000 1999
--------------------- -------------- --------------- --------------- ---------------
Basic:
Earnings:
---------
<S> <C> <C> <C> <C>
Net income $ 645 $ 863 $ 2,137 $ 2,532
============== =============== =============== ===============
Shares:
-------
Weighted average
common shares outstanding 2,524,233 2,661,460 2,564,740 2,684,159
============== =============== =============== ===============
Net income per share, basic $ 0.26 $ 0.32 $ 0.83 $ 0.94
============== =============== =============== ===============
Diluted:
Earnings:
---------
Net income $ 645 $ 863 $ 2,137 $ 2,532
============== =============== =============== ===============
Shares:
-------
Weighted average
common shares outstanding 2,524,233 2,661,460 2,564,740 2,684,159
Add: Dilutive effect of outstanding
options and restricted share awards 1,124 7,029 1,350 5,693
-------------- --------------- --------------- ---------------
Weighted average common shares
shares outstanding, as adjusted 2,525,357 2,668,489 2,566,090 2,689,852
============== =============== =============== ===============
Net income per share, diluted $ 0.26 $ 0.32 $ 0.83 $ 0.94
============== =============== =============== ===============
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<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARY
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; 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 increased 7.2% from $384.4 million at December 31, 2000 to $412.0
million at September 30, 2000, primarily as a result of increases in loans
receivable, net, and cash and due from banks, which was funded primarily by
growth in deposits and an increase in advances from the Federal Home Loan Banks
(FHLB) of Indianapolis and Cincinnati.
Loans receivable, net, were $246.0 million at December 31, 1999, compared to
$280.2 million at September 30, 2000, a 13.9% increase. This increase is
primarily the result of increases in commercial mortgage and business loans of
$26.2 million, consumer loans of $8.1 million, and residential mortgage loans of
$700,000.
Securities available for sale decreased from $6.4 million at December 31, 1999
to $6.3 million at September 30, 2000 as a result of principal repayments.
Mortgage-backed securities held-to-maturity decreased from $26.4 million at
December 31, 1999 to $21.8 million at September 30, 2000, as a result of
principal repayments. Other debt securities held-to-maturity decreased to $70.5
million at September 30, 2000 from $71.5 million at December 31, 1999 as a
result of security maturities.
Federal Home Loan Bank stock, at cost, increased by $224,000 as the Company was
required to purchase stock to support advances obtained from the Federal Home
Loan Banks of Indianapolis and Cincinnati.
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<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARY
Cash and interest bearing deposits with banks decreased from $13.0 million at
December 31, 1999 to $11.6 million at September 30, 2000 as a result of other,
less liquid assets growing more quickly than the Company's funding sources,
resulting in decreased liquidity over the period.
Total deposits increased from $226.5 million at December 31, 1999 to $244.1
million at September 30, 2000. The increase in deposits resulted from growth in
both 1) demand and savings deposit accounts, which management attributes
primarily to its promotional efforts to attract lower cost transaction accounts,
and 2) time deposits, which management attributes primarily to more aggressive
pricing within its market areas. In addition, about $8.6 million in growth
resulted in the movement of funds from retail repurchase agreements (classified
as borrowed funds on the balance sheet) to interest-bearing deposit accounts.
Total stockholders' equity decreased to $41.5 million at September 30, 2000 from
$41.6 million at December 31, 1999 primarily as a result of net income of $2.1
million and unrealized gains on available for sale securities, net of tax, of
$106,000, offset by dividends to shareholders of $1.1 million and treasury stock
repurchases of $1.5 million.
Results of Operations
Net Income. Net income was $645,000 ($0.26 per share diluted) for the three
months ended September 30, 2000 compared to $863,000 ($0.32 per share diluted)
for the three months ended September 30, 1999. For the nine months ended
September 30, 2000, net income was $2.1 million as compared to $2.5 million for
the same period in 1999. Net income decreased from the three and nine month
periods ended September 30, 1999 as compared to the same periods in 2000
primarily because of increases in the provision for loan losses and in
non-interest expenses.
Net interest income for the three month periods ended September 30, 2000 and
1999. Net interest income decreased 6.6% from $3.2 million in 1999 to $3.0
million in 2000 primarily as a result of rising market interest rates. As
interest rates have risen since June, 1999, the cost of the Company's
interest-bearing liabilities has increased faster than the yield on its
interest-earning assets. This compression of net interest margin has more than
offset the growth in average interest-earning assets from the three months ended
September 30, 1999 to the same period in 2000.
Total interest income increased $939,000 million, or 13.6%, to $7.8 million for
the three months ended September 30, 2000 compared to $6.9 million in the prior
year as a result of 1) an increase in interest-earning assets and 2) an increase
in the overall yield on interest-earning assets attributable to a general rise
in market interest rates. The average yield on interest-earning assets increased
from 7.66% in 1999 to 7.98% in 2000 due to the rise in market interest rates and
an increase in higher-yielding commercial and consumer loans as a percent of
total interest-earning assets. Interest on loans receivable, including fees,
increased $1.0 million as a result of 1) an increase in the average balance of
net loans receivable, and 2) an increase in the average rate on net loans
receivable. Dividends on FHLB stock increased by $69,000 due to an increase in
average FHLB stock outstanding.
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<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARY
Total interest expense increased $1.1 million, or 31.6%, to $4.8 million for the
three months ended September 30, 2000 compared to $3.7 million for the three
months ended September 30, 1999 as a result of 1) increases in average deposits
and average borrowings from the Federal Home Loan Banks of Indianapolis and
Cincinnati, and 2) a general increase in the cost of interest-bearing
liabilities as a consequence of rising interest rates. The average cost of funds
increased from 4.75% in 1999 to 5.58% in 2000 due to higher market interest
rates and a funding mix more heavily weighted toward higher-costing FHLB
advances.
Net interest income for the nine month periods ended September 30, 2000 and
1999. Net interest income increased 2.3% from $9.0 million in 1999 to $9.3
million in 2000 primarily as a result of the increase in interest-earning assets
funded by increases in deposits and FHLB advances.
Total interest income increased $3.3 million, or 17.4%, to $22.6 million for the
nine months ended September 30, 2000 compared to $19.2 million in the prior year
as a result of 1) an increase in interest-earning assets and 2) an increase in
the overall yield on interest-earning assets attributable to a general rise in
market interest rates. The average yield on interest-earning assets increased
from 7.59% in 1999 to 7.90% in 2000 due to the rise in market interest rates and
an increase in higher-yielding commercial and consumer loans as a percent of
total interest-earning assets. Interest on loans receivable, including fees,
increased $3.1 million and interest on other debt securities increased $186,000
as a result of an increase in the yields and average balances associated with
these assets. Dividends on FHLB stock increased by $226,000 due to an increase
in average FHLB stock outstanding.
Total interest expense increased $3.1 million, or 30.7%, to $13.3 million for
the nine months ended September 30, 2000 compared to $10.1 million for the nine
months ended September 30, 1999 as a result of the growth in deposits and an
increase in average borrowings from the Federal Home Loan Banks of Indianapolis
and Cincinnati. The average cost of funds increased from 4.76% in 1999 to 5.32%
in 2000 due to higher market interest rates and a funding mix more heavily
weighted in higher-costing FHLB advances and retail repurchase agreements.
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<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARY
Provision for loan losses. The provision for loan losses was $381,000 for the
three months ended September 30, 2000 compared to $183,000 for the same three
month period in 1999, and $783,000 for the nine months ended September 30, 2000
compared to $475,000 for the same nine month period in 1999. The provision for
loan losses is charged to operations to bring the total allowance for loan
losses to a level considered by management to be adequate to provide for
estimated losses based on management's evaluation of the collectibility of the
loan portfolio, including the nature of the portfolio, credit concentrations,
trends in historical loss experience, specified impaired loans, and economic
conditions. The Company made provisions of $381,000 for the three months ended
September 30, 2000 and $783,000 for the nine months ended September 30, 2000 to
increase the allowance for loan losses to an amount considered reasonable by
management based on an evaluation as of September 30, 2000. The allowance was
increased primarily due to growth in commercial real estate and commercial
business loans, which possess a higher inherent risk of loss than one-to-four
family residential mortgage loans. Also, the Banks classified $5,729,000 as
substandard during the quarter ended September 30, 2000. Although management
uses the best information available, future adjustments to the allowance may be
necessary due to changes in economic, operating, regulatory and other conditions
that may be beyond the Company's control. While the Company maintains its
allowance for loan losses at a level which it considers adequate to provide for
estimated losses, there can be no assurance that further additions will not be
made to the allowance for loan losses and that actual losses will not exceed the
estimated amounts. At September 30, 2000, non-performing loans amounted to
$968,000. Included in non-performing loans are loans over 90 days past due in
the amount of $70,000. These loans are accruing interest as the estimated value
of the collateral and collection efforts are deemed sufficient to ensure full
recovery.
Non-interest income. Non-interest income increased 46.8% to $499,000 for the
three months ended September 30, 2000 compared to $340,000 for the three months
ended September 30, 1999. The increase is attributable primarily to 1) an
increase in commission income on the sale of investment products such as mutual
funds, stocks, bonds, and annuities, and 2) an increase in service charges on
deposit accounts resulting from the increase in deposit accounts.
Non-interest income increased 29.7% to $1.3 million for the nine months ended
September 30, 2000 compared to $1.0 million for the nine months ended September
30, 1999. The increase is attributable primarily to 1) an increase in commission
income on the sale of investment products such as mutual funds, stocks, bonds,
and annuities, 2) an increase in service charges on deposit accounts resulting
from the increase in deposit accounts, and 3) the gain on sale of the Company's
former corporate headquarters. These increases were offset by a decrease in the
gain on sale of mortgage loans as increased market interest rates resulted in
decreased mortgage loan originations.
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<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARY
Non-interest expense. Non-interest expense increased by $143,000 for the three
months ended September 30, 2000 as compared to the same period in 1999. The
increase results primarily from increases in occupancy and equipment expenses,
data processing service expense, and other operating expenses. Occupancy and
equipment costs increased $67,000 in the third quarter 2000 compared to the
third quarter 1999 as a result of increased property tax expense accruals
related to the occupation of a new corporate headquarters building in mid-June
1999. Data processing service expense increased $26,000 due primarily to an
increase in third party data processing costs related to additional services
offered to customers of the three banking subsidiaries. Other operating expenses
increased $60,000 in the current period primarily related increased advertising
and consulting fees.
Non-interest expense increased by $894,000 for the nine months ended September
30, 2000 as compared to the same period in 1999. The increase results primarily
from increases in compensation and benefits expenses, occupancy and equipment
expenses, data processing service expense, and other operating expenses.
Compensation and benefits expense increased $188,000 due to general staff
increases designed to help the Company deal with its strong growth in recent
years. Occupancy and equipment costs increased $373,000 for the nine months
ended September 30, 2000 compared to the same period in 1999 as a result of
increased expenses related to the occupation of a new corporate headquarters
building in June 1999. Data processing service expense increased $104,000 due
primarily to 1) conversion costs related to switching ATM processors and
increased ATM transaction volumes, and 2) an increase in third party data
processing costs related to additional services offered to customers of the
three banking subsidiaries. Other operating expenses increased $274,000 in the
current period primarily related to a large one-time charitable contribution
made to a local non-profit organization and increased advertising and consulting
fees.
Income tax expense. Income tax expense for the three month period ended
September 30, 2000 was $364,000, compared to $543,000 for the same period in
1999. The effective tax rate for the three months ended September 30, 2000 was
36.1% compared to 38.6% for the same period in 1999. Income tax expense for the
nine month period ended September 30, 2000 was $1.3 million, compared to $1.6
million for the same period in 1999. The effective tax rate for the nine months
ended September 30, 2000 was 37.6% compared to 38.5% for the same period in
1999.
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<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARY
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, customer
repurchase agreements, proceeds from loan repayments, maturing securities and
FHLB advances. While loan repayments and maturities are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by market
interest rates, general economic conditions and competition. At September 30,
2000, the Company had cash and interest-bearing deposits with banks of $11.6
million and securities available-for-sale with a fair value of $6.3 million. If
the Company requires funds beyond its ability to generate them internally, it
has additional borrowing capacity with the FHLB's of Indianapolis and Cincinnati
as well as collateral eligible for repurchase agreements.
The Company's primary investing activity is the origination of commercial real
estate and business loans. The Company also invests in residential mortgage and
consumer loans, U.S. Government and agency securities and mortgage-backed
securities issued by U.S. Government agencies.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. Historically, the Company has been able to retain a significant
amount of its deposits as they mature.
The subsidiary banks are required to maintain specific amounts of capital
pursuant to regulatory requirements. As of September 30, 2000, the subsidiary
banks were in compliance with all regulatory capital requirements that were
effective as of such date with tangible, core and risk-based capital ratios as
follows:
<TABLE>
<CAPTION>
Total Capital To Tier 1 Capital To Tier 1 Capital
Risk-weighted Assets Risk-weighted Assets To Average Assets
---------------------------- ---------------------------- -------------------------
<S> <C> <C> <C>
Community Bank 14.5% 14.6% 9.5%
Heritage Bank 13.1% 13.1% 9.3%
Community Bank of Kentucky 18.5% 18.5% 12.9%
</TABLE>
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<PAGE>
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board-approved policy limits. The Company uses an
earnings simulation model to analyze net interest income sensitivity to
movements in interest rates. Given an immediate, sustained 200 basis point
upward shock to the yield curve used in the simulation model, it is estimated
net interest income for the Company would decrease by 8.54 percent over one
year. A 200 basis point immediate, sustained downward shock in the yield curve
would increase net interest income by an estimated 7.84 percent over one year.
These estimated changes in net interest income are within the policy guidelines
established by the Company's board of directors.
- 15 -
<PAGE>
PART II
OTHER INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
Item 1. Legal Proceedings
The Company is not a party to any legal proceedings.
Periodically, there have been various claims and lawsuits
involving the Bank, mainly as a plaintiff, such as claims to
enforce liens, condemnation proceedings on properties in which
the Bank holds security interests, claims involving the making
and servicing of real property loans and other issues incident to
the Bank's business. The Bank is not a party to any pending legal
proceedings that it believes would have a material adverse affect
on its financial condition or operations.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on August 23, 2000
announcing that Michael L. Douglas stepped down as President and
CEO of Community Bank Shares, Inc.(the "Company"). James D.
Rickard was appointed the new President and CEO of the Company.
Mr. Douglas will serve as Executive Vice President and Chief
Operating Officer for Community Bank Shares of Indiana, Inc. and
President and Chief Executive Officer for Community Bank until
Douglas' retirement in early 2001.
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<PAGE>
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 14, 2000 BY: /s/ James D. Rickard
------------------------- -----------------------------
James D. Rickard
President, CEO, and Director
Dated: November 14, 2000 BY: /s/ Paul A. Chrisco
-------------------------- ------------------------
Paul A. Chrisco
Chief Financial Officer
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<PAGE>
