SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
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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
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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: 2,544,307 shares of common stock were outstanding as of July
31, 2000.
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COMMUNITY BANK SHARES OF INDIANA, INC.
INDEX
Page
Part I Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 (unaudited) 3
Consolidated Statements of Income
for the three and six months
ended June 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows
for the three and six months
ended June 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 9-15
Item 2. Quantitative and Qualitative Disclosures
About Market Risk 16
Part II Other Information 17-18
Signatures 19
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PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2000 1999
---- ----
ASSETS (In thousands)
<S> <C> <C>
Cash and due from banks ............................... $ 9,706 $ 7,248
Interest bearing deposits with banks .................. 5,265 5,767
Securities available for sale, at fair value .......... 6,344 6,428
Securities-held to maturity:
Mortgage-backed securities .......................... 23,395 26,388
Other debt securities ............................... 70,493 71,521
Loans receivable, net ................................. 271,890 246,018
Federal Home Loan Bank stock, at cost ................. 7,528 7,362
Foreclosed real estate ................................ -- 13
Premises and equipment ................................ 10,019 9,754
Accrued interest receivable ........................... 2,975 2,795
Other assets .......................................... 762 1,149
--------- ---------
Total Assets ...................................... $ 408,377 $ 384,443
========= =========
LIABILITIES
Deposits .............................................. $ 254,497 $ 226,473
Borrowed funds ........................................ 110,471 114,432
Accrued interest payable .............................. 144 91
Accrued expenses and other liabilities ................ 1,957 1,817
--------- ---------
Total Liabilities ................................. 367,069 342,813
--------- ---------
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 ............................ 19,483 19,472
Retained earnings-substantially restricted ............ 24,660 23,859
Unearned ESOP and stock compensation .................. (274) (339)
Accumulated other comprehensive income-net
unrealized gain on securities available for sale .... (181) (232)
Less treasury stock, at cost - 102,891 shares
(80,391 shares at December 31, 1999) ................ (2,653) (1,403)
--------- ---------
Total Stockholders' Equity ........................ 41,308 41,630
--------- ---------
Total Liabilities and Stockholders' Equity ........ $ 408,377 $ 384,443
========= =========
</TABLE>
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 Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME (In thousands, except per share data)
<S> <C> <C> <C> <C>
Loans receivable, including fees ........................ $ 5,711 $ 4,526 $10,983 $ 8,856
Securities:
Mortgage-backed securities ............................ 471 507 955 937
Other debt securities ................................. 1,165 1,117 2,352 2,170
Federal Home Loan Bank dividends ........................ 149 73 294 137
Interest bearing deposits with banks .................... 86 85 141 227
------- ------- ------- -------
Total interest income .............................. 7,582 6,308 14,725 12,327
INTEREST EXPENSE
Deposits ................................................ 2,784 2,206 5,272 4,429
Advances from Federal Home Loan Bank and other borrowings 1,675 1,123 3,217 2,088
------- ------- ------- -------
Total interest expense ............................. 4,459 3,329 8,489 6,517
Net interest income ................................ 3,123 2,979 6,236 5,810
Provision for loan losses ............................... 221 156 402 292
------- ------- ------- -------
Net interest income after provision for
loan losses ...................................... 2,902 2,823 5,834 5,518
NON-INTEREST INCOME
Service charges on deposit accounts ..................... 149 115 275 231
Commission income ....................................... 165 135 325 261
Gain on sale of loans ................................... 44 49 78 158
Gain on sale of premises and equipment .................. -- -- 86 --
Other income ............................................ 19 5 35 10
------- ------- ------- -------
Total non-interest income ......................... 377 304 799 660
------- ------- ------- -------
NON-INTEREST EXPENSE
Compensation and benefits ............................... 1,182 1,137 2,407 2,224
Occupancy and equipment ................................. 305 161 610 304
Deposit insurance premiums .............................. 11 26 22 53
Data processing service ................................. 185 150 367 290
Other operating expenses ................................ 392 335 812 597
------- ------- ------- -------
Total non-interest expense ......................... 2,075 1,809 4,218 3,468
------- ------- ------- -------
Income before income taxes ......................... 1,204 1,318 2,415 2,710
Income tax expense ...................................... 440 510 923 1,041
------- ------- ------- -------
Net Income ......................................... 764 808 1,492 1,669
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gain on securities:
Unrealized holding gains arising during the period ...... 4 11 51 10
Less: reclassification adjustment ................... -- -- -- --
------- ------- ------- -------
Other comprehensive income ......................... 4 11 51 10
------- ------- ------- -------
Comprehensive Income ............................... $ 768 $ 819 $ 1,543 $ 1,679
======= ======= ======= =======
Net income per common share, basic ................. $ 0.30 $ 0.30 $ 0.58 $ 0.62
======= ======= ======= =======
Net income per common share, diluted ............... $ 0.30 $ 0.30 $ 0.58 $ 0.62
======= ======= ======= =======
</TABLE>
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)
Six Months Ended
June 30,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES (In thousands)
<S> <C> <C>
Net income .................................................. $ 1,492 $ 1,669
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of premiums and accretion of discounts ... 13 (40)
Provision for loan losses ............................. 402 292
Proceeds from sales of mortgage loans ................. 7,224 28,973
Mortgage loans originated for sale .................... (7,146) (23,751)
Net gain on sale of mortgage loans .................... (78) (157)
Net gain on sale of foreclosed real estate ............ (3) --
Depreciation expense .................................. 319 112
Gain on sale of premises and equipment ................ (86) --
ESOP and stock compensation plan expense .............. 63 166
Federal Home Loan Bank stock dividends ................ (26) (17)
Increase in accrued interest receivable ............... (180) (475)
Increase in accrued interest payable .................. 53 82
Net change in other assets/liabilities ................ 531 407
-------- --------
Net Cash Provided By Operating Activities ........... 2,578 7,261
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits with banks .. 502 4,459
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 .. 168 33
Principal collected on securities held to maturity .... 2,983 6,565
Loan originations and principal payments on loans, net (25,974) (24,071)
Purchase of Federal Home Loan Bank stock .............. (140) (1,116)
Proceeds from sale of foreclosed real estate .......... 16 200
Proceeds from sale of premises and equipment .......... 50 --
Acquisition of premises and equipment ................. (848) (842)
-------- --------
Net Cash Used By Investing Activities .............. (22,218) (41,565)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits ................... 28,024 (904)
Net increase (decrease) in retail repurchase agreements (8,211) 6,552
Repayment of advances from Federal Home Loan Bank ..... (35,650) (1,500)
Advances from Federal Home Loan Bank .................. 39,900 28,500
Purchase of treasury stock ............................ (1,237) (604)
Dividends paid ........................................ (728) (697)
-------- --------
Net Cash Provided By Financing Activities ........... 22,098 31,347
-------- --------
Net Increase (Decrease) in Cash and Due From Banks ............ 2,458 (2,957)
Cash and due from banks at beginning of period ................ 7,248 14,051
-------- --------
Cash and Due From Banks at End of Period ...................... $ 9,706 $ 11,094
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
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 NCF Bank and Trust Company
(NCF Bank). Community, Heritage, and NCF Bank 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 June 30, 2000, and the
results of operations for the three and six months ended June 30, 2000
and 1999 and cash flows for the six months ended June 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
Six Months Ended
June 30,
2000 1999
---- ----
(In Thousands)
Cash payments for:
<S> <C> <C>
Interest .................................... $8,436 $6,435
Taxes ....................................... 997 966
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 --
</TABLE>
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COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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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 six months ended June 30, 2000 and 1999:
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
Unrealized gains on securities:
Unrealized holding gains (losses)
<S> <C> <C> <C> <C>
arising during the period .... $ 7 $18 $84 $17
Income tax expense (benefit) ..... 3 7 33 7
--- --- --- ---
Net of tax amount ................ 4 11 51 10
--- --- --- ---
Less: reclassification adjustment
adjustment for (gains) losses
included in net income ....... -- -- -- --
Income tax expense (benefit) ..... -- -- -- --
--- --- --- ---
-- -- -- --
--- --- --- ---
Other comprehensive income ... $ 4 $11 $51 $10
=== === === ===
</TABLE>
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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 Six months ended
June 30, June 30,
In thousands, except for share ----------------------- -----------------------
and per share amounts 2000 1999 2000 1999
--------------------- ---------- ---------- ---------- ----------
Basic:
Earnings:
<S> <C> <C> <C> <C>
Net income .............. $ 764 $ 808 $ 1,492 $ 1,669
========== ========== ========== ==========
Shares:
Weighted average
common shares outstanding 2,565,817 2,694,834 2,586,361 2,695,806
========== ========== ========== ==========
Net income per share, basic ......... $ 0.30 $ 0.30 $ 0.58 $ 0.62
========== ========== ========== ==========
Diluted:
Earnings:
Net income .............. $ 764 $ 808 $ 1,492 $ 1,669
========== ========== ========== ==========
Shares:
Weighted average
common shares outstanding 2,565,817 2,694,834 2,586,361 2,695,806
Add: Dilutive effect of
Outstanding options 454 5,357 463 4,754
---------- ---------- ---------- ----------
Weighted average shares
outstanding, as adjusted 2,566,271 2,700,191 2,586,824 2,700,560
========== ========== ========== ==========
Net income per share, diluted ....... $ 0.30 $ 0.30 $ 0.58 $ 0.62
========== ========== ========== ==========
</TABLE>
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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 6.2% from $384.4 million at December 31, 2000 to
$408.4 million at June 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 $271.9 million at June 30, 2000, a 10.5% increase. This increase is
primarily the result of increases in commercial mortgage and business loans of
$20.0 million, consumer loans of $4.6 million, and residential mortgage loans of
$1.7 million.
Securities available for sale decreased from $6.4 million at December
31, 1999 to $6.3 million at June 30, 2000 as a result of principal repayments.
Mortgage-backed securities held-to-maturity decreased from $26.4
million at December 31, 1999 to $23.4 million at June 30, 2000, as a result of
principal repayments. Other debt securities held-to-maturity decreased to $70.5
million at June 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 $166,000 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 increased from $13.0
million at December 31, 1999 to $15.0 million at June 30, 2000 as a result of
other, less liquid assets growing less quickly than the Company's funding
sources, resulting in increased liquidity over the period.
Total deposits increased from $226.5 million at December 31, 1999 to
$254.5 million at June 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 accounts, and 2) time
deposits, which management attributes primarily to more aggressive pricing
within its market areas. In addition, about $9.5 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 $41.3 million at June 30, 2000
from $41.6 million at December 31, 1999 primarily as a result of net income of
$1.5 million and unrealized gains on available for sale securities, net of tax,
of $51,000, offset by dividends to shareholders of $689,000 and treasury stock
repurchases of $1.2 million.
Results of Operations
Net Income. Net income was $764,000 ($0.30 per share diluted) for the
three months ended June 30, 2000 compared to $808,000 ($0.30 per share diluted)
for the three months ended June 30, 1999. For the six months ended June 30,
2000, net income was $1.5 million as compared to $1.7 million for the same
period in 1999. Net income decreased from the three and six month periods ended
June 30, 1999 as compared to the same periods in 2000 primarily because of
increased non-interest expenses.
Net interest income for the three month periods ended June 30, 2000 and
1999. Net interest income increased 4.8% from $3.0 million in 1999 to $3.1
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 $1.3 million, or 20.2%, to $7.6 million
for the three months ended June 30, 2000 compared to $6.3 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 7.51% in 1999 to 7.90% in 2000 due to the rise in market interest rates and
an increase in higher-yielding commercial loans as a percent of total
interest-earning assets. Interest on loans receivable, including fees, increased
$1.2 million and interest on other debt securities increased $48,000 as a result
of an increase in the average balances associated with these assets. Dividends
on FHLB stock increased by $76,000 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 33.9%, to $4.5
million for the three months ended June 30, 2000 compared to $3.3 million for
the three months ended June 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 4.44% in
1999 to 5.02% in 2000 due to higher market interest rates and a funding mix more
heavily weighted in higher-costing FHLB advances and retail repurchase
agreements.
Net interest income for the six month periods ended June 30, 2000 and
1999. Net interest income increased 7.3% from $5.8 million in 1999 to $6.2
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 $2.4 million, or 19.5%, to $14.7
million for the six months ended June 30, 2000 compared to $12.3 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 7.53% in 1999 to 7.84% in 2000 due to the rise in market
interest rates and an increase in higher-yielding commercial loans as a percent
of total interest-earning assets. Interest on loans receivable, including fees,
increased $2.1 million and interest on other debt securities increased $182,000
as a result of an increase in the average balances associated with these assets.
Dividends on FHLB stock increased by $157,000 due to an increase in average FHLB
stock outstanding.
Total interest expense increased $2.0 million, or 30.3%, to $8.5
million for the six months ended June 30, 2000 compared to $6.5 million for the
six months ended June 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 4.47% in 1999 to 4.91%
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 $221,000
for the three months ended June 30, 2000 compared to $156,000 for the same three
month period in 1999, and $402,000 for the six months ended June 30, 2000
compared to $292,000 for the same six 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 $221,000 for the three months ended
June 30, 2000 and $402,000 for the six months ended June 30, 2000 to increase
the allowance for loan losses to an amount considered reasonable by management
based on an evaluation as of June 30, 2000. The allowance was increased due to
increases in commercial real estate and commercial business loans, which possess
a higher inherent risk of loss than one-to-four family residential mortgage
loans. 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 June 30,
2000, non-performing loans, which includes loans on non-accrual and loans past
due 90 days or more but for which interest is still being accrued, amounted to
$404,000.
Non-interest income. Non-interest income increased 24.0% to $377,000
for the three months ended June 30, 2000 compared to $304,000 for the three
months ended June 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 21.1% to $799,000 for the six months
ended June 30, 2000 compared to $660,000 for the six months ended June 30, 1999.
The increase is attributable primarily to 1) the gain on sale of the Company's
former corporate headquarters, 2) an increase in commission income on the sale
of investment products such as mutual funds, stocks, bonds, and annuities, and
3) an increase in service charges on deposit accounts resulting from the
increase in deposit accounts. 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 $266,000 for
the three months ended June 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 $144,000 in the second quarter 2000 compared to the
second quarter 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 $35,000 due primarily to conversion costs related to switching
ATM processors and increased ATM transaction volumes. Other operating expenses
increased $57,000 in the current period primarily related increased advertising
and consulting fees.
Non-interest expense increased by $750,000 for the six months ended
June 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 $183,000 due to additional
staff for the commercial loan origination and loan operations areas as the
Company continued to focus on its balance sheet restructuring strategy
emphasizing the origination of high-quality commercial real estate and business
loans. Occupancy and equipment costs increased $306,000 in the first six months
ended June 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 $77,000 due primarily to
conversion costs related to switching ATM processors and increased ATM
transaction volumes. Other operating expenses increased $215,000 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
June 30, 2000 was $440,000, compared to $510,000 for the same period in 1999.
The effective tax rate for the three months ended June 30, 2000 was 36.5%
compared to 38.7% for the same period in 1999. Income tax expense for the six
month period ended June 30, 2000 was $923,000, compared to $1.0 million for the
same period in 1999. The effective tax rate for the six months ended June 30,
2000 was 38.2% compared to 38.4% 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 June 30, 2000,
the Company had cash and interest-bearing deposits with banks of $15.0 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.
<TABLE>
<CAPTION>
The subsidiary banks are required to maintain specific amounts of
capital pursuant to regulatory requirements. As of June 30, 2000, the subsidiary
banks were in compliance with all regulatory capital requirements which were
effective as of such date with tangible, core and risk-based capital ratios as
follows:
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... 14.9% 15.0% 9.6%
Heritage Bank.... 12.5% 12.5% 9.1%
NCF Bank ........ 19.2% 19.2% 13.1%
</TABLE>
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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
Year 2000 Update
At December 31, 1999, the Company's internal systems and the systems of
its third-party data processors were Year 2000 compliant. The Company has
experienced no errors or difficulties processing financial and operational
information related to the Year 2000 issue. Likewise, the Company is unaware of
any Year 2000 issues that have impaired the ability of the Company's borrowers
to repay their debt.
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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 8.98 percent over one
year. A 200 basis point immediate, sustained downward shock in the yield curve
would increase net interest income by an estimated 8.00 percent over one year.
These estimated changes in net interest income are within the policy guidelines
established by the Company's board of directors.
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<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
The Annual Meeting of the Shareholders of the Company was held on
May 16, 2000. At this meeting proxies were solicited under
Regulation 14a of the Securities and Exchange Act of 1934. Total
shares issued and outstanding entitled to vote at the meeting was
2,632,252. A total of 1,939,874 shares were represented by
shareholders in attendance or by proxy, representing a quorum.
Shareholders approved the following directors for the indicated
term and by the indicated votes for or against:
Director Term Votes For Votes Withheld or Against
-------- ---- --------- -------------------------
Gordon L. Huncilman 3 Years 1,922,159 17,715
James W. Robinson 3 Years 1,922,659 17,215
Timothy T. Shea 3 Years 1,922,459 17,415
In addition, at the same May 16, 2000 meeting shareholders also
approved the ratification of Monroe Shine and Company, Inc. as
the Company's independent auditors for the year ended December
31, 2000 by a vote of 1,883,433 for, 48,522 against, and 7,919
abstaining.
Item 5. Other Information
Not applicable.
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<PAGE>
PART II
OTHER INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 2000.
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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 May 15, 2000 BY: /s/ Michael L. Douglas
---------------------------- -------------------------
Michael L. Douglas
President, CEO, and Director
Dated May 15, 2000 BY: /s/ Paul A. Chrisco
---------------------------- ----------------------
Paul A. Chrisco
Vice President and
Chief Accounting Officer
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<PAGE>
