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Community Bank Shares of Indiana 10-Q 2009 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
For the
quarterly period ended September 30, 2009
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)
Registrant’s
telephone number, including area code 812-944-2224
Indicate
by check mark 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. T Yes £ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). £ Yes T No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check One):
Large
Accelerated Filer £ Accelerated
Filer £ Non-
Accelerated Filer T Smaller
Reporting Company £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). £ Yes T No
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS: Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. £ Yes £ 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: 3,268,150 shares of common stock were outstanding as of
November 11, 2009.
COMMUNITY
BANK SHARES OF INDIANA, INC.
INDEX
PART I - FINANCIAL INFORMATION
COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
See
accompanying notes to consolidated financial statements. PART I - FINANCIAL INFORMATION
COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
PART
I - FINANCIAL INFORMATION
COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
PART I - FINANCIAL INFORMATION
COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollar
amounts in thousands, except per share data)
(Unaudited)
See
accompanying notes to consolidated financial statements. PART I - FINANCIAL INFORMATION
COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
See
accompanying notes to consolidated financial statements. COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Presentation
of Interim Information
Community
Bank Shares of Indiana, Inc. (the “Company”, “we,” “our” or “us”) is a bank
holding company headquartered in New Albany, Indiana. Our wholly-owned banking
subsidiaries are Your Community Bank (“Your Community Bank” or “YCB”), and The
Scott County State Bank (“Scott County State Bank” or “SCSB”). YCB
and SCSB are at times collectively referred to herein as the
“Banks”. The Banks are state-chartered commercial banks headquartered
in New Albany, Indiana and Scottsburg, Indiana, respectively, and are both
regulated by the Indiana Department of Financial Institutions. Your
Community Bank is also regulated by the Federal Deposit Insurance Corporation
and (with respect to its Kentucky branches) the Kentucky Department of Financial
Institutions. Scott County State Bank is also regulated by the
Federal Reserve.
Your
Community Bank has three wholly-owned subsidiaries to manage its investment
portfolio. CBSI Holdings, Inc. and CBSI Investments, Inc. are Nevada
corporations which jointly own CBSI Investment Portfolio Management, LLC, a
Nevada limited liability corporation which holds and manages investment
securities previously owned by Your Community Bank.
Your
Community Bank also has a Community Development Entity (CDE) subsidiary formed
in July 2002 named CBSI Development Fund, Inc. The CDE enables Your
Community Bank to participate in the federal New Markets Tax Credit (“NMTC”)
Program. The NMTC Program is administered by the Community
Development Financial Institutions Fund of the United States Treasury and is
designed to promote investment in low-income communities by providing a tax
credit over seven years for equity investments in CDE’s.
In June
2004 and June 2006, we completed placements of floating rate subordinated
debentures through two trusts that we formed, Community Bank Shares (IN)
Statutory Trust I and Trust II (“Trusts”). Because the Trusts are not
consolidated with us, pursuant to FASB Interpretation No. 46, now codified as
FASB ASC 810-10, our financial statements reflect the subordinated debt we
issued to the Trusts.
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, 2009, the results of operations for the three
months and nine months ended September 30, 2009 and 2008, and cash flows for the
nine months ended September 30, 2009 and 2008. All of these
adjustments are of a normal, recurring nature. Interim results are
not necessarily indicative of results for a full year.
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. GAAP for interim financial information and with the
instructions for Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by U.S. GAAP for complete financial
statements.
For
further information, refer to the consolidated financial statements and
footnotes included in our annual report on Form 10-K for the year ended December
31, 2008. The consolidated financial statements include our accounts
and our subsidiaries’ accounts. All material intercompany balances
and transactions have been eliminated in consolidation. COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reclassifications: Some
items in the prior financial statements were reclassified to conform to the
current presentation.
2. Securities
The fair
value of available for sale securities and the related gross unrealized gains
and losses recognized in accumulated other comprehensive income (loss) were as
follows:
The
amortized cost and fair value of the investment securities portfolio are shown
by expected maturity. Expected maturities may differ from contractual maturities
if borrowers have the right to call or prepay obligations with or without call
or prepayment penalties. Mortgage-backed agency securities and mutual
funds which do not have a single or stated maturity are shown
separately.
COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Sales of
available for sale securities were as follows.
Securities
with unrealized losses at September 30, 2009 and December 31, 2008, aggregated
by investment category and length of time that individual securities have been
in a continuous loss position are as follows:
COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. The investment securities portfolio is evaluated for OTTI by
segregating the portfolio into two general segments and applying the appropriate
OTTI model. Investment securities are generally evaluated for OTTI
under Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments
in Debt and Equity Securities, now codified as FASB ASC
320-10. However, certain purchased beneficial interests,
including collateralized debt obligations that had credit ratings at the time of
purchase of below AA are evaluated using the model outlined in EITF Issue No.
99-20, Recognition of Interest
Income and Impairment on Purchased Beneficial Interests that Continue to be Held
by a Transfer in Securitized Financial Assets, now codified as FASB ASC
325-40.
In
determining OTTI under the FASB ASC 320-10 model, management considers many
factors, including: (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the entity has the intent to sell
the debt security or more likely than not will be required to sell the debt
security before its anticipated recovery. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in
time.
The
second segment of the portfolio uses the OTTI guidance provided by FASB ASC
325-40 that is specific to purchased beneficial interests that, on the purchase
date, were rated below AA. Under the FASB ASC 325-40 model, the
Company compares the present value of the remaining cash flows as estimated at
the preceding evaluation date to the current expected remaining cash
flows. An OTTI is deemed to have occurred if there has been an
adverse change in the remaining expected cash flows. COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
When OTTI
occurs, the amount of the OTTI recognized in earnings depends on whether an
entity intends to sell the security or it is more likely than not it will be
required to sell the security before recovery of its amortized cost basis, less
any current-period credit loss. If an entity intends to sell or it is more
likely than not it will be required to sell the security before recovery of its
amortized cost basis, less any current-period credit loss, the OTTI shall be
recognized in earnings equal to the entire difference between the investment’s
amortized cost basis and its fair value at the balance sheet date. If an entity
does not intend to sell the security and it is not more likely than not that the
entity will be required to sell the security before recovery of its amortized
cost basis less any current-period loss, the OTTI shall be separated into the
amount representing the credit loss and the amount related to all other factors.
The amount of the total OTTI related to the credit loss is determined based on
the present value of cash flows expected to be collected and is recognized in
earnings. The amount of the total OTTI related to other factors is recognized in
other comprehensive income, net of applicable taxes. The previous amortized cost
basis less the OTTI recognized in earnings becomes the new amortized cost basis
of the investment.
As of
September 30, 2009, the Company’s security portfolio consisted of 195
securities, 16 of which were in an unrealized loss position. The majority of
unrealized losses are related to the Company’s state and municipal, and
collateralized debt obligations, as discussed below:
State and
Municipal
At
September 30, 2009 the Company had approximately $2.4 million of state and
municipal securities with an unrealized loss of $66,000. Of the 119
state and municipal securities in the Company’s portfolio, 104 had an investment
grade rating as of September 30, 2009 while 15 were not rated. The
decline in value in these securities is attributable to interest rate and
liquidity, and not credit quality. All of the state and municipal
securities in the Company’s portfolio have a fair value as a percentage of
amortized cost greater than 90%. The Company does not have the intent
to sell its state and municipal securities and it is unlikely that we will be
required to sell the securities before the anticipated recovery. The
Company does not consider these securities to be other-than-temporarily impaired
at September 30, 2009. COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Collateralized Debt
Obligations
The
Company’s unrealized losses on collateralized debt obligations relate to its
investment in six pooled trust preferred securities. The decline in fair value
is primarily attributable to temporary illiquidity and the financial crisis
affecting these markets and not necessarily the expected cash flows of the
individual securities. Due to the illiquidity in the market, it is unlikely that
the Company would be able to recover its investment in these securities if the
Company sold the securities at this time.
Our
analysis of six of these investments falls within the scope of FASB ASC 325-40
and includes $4.6 million book value of pooled trust preferred securities
(CDOs). See the table below for a detail of the CDOs (in
thousands):
COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
issuers in these securities are primarily banks, but some of the pools do
include a limited number of insurance companies. The Company uses the OTTI
evaluation model to evaluate the present value of expected cash flows. The OTTI
model considers the structure and term of the CDO and the financial condition of
the underlying issuers. Specifically, the model details interest rates,
principal balances of note classes and underlying issuers, the timing and amount
of interest and principal payments of the underlying issuers, and the allocation
of the payments to the note classes. The current estimate of expected cash flows
is based on the most recent trustee reports and any other relevant market
information including announcements of interest payment deferrals or defaults of
underlying trust preferred securities. Assumptions used in the model include
expected future default rates and prepayments. To develop our assumptions we
reviewed the underlying issuers and determined the specific default rate by
reviewing the financial condition of each issuer and whether they were currently
in deferral or default. We considered all defaults to be
immediate. We considered all relevant data in developing our
assumptions, however, we specifically reviewed each issuer’s profitability,
credit ratings, if available, credit ratios, and credit quality metrics for the
loan portfolios (if a bank). For those issuers we identified at risk
of default, we estimated the amount of loss, net of any anticipated recoveries,
which ranged from 100% for those issuers already in default at the evaluation
date to 0.40%. Upon completion of the September 30, 2009 analysis,
our model indicated other-than-temporary impairment of four of these
securities. These four securities had OTTI losses of $1.9 million, of
which $1.1 million was recorded as expense and $806,000 was recorded in other
comprehensive loss. These four securities remained classified as
available for sale at September 30, 2009, and together, the six securities
subject to FASB ASC 325-40 accounted for the $1.6 million of unrealized loss in
the collateralized debt obligations category at September 30, 2009.
The table
below presents a rollforward of the credit losses recognized in earnings for the
three and nine months ended September 30, 2009:
COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Loans
Loans at
September 30, 2009 and December 31, 2008 consisted of the
following:
Activity
in the allowance for loan losses was as follows:
Information
about impaired loans is presented below. There were no impaired loans
for the periods presented without an allowance allocation.
COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Deposits
Deposits
at September 30, 2009 and December 31, 2008 consisted of the
following:
5. Earnings
(Loss) Per Common Share
Earnings
(loss) per common share were computed as follows:
COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock
options for 243,620 and 262,970 shares of common stock were excluded from the
calculation of diluted net income per share for the three and nine months ended
September 30, 2009, respectively, because their effect was
antidilutive. This compares to stock options for 249,260 and 240,420
shares of common stock that were excluded from the calculation of diluted net
income per share for the three and nine months ended September 30, 2008,
respectively. Warrants for 386,270 shares of common stock were excluded from the
calculation of diluted net income (loss) per share for the nine months ended
September 30, 2009 due to the net loss for that period. Performance
units totaling 20,700 and 43,000 were excluded from the calculation of diluted
net income (loss) per share for the three and nine months ended September 30,
2009 and 2008, respectively, because all of the conditions necessary for
issuance of common stock had not been met as of those dates. Deferred
stock units totaling 45,000 and 0 were excluded from the calculation of diluted
net income (loss) per share for the three and nine months ended September 30,
2009 and 2008, respectively, because all of the conditions necessary for
issuance of common stock had not been met as of those dates.
6. Stock-Based
Compensation Plans
Our stock
option plan provides for the granting of both incentive and nonqualified stock
options at exercise prices not less than the fair market value of the common
stock on the date of grant and expiration dates of up to ten
years. Terms of the options are determined by our Board of Directors
at the date of grant and generally vest over periods of three to four
years. Payment of the option price may be in cash or shares of common
stock at fair market value on the exercise date at the election of the
employee. Non-employee directors are eligible to receive only
nonqualified stock options. We may grant stock options under the
current plan for an additional 232,250 shares of common stock. The aggregate
intrinsic value for options outstanding and exercisable at September 30, 2009
and December 31, 2008 was $0. There was $34,000 and $116,000 in total
compensation cost related to unvested options not recognized at September 30,
2009 and December 31, 2008, respectively, with a weighted-average period of 0.7
and 1.2 years over which the cost is expected to be recognized as of September
30, 2009 and December 31, 2008, respectively. The Company recognized
$9,000 and $33,000 in expense for stock options for the three and nine months
ended September 30, 2009, respectively, and $25,000 and $114,000 in expense
during the three and nine months ended September 30, 2008,
respectively. The Company has options vested and expected to vest of
234,520 with aggregate intrinsic value of $0 and a weighted average remaining
contractual term of 5.6 years as of September 30, 2009. During the
nine months ended September 30, 2009, no options were granted and 28,450 options
were forfeited.
We may
grant performance unit awards to employees for up to 275,000 shares of common
stock. The level of performance shares eventually distributed is
contingent upon the achievement of specific performance criteria within a
specified award period set at the grant date. We reversed $0 and
$66,000 of previously recognized expense for performance unit awards for the
three and nine months ended September 30, 2009, respectively. We did
not grant performance units during the nine months ended September 30, 2009
while 1,800 performance units were forfeited in 2009. We recognized
$18,000 and $51,000 in expense for performance unit awards for the three and
nine months ended September 30, 2008, respectively. COMMUNITY
BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We
granted 4,000 restricted stock awards to employees during the nine months ended
September 30, 2009 which had an aggregate fair value of $32,000 at the date of
grant and vest in the first quarter of 2012. The fair value of
restricted stock awards was calculated based on the Company’s stock price at the
date of issuance. For the three and nine months ended September 30,
2009, we recognized $9,000 and $62,000 in expense for restricted stock awards,
respectively. During the first nine months of 2009, 7,000 restricted
stock awards were forfeited. For the three and nine months ended
September 30, 2008, we recognized $31,000 and $84,000 in expense for restricted
stock awards, respectively.
During
the first nine months of 2009, we granted 45,000 deferred stock units to
employees which had an aggregate fair value of $363,000 at the date of grant and
vest on December 31, 2011. The fair value of deferred stock unit
awards was calculated based on the Company’s stock price at the date of
issuance. We recognized $0 in expense for the three and nine months
ended September 30, 2009 for deferred stock units.
7.
Other Comprehensive Income (Loss)
Other
comprehensive income (loss) components and related taxes were as
follows.
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