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Community Bank Shares of Indiana 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
form10q.htm


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)

Indiana
35-1938254
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

101 W. Spring Street, New Albany, Indiana
47150
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code   812-944-2224

Not applicable
Former name, former address and former fiscal year, if changed since last report

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

Page
     
 
     
 
3
     
 
4
     
 
6
     
 
7
     
 
8
     
31
     
49
     
52
     
 
     
53
     
53
     
53
     
 
54
     
 
55

2


PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
September 30, 
2009
   
December 31,
2008
 
   
(In thousands, except share data)
 
ASSETS
           
Cash and due from financial institutions
  $ 11,618     $ 19,724  
Interest-bearing deposits in other financial institutions
    46,813       45,749  
Securities available for sale
    173,735       121,659  
Loans held for sale
    829       308  
Loans, net of allowance for loan losses of $17,523 and $9,478
    540,822       623,103  
Federal Home Loan Bank and Federal Reserve stock
    8,472       8,472  
Accrued interest receivable
    3,228       3,163  
Premises and equipment, net
    14,598       15,128  
Company owned life insurance
    18,303       17,745  
Goodwill
          15,335  
Other intangible assets
    1,414       2,492  
Foreclosed and repossessed assets
    4,679       1,241  
Other assets
    9,302       3,244  
Total Assets
  $ 833,813     $ 877,363  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits
               
Non interest-bearing
  $ 94,236     $ 92,467  
Interest-bearing
    524,496       510,718  
Total deposits
    618,732       603,185  
Other borrowings
    53,242       78,983  
Federal Home Loan Bank advances
    79,974       111,943  
Subordinated debentures
    17,000       17,000  
Accrued interest payable
    1,337       1,705  
Other liabilities
    3,848        1,948  
Total liabilities
    774,133       814,764  
                 
Commitments and contingent liabilities
           
                 
Shareholders’ equity
               
Preferred stock, without par value; 5,000,000 shares authorized; 0 issued or outstanding
           
Preferred stock, series A, without par value; 19,500 shares authorized; 19,468 and 0 issued and outstanding in 2009 and 2008, respectively; liquidation preference of $1,000 per share
    19,012        
Common stock, $.10 par value per share; 10,000,000 shares authorized; 3,863,942 shares issued; 3,268,325 and 3,242,577 outstanding in 2009 and 2008, respectively
    386       386  
Additional paid-in capital
    45,573       45,313  
Retained earnings
    3,159       28,268  
Accumulated other comprehensive income (loss)
    1,834       (640 )
Treasury stock, at cost (2009- 595,617 shares, 2008- 621,365 shares)
     (10,284 )      (10,728 )
Total shareholders’ equity
     59,680        62,599  
Total Liabilities and Shareholders’ Equity
  $ 833,813     $ 877,363  

See accompanying notes to consolidated financial statements.

3


PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Interest and dividend income
                       
Loans, including fees
  $ 8,162     $ 9,662     $ 24,842     $ 29,656  
Taxable securities
    1,111       1,268       3,403       3,545  
Tax-exempt securities
    477       201       998       484  
Federal Home Loan Bank and Federal Reserve dividends
    46       109       222       329  
Interest-bearing deposits in other financial institutions
    21       40       119       156  
Interest and dividend income
    9,817       11,280        29,584        34,170  
                                 
Interest expense
                               
Deposits
    2,370       3,400       7,605       10,535  
Other borrowings
    227       319       671       1,116  
Federal Home Loan Bank advances
    1,012       1,403       3,524       4,194  
Subordinated debentures
    116       212       423       711  
Interest expense
    3,725       5,334       12,223       16,556  
Net interest income
    6,092       5,946       17,361       17,614  
                                 
Provision for loan losses
    30       580       15,440       3,310  
                             
Net interest income after provision for loan losses
 
6,062
      5,366    
1,921
      14,304  
                                 
Non-interest income
                               
Service charges on deposit accounts
    949       918       2,559       2,499  
Commission income
    8       48       48       138  
Net gain on sales of available for sale securities
    83       72       1,290       363  
Mortgage banking income
    56       40       244       179  
Gain on sale of loans
    -       -       197       -  
Earnings on company owned life insurance
    187       185       558       548  
Change in fair value and cash settlement of interest rate swap
    -       -       -       180  
Interchange income
    209       207       627       612  
Other-than-temporary loss
                               
Total impairment loss
    (1,906 )     -       (1,906 )     -  
Loss recognized in other comprehensive income (loss)
    806       -       806       -  
Net impairment loss recognized in earnings
    (1,100 )     -       (1,100 )     -  
Other income
    86       46       341       216  
Non-interest income
    478       1,516       4,764       4,735  
                                 
Non-interest expense
                               
Salaries and employee benefits
    2,584       3,066       8,653       9,086  
Occupancy
    576       581       1,835       1,596  
Equipment
    360       400       1,102       1,117  
Data processing
    656       506       1,862       1,427  
Marketing and advertising
    96       177       395       558  
Legal and professional service fees
    353       307       1,160       849  
FDIC insurance premiums
    310       98       1,321       141  
Goodwill and other intangible asset impairment
    -       -       16,154       -  
Prepayment penalties on extinguishment of debt
    28       -       279       -  
Foreclosed assets, net
    (14 )     100       530       156  
Other expense
    552       505       1,777       1,673  
Total non-interest expense
    5,501       5,740       35,068       16,603  
Income (loss) before income taxes
    1,039       1,142       (28,383 )     2,436  
                                 
Income tax expense (benefit)
    82       223       (5,093 )     263  
                                 
Net income (loss)
    957       919       (23,290 )     2,173  
                                 
Preferred stock dividends and discount accretion
    (265 )     -       (356 )     -  
                                 
Net income (loss) available to common shareholders
  $ 692     $ 919     $ (23,646 )   $ 2,173  

4


PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Earnings (Loss) per common share:
                       
Basic
  $ 0.21     $ 0.28     $ (7.27 )   $ 0.67  
Diluted
  $ 0.21     $ 0.28     $ (7.27 )   $ 0.66  
                                 
Dividends per common share
  $ 0.100     $ 0.175     $ 0.450     $ 0.525  
                                 
Comprehensive income (loss)
  $ 4,676     $ (734 )   $ (20,816 )   $ (1,473 )

5


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)

   
Preferred Stock
   
Common Stock
   
Additional Paid-In Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Income (Loss)
   
Treasury Stock
   
Total Shareholders’ Equity
 
Balance, January  1, 2009
  $     $ 386     $ 45,313     $ 28,268     $ (640 )   $ (10,728 )   $ 62,599  
Comprehensive loss:
                                                       
Net loss
                      (23,290 )                 (23,290 )
Change in securities available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings, net of reclassifications and tax effects
                            2,414             2,414  
Unrealized gain on pension benefits, net of tax effects
                            60             60  
Total comprehensive loss
                                                    (20,816 )
Cash dividends declared on common stock ($0.450 per share)
                      (1,463 )                 (1,463 )
Dividends on preferred stock
                      (328 )                 (328 )
Issuance of treasury stock under dividend reinvestment plan
                (231 )                 444       213  
Issuance of preferred stock
    18,984                                     18,984  
Issuance of warrants to purchase common shares
                445                         445  
Amortization of preferred discount
    28                       (28 )                      
Stock award expense
                46                         46  
Balance,  September 30, 2009
  $     19,012     $ 386     $ 45,573     $ 3,159     $ 1,834     $ (10,284 )   $ 59,680  

See accompanying notes to consolidated financial statements.

6


PART I - FINANCIAL INFORMATION
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine Months Ended
September 30,
 
   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
(In thousands)
 
Net income (loss)
  $ (23,290 )   $ 2,173  
Adjustments to reconcile net income to net cash from operating activities:
               
Provision for loan losses
    15,440       3,310  
Depreciation and amortization
    1,356       1,371  
Net amortization (accretion) of securities
    73       (89 )
Net gain on sales of available for sale securities
    (1,290 )     (363 )
Other-than-temporary loss
    1,100       -  
Prepayment penalties on extinguishment of debt
    279       -  
Mortgage loans originated for sale
    (15,273 )     (10,472 )
Proceeds from mortgage loan sales
    14,977       10,963  
Net gain on sales of mortgage loans
    (225 )     (147 )
Earnings on company owned life insurance
    (558 )     (548 )
FHLB stock dividends
    -       (16 )
Gain on sale of loans
    (197 )     -  
Goodwill and other intangible asset impairment
    16,154       -  
Shared based compensation expense
    46       234  
Net loss on disposition of other foreclosed assets
    168       27  
Net gain on disposition of premises and equipment
    (5 )     (2 )
Net change in:
               
Accrued interest receivable
    (65 )     143  
Accrued interest payable
    (368 )     86  
Other assets
    (7,324 )     52  
Other liabilities
    1,835       (677 )
Net cash from operating activities
    2,833       6,045  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Net change in interest-bearing deposits
    (1,064 )     (9,756 )
Available for sale securities:
               
Sales
    71,977       19,098  
Purchases
    (136,919 )     (55,411 )
Maturities, prepayments and calls
    16,640       20,694  
Loan originations and payments, net
    47,497       (8,892 )
Proceeds from the sale of other real estate
    1,227       244  
Purchases of premises and equipment
    (600 )     (1,148 )
Proceeds from the sale of premises and equipment
    8       9  
Proceeds from sale of loans held for investment
    14,739       -  
Purchase of Federal Reserve and FHLB stock
    -       (1 )
Investment in company owned life insurance
    -       (100 )
Net cash from investing activities
    13,505       (35,263 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net change in deposits
    15,564       24,538  
Net change in other borrowings
    (25,741 )     (2,926 )
Proceeds from Federal Home Loan Bank advances
    -       67,000  
Repayment of Federal Home Loan Bank advances
    (32,279 )     (51,500 )
Purchase of treasury stock
    -       (273 )
Proceeds from issuance of preferred stock and warrants
    19,468       -  
Cash dividends paid on preferred shares
    (206 )     -  
Cash dividends paid on common shares
    (1,250 )     (1,706 )
Net cash from financing activities
    (24,444 )     35,133  
Net change in cash and due from financial institutions
    (8,106 )     5,915  
Cash and due from financial institutions at beginning of period
    19,724       14,570  
Cash and due from financial institutions at end of period
  $ 11,618     $ 20,485  
                 
Supplemental noncash disclosures:
               
Transfer from loans to foreclosed assets
  $ 5,045     $ 510  
Sale and financing of foreclosed assets
  $ 202     $ 278  
Issuance of treasury shares under dividend reinvestment plan
  $ 213     $ -  

See accompanying notes to consolidated financial statements.

7


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.

8


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:

   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
   
(In thousands)
 
September 30, 2009:
     
Securities available for sale:
                       
State and municipal
  $ 47,953     $ 2,194     $ (66 )   $ 50,081  
Residential mortgage-backed securities issued by U.S. Government sponsored entities
    117,645       2,742       -       120,387  
Collateralized debt obligations, including trust preferred securities
    4,613       -       (1,595 )     3,018  
Mutual funds
    250       -       (1 )     249  
Total securities available for sale
  $ 170,461     $ 4,936     $ (1,662 )   $ 173,735  
                                 
December 31, 2008:
                               
Securities available for sale:
                               
State and municipal
  $ 20,926     $ 174     $ (558 )   $ 20,542  
Residential mortgage-backed securities issued by U.S. Government sponsored entities
    95,170       2,430       (12 )     97,588  
Collateralized debt obligations, including trust preferred securities
     5,696        -        (2,411 )      3,285  
Mutual funds
    250       -       (6 )     244  
Total securities available for sale
  $ 122,042     $ 2,604     $ (2,987 )   $ 121,659  
 
 
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.


   
September 30, 2009
 
   
Amortized Cost
   
Fair Value
 
   
(In thousands)
 
Within one year
  $ 1,498     $ 1,511  
One to five years
    934       957  
Five to ten years
    4,051       4,269  
Beyond ten years
    46,083       46,362  
Residential mortgage-backed securities issued by U.S. Government sponsored entities
    117,645       120,387  
Mutual funds
    250       249  
Total
  $ 170,461     $ 173,735  

9

 
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Sales of available for sale securities were as follows.

   
Three Months Ended
September 30
   
Nine Months Ended
September 30
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
Proceeds
  $ 21,060     $ 3,051     $ 71,977     $ 19,098  
Gross gains
    83       72       1,290       363  
Gross losses
    -       -       -       -  

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:

   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
September 30, 2009
 
(In thousands)
 
State and municipal
  $ 1,360     $ (8 )   $ 1,002     $ (58 )   $ 2,362     $ (66 )
Collateralized debt obligations, including trust preferred securities
     -        -        3,018       (1,595 )      3,018       (1,595 )
Mutual funds
    -       -       249       (1 )     249       (1 )
Total temporarily impaired
  $ 1,360     $ (8 )   $ 4,269     $ (1,654 )   $ 5,629     $ (1,662 )

10


COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
December 31, 2008
 
(In thousands)
 
State and municipal
  $ 13,174     $ (558 )   $ -     $ -     $ 13,174     $ (558 )
Residential mortgage-backed securities issued by U.S. Government sponsored entities
    2,241       (8 )     560       (4 )     2,801       (12 )
Collateralized debt obligations, including trust preferred securities
    -       -       3,285       (2,411 )     3,285       (2,411 )
Mutual funds
    -       -       244       (6 )     244       (6 )
Total temporarily impaired
  $ 15,415     $ (566 )   $ 4,089     $ (2,421 )    $ 19,504     $ (2,987 )

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.

11


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.

12


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):

 
Current Rating
 
Par Value
   
Book Value
   
Estimated Fair Value
   
Previously Recognized OTTI Related to Credit Loss, Pre-Tax
   
Current Quarter OTTI Related to Credit Loss, Pre-Tax
 
Security 1
B+ (S&P)
  $ 2,000     $ 2,000     $ 1,308     $ -     $ -  
Security 2
Ba3
    331       330       233       -       -  
Security 3
Ca
    49       43       37       -       5  
Security 4
Ca
    317       283       238       -       35  
Security 5
Ca
    1,509       979       601       -       530  
Security 6
Ca
    1,509       979       601       -       530  
      $ 5,715     $ 4,613     $ 3,018     $ -     $ 1,100  

13

 
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:

   
Three and Nine Months Ended 
September 30, 2009
     
Beginning balance
  $ -  
Other-than-temporary impairment related to credit losses
    1,100  
Ending balance
  $ 1,100  

14

 
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:

   
September 30,
2009
   
December 31,
2008
 
   
(In thousands)
 
Commercial
  $ 93,971     $ 95,365  
Mortgage loans on real estate:
               
Residential
    142,073       177,230  
Commercial
    198,129       206,973  
Construction
    52,039       73,936  
Home equity
    56,863       60,539  
Loans secured by deposit accounts
    1,149       1,242  
Consumer
    14,121        17,296  
Subtotal
    558,345       632,581  
Less:
               
Allowance for loan losses
    (17,523 )     (9,478 )
Loans, net
  $ 540,822     $ 623,103  

Activity in the allowance for loan losses was as follows:

   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
Beginning balance
  $ 18,371     $ 6,890     $ 9,478     $ 6,316  
Charge-offs
    (916 )     (470 )     (7,563 )     (2,691 )
Recoveries
    38       25       168       90  
Provision for loan losses
    30       580       15,440       3,310  
Ending balance
  $ 17,523     $ 7,025     $ 17,523     $ 7,025  

Information about impaired loans is presented below.  There were no impaired loans for the periods presented without an allowance allocation.
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(In thousands)
 
Impaired loans, including troubled debt restructurings of $17,612 and $0
  $ 34,317     $ 20,189  
Amount of the allowance for loan losses allocated
    5,695       4,413  
Average impaired loans during the period
    27,235       8,107  
Interest income recognized and received during impairment
    227       4  
Loans past due over 90 days still on accrual
    -       -  
Non-accrual loans
    16,553       20,702  

15

 
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:

   
September 30,
2009
   
December 31,
2008
 
   
(In thousands)
 
             
Demand (NOW)
  $ 78,589     $ 91,641  
Money market accounts
    129,143       101,032  
Savings
    31,018       29,302  
Individual retirement accounts
    33,490       28,981  
Certificates of deposit, $100,000 and over
    108,371       97,440  
Other certificates of deposit
    143,885       162,322  
                 
Total interest bearing deposits
    524,496       510,718  
                 
Total non-interest bearing deposits
    94,236       92,467  
                 
Total deposits
  $ 618,732     $ 603,185  

5.   Earnings (Loss) Per Common Share

Earnings (loss) per common share were computed as follows:

   
Three months ended
September 30,
   
Nine months ended
 September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands, except for share and per share amounts)
 
Basic:
                       
Net income (loss)
  $ 957     $ 919     $ (23,290 )   $ 2,173  
Less:  Preferred stock dividend and amortization of discount
    (265 )     -    
_____(356)
      -  
Net income (loss) available to common shareholders
  $ 692     $ 919     $ (23,646 )   $ 2,173  
Average shares outstanding
    3,258,483       3,248,109       3,254,139       3,250,375  
Net income (loss) per common share, basic
  $ 0.21     $ 0.28     $ (7.27 )   $ 0.67  
                                 
Diluted:
                               
Net income (loss) available to common shareholders
  $ 692     $ 919     $ (23,646 )   $ 2,173  
Average shares:
                               
Common shares outstanding for basic
    3,258,483       3,248,109       3,254,139       3,250,375  
Add:  Dilutive effect of outstanding options
    -       5,165       -       13,934  
Add:  Dilutive effect of outstanding warrants
 
20,330
      -       -       -  
Average shares and dilutive potential common shares
    3,278,813       3,253,274       3,254,139       3,264,309  
Net income (loss) per common share, diluted
  $ 0.21     $ 0.28     $ (7.27 )   $ 0.66