OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
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, but rather statements based on our current expectations regarding our business strategies and their intended results and our 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 our 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; competitive conditions in the banking markets served by our subsidiaries; the adequacy of the allowance for losses on loans and the level of future provisions for losses on loans; and other factors disclosed periodically in our 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 us or on our behalf. We assume no obligation to update any forward-looking statements. Financial Condition Total assets decreased by $653,000to $846.1 millionas of March 31, 2014from $846.7 millionas of December 31, 2013. The decline was attributable to decreases in interest-bearing deposits in other financial institutions of $6.5 millionand settlement receivable for security sales of $7.7 million, offset primarily by an increase in net loans of $12.3 million. Net loans increased to $565.3 millionat March 31, 2014from $552.9 millionas of December 31, 2013. During the second quarter of 2013, the Company acquired First Federal of Lexington, Kentuckyin an FDIC-assisted transaction. Subsequent to the acquisition, the Company hired two lenders in Lexingtonwhich has boosted the Company's new loan originations and contributed to the increase in net
loans during the period.
Securities available for sale decreased by
$821,000to $194.5 millionas of March 31, 2014from $195.3 millionat December 31, 2013primarily due to purchases of $17.2 million, offset by sales of $23.8 millionand maturities, prepayments and calls of $3.5 million. The securities portfolio serves as a source of liquidity and earnings and plays an important part in the management of interest rate risk. The current strategy for the investment portfolio is to maintain an overall average repricing term between 3.0 and 3.5 years to limit exposure to rising interest rates. 41 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC.
Total deposits increased by
$11.5 millionto $655.1 millionas of March 31, 2014from $643.6 millionat December 31, 2013. Non-interest bearing deposits increased by $5.5 millionduring the period while interest-bearing deposits increased by $5.9 millionas the Company continued to effectively deploy its funding strategy by emphasizing growth in non-interest bearing deposits and pricing its interest bearing deposits at an appropriate level given on-balance sheet liquidity and the amount of unpledged securities in its investment portfolio. Net Income Available to Common Shareholders. Net income available to common shareholders increased to $2.0 millionfor the three months ended March 31, 2014from $1.7 millionfor the same period in 2013. Basic and diluted earnings per common share increased to $0.59per share for the first quarter of 2014 as compared to $0.50per common share for the first quarter of 2013. The increase in net income available to common shareholders was attributable to increases in net interest income of $439,000and non-interest income of $253,000and a decrease in preferred stock dividends of $111,000, offset by an increase in non-interest expense of $465,000. The annualized return on average assets and average shareholders' equity were 1.01% and 9.48% for the three months ended March 31, 2014, respectively, compared to 0.95% and 8.87% for the equivalent period in 2013.
Subsequent to the end of the quarter, the Company announced an agreement to acquire
First Financial Service Corporation of Elizabethtown, Kentuckyand the associated subscription agreements with investors for approximately $25.0 million. The acquisition is expected to be completed in the third or fourth quarter of 2014 and is dependent upon regulatory and shareholder approval by both Company's shareholders. The Company anticipates incurring significant professional and consulting expenses associated with closing including auditing, legal, and investment banker fees that could materially impact the Company's non-interest expense for the remainder of 2014. More information is available about the acquisition agreement in the 8-K filed by the Company on April 22, 2014. Net interest income. Net interest income increased from $7.1 millionfor the three months ended March 31, 2013to $7.5 millionin 2014, while the Company's net interest margin on a fully taxable equivalent basis increased to 4.09% from 4.06%. The increase in net interest margin was due to the reduction in the cost of interest-bearing liabilities to 0.34% for the first quarter of 2014 from 0.47% in the same quarter in 2013. The decrease in the cost of funds was achieved through reductions in FHLB advances and time deposits. The Company has been lowering offering rates for its deposit products given the level of on-balance sheet liquidity which has resulted in some deposit runoff with the average balance for time deposits decreasing to $148.5 millionin 2014 from $164.8 millionin 2013. Also contributing to the increase in margin, were average non-interest bearing deposits of $183.1 millionin 2014, an increase from $167.1 millionfor the same quarter in 2013. The yield on interest earning assets declined to 4.33% in 2014 from 4.40% in 2013 while interest income increased to $8.4 millionon fully taxable equivalent basis from $8.1 millionover the respective periods. The increase in interest income was due to the acquisition of First Federal Bank of Lexington, Kentuckyin the second quarter of 2014 and subsequent loan growth in that market. The Company's average loans increased to $564.6 millionfor the quarter ended March 31, 2014from $466.1 millionin 2013 which has primarily been funded by a reduction in taxable securities from $172.4 millionto $121.3 million, respectively. 42 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC.
Average Balance Sheets. The following tables set forth certain information relating to our average balance sheets and reflect the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are computed on daily average balances. For analytical purposes, net interest margin and net interest spread are adjusted to a taxable equivalent adjustment basis to recognize the income tax savings on tax-exempt assets, such as state and municipal securities. A tax rate of 34% was used in adjusting interest on tax-exempt assets to a fully taxable equivalent ("FTE") basis. Loans held for sale and loans no longer accruing interest are included in total loans. Three Months Ended March 31, 2014 2013 Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost (In thousands) ASSETS Earning assets: Interest-bearing deposits in other financial institutions
$ 13,173 $ 260.80 % $ 24,725 $ 280.45 % Taxable securities 121,285 561 1.88 172,377 729 1.72 Tax-exempt securities 78,968 1,116 5.73 78,125 1,144 5.94 Total loans and fees (1) (2) (3) 564,635 6,624 4.76 466,133 6,156 5.36 Federal Home Loan Bankand Federal Reserve stock 5,955 53 3.60 5,998 56 3.77 Total earning assets 784,016 8,380 4.33 747,358 8,113 4.40 Less: Allowance for loan losses (8,480 ) (8,752 ) Non-earning assets: Cash and due from financial institutions 10,068 16,129 Premises and equipment, net 18,474 14,043 Other assets 41,563 46,225 Total assets $ 845,641 $ 815,003LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Savings and other $ 309,676 $ 1420.19 % $ 289,523 $ 1370.19 % Time deposits 148,458 111 0.30 164,756 192 0.47 Other borrowings 45,390 30 0.27 46,440 29 0.25 Federal Home Loan Bankadvances 47,333 94 0.80 36,222 178 1.99 Subordinated debentures 17,000 99 2.37 17,000 102 2.43 Total interest-bearing liabilities 567,857 476 0.34 553,941 638 0.47 Non-interest bearing liabilities: Non interest-bearing deposits 183,084 167,140 Accrued interest payable and other liabilities 4,328 6,726 Stockholders' equity 90,372 87,196 Total liabilities and shareholders' equity $ 845,641 $ 815,003Net interest income (taxable equivalent basis) $ 7,904 $ 7,475Less: taxable equivalent adjustment (379 ) (389 ) Net interest income $ 7,525 $ 7,086Net interest spread 3.99 % 3.94 % Net interest margin 4.09 4.06
(1) The amount of direct loan origination cost included in interest on loans was
(2) Calculations include non-accruing loans in the average loan amounts
(3) The amount of accretion recorded for acquired loans included in interest
$45and $0for the three months ended March 31, 2014and 2013. 43 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC.Rate/Volume Analysis. The table below illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and interest expense on a FTE basis during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due
to rate. Three Months Ended March 31, 2014 compared to Three Months Ended March 31, 2013 Increase/(Decrease) Due to Total Net Change Volume Rate (In thousands) Interest income:
Interest-bearing deposits in other financial institutions
$ (2 ) $ (17 ) $ 15Taxable securities (168 ) (231 ) 63 Tax-exempt securities (28 ) 12 (40 ) Total loans and fees 468 1,206 (738 )
Federal Home Loan Bank and Federal Reserve stock (3 ) - (3 ) Total increase (decrease) in interest income 267
970 (703 ) Interest expense: Savings and other 5 9 (4 ) Time deposits (81 ) (18 ) (63 ) Other borrowings 1 (1 ) 2
Federal Home Loan Bank advances (84 ) 44 (128 ) Subordinated debentures (3 ) - (3 ) Total increase (decrease) in interest expense (162 ) 34 (196 ) Increase (decrease) in net interest income
$ 429 $ 936 $ (507 )44 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC.
Allowance and Provision for Loan Losses. Our financial performance depends on the quality of the loans we originate and management's ability to assess the degree of risk in existing loans when it determines the allowance for loan losses. An increase in loan charge-offs or non-performing loans or an inadequate allowance for loan losses could have an adverse effect on net income. The allowance is determined based on the application of loss estimates to graded loans by categories.
Summary of Loan Loss Experience:
Three Months Ended
March 31, 20142013 (In thousands)
Activity for the period ended:
$ 8,009 $ 8,762Charge-offs: Residential real estate (51 ) (170 ) Commercial real estate - (1,208 ) Construction - - Commercial (1 ) - Home equity - (5 ) Consumer (59 ) (51 ) Total (111 ) (1,434 ) Recoveries: Residential real estate 6 7 Commercial real estate 74 31 Construction 67 2 Commercial 23 30 Home equity 2 2 Consumer 26 22 Total 198 94
Net loan (charge-offs) recoveries 87 (1,340 )
Provision 282 247 Ending balance
$ 8,378 $ 7,66945 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC. Provision for loan losses increased by $35,000for the first three months of 2014 to $282,000compared to $247,000for the same period in 2013 while net charge-offs decreased over the same periods from $1.3 millionin 2013 to net recoveries of $87,000in 2014. The Company's non-performing loans increased to $9.6 millionas of March 31, 2014from $7.8 millionas of December 31, 2013. The increase in non-accrual loans was attributable mostly to one large commercial relationship totaling $2.7 millionduring the first quarter of 2014. The Company had previously classified the credit as impaired and had allocated a specific reserve of $134,000in 2013. The addition of this relationship to non-accrual status was the primary cause for the increase in the Company's non-performing assets from December 31, 2013. The Company did not record additional provision for loan losses related to this credit in the first quarter of 2014. The decrease in net charge-offs for the three month period in 2014 was due to the charge-off of $1.2 millionfor one commercial real estate relationship in 2013 that was not repeated in 2014. The Company's provision for loan losses in the first quarter of 2014 was due to an increase in the allocation for loans collectively evaluated for impairment and the downgrade during the quarter of several smaller credits. During the quarter, the Company did not identify any new, significant impaired loan relationships or large write-downs of collateral securing impaired loans. Classified loans (substandard or doubtful) declined to $17.6 millionas of March 31, 2014from $19.3 millionwhile criticized loans (watch and special mention) also decreased to $23.3 millionfrom $25.7 millionover the same period (see Footnote 3 to the Company's consolidated financial statements for a description of the rating classifications and more loan detail). The same trend was present in the Company's level of past due credits as total past due loans declined to $12.9 millionat the end of first quarter from $16.4 million. While the Company's credit metrics are improving, there are still a few large impaired credit relationships which could significantly impact provision for loan losses in the future should the value of underlying credit erode further or loss mitigation tactics be unsuccessful. Due to the aforementioned provision and charge-off activity, the allowance for loan losses as a percentage of loans increased to 1.46% of loans as of March 31, 2014from 1.43% at December 31, 2013. Federal regulations require insured institutions to classify their assets on a regular basis. The regulations provide for three categories of classified loans: substandard, doubtful and loss. The regulations also contain a special mention and a specific allowance category. Special mention is defined as loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified as loss, the insured institution must either establish specified allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge off such amount. The Company continues to closely monitor its loan portfolio to identify any additional problem credits, deterioration in underlying collateral values, and credits requiring further downgrades in accordance with the Company's internal policies. As of March 31, 2014, management has provided for probable incurred losses within the loan portfolio based on information currently available to the Company. 46 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC. Asset Quality. Loans, including impaired loans, are placed on non-accrual status when they become past due ninety days or more as to principal or interest, unless they are adequately secured and in the process of collection. When these loans are placed on non-accrual status, all unpaid accrued interest is reversed and the loans remain on non-accrual status until the loan becomes current or the loan is deemed uncollectible and is charged off. Impaired loans are those loans for which it is probable that all scheduled interest and principal payments will not be received based on the contractual terms of the loan agreement. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. TDR's totaled $10.9 millionand $10.5 millionat March 31, 2014and December 31, 2013, while $2.9 millionand $389,000were included in the Company's non-accrual loans as of
the same dates, respectively. The Company's non-performing assets as of
March 31, 2014and December 31, 2013were as March 31, December 31, 2014 2013 (In thousands) Loans on non-accrual status $ 9,638 $ 7,788
Loans past due over 90 days still on accrual -
Total non-performing loans 9,638
Foreclosed and repossessed assets 6,334
Total non-performing assets
Non-performing loans to total loans 1.68 % 1.39 % Non-performing assets to total loans 2.78
Allowance as a percent of non-performing loans 86.93
Allowance as a percent of total loans 1.46
1.43 47 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.Non-interest income. Non-interest income increased by $253,000to $1.7 millionfor the quarter ended March 31, 2014from $1.4 millionfor the same period in 2013 mostly due to increases in gains on sales of available for sale securities of $289,000and service charges on deposit accounts of $45,000, offset by a decrease in mortgage banking income of $63,000. The increase in gains on sales of available for sale securities was due to higher sales volume during 2014 as compared to 2013 as the Company sold $23.8 millionin 2014 versus $3.4 million2013. Service charge income on deposit accounts increased to $792,000in 2014 from $747,000in 2013 due to higher service fee income on checking accounts and higher non-sufficient funds fees. Mortgage banking income declined to $16,000in 2014 from $79,000in 2013 due to more originated loans being retained in the portfolio. In 2013, management elected to retain more of the loans that had previously been originated for sale into the secondary market to help offset the declining loan portfolio. Non-interest expense. Non-interest expense increased by $465,000to $6.6 millionin 2014 from $6.1 millionin 2013 due to increases in salaries and employee benefits, occupancy, data processing and foreclosed and repossessed assets net expense, offset by a decrease in other expenses. Salaries and employee benefits increased to $3.4 millionin 2014 from $3.3 millionwhile the number of full time equivalent employees increased to 209 from 200 over the same period. The increase in expense is attributable to higher base compensation and insurance expense due to the increase in employees, offset by a reduction in accrued incentive compensation. Occupancy expense increased to $700,000in 2014 from $525,000due to the addition of three branch locations as part of the Company's acquisition of First Federal Bankin Lexington, Kentuckyin the second quarter of 2013 as well as higher snow removal and associated utilities expense. Foreclosed and repossessed asset net expense was $138,000for the first three months of 2014 as compared to $(18,000)in 2013 as the Company recorded a net gain on sales of foreclosed assets of $75,000in 2013 and a net loss of $15,000in 2014. Also contributing to foreclosed and repossessed asset expense in 2014 was an increase in maintenance and property taxes of $107,000. Other expenses decreased by $88,000to $663,000in the first quarter of 2014 from $751,000in 2013 due to a $100,000loss incurred in 2013 on the disposal of land previously held for future development.
Income tax expense. Income tax expense for the three months ended
March 31, 2014was $257,000as compared to $270,000for the equivalent period in 2013 while the effective tax rate for the respective periods declined to 10.8% in 2014 from 12.4% in 2013. The decrease in income tax expense was due to an increase in tax-exempt items recognized in the first quarter of 2014 as compared to 2013. 48 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC. Liquidity and Capital Resources Liquidity levels are adjusted in order to meet funding needs for deposit outflows, repayment of borrowings, and loan commitments and to meet asset/liability objectives. Our 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 March 31, 2014, we had cash and interest-bearing deposits with banks of $22.6 millionand securities available-for-sale with a fair value of $194.5 million. If we require funds beyond the funds we are able to generate internally, we have $70.0 millionin additional aggregate borrowing capacity with the Federal Home Loan Bank of Indianapolisbased on our current FHLB stock holdings, unused federal funds lines of credit with various nonaffiliated financial institutions of $31.5 million. Management believes the Company's liquidity sources are adequate to meet its operational needs. The Banks are required to maintain specific amounts of capital pursuant to regulatory requirements. As of March 31, 2014, Your Community Bankand Scott County State Bankwere each considered well capitalized under regulatory capital requirements and were in compliance with all regulatory capital requirements that were effective as of such date with capital ratios as follows: March 31, 2014: Total Tier 1 Tier 1 Capital To Capital To Capital To Risk-weighted Risk-weighted Average Assets Assets Assets Consolidated 18.7 % 17.5 % 12.7 %
Your Community Bank 15.7 % 14.4 % 10.8 % Scott County State Bank 20.4 %
19.5 % 12.1 %
Minimum for banks to be well capitalized under regulatory capital requirements: 10.0 %
6.0 % 5.0 % December 31, 2013: Total Tier 1 Tier 1 Capital To Capital To Capital To Risk-weighted Risk-weighted Average Assets Assets Assets Consolidated 18.5 % 17.2 % 12.5 % Your Community Bank 16.1 % 14.9 % 11.1 % Scott County State Bank 20.0 % 19.0 % 11.8 % Minimum for banks to be well capitalized under regulatory capital requirements: 10.0 %
6.0 % 5.0 % 49 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMUNITY BANK SHARES OF INDIANA, INC.
We have been repurchasing shares of our common stock since
May 21, 1999. A net total of 426,823 shares at an aggregate cost of $7.4 millionhave been repurchased since that time under both the current and prior repurchase plans. Our Board of Directors authorized a share repurchase plan in June 2007under which a maximum of $5.0 millionof our common stock may be purchased. Through March 31, 2014, a total of $1.6 millionhad been expended to purchase 85,098 shares under the current repurchase plan. As a condition for participating in SBLF, the Company may only declare and pay a dividend on the common stock or other stock junior to the SBLF Preferred Stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of the Company's Tier 1 Capitalwould be at least 90% of the Tier 1 Capitalof the Company as of September 15, 2011, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred Stock (the "Tier 1 Dividend Threshold"). Beginning on the first day of the eleventh dividend period, the amount of the Tier 1 Dividend Threshold will be reduced by 10% for each one percent increase in QSBL from the baseline level through the ninth dividend period. Under the terms of the SBLF Preferred Stock, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the SBLF Preferred Stock, junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the SBLF Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach. During June 2004and 2006, we completed placements of $7.0 millionand $10.0 millionfloating rate subordinated debentures through Community Bank Shares (IN) Statutory Trust I and Trust II, (trusts we formed), respectively. These securities are reported as liabilities for financial reporting, but Tier 1 Capitalfor regulatory purposes. We used the proceeds for general business purposes and to support our future opportunities for growth.
Off Balance Sheet Arrangements and Contractual Obligations
The amount and nature of our off balance sheet arrangements and contractual obligations at
50 PART I - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/liability management is the process of balance sheet control designed to ensure safety and soundness and to maintain liquidity and regulatory capital standards while maintaining acceptable net interest income. Interest rate risk is the exposure to adverse changes in net interest income as a result of market fluctuations in interest rates. Management continually monitors interest rate and liquidity risk so that it can implement appropriate funding, investment, and other balance sheet strategies. Management considers market interest rate risk to be our most significant ongoing business risk consideration. We currently contract with an independent third party consulting firm to measure our interest rate risk position. The consulting firm utilizes an earnings simulation model to analyze net interest income sensitivity. Current balance sheet amounts, current yields and costs, corresponding maturity and repricing amounts and rates, other relevant information, and certain assumptions made by management are combined with gradual movements in interest rates of 200 basis points up at
December 31, 2013and March 31, 2014within the model to estimate their combined effects on net interest income over a one-year horizon. In 2008, the Federal Open Market Committee lowered its target for the federal funds rate to 0-25 bps. A majority of our loans are indexed to the prime rate, therefore, the Company has excluded an evaluation of the effect on net interest income assuming a decrease in interest rates as further reductions in the prime rate are extremely unlikely. We feel that using gradual interest rate movements within the model is more representative of future rate changes than instantaneous interest rate shocks. Growth in amounts are not projected for any balance sheet category when constructing the model because of the belief that projected growth can mask current interest rate risk imbalances over the projected horizon. We believe that the changes made to the model's interest rate risk measurement process have improved the accuracy of results of the process, consequently giving better information on which to base asset and liability allocation decisions going forward. Assumptions based on the historical behavior of our deposit rates and balances in relation to changes in interest rates are incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. We continually monitor and update the assumptions as new information becomes available. Actual results will differ from the model's simulated results due to timing, magnitude and frequency of interest rate changes, and actual variations from the managerial assumptions utilized under the model, as well as changes in market conditions and the application and timing of various management strategies. The base scenario represents projected net interest income over a one year forecast horizon exclusive of interest rate changes to the simulation model. Given a gradual 200 basis point increase in the projected yield curve used in the simulation model (Up 200 Scenario), we estimated that as of March 31, 2014our net interest income would decrease by an estimated 0.5%, or $142,000, over the one year forecast horizon. As of December 31, 2013, in the Up 200 Scenario we estimated that net interest income would decrease $226,000, over a one year forecast horizon ending December 31, 2013. 51 PART I - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The projected results are within our asset/liability management policy limits which states that the negative impact to net interest income should not exceed 7% in a 100 or 200 basis point increase or decrease in the projected yield curve over a one year forecast horizon. The forecast results are heavily dependent on the assumptions regarding changes in deposit rates; we can minimize the reduction in net interest income in a period of rising interest rates to the extent that we can curtail raising deposit rates during this period. We continue to explore transactions and strategies to both increase our net interest income and minimize our interest rate risk. Our interest sensitivity profile at any point in time will be affected by a number of factors. These factors include the mix of interest sensitive assets and liabilities as well as their relative repricing schedules. It is also influenced by market interest rates, deposit growth, loan growth, and other factors. The tables below illustrate our estimated annualized earnings sensitivity profile based on the above referenced asset/liability model as of March 31, 2014and December 31, 2013, respectively. The tables below are representative only and are not precise measurements of the effect of changing interest rates on our net interest income in the future.
The following table illustrates our estimated one year net interest income sensitivity profile based on the asset/liability model as of
Sensitivity as of
Gradual Increase in Rates of 200 Base Basis Points
Projected interest income: Loans $ 27,540 $ 28,640 Investments 5,126 5,277 FHLB and FRB stock 181 181 Interest-bearing deposits in other financial institutions 3 5 Total interest Income 32,850 34,113 Projected interest expense: Deposits 1,004 1,768 Federal funds purchased, line of credit and repurchase agreements 143 619 FHLB advances 324 347 Subordinated debentures 398 540 Total interest expense 1,869 3,274 Net interest income $ 30,981 $ 30,839 Change from base (142 ) Percent change from base (0.46 )% 52 PART I - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table illustrates our estimated one year net interest income sensitivity profile based on the asset/liability model as of
Rate Sensitivity as of
Gradual Increase in Rates of 200 Base Basis Points Projected interest income: Loans
$ 26,757$ 27,848 Investments 5,245 5,312 FHLB and FRB stock 181 181 Interest-bearing deposits in other financial
Institutions 5 25 Federal funds sold 15 54 Total interest income 32,203 33,420 Projected interest expense: Deposits 974 1,745 Federal funds purchased, line of credit and Repurchase agreements 185 714 FHLB advances 329 329 Subordinated debentures 399 542 Total interest expense 1,887 3,330 Net interest income
$ 30,316$ 30,090 Change from base $ (226 ) % Change from base (0.7 )% 53 PART I - ITEM 4 CONTROLS AND PROCEDURES With the participation of the Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer) of Community Bank Shares of Indiana, Inc.("CBIN"), CBIN's management has evaluated the effectiveness of CBIN's disclosure controls and procedures (as defined in Rule 13a-15(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, CBIN's Chief Executive Officer and Chief Financial Officer have concluded that CBIN's disclosure controls and procedures are effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by CBIN in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'srules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by CBIN in the reports that it files or submits under the Exchange Act is accumulated and communicated to CBIN's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in CBIN's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fiscal quarter ended