News Column

MANAGEMENT'S DISCUSSION AND ANALYSIS

August 14, 2014

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 increased by $29.2 million to $875.9 million as of June 30, 2014 from $846.7 million as of December 31, 2013. The increase in total assets was primarily due to an increase in net loans of $26.8 million and interest-bearing deposits in other financial institutions of $7.8 million. Net loans increased to $580.0 million at June 30, 2014 from $552.9 million as of December 31, 2013. During the second quarter of 2013, the Company acquired First Federal of Lexington, Kentucky in an FDIC-assisted transaction. Subsequent to the acquisition, the Company hired two lenders in Lexington which has boosted the Company's new loan originations and contributed to the increase in net

loans during the period. Securities available for sale increased by $3.7 million to $199.1 million as of June 30, 2014 from $195.3 million at December 31, 2013 primarily due to purchases of $28.9 million, offset by sales of $32.8 million and maturities, prepayments and calls of $7.2 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. 44 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 $40.0 million to $683.6 million as of June 30, 2014 from $643.6 million at December 31, 2013. Interest bearing deposits increased by $25.9 million during the period while non interest-bearing deposits increased by $14.1 million as 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 million for the three months ended June 30, 2014 from $1.9 million for the same period in 2013. Basic and diluted earnings per common share increased to $0.59 per share for the second quarter of 2014 as compared to $0.57 per common share for the second quarter of 2013. The increase in net income available to common shareholders was attributable to an increase in net interest income of $101,000 and decreases in provision for loan loss expense of $2.3 million, non-interest expense of $182,000, and preferred stock dividends of $179,000, offset by a decrease in non-interest income of $2.4 million. The annualized return on average assets and average shareholders' equity were 1.00% and 9.25% for the three months ended June 30, 2014, respectively, compared to 1.04% and 10.05% for the equivalent period in 2013. Net income available to common shareholders for the six month period ended June 30, 2014 increased to $4.0 million from $3.6 million in the equivalent period in 2013. Basic earnings per share was $1.18 and diluted earnings per common share was $1.17 in 2014, an increase from basic and diluted earnings per share of $1.06 in 2013. The increase in net income available to common shareholders was due to an increase in net interest income of $540,000 and decreases in provision for loan loss expense of $2.2 million and preferred stock dividends of $290,000, offset by a decrease in non-interest income of $2.2 million and an increase in non-interest expense of $283,000. The primary factor for the decrease in non-interest income is due to the bargain purchase gain recognized from the acquisition of First Federal Bank of Lexington, Kentucky during the second quarter of 2013 which was not repeated in 2014. The annualized return on average assets and shareholders' equity were 1.01% and 9.36% for the six months ended June 30, 2014, respectively, compared to 1.00% and 9.47% for the equivalent period in 2013. 45 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC. Net interest income. Net interest income increased slightly from $7.8 million for the three months ended June 30, 2014 to $7.9 million in 2013, while the Company's net interest margin on a fully taxable equivalent basis decreased to 4.19% from 4.23%. The decrease in net interest margin was the result of a lower yield on interest earning assets that was not fully offset by a decline in the cost of funds. The yield on interest-earning assets declined to 4.43% for the second quarter of 2014 from 4.50% in 2013 while the average balance of interest-earning assets increased to $796.5 million from $780.7 million over the respective period. The primary reason for the decline was the yield on loans, which decreased to 4.88% in 2014 from 5.25% in 2013. In the current rate environment, higher yielding loans are maturing or renewing at lower rates which has pressured the Company's net interest margin. As a result, interest income from loans has remained relatively flat, increasing by $174,000 from the second quarter of 2013, while the average balance of loans over the same period has increased by $54.7 million. The average cost of funds declined to 0.33% for the second quarter of 2014 from 0.37% in 2013. The decrease in the cost of funds was achieved through reductions in the average cost of time deposits and the average balance as the Company's deposit mix has shifted to lower costing savings and other transaction type accounts. In addition, the Company has been lowering offering rates for its deposit products given the level of on-balance sheet liquidity which has resulted in some time deposit runoff with the average balance for time deposits decreasing to $144.3 million in 2014 from $170.9 million in 2013. Net interest income for the six months ended June 30, 2013 increased to $15.5 million from $14.9 million in 2013 while the net interest margin on a fully taxable equivalent basis remained consistent at 4.14%. Net interest margin for 2014 was impacted by a decline in the yield on interest earning assets from 4.45% to 4.38%, offset by a decrease in the cost of interest-bearing liabilities to 0.34% for the first six months of 2014 from 0.42% in 2013. The largest component of the Company's interest earning assets, loans, had an average balance of $574.0 million and an average yield of 4.82% for 2014 as compared to an average balance and yield of $497.6 million and 5.30% in 2013 as the Company continues to experience maturation, renewals, and originations at lower rates. The cost of interest bearing liabilities declined compared to 2013 with the most significant decrease in time deposits with an average cost of 0.30% on an average balance of $146.4 million in 2014 from 0.42% and $167.8 million in 2013. The Company has lowered its offering rates for time deposits which has resulted in a lower average cost, but has also to a reduction in accounts and average balances. Cost of funds on FHLB advances also decreased to 0.78% on an average balance of $45.2 million in 2014 from 1.82% and $31.6 million in 2013, which was a result of the maturation of higher yielding advances during second half of 2013 and the first six months of 2014. 46 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 June 30, 2014 2013 Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost (In thousands) (In thousands) ASSETS Earning assets: Interest-bearing deposits with banks $ 13,433$ 9 0.26 % $ 10,325$ 16 0.63 % Taxable securities 112,139 489 1.75 154,220 629 1.64 Tax-exempt securities 81,619 1,138 5.59 79,778 1,148 5.77 Total loans and fees (1) (2) 583,345 7,098 4.88 528,635 6,924 5.25 FHLB and Federal Reserve stock 5,962 63 4.24 7,749 48 2.46 Total earning assets 796,498 8,797 4.43 780,707 8,765 4.50 Less: Allowance for loan losses (8,501 ) (7,768 ) Non-earning assets: Cash and due from banks 16,788 18,876 Bank premises and equipment, net 18,376 13,684 Other assets 39,963 45,488 Total assets $ 863,124$ 850,987 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings and other $ 329,190$ 162 0.20 % $ 321,149$ 147 0.18 % Time deposits 144,331 105 0.29 170,854 155 0.36 Other borrowings 39,813 23 0.23 46,432 28 0.24 FHLB advances 43,187 82 0.76 26,940 107 1.59 Subordinated debentures 17,000 101 2.38 17,000 102 2.40 Total interest-bearing liabilities 573,521 473 0.33 582,375 539 0.37 Non-interest bearing liabilities: Non-interest demand deposits 191,466 173,330 Accrued interest payable and other liabilities 4,968 7,362 Stockholders' equity 93,169 87,920 Total liabilities and stockholders' equity $ 863,124$ 850,987 Net interest income (taxable equivalent basis) $ 8,324$ 8,226 Less: taxable equivalent adjustment (387 ) (390 ) Net interest income $ 7,937$ 7,836 Net interest spread 4.10 % 4.13 % Net interest margin 4.19 4.23



(1) The amount of direct loan origination cost included in interest on loans was

$99 and $90 for the three months ended June 30, 2014 and 2013.

(2) Calculations include non-accruing loans in the average loan amounts

outstanding.

(3) The amount of accretion recorded for acquired loans included in interest

income was $61 and $181 for the three months ended June 30, 2014 and 2013. 47 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC. Six Months Ended June 30, 2014 2013 Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost (In thousands) (In thousands) ASSETS Earning assets: Interest-bearing deposits in other financial institutions $ 13,304$ 35 0.53 % $ 17,485$ 44 0.50 % Taxable securities 116,686 1,050 1.81 163,248 1,358 1.68 Tax-exempt securities 80,301 2,254 5.66 78,956 2,292 5.85 Total loans and fees (1) (2) 574,042 13,722 4.82 497,558 13,080 5.30 FHLB and Federal Reserve stock 5,959 116 3.92 6,878 104 3.06 Total earning assets 790,292 17,177 4.38 764,125 16,878 4.45 Less: Allowance for loan losses (8,491 ) (8,257 ) Non-earning assets: Cash and due from banks 13,446 17,510 Bank premises and equipment, net 18,425 13,863 Other assets 40,701 45,840 Total assets $ 854,373$ 833,081 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings and other $ 319,487$ 304 0.19 % $ 305,423$ 284 0.19 % Time deposits 146,383 216 0.30 167,821 347 0.42 Other borrowings 42,586 53 0.25 46,436 57 0.25 FHLB advances 45,249 176 0.78 31,555 285 1.82 Subordinated debentures 17,000 200 2.37 17,000 204 2.42 Total interest-bearing liabilities 570,705 949 0.34 568,235 1,177 0.42 Non-interest bearing liabilities: Non-interest demand deposits 187,298 170,252 Accrued interest payable and other liabilities 4,592 7,034 Stockholders' equity 91,778 87,560 Total liabilities and stockholders' equity $ 854,373$ 833,081 Net interest income (taxable equivalent basis) $ 16,228$ 15,701 Less: taxable equivalent adjustment (766 ) (779 ) Net interest income $ 15,462$ 14,922 Net interest spread 4.04 % 4.03 % Net interest margin 4.14 4.14



(1) The amount of direct loan origination cost included in interest on loans was

$198 and $173 for the six months ended June 30, 2014 and 2013.

(2) Calculations include non-accruing loans in the average loan amounts

outstanding.

(3) The amount of accretion recorded for acquired loans included in interest

income was $106 and $184 for the six months ended June 30, 2014 and 2013. 48 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES 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 fully taxable equivalent 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 June 30, 2014 Six Months Ended June 30, 2014 compared to compared to Three Months Ended June 30, 2013 Six Months Ended June 30, 2013 Increase/(Decrease) Due to Increase/(Decrease) Due to Total Net Total Net Change Volume Rate Change Volume Rate (In thousands) (In thousands) Interest income: Interest-bearing deposits in other financial institutions $ (7 )$ 4 $ (11

) $ (9 )$ (11 )$ 2 Taxable securities (140 ) (181 ) 41 (308 ) (412 ) 104 Tax-exempt securities (10 ) 26 (36 ) (38 ) 39 (77 ) Total loans and fees 174 686 (512 ) 642 1,896 (1,254 ) FHLB and Federal Reserve stock 15 (13 ) 28 12 (15 ) 27 Total increase (decrease) in interest income 32 522 (490 ) 299 1,497 (1,198 ) Interest expense: Savings and other 15 4 11 20 13 7 Time Deposits (50 ) (22 ) (28 ) (131 ) (40 ) (91 ) Other borrowings (5 ) (4 ) (1 ) (4 ) (5 ) 1 FHLB advances (25 ) 46 (71 ) (109 ) 93 (202 ) Subordinated debentures (1 ) - (1 ) (4 ) - (4 ) Total increase (decrease) in interest expense (66 ) 24 (90 ) (228 ) 61 (289 ) Increase (decrease) in net interest income $ 98$ 498$ (400 )$ 527$ 1,436$ (909 ) 49 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 Six Months Ended June 30, June 30, Activity for the period ended: 2014 2013 2014 2013 (In thousands) Beginning balance $ 8,378$ 7,669$ 8,009$ 8,762 Charge-offs: Residential real estate (93 ) (202 ) (144 ) (372 ) Commercial real estate (23 ) - (23 ) (1,208 ) Construction - (156 ) - (156 ) Commercial business - (39 ) (1 ) (39 ) Home equity (42 ) (27 ) (42 ) (32 ) Consumer (52 ) (44 ) (111 ) (95 ) Total (210 ) (468 ) (321 ) (1,902 ) Recoveries: Residential real estate 2 3 7 10 Commercial real estate 21 3 95 34 Construction - 2 67 4 Commercial business 67 20 90 50 Home equity 6 2 9 4 Consumer 27 21 53 43 Total 123 51 321 145 Net loan charge-offs (87 ) (417 ) - (1,757 ) Provision for loan losses 190 2,470 472 2,717 Ending balance $ 8,481$ 9,722$ 8,481$ 9,722 50 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 decreased to $190,000 and $472,000 for the three and six months ending June 30, 2014 from $2.5 million and $2.7 million for the same periods in 2013. Net charge-offs for the three and six months ended June 30, 2014 were $87,000 and $0 compared to $417,000 and $1.8 million in 2013. Net-charge-offs for the six months ended June 30, 2014 decreased from 2013 due to a $1.2 million charge-off for one credit relationship, or the full amount of allocated reserves during 2013. The Company's non-performing loans increased to $9.6 million as of June 30, 2014 from $7.8 million as of December 31, 2013 due primarily to one loan with a balance of $2.7 million being placed on non-accrual in the first quarter of 2014. As of June 30, 2014, the Company had allocated $134,000 for loan losses which was recorded in 2013. The decrease in the Company's provision for loan losses for the three and six months ended June 30, 2014 was due primarily to the allocation of $2.0 million for one credit in the second quarter of 2013 that was not repeated in 2014. Subsequently, in the fourth quarter of 2013, the Company charged-off the allocated allowance leaving a remaining balance of $814,000 as of June 30, 2014. Currently, the Company does not have an allocation for loan losses for this credit. Additionally, the provision for loan losses was positively impacted by lower net charge-off activity during the period. The Company allocates allowance for loan losses for loans collectively evaluated for impairment by using its average three year charge-off history, adjusted for certain qualitative factors. As the Company's charge-offs decrease, the amount allocated decreases as well. The Company's classified loans (substandard and doubtful) decreased to $18.6 million as of June 30, 2014 from $19.3 million as of December 31, 2013 while criticized loans (watch and special mention) increased to $38.0 million from $25.7 million. The same trend was present in the Company's level of past due credits as total past due loans declined to $11.9 million at the end of second quarter from $16.4 million at December 31, 2013. At June 30, 2014, 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 1.44% of loans as of June 30, 2014 from 1.43% at December 31, 2013. 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 $10.5 million at June 30, 2014 and December 31, 2013, while $2.8 million and $389,000 were included in the Company's non-accrual loans as of the same dates, respectively. 51 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC. The Company's non-performing assets as of June 30, 2014 and December 31, 2013 were as follows: June 30, December 31, 2014 2013 (In thousands) Loans on non-accrual status $ 9,589$ 7,788

Loans past due over 90 days still on accrual - - Total non-performing loans 9,589



7,788

Foreclosed and repossessed assets 6,029



5,988

Total non-performing assets $ 15,618 $



13,776

Non-performing loans to total loans 1.63 % 1.39 % Non-performing assets to total loans 2.66



2.46

Allowance as a percent of non-performing loans 88.45



102.84

Allowance as a percent of total loans 1.44 1.43

Non-interest income. Non-interest income decreased to $1.5 million for the second quarter of 2014 from $4.0 million for 2013, a decrease of $2.4 million. The decrease was due to a bargain purchase gain of $1.9 million related to the acquisition of First Federal in Lexington, Kentucky recorded in the second quarter of 2013 and a decrease in net gains on sales of available for sale securities of $508,000. The bargain purchase gain was recorded as the difference between the fair value of the assets acquired and liabilities assumed in the Company's FDIC assisted acquisition of First Federal. Associated with the acquisition, the Company sold securities to provide liquidity for the reduction in deposits at First Federal. The Company sold $46.3 million of securities in the second quarter of 2013, realizing net gains of $509,000. Non-interest income decreased by $2.2 million to $3.2 million for the six months ended June 30, 2014 from $5.4 million in 2013 due to a bargain purchase gain of $1.9 million recorded in 2013 that was not repeated in 2014 and decreases in net gains on sales of available for sale securities of $219,000 and mortgage banking income of $95,000. As previously discussed, the Company recorded a $1.9 million bargain purchase gain associated with its acquisition of First Federal in the second quarter of 2013 and sold securities, primarily during the second quarter of 2013 to fund reduction in deposits. The decrease in mortgage banking income was due to a strategy shift during 2013 to begin retaining a higher percentage of originated 1-4 family mortgages as opposed to selling into the secondary market. As a result, the amount of loans sold has declined substantially from 2013 along with the corresponding income. 52 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMMUNITY BANK SHARES OF INDIANA, INC.

Non-interest expense. Non-interest expense for the three months ended June 30, 2014 decreased by $182,000 to $6.5 million from $6.7 million in 2013 due to decreases in FDIC insurance premiums and foreclosed and repossessed assets, net expense, offset by an increase in legal and professional services. FDIC insurance premiums decreased to $129,000 in 2014 from $211,000 in 2013 as a result of a lower assessment associated with the Company's subsidiary banks improving loan portfolio credit quality. Foreclosed and repossessed asset net of expense was $53,000 in 2014 compared to $242,000 in 2013 as the Company recognized gains on sales of $68,000 in 2014 as compared to losses of $123,000 in 2013. Legal and professional fees increased by $118,000 to $738,000 during 2014 from $620,000 in 2013 due to expenditures incurred related to the Company's pending acquisition of First Financial Service Corporation in Elizabethtown, Kentucky ("FFKY"). During the second quarter of 2014, the Company incurred $323,000 of expense, primarily legal, associated with preparation of agreements and related SEC filings. The Company anticipates incurring significant professional service fees for the FFKY acquisition including legal, accounting, and valuation services for the remainder of 2014 and into 2015. Non-interest expense was $13.1 million for the six months ended June 30, 2014, an increase of $283,000 from $12.8 million in 2013 as increases in salaries and employee benefits, legal and professional service fees, and occupancy expense were offset by a decrease in foreclosed and repossessed assets, net, FDIC insurance premiums, and other expenses. Salaries and employee benefits increased to $6.7 million in 2014 from $6.6 million in 2013 due to an increase in the number of employees, pay rate increases, health insurance premiums, which was offset by a decrease in the accrual for incentive compensation. Occupancy expense increased to $1.2 million in 2014 from $1.1 million for the same period in 2013 related to the additional branch locations in Lexington, Kentucky as part of the First Federal Savings Bank acquisition in 2013 as well as increased snow removal and associated utility costs. Legal and professional service fees increased $125,000 to $1.2 million for the six months ended June 30, 2014 from $1.0 million as the Company incurred $370,000 for consulting and legal fees associated with its pending acquisition of FFKY. Foreclosed and repossessed, net, decreased by $33,000 to $191,000 for the six months ended June 30, 2014 from $224,000 as the Company recognized net gains on sales of $53,000 in 2014 compared to net losses of $48,000 in 2013. FDIC insurance premiums decreased by $62,000 to $293,000 for 2014 from $355,000 for the same period in 2013 due to a decrease in the assessment rates for the Company's subsidiary banks due to their improving loan portfolio credit quality. Other expenses decreased from $1.4 million for the six months ended June 30, 2014 to $1.3 million for the same period in 2013 due to a $100,000 loss incurred in 2013 on the disposal of land previously held for future development. Income tax expense. Income tax expense for the three months ended June 30, 2014 was $610,000 as compared to $420,000 for the equivalent period in 2013 while the effective tax rate was 22.0% and 16.0% for the respective periods. The increase in income tax expense was primarily due to $323,000 of acquisition related expenditures incurred in the second quarter of 2014 which are non-deductible. Income tax expense for the six months ended June 30, 2014 increased to $867,000 from $690,000 in 2013 while the effective tax rate increased to 16.9% in 2014 from 14.4% in 2013. The increase in income tax expense and effective tax rate was due to expenditures associated with the FFKY acquisition of $370,000 recognized in 2014 which are non-deductible. 53 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 June 30, 2014, we had cash and interest-bearing deposits with banks of $38.1 million and securities available-for-sale with a fair value of $199.1 million. If we require funds beyond the funds we are able to generate internally, we have $150.0 million in additional aggregate borrowing capacity with the Federal Home Loan Bank of Indianapolis based 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 June 30, 2014, Your Community Bank and Scott County State Bank were 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: June 30, 2014: Total Tier 1 Tier 1 Capital To Capital To Capital To Risk-weighted Risk-weighted Average Assets Assets Assets Consolidated 18.7 % 17.4 % 12.6 % Your Community Bank 15.9 % 14.6 % 11.0 % Scott County State Bank 20.3 % 19.4 % 11.9 % 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 % 54 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 423,323 shares at an aggregate cost of $7.3 million have been repurchased since that time under both the current and prior repurchase plans. Our Board of Directors authorized a share repurchase plan in June 2007 under which a maximum of $5.0 million of our common stock may be purchased. Through June 30, 2014, a total of $1.6 million had 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 Capital would be at least 90% of the Tier 1 Capital of 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 2004 and 2006, we completed placements of $7.0 million and $10.0 million floating 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 Capital for 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 June 30, 2014 were not significantly different from the information that was reported in the Company's annual report on Form 10-K for the year ended December 31, 2013.

55 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, 2013 and June 30, 2014 within 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 June 30, 2014 our net interest income would decrease by an estimated 0.7%, or $217,000, 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, 2014. 56 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 June 30, 2014 and 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 June 30, 2014 and ending on June 30, 2015:

Interest Rate



Sensitivity as of June 30, 2014:

Gradual Increase in Rates of 200 Base Basis Points Projected interest income: Loans $ 28,174 $ 29,182 Investments 5,241 5,343 FHLB and FRB stock 193 193 Interest-bearing deposits in other financial institutions 52 195 Total interest Income 33,660 34,913 Projected interest expense: Deposits 1,104 1,945 Federal funds purchased, line of credit and repurchase agreements 131 567 FHLB advances 334 384 Subordinated debentures 397 540 Total interest expense 1,966

3,436 Net interest income $ 31,694 $ 31,477 Change from base (217 )

Percent change from base

(0.7 )% 57 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 December 31, 2013 and ending December 31, 2014:

Interest Rate



Sensitivity as of December 31, 2013

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 )% 58 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's rules 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 June 30, 2014, that has materially affected, or is reasonably likely to materially affect, CBIN's internal control over financial reporting.

59


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