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Sunday, December 26, 2010

Community Bank Shares of Indiana (CBIN)

Your Community Bank and Scott County State Bank

Louisville, KY standard metro statistical area.

Stock is selling for $9.24.  Yahoo claims they're earning $1.68.
The Company's current business strategy is to operate well-capitalized, profitable and independent community banks that have a significant presence in their primary market areas.  The Company‚Äôs growth strategy is focused on expansion through organic growth within its market areas.
Let's check the SEC statements:

Quarter ending Sept 30, 2010
 3.3 million shares on Nov 12, 2010.
$6.2 million net interest income after provision for losses
$1.6 million non-interest income
$5.6 million non-interest expenses (mostly service charges on deposit accounts, $2.7 million from insufficient funds type charges).  This will decrease with new regulations.
net income of $1.4 million or 42 cent diluted for the Q.  $1.35 for 9 months.

Let's go to the 10-K
3.3 million shares on Mar 22, 2010

Long term performance deteriorated starting in 2008 or even 2007.  They took a big loss in 2009 due to a giant provision for loan losses, and some sort of massive non-interest expense.  Shareholder equity fell back to 2005 levels and they lost nearly $7 a share!
The net loss available to common shareholders in 2009 was primarily due to a goodwill and other intangible asset impairment charge of $16.2 million and provision for loan losses of $15.9 million.
Net interest margins historically were just above 3% (nothing like NICK!), return on assets have been about half a percent, return on equity mid-to-high single digits.  Efficiency ratio was historically in the mid 70s.  The capitalization ratios on the 10-K look good, but FDIC will show more.

Sold off some real estate loans to increase liquidity.  But also foreclosures and lower loan demand.  Big chargeoffs in construction loans (no surprise there).  Lower mortgage servicing rights.
 
As of December 31,
(Dollars in thousands)
2009
2008
2007
2006
2005
Real estate:
Residential
$ 134,969 $ 177,230 $ 186,831 $ 187,080 $ 111,969
Commercial
193,577 206,973 191,774 179,405 186,644
Construction
51,592 73,936 87,364 83,944 61,031
Commercial
94,168 95,365 88,353 80,132 92,640
Home equity
54,434 60,539 60,380 62,720 58,060
Consumer
13,676 17,296 20,024 19,549 7,295
Loans secured by deposit accounts
1,003 1,242 1,322 756 729
Total loans
$ 543,419 $ 632,581 $ 636,048 $ 613,586 $ 518,368

I hate to dump a lot of tables in here, but this one seems fairly important:

(Dollars in thousands)
2009
2008
2007
2006
2005
Allowance for loan losses at beginning of year
$ 9,478 $ 6,316 $ 5,654 $ 5,920 $ 4,523
Acquired allowance of SCSB, July 1,2006
- - - 754 -
Charge-offs:
Residential real estate
(474 ) (239 ) (173 ) (35 ) (83 )
Commercial real estate
(411 ) (720 ) (44 ) (193 ) -
Construction
(5,742 ) (780 ) - (600 ) -
Commercial business
(2,122 ) (1,080 ) (207 ) (138 ) (194 )
Home equity
(975 ) (491 ) (187 ) (26 ) (198 )
Consumer
(661 ) (503 ) (190 ) (362 ) (64 )
Total
(10,385 ) (3,813 ) (801 ) (1,354 ) (539 )
Recoveries:
Residential real estate
36 1 14 - -
Commercial real estate
14 4 9 9 7
Construction
- 2 - - -
Commercial business
52 7 92 26 34
Home equity
4 4 2 - 3
Consumer
112 100 50 37 142
Total
218 118 167 72 186
Net loan charge-offs
(10,167 ) (3,695 ) (634 ) (1,282 ) (353 )
Provision for loan losses
15,925 6,857 1,296 262 1,750
Allowance for loan losses at end of year
$ 15,236 $ 9,478 $ 6,316 $ 5,654 $ 5,920
Ok, the story here is that in 2005, 2006, and 2007, things were humming right along.  They picked up some allowance in 2006 with an acquisition.  Looks like they saw bad news on the horizon in 2007 and provisioned accordingly.  They got clobbered in 2008 and had to set aside five times as much.  2009 was far worse and they set aside twice as much as 2008.  Now the allowance is three times as high going into 2010.

Let's go back to the Sept 2010 quarter.
(Note: they've got about $1 million in state and municipal bonds with maturities of more than a year. Total is $4 million at fair value.)

Ok, so the last 9 months, they tossed in another $2.9 million and ended with an allowance of $12.7 million.  Ok, so things look slightly better now.

Money market accounts are up, savings are up slightly, CDs are down.  Total deposits are up this year.

Impaired loans are down from the end of 2009.


GOODWILL IMPAIRMENT

Note 5 in the 10-K explains the Goodwill impairment.  June 2009, the stock traded below book value triggering an evaluation.  They brought in a 3rd party to assist.  The 10-K explains the process and they determined that the value of goodwill was $15.3 million below the carrying value.

One of Berkshire Hathaway's annual report discussions by Warren Buffett from long ago had a great discussion about goodwill which more or less turned into the current accounting rules.  In the old days, companies would depreciate their goodwill, which often made no sense.


FDIC CHECK

"Your Community Bank" #28915 is about 5 times bigger than "Scott County State Bank" #10485.

Start out looking at the holding company #2356073.  Let's compare CBIN with 13 banks with $500 million to $1 billion assets in Kentucky, same time period of Sept 2010.


CBIN has a higher cash to assets ratio.
More commercial real estate loans
Less farmland (not surprising)
More commercial and industrial loans
Slightly more home equity loans
Way less adjustable rate residential loans

Residential loans have longer duration
Other loans have longer duration

Much less Goodwill (not surprising after the writedown)
Higher net income vs assets
Higher total bank equity capital vs assets

Much higher unused commitments: revovers, commercial real estate, other.
No derivatives

0.95% of assets are 30-89 days overdue vs 0.61% for other banks, mostly due to construction loans (which the bank mentioned)

No assets are 90+ days overdue.
1.84% assets are in non-accrual (1.02% is construction) vs 2.15% for the other banks (1.05% is construction)

3.49% net interest income vs 3.28% for the other banks
0.47% provision vs 0.61%
0.75% non-interest income vs 0.91%
2.66% non-interest expense vs 2.96%
1.10% pre-tax net operating income vs 0.62%
0.98% net income vs 0.76%
0.89% net charge-offs vs 0.46%

4.97% yield on earning assets vs 5.18%
1.06% cost of funding earning assets vs 1.57%
3.91% net interest margin vs 3.61%
0.84% non-interest income vs 1.00%
2.98% non-interest expense vs 3.25%
0.99% ROA vs 0.76%

1.78% earnings coverage of net loan charge-offs vs 2.68%
62% efficiency vs 70%
$6.6 million in assets per employee vs $3.8

2.46% loss allowance /loans vs 1.81%
83% loss allowance /noncurrent loans vs 53%

9.98% equity capital to assets vs 9.45%
9.51% core capital ratio vs 8.41%
13.62% tier 1 risk-based capital ratio vs 12.33%
14.88% total risk-based capital ratio vs 13.59%

Now let me take a quick look at Scott County State Bank to see if there's any garbage hidden in these numbers.

Yep, 1.98% of assets are 30-89 days past due.
Only .68% of assets in non-accrual status.
Performance ratios look better.

I've been considering the macroeconomic forces at work in the world and their impact on CBIN.  Obviously the housing market problems are the most obvious.  I've been following one local housing market for about 2 years on both Zillow and MLS and what I've seen matches Zillow's overall price indicator.  I recall that Louisville has traditionally been one of the lowest priced metro housing markets in the US.

Looking at Zillow, it looks like the Louisville residential housing market has been remarkably stable since 2006.  Looking at the recent entries in the market, a large number of them look distressed.  $19K, $24K, $15K, $6K.  There's a rental-property house for sale at $6.4K that sold in 2006 for $10K.  Jumping out to the suburbs, prices in Sellersburg have been stable.


OTHER STUFF

Looking for news articles...
fraud scheme uncovered where Eastern Livestock Company cycled fake checks through several banks and was based out of Your Community Bank. A different bank identified the fraud.  Fifth Third Bank is seeking a judgement of $32.5 million plus $13 million against presumably Eastern Livestock.

Oh you bastards!  Seeking Alpha briefly covered CBIN just about a week ago!  And I mean that with the utmost respect.
Director Norman E Pfau Jr acquired 91,820 shares of this bank holding company, paying $8.52 per share for a total amount of $782,306. 
This was an indirect purchase through Cake Holdings. Mr Pfau owns 80% of Cake Holdings. This Indiana based bank holding company for Your Community Bank and The Scott County State Bank reported earnings of $1.4 million or 42 cents in the third quarter, up 100% from Q3 2009. With a P/E of 5 and a Price/Book ratio of 0.6, this small bank holding company looks very attractively valued. The troubled asset ratio (TAR) for Scott County State Bank is 19.9 while the (TAR) for Your Community Bank is 24.40.
River Ridge Development Authority amended an $8.5 million bond resolution to defer principal payments (oh jeez!), and part of that is through STIMULUS funding  This allowed them to secure a loan from Your Community Bank, including a 45% rebate on the interest rate

This site claims that Your Community Bank and Scott County State Bank are "weak".  It was posted back in August 2010.
Scott County State Bank Scottsburg IN $133,930 D
Your Community Bank New Albany IN $691,320 D+ 
I picked a bank that the FDIC closed down about a week ago (First Southern Bank, Batesville, AR #58052).   Performance ratios look outstanding.  Almost no accounts were past due.


Well, that pretty much kills CBIN as an investment.

UPDATE  Dec 28, 2010:
An email raises the point that the First Southern Bank that I looked at may have been an odd case.  It seems they bought $22 million in fake bonds which wiped out their equity.   I'll look at some other failed banks to try to get a sense of whether this is a severe outlier or not.


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