UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange
Act of 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended December 31, 1997
OR
[ ] Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of
1934 [NO FEE REQUIRED]
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)
United States 35-1938254
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification Number
202 East Spring Street, New Albany, Indiana 47150
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (812)944-2224
Securities Registered pursuant to Section 12(b) of
the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
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 twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO_.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K, [ ].
As of March 25, 1998, there were issued and outstanding 1,983,722 shares of the
Registrant's Common Stock.
1
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the asked price of $23.875 per share of
such stock as of March 25, 1997, was approximately $38.0 million. (The exclusion
from such amount of the market value of the shares owned by any person shall not
be deemed an admission by the Registrant that such person is an affiliate of the
Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Annual Report to Stockholders for the fiscal year
ended December 31, 1997.
Part III of Form 10-K - Joint Proxy Statement/Prospectus for the 1998 Annual
Meeting of Stockholders.
2
<PAGE>
PART I
ITEM 1. BUSINESS
General
Community Bank Shares of Indiana, Inc. (the Company) is a bank holding
company of Community Bank of Southern Indiana, (Community) and Heritage Bank of
Southern Indiana, (Heritage) two wholly-owned subsidiaries. Community and
Heritage are state chartered stock commercial banks headquartered in New Albany,
Indiana and Jeffersonville, Indiana, respectively. Community and Heritage are
regulated by the Indiana Department of Financial Institutions and the Federal
Deposit of Insurance Corporation.
Community was founded in 1934 as a federal mutual savings and loan
association. Community converted to a federal mutual savings bank in 1989, and
became a federal stock savings bank on May 1, 1991. On December 2, 1996
Community converted from a federal stock savings bank to a state chartered stock
commercial bank. Community's deposits have been federally insured since 1934 by
the Savings Association Insurance Fund ("SAIF") and its predecessor, the Federal
Savings and Loan Insurance Corporation, and Community has been a member of the
Federal Home Loan Bank System since 1934.
On January 3, 1996, the Company capitalized Heritage Bank of Southern
Indiana, a newly organized state chartered commercial bank, for a total
investment of $4,150,000. Heritage began operations as of January 8, 1996, and
provides a variety of banking services to individuals and business customers
through its office in Jeffersonville, Indiana.
The Company had total assets of $254.1 million, total deposits of
$186.0 million, and stockholders' equity of $27.7 million as of December 31,
1997. The Company's principal executive office is located at 202 East Spring
Street, New Albany, Indiana 47150, and the telephone number at that address is
(812) 944-2224.
The Company's two subsidiaries are community-oriented financial
institutions offering a variety of financial services to their local community.
The subsidiaries are engaged primarily in the business of attracting deposits
from the general public and using such funds to originate mortgage loans for the
purchase of single-family homes in Floyd and Clark Counties, Indiana, and in
surrounding communities and the origination of small to medium sixed business
loans. The subsidiaries primary lending activity involves the origination of 15-
and 30-year fixed-rate and adjustable-rate mortgage ("ARM") loans secured by
single family residential real estate loans and various term business related
real estate loans. Depending on each subsidiary's liquidity, interest rate risk
and balance sheet positions, fixed-rate mortgage loans are originated for
inclusion in the retained loan portfolio or sale in the secondary market, while
ARM loans are originated primarily for retention in each subsidiary's portfolio.
Fixed-rate mortgage loans are originated primarily for sale in the secondary
market, while ARM loans are retained in the subsidiary's portfolio. To a lesser
extent, the subsidiaries makes home equity loans secured by the borrower's
principal residence and other types of consumer loans such as auto loans.
Although Community holds a small amount of multi-family residential real
estate loans in its portfolio, the Company does not emphasize the origination of
such loans. The Company's affiliates make secured and unsecured business loans
to local businesses and professional organizations. In addition, the Company
invests in mortgage-backed securities issued or guaranteed by GNMA, FNMA, or
FHLMC, and in securities issued by the United States Government and agencies
thereof.
3
<PAGE>
THE CONVERSION AND REORGANIZATION
On October 18, 1994, the Boards of Directors of the Community Savings
Bank, FSB (predecessor to Community Bank of Southern Indiana) and Community Bank
Shares, M.H.C. (the MHC), the predecessor to Community Bank Shares of Indiana,
Inc., adopted a Plan of Conversion and Agreement and Plan of Reorganization (the
Plan). Pursuant to the Plan, (i) the MHC, which owned approximately 51 percent
of Community Savings Bank (the Bank), converted from mutual to stock form and
simultaneously merged with and into the Bank, with Community Savings Bank being
the surviving entity; (ii) the Bank then merged into an interim savings bank
formed as a wholly-owned subsidiary of Community Bank Shares of Indiana, Inc.
(the Company), a newly organized Indiana corporation, with Community being the
surviving entity; and (iii) the outstanding shares of Community common stock
(other than those held by the MHC, which were canceled) were converted into
shares of common stock of the Company. Pursuant to the Plan, the Company then
sold additional shares equal to approximately 51 percent of the common shares of
the Company.
Shares of the Company's common stock were offered in a subscription
offering in descending order of priority to eligible account holders,
tax-qualified employee stock benefit plans, supplemental eligible account
holders, other members, directors, officers and employees and public
stockholders.
On April 7, 1995, Community Bank Shares of Indiana, Inc. was formally
established. The Company received proceeds from the sale of stock, net of
conversion expenses, of $9.5 million. Community received a capital distribution
from the Company equal to 50% of the net proceeds or $4.8 million.
Business Strategy
The Company's current business strategy is to operate well capitalized,
profitable and independent community banks with a significant presence in their
primary market areas. The Company has sought to implement this strategy in
recent years by: (1) emphasizing the origination of residential mortgage loans,
small to medium size commercial business loans, and consumer loans in the
Company's primary market area; (2) maintaining a conservative interest rate risk
exposure profile; (3) controlling operating expense; and (4) broadening the
scope of services offered to its customers.
The success of the current business strategy is reflected in the
consistent increases in capital and a retail growth strategy that has included
upgrading two limited service offices to full service offices, opening two full
service branch offices to attract retail customers and the formation of a second
subsidiary bank, Heritage Bank of Southern Indiana, which in addition to
traditional banking services sells alternative financial products as well.
Market Area
The Company's primary market area is the counties of Floyd, Clark and
Harrison, which are located in Southern Indiana along the Ohio River. Clark and
Floyd counties are two of the seven counties comprising the Louisville, Kentucky
Standard Metropolitan Statistical Area, which has a population in excess of one
million. The population of the Company's primary market area is approximately
185,000. The Company's headquarters are in New Albany, Indiana, a city of
45,000, which is located approximately three miles from the center of
Louisville.
4
<PAGE>
The Company's business and operating results are significantly affected
by the general economic conditions prevalent in its market area.
Lending Activities
General. At December 31, 1997, the Company's net portfolio of loans
receivable (including loans classified as held for sale) totaled $143.8 million,
representing approximately 56.6% of the Company's total assets at that date. The
principal lending activity of the Company is the origination of single-family
residential loans and secured and unsecured commercial business loans to local
business and professional organizations. To a lesser extent the Company also
originates residential construction loans and consumer loans (consisting
primarily of home equity loans secured by the borrower's principal residence.)
In addition, the Company also originates secured and unsecured commercial
business loans to local business and professional organizations. Substantially
all of the Company's mortgage loan portfolio consists of conventional mortgage
loans.
Since the early 1980's, the Company has worked to make its interest
earning assets more interest rate sensitive by actively originating ARM loans,
adjustable rate second mortgage loans and home equity loans, and short-term or
adjustable consumer loans. Since the early 1990's, the Company has diligently
increased the percentage of local commercial loan originations and outstandings.
The Company continues to actively originate fixed-rate mortgage loans,
generally with terms to maturity of between 15- to 30- years terms and secured
by one-to-four family residential properties. One-to-four family fixed-rate
loans generally are originated for retention in the loan portfolio or resale in
the secondary mortgage market. The Company sells mortgage loans with servicing
either retained or released. The Company earns service fee income on those loans
where servicing is retained.
The Company also originates interim construction loans on one-to-four
family residential properties, mortgage loans secured by multi-family
residential properties, and consumer loans for a variety of purposes, including
home equity loans, home improvement loans and automobile loans.
5
<PAGE>
Analysis of Loan Portfolio
Set forth below is selected data relating to the composition of the
Company's loan portfolio by type of loan and type of security on the dates
indicated. The table does not include mortgage-backed securities as the Company
classifies such securities as investment securities.
Analysis of Loan Portfolio
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- --------------------------
Conventional real estate loans: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential interim
Construction loans $ 1,981 1.38% $ 3,184 2.33% $ 2,583 2.19%
Residential 82,184 57.14% 89,097 65.11% 91,451 77.39%
Commercial real estate 21,803 15.16% 16,954 12.39% 7,403 6.26%
Commercial business loans (1) 27,929 19.42% 20,191 14.76% 11,769 9.96%
------------- ----------- ------------- ----------- ------------- ----------
Total real estate loans $133,897 93.10% $129,426 94.59% $113,206 95.80%
Consumer Loans:
Savings account loans 874 0.61% 593 0.43% 458 0.39%
Equity lines of credit (2) 6,846 4.76% 5,215 3.82% 4,045 3.42%
Automobile loans 1,570 1.09% 1,344 0.98% 1,042 0.88%
Other (2) (3) 2,327 1.62% 2,167 1.58% 1,335 1.13%
------------- ----------- ------------- ----------- ------------- ----------
Total consumer loans $11,617 8.08% $9,319 6.81% $6,880 5.82%
Less:
Loans in process 836 0.58% 1,245 0.91% 1,282 1.08%
Deferred loan origination fees
and costs, net 22 0.02% 10 0.01% 34 0.03%
Allowance for loan losses 837 0.58% 655 0.48% 600 0.51%
============= =========== ============= =========== ============= ==========
Total loans, net $143,819 100.00% $136,835 100.00% $118,170 100.00%
============= =========== ============= =========== ============= ==========
</TABLE>
(1) Commercial business loans are made on both a secured and unsecured basis
primarily to small businesses and professional organizations within the
Company's primary market area. These loans are not secured by the borrower's
real estate.
(2) Equity lines of credit and home improvement loans are secured by the
principal residence of the borrower.
(3) Includes home improvement, education and unsecured personal loans.
6
<PAGE>
Type of Security
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Type of Security
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate:
1 to 4 family (1) $ 80,857 56.22% $ 88,777 64.88% $ 89,718 75.92%
Other dwelling units 3,308 2.30% 3,504 2.56% 4,316 3.65%
Commercial real estate 21,803 15.16% 16,954 12.39% 7,403 6.26%
Equity lines of credit 6,846 4.76% 5,215 3.82% 4,045 3.42%
Commercial business 27,929 19.42% 20,191 14.76% 11,769 9.96%
Savings accounts 874 .61% 593 0.43% 458 0.39%
Automobile loans 1,570 1.09% 1,344 0.98% 1,042 0.88%
Other (2) 2,327 1.62% 2,167 1.58% 1,335 1.13%
------------- ----------- ------------ ---------- ------------- -------------
Total $ 145,514 101.18% $138,745 101.40% $120,086 101.62%
Less:
Loans in process 836 .58% 1,245 0.91% 1,282 1.08%
Deferred loan origination fees
and costs, net 22 .02% 10 0.01% 34 0.03%
Allowance for loan losses 837 .58% 655 0.48% 600 0.51%
------------- ----------- ------------ ---------- ------------- -------------
Total loans, net $ 143,819 100.00% $136,835 100.00% $118,170 100.00%
============= =========== ============ ========== ============= =============
</TABLE>
(1) Includes construction loans converted to permanent loans.
(2) Includes unsecured personal loans, education loans and home improvement
loans.
7
<PAGE>
Related Party Transactions
The following table represents the indebtedness of certain directors,
officers and their associates as of December 31, 1997. Such indebtedness was
incurred in the ordinary course of business on substantially the same terms as
those prevailing at the time for comparable transactions with other persons and
does not involve more than normal risk of collectibility or present other
unfavorable features.
<TABLE>
<CAPTION>
Loan Balance/Line of
Line of Credit/Loan Credit
Name Position Total Available Disbursed
- -------------------------- ------------------------------------ ------------------------- -----------------------
<S> <C> <C> <C>
Robert J. Koetter, Sr. Director $976,132.28 $976,132.28
Gary L. Libs Director 778,169.43 778,169.43
M. Diane Murphy Senior Vice President 102,677.84 77,962.00
Timothy T. Shea Director 196,034.72 196,034.72
Kerry M. Stemler Director 1,950,791.85 1,344,191.85
James M. Stutsman Senior Vice President 118,710.53 118,710.53
Robert E. Yates President and CEO 111,164.11 83,925.47
C. Thomas Young Chairman of Board of Directors 569,859.74 504,162.88
Steven Stemler Director 82,929.04 52,929.04
Dale Orem Director 197,984.16 194,586.56
</TABLE>
8
<PAGE>
Loan Maturity Schedule
The following table sets forth certain information at December 31, 1997,
regarding the dollar amount of loans maturing in the Company's portfolio based
on their contractual terms to maturity. Demand loans and loans having no stated
schedule of repayments and no stated maturity are reported as due in one year or
less. Adjustable and floating-rate loans are shown as being due in the period in
which interest rates are next scheduled to adjust. Fixed rate loans are shown as
being due in the period in which the contractual repayment is due.
<TABLE>
<CAPTION>
Within one One through Three through Five through Ten through Beyond
year three years five years ten years twenty years twenty years Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgages:
Adjustable $ 23,313 $ 19,294 $ 8,702 $ 938 $ -- $ -- $ 52,247
Fixed 2,671 4,010 7,837 6,653 6,046 1,892 29,109
Second mortgages 60 143 471 835 1,096 204 2,809
Installment 2,252 1,688 2,173 2,852 2,613 39 11,617
Commercial business
financial and agricultural 22,021 10,200 12,914 2,513 2,084 -- 49,732
------------ ----------- ---------- ----------- ----------- ------------ ------------
Total $ 50,317 $ 35,335 $ 32,097 $ 13,791 $ 11,839 $ 2,135 $ 145,514
============ =========== =========== =========== =========== ============ ============
</TABLE>
9
<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 1997, which have fixed rates and have floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
rates Adjustable rates Total
------------------ -------------------- -----------------
<S> <C> <C> <C>
Real estate mortgage $ 29,109 $ 55,056 $ 84,165
Commercial business loans 17,731 32,001 49,732
Consumer 10,445 1,172 11,617
------------------ -------------------- -----------------
Total $ 57,285 $ 88,229 $ 145,514
================== ==================== =================
</TABLE>
Residential Real Estate Loans. The Company's primary lending activity
consists of the origination of one-to-four family, owner-occupied, residential
mortgage loans secured by property located in the Company's primary market area.
The majority of the Company's residential mortgage loans consist of loans
secured by owner-occupied, single family residences. At December 31, 1997, the
Company had $80.9 million, or 56.2 percent of its net loan portfolio, invested
in loans secured by one-to-four family residences.
The Company currently offers residential mortgage loans for terms up to
30 years, with adjustable or fixed interest rates. Origination of fixed-rate
mortgage loans versus ARM loans is monitored on an ongoing basis and is affected
significantly by the level of market interest rates, customer preference, and
loan products offered by the Company's competitors. Therefore, even if
management's strategy is to emphasize ARM loans, market conditions may be such
that there is greater demand for fixed-rate mortgage loans.
The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Company predictable cash flows as would long-term, fixed-rate loans. ARM loans,
however, carry increased credit risk associated with potential higher monthly
payments by borrowers as general market interest rates increase. It is possible,
therefore, that during a period of rising interest rates, the risk of default on
ARM loans may increase due to the upward adjustment of interest costs to the
borrower.
The Banks' fixed-rate mortgage loans are amortized on a monthly basis
with principal and interest due each month. Residential real estate loans often
remain outstanding fro significantly shorter periods than their contractual
terms because borrowers may refinance or prepay loans at their option.
The Company's ARM loans adjust annually with interest rate adjustment
limitations of 2 percentage points per year and 6 percentage points over the
life of the loan. The Company also makes ARM loans with interest rates that
adjust every one, three or five years. The interest rate on ARM loans is based
on the one-year, three-year or five-year U.S. Treasury Constant Maturity Index
commensurate with the applicable like term mortgage plus 275 basis points. The
Company's policy is to qualify borrowers for ARM loans based on the fully
indexed rate of the ARM loan. That is, a borrower is qualified for an ARM loan
by evaluating the borrower's ability to service the loan at an
10
<PAGE>
interest rate equal to the maximum annual rate increase added to the current
index. ARM loans totaled $52.2 million, or 36.3 percent of the Bank's total
loan portfolio at December 31, 1997.
The Company has used different indices for its ARM loans such as the
National Average Median Cost of Funds, the Sixth District Net Cost of Funds
Monthly Index, the National Average Contract Rate for Previously Occupied Homes,
the Average three year Treasury Bill Rate, and the Eleventh District Cost of
Funds. Consequently, the adjustments in the Company's portfolio of ARM loans
tend not to reflect any one particular change in any specific interest rate
index, but general interest rate trends overall.
The Company has limited its real estate loan originations to properties
within its primary market area since 1988. However, during the five year period
through 1988, the Company purchased at par approximately $45 million of
one-to-four family residential loans from its wholly owned service corporation
subsidiary, First Community Service Corp. (the "Service Corporation"). Of this
original $45 million, $9.8 million was still outstanding as of December 31,
1997. The Service Corporation operated loan production offices in Port St.
Lucie, Naples, and West Palm Beach, Florida and Louisville, Kentucky. The
offices originated primarily one-year ARM loans with 30 year terms, and to a
lesser extent, one-year ARM loans with 15 year terms. During this same period,
the Company purchased for its portfolio approximately $15.0 million of
one-to-four family mortgage loans in several packages from various banks
and mortgages companies. Of this original $15 million, $5.1 million was still
outstanding as of December 31, 1997. The mortgages purchased were predominantly
ARM loans with annual rate adjustments. These purchased loans, both from the
Service Corporation and from outside sources, accounted for the majority of the
Company's variable rate, one-to-four family residential mortgage loans from 1983
through 1988.
Concentration on lending exclusively in the Company's primary market
area, and increasing both its portfolio of investment securities and increasing
the Company's commercial and consumer loan portfolio has caused the Company's
loan portfolio of residential loans to decline from $116.7 million at December
31, 1989, to $84.2 million at December 31, 1997.
Regulations limit the amount that a bank may lend via conforming loans
qualifying for sale in the secondary market in relationship to the appraised
value of the real estate securing the loan, as determined by an appraisal at the
time of loan origination. Such regulations permit a maximum loan-to-value ratio
of 95 percent for residential property and from 65 to 90 percent for all other
real estate related loans. The Company's lending policies, however, generally
limit the maximum loan-to-value ratio on both fixed-rate and ARM loans to 80
percent of the lesser of the appraised value or the purchase price of the
property to serve as security for the loan, unless insured by a private mortgage
insurer.
The Company occasionally makes real estate loans with loan-to-value
ratios in excess of 80 percent. For real estate loans with loan-to-value ratios
of between 80 and 90 percent, the Company requires the first 20 percent of the
loan to be covered by private mortgage insurance. For real estate loans with
loan-to-value ratios of between 90 percent and 95 percent, the Company requires
private mortgage insurance to cover the first 25 to 30 percent of the loan
amount. The Company requires fire and casualty insurance, as well as title
insurance or an opinion of counsel regarding good title, on all properties
securing real estate loans made by the Company.
11
<PAGE>
Construction Loans. The Company originates loans to finance the
construction of owner-occupied residential property. At December 31, 1997, the
Company had $ 2.0 million or 1.4 percent of its total gross loan portfolio
invested in interim construction loans. The Company makes construction loans to
private individuals for the purpose of constructing a personal residence or to
local real estate builders and developers. Construction loans generally are made
with either adjustable or fixed-rate terms of up to six months. Loan proceeds
are disbursed in increments as construction progresses and as inspections
warrant. Construction loans are structured to be converted to permanent loans
originated by the Company at the end of the construction period or to be
terminated upon receipt of permanent financing from another financial
instituion.
Commercial Real Estate Loans. Loans secured by commercial real estate
constituted approximately $21.8 million, or 15.2 percent, of the Company's total
net loan portfolio at December 31, 1997. The Company's permanent commercial real
estate loans are secured by improved property such as offices, small business
facilities, apartment buildings, nursing homes, warehouses and other
non-residential buildings, most of which are located in the Company's primary
market area and most of which are to be used or occupied by the borrowers.
Commercial real estate loans have been offered at adjustable interest rates and
at fixed rates with balloon provisions at the end of the term financing. The
Company continues to originate commercial real estate loans, commercial real
estate construction loans and land loans.
Loans secured by commercial real estate generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentrations of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multifamily and commercial real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired. Currently, the Company does not
emphasize the origination of multi-family residential or commercial real estate
loans. In addition, the Company imposes stringent loan-to-value ratios, requires
conservative debt coverage ratios, and continually monitors the operation and
physical condition of the collateral.
Commercial Business Loans. The Company also originates non-real estate
related business loans to local small businesses and professional organizations.
Commercial business loans accounted for approximately $27.9 million or 19.4
percent of the Company's loan portfolio of December 31, 1997. This type of
commercial loan has been offered at both variable rates and fixed rates with
balloon payments required at maturity.
The Company intends to increase its origination of commercial business
loans. Such loans generally have shorter terms and higher interest rates than
mortgage loans. However, commercial business loans also involve a higher level
of credit risk because of the type and nature of the collateral.
Consumer Loans. As of December 31, 1997, consumer loans totaled $11.6
million or 8.1 percent of the Company's total loan portfolio. The principal
types of consumer loans offered by the Company are equity lines of credit, auto
loans, home improvement loans, and loans secured by deposit accounts. Equity
lines of credit are predominately made at rates which adjust periodically and
are indexed to the prime rate. Some consumer loans are offered on a fixed-rate
basis depending upon the borrower's preference. The Company's equity lines of
12
<PAGE>
credit are generally secured by the borrower's principal residence and a
personal guarantee. At December 31, 1997, equity lines of credit totaled $ 6.8
million, or 59.0 percent of consumer loans.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Credit worthiness of the applicant is of primary
consideration, however. The underwriting process also includes a comparison of
the value of the security in relation to the proposed loan amount.
Loan Solicitation and Processing. Loan originations are derived from a
number of sources such as loan sales staff, real estate broker referrals,
existing customers, borrowers, builders, attorneys and walk-in customers. Upon
receipt of a loan application, a credit report is made to verify specific
information relating to the applicant's employment, income, and credit standing.
In the case of a real estate loan, an independent appraiser approved by the
Company undertakes an appraisal of the real estate intended to secure the
proposed loan. A loan application file is first reviewed by the Company's loan
department and then, depending on the amount of the loan, is submitted for
approval to a loan committee consisting of at least two senior officers of the
Company, or their designee, and subsequently ratified by the full Board of
Directors. One-to-four family residential mortgage loans with principal balances
in excess of $500,000 and multi-family and commercial real estate loans with
principal balances in excess of $500,000 must be submitted by the loan
department directly to the Executive Loan Committee of the Board of Directors
for approval. Once the Board of Directors ratifies or approves a loan, a loan
commitment is promptly issued to the borrower.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral and such insurance must be
maintained during the full term of the loan. Title insurance or an attorney's
opinion based on a title search of the property is required on all loans secured
by real property.
13
<PAGE>
Loan Originations, Purchases and Sales. The Company originated
approximately 96.0 percent of all loans in the Company's portfolio at December
31, 1997. The Company no longer purchases loans originated by others. The
following table sets forth the Company's gross loan originations and loans sold
for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loans originated:
Interim Construction loans $ 2,725 $ 4,612 $ 4,688
Residential 15,045 16,231 16,814
Commercial real estate 10,464 16,070 5,118
Consumer loans 3,140 6,796 2,602
Commercial business loans 10,910 6,471 17,031
====================================
Total loans originated $ 42,284 $ 50,180 $ 46,253
====================================
Loans sold:
Whole loans $ 8,290 $ 5,743 $ 3,974
====================================
</TABLE>
Loan Commitments. The Company issues standby loan origination
commitments to qualified borrowers primarily for the construction and purchase
of residential real estate and commercial real estate. Such commitments are made
on specified terms and conditions and are made for periods of up to 60 days,
during which time the interest rate is locked-in. If a loan is not scheduled to
close immediately after approval, the Company charges a fee for a loan
commitment based on a percentage of the loan amount. The loan commitment fee is
credited towards the closing costs of the loan if the borrower receives the loan
from the Company. If the potential borrower chooses to borrow funds from another
institution, the commitment fee is forfeited. At December 31, 1997, the Company
had commitments to originate loans of $3.6 million, as well as commitments to
fund the undisbursed portion of construction loans in process of $836,000.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Company generally receives loan origination fees. The Financial
Accounting Standards Board ("FASB") in December 1986 issued SFAS No. 91 on the
accounting for non-refundable fees and costs associated with originating or
acquiring loans. To the extent that loans are originated or acquired for the
portfolio, SFAS No. 91 requires that the Company defer loan origination fees and
costs and amortize such amounts as an adjustment of yield over the life of the
loan by use of the level yield method. Fees and costs deferred under SFAS No. 91
are recognized into income immediately upon the sale of the related loan. At
December 31, 1997, the Company had $ 22,277 of outstanding net deferred loan
fees and costs.
In addition to loan origination fees, the Company also receives other
fees and service charges which consist primarily of late charges and loan
servicing fees on loans sold. The Company recognized loan servicing fees on
loans sold and late charges of $199,940, $205,453, and $211,122 for the years
ended December 31, 1997, 1996 and 1995, respectively.
14
<PAGE>
Loan origination and commitment fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.
Loans to One Borrower. Under FIRREA, current regulations limit loans to
one borrower in an amount equal to 15 percent of unimpaired capital and
unimpaired surplus on an unsecured basis, and an additional amount equal to 10
percent of unimpaired capital and unimpaired surplus if the loan is secured by
readily marketable collateral (generally, financial instruments, but not real
estate). Under FIRREA, the Company's subsidiaries had maximum loan to one
borrower limits of approximately $ 3.4 million and $ 652,000 at December 31,
1997, for Community Bank and Heritage Bank, respectively. The Company's
subsidiaries are in compliance with the loans-to-one borrower limitations.
Delinquencies. The Company's collection procedures provide that when a
loan is 15 days past due, a late charge is added and the borrower is contacted
by mail and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower. Additional late charges may
be added and, if the loan continues in a delinquent status for 90 days or more,
the Company generally initiates foreclosure proceedings.
Non-Performing Assets and Asset Classification. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Residential and
commercial mortgage loans are placed on non-accrual status generally when either
principal or interest is 90 days or more past due and management considers the
interest uncollectible or when the Company commences foreclosure proceedings.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned ("REO") until
such time as it is sold. When REO is acquired, it is recorded at the lower of
the unpaid principal balance of the related loan or its fair market value, less
cost to sell. After the date of acquisition, all costs incurred in maintaining
the property are expensed and costs incurred for the improvement or development
of such property are capitalized up to the extent of their fair value. At
December 31, 1997, the Company did not own any property acquired as the result
of foreclosure or by deed in lieu or foreclosure.
15
<PAGE>
The following table sets forth information regarding non-accrual loans
and other non-performing assets at the dates indicated. At December 31, 1997,
the Company had no restructured loans within the meaning of SFAS No. 15. It is
the Company's policy to generally not accrue interest on loans delinquent more
than 90 days.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on
a non-accrual basis:
Residential mortgage loans $ 103 $ 207 $ 27 $ 576 $ 771
Commercial real estate -- -- -- -- --
Consumer 22 -- -- 2 --
============ ============= ============= ============ ============
Total $ 125 $ 207 $ 27 $ 578 $ 771
============ ============= ============= ============ ============
Percentage of total loans .09% 0.15% 0.02% 0.09% 0.78%
Foreclosed real estate (1) $ -- $ 101 $ -- $ 102 $ 3,213
============ ============= ============= ============ ============
</TABLE>
(1) Represents the book value of property acquired by the Company through
foreclosure or deed in lieu of foreclosure. Foreclosed real estate acquired
through foreclosure or deed in lieu of foreclosure is recorded at the lower of
its fair value less estimated cost to sell or cost.
The following is a summary of gross interest income that would have
been recorded if all loans accounted for on a non-accrual basis were current in
accordance with their original terms and gross interest income that was actually
recorded during the periods.
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross interest income that would
have been recorded if all non-accrual
loans were on a current basis $ 11 $ 13 $ 10
============= ============= ============
Gross interest income actually recorded $ -- $ 2 $ 5
============= ============= ============
</TABLE>
16
<PAGE>
The following table sets forth information with respect to the Banks'
delinquent loans at December 31, 1997:
<TABLE>
<CAPTION>
At December 31, 1997 Number of loans
----------------------- -------------------
(In thousands)
<S> <C> <C>
Residential real estate:
Loans (30 to 89 days delinquent) $ 315 6
Loans more than 90 days delinquent 294 5
Commercial real estate loans:
(30 days or more delinquent) 550 6
Consumer loans (30 to 89 days delinquent) 314 7
======================= ===================
Total $ 1,473 24
======================= ===================
</TABLE>
Classified Assets. Loans and other assets such as debt and equity
securities considered to be of lesser quality are classified as "substandard" or
"impaired" assets. A loan or other asset is considered substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligor and by the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the Bank will sustain
"some loss" if the deficiencies are not corrected. For debt and equity
securities, permanent impairments in value are recognized by a write-down of the
security to fair value with a corresponding charge to other income.
On January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" which requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or if expedient, at the loan's observable
market price or the fair value of collateral if the loan is collateral
dependent. A loan is classified as impaired by management when, based on current
information and events, it is probable that the Bank will be unable to collect
all amounts due in accordance with the terms of the loan agreement. If the fair
value, as measured by one of these methods, is less than the recorded investment
in the impaired loan, the Bank establishes a valuation allowance with a
provision charged to expense. Management reviews the valuation of impaired loans
on a monthly basis to consider changes due to the passage of time or revised
estimates. Assets that do not expose the Banks to risk sufficient to warrant
classification in one of the aforementioned categories, but which poses some
weaknesses, are required to be designated "special mention" by management.
An insured institution is required to establish and maintain an
allowance for loan losses at a level that is adequate to absorb estimated credit
losses associated with the loan portfolio, including binding commitments to
lend. General allowances represent loss allowances which have been established
to recognize the inherent risk associated with lending activities. When an
insured institution classifies problem assets as "loss," it is required either
to establish an allowance for losses equal to 100% of the amount of the assets,
or charge off the classified asset. The amount of its valuation allowances is
subject to review by the FDIC which can order the establishment of additional
general loss allowances. The Banks review the loan portfolio monthly to
determine whether any loans require classification in accordance with applicable
regulations.
17
<PAGE>
At December 31, 1997, the Banks had $771,185 classified as special
mention assets, $482,813 classified as substandard assets, and no assets
classified as impaired assets.
Allowance for Loan Losses. Management's policy is to provide for
estimated losses in the Banks' loan portfolio based on management's evaluation
of the probable losses that may be incurred. The allowance for loan losses is
maintained at a level believed adequate by management to absorb credit losses
inherent in the portfolio. Such evaluation, which includes a review of all loans
for which full collectibility of interest and principal may not be reasonably
assured, considers, among other matters, the estimated fair market value of the
underlying collateral, past loss experience, volume, growth, and composition of
the portfolio. During 1995 the Company credited $58,000 to the provision for
losses on loans. In 1997 and 1996 the Company charged approximately $210,000 and
$67,000, respectively, to the provision for losses on loans. Management will
continue to review the entire loan portfolio to determine the extent, if any, to
which further additional loan loss provisions may be deemed necessary.
18
<PAGE>
Analysis of the Allowance For Loan Losses. The following table sets
forth information with respect to the Bank's allowance for loan losses at the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Total loans outstanding $ 143,819 $ 136,835 $ 120,086
Average loans outstanding 141,825 128,034 116,279
Allowance balance
(at beginning of period) $ 655 $ 600 $ 541
Provision (credit)
Residential 70 7 6
Commercial 132 17 15
Consumer 8 43 37
Recoveries (charge offs), net
Residential (11) (4) 1
Commercial (10) - -
Consumer (7) 16 -
------------- ------------- -------------
Allowance balance (at end of
period) $ 837 $ 655 $ 600
============= ============= =============
Allowance for loans losses as
a percent of total loans
outstanding .58% .48% 0.50%
Net loans charged off as a
percent of average loans
outstanding .02% .01% 0.00%
</TABLE>
19
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation to the allowance by category is not necessarily indicative of further
losses and does not restrict the use of the allowance to absorb losses in any
category.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential loans $ 183 22.0% $ 197 30.0% $ 60 10.0%
Commercial loans 561 67.0% 393 60.0% 150 25.0%
Consumer loans 93 11.0% 65 10.0% 390 65.0%
======================== ========================= =========================
Total $ 837 100.0% $ 655 100.0% $ 600 100.0%
======================== ========================= =========================
</TABLE>
Investment Activities
In recent years, the Banks' have sought to increase the percentage of
its assets invested in securities issued or guaranteed by the U.S. Government or
an agency thereof. The emphasis on the Banks' investment portfolio has been to
(i) improve the Banks' interest rate sensitivity by reducing the average term to
maturity of the Banks assets, (ii) improve liquidity, and (iii) effectively
reinvest excess funds.
The Banks' investment securities portfolio is managed by the President
and Chief Executive Officer of the Banks in accordance with a comprehensive
investment policy which addresses strategies, types and levels of allowable
investments and which is reviewed and approved by the Board of Directors on an
annual basis. The management of the investment securities portfolio is set in
accordance with strategies developed by the Banks' Asset and Liability
Committee. The Banks' investment securities currently consist primarily of U.S.
agency and government securities.
Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
as well as management's projections as to the short term demand for funds to be
used in the Banks' loan origination and other activities.
20
<PAGE>
Securities Analysis
The following table sets forth the securities portfolio as of
December 31 for the years indicated.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- -----------------------------------
Fair Amortized Percent of Fair Amortized Percent of
Value Cost Portfolio Value Cost Portfolio
<S> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity (1)
Debt securities:
U.S. Government:
Due in one year or less -- -- -- -- -- --
Due after one year through five years -- -- -- -- -- --
Federal Agency:
Due in one year or less $ 6,434 $ 6,500 7.03% $ 4,985 $ 5,000 5.96%
Due after one year through five years $ 7,500 $ 7,500 8.11% $ 15,873 $ 16,000 19.08%
Due after five years through ten years $ 38,060 $ 38,006 41.09% $ 26,883 $ 27,197 32.43%
Due after ten years $ 11,942 $ 12,000 12.97% $ 4,419 $ 4,500 5.37%
Municipal
Due after one year through five years $ 635 $ 635 .69% -- -- --
Due after five years through ten years $ 910 $ 883 .95% $ 626 $ 637 0.76%
Due after ten years $ 1,194 $ 1,130 1.22% $ 2,060 $ 2,012 2.40%
Mortgage backed securities (3) $ 23,585 $ 23,387 25.28% $ 24,689 $ 24,724 29.49%
==================================== ===================================
Total securities held to maturity $ 90,260 $ 90,041 97.35% $ 79,535 $ 80,070 95.49%
==================================== ===================================
Nonmarketable equity securities
FHLB stock $ 1,575 $ 1,575 1.70% $ 1,250 $ 1,250 1.49%
------------------------------------ -----------------------------------
Securities available for sale(2) Debt securities:
Federal Agency:
Due in one year or less
Due after one year through five years -- -- -- $ 1,502 $ 1,500 1.79%
Due after five years through ten years -- -- -- -- -- --
Due after ten years -- -- -- -- -- --
Mortgage backed securities(3) $ 883 $ 878 .95% $ 1,029 $ 1,034 1.23%
==================================== ===================================
Total securities available for sale $ 883 $ 878 .95% $ 2,531 $ 2,534 3.02%
==================================== ===================================
</TABLE>
(1) Securities held to maturity are carried at amortized cost.
(2) Securities available for sale are carried at fair value at
December 31, 1997. Effective January 1, 1994, the Company adopted Financial
Accounting Standards Board ("FASB") No. 115. See note 1 of Notes to
Consolidated Financial Statements included in the Annual Report for a
discussion of FASB 115. Prior to that date, securities available for sale
were carried at the lower of amortized cost or fair value.
(3) The expected maturities of mortgage-backed securities may differ from
contractual maturities because the mortgages underlying the obligations may
be prepaid without penalty.
21
<PAGE>
Sources of Funds
General. The major source of funds for the Company is dividends from
its subsidiaries, the Banks, which are limited by FDIC regulations. See
"Limitations of Capital Distributions." The following discusses the sources of
funds for the Banks. Deposits are the major source of the Banks' funds for
lending and other investment purposes. In addition to deposits, the Banks derive
funds from the amortization and prepayment of loans and mortgage-backed
securities, the sale or maturity of investment securities, operations and
advances from the FHLB of Indianapolis. Scheduled loan principal repayments are
a relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources or on a longer term
basis for general business purposes.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market deposit, term certificate accounts (including negotiated jumbo
certificates in denominations of $100,000 or more) and individual retirement
accounts. Deposit account terms vary according to the minimum balance required,
the time periods the funds must remain on deposit and the interest rate, among
other factors. The Banks regularly evaluate the internal cost of funds, survey
rates offered by competing institutions, review cash flow requirements for
lending and liquidity, assess the interest rate risk position, and execute rate
changes when deemed appropriate. The Banks do not obtain funds through brokers,
nor do they actively solicit funds outside their primary market area.
Jumbo certificates of deposit with principal amounts of $100,000 or more
constituted $28.3 million, or 15.2 percent of the Company's total deposit
portfolio at December 31, 1997. Jumbo deposits include deposits from various
business entities, individuals and local governments and authorities. Jumbo
deposits make the Banks susceptible to large deposit withdrawals if one or more
depositors withdraw deposits. Such withdrawals may adversely impact the Banks'
cost of funds, liquidity and funds available for lending. However, as part of
the Banks' asset/liability management strategy, each entity and the Company as a
whole attempts to reduce this risk by matching the maturities of its jumbo
deposits with the maturities or repricing intervals of a similar amount of
assets such as investment securities or mortgage-backed securities.
22
<PAGE>
Deposit Flow
The following table sets forth the change in dollar amount of deposits in
the various types of deposit accounts offered by the Company's affiliate Banks
at the dates indicated.
<TABLE>
<CAPTION>
Balance at % of Increase Balance at % of Increase
12/31/97 Deposits (Decrease) 12/31/96 Deposits (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts $ 33,428 18.0% $ 2,076 $ 31,352 17.8% $ 10,397
Jumbo certificates 28,328 15.2% 2,658 25,670 14.5% 6,496
Passbook and regular savings 31,377 16.9% (1,210) 32,666 18.5% (13,863)
One-to-twelve month money
market certificates 28,425 15.3% (3,009) 31,489 17.8% 2,435
12 to 60 month certificates 53,657 28.8% 8,196 45,327 25.7% 2,716
IRA certificate accounts 10,806 5.8% 686 10,120 5.7% 352
======================================= ======================================
Total $ 186,021 100.0% $ 9,397 $ 176,624 100.0% $ 8,533
======================================= ======================================
</TABLE>
<TABLE>
<CAPTION>
Balance at % of Increase
12/31/95 Deposits (Decrease)
<S> <C> <C> <C>
Checking accounts $ 20,955 12.5% $ (821)
Jumbo certificates 19,174 11.4% (365)
Passbook and regular savings 46,529 27.7% (12,207)
One-to-twelve month money
market certificates 29,054 17.3% 5,616
12 to 60 month certificates 42,611 25.3% 872
IRA certificate accounts 9,768 5.8% 1,067
=======================================
Total $ 168,091 100.0% $ (5,838)
=======================================
</TABLE>
23
<PAGE>
Deposits
Consolidated deposits of the Banks as of December 31, 1997, were
represented by the various types of savings programs described below.
<TABLE>
<CAPTION>
Weighted
Average Percentage
Interest Minimum Minimum of Total
Rate Term Category Amount Balance Savings
---- ------- ------------------------ ---------- ------------ ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Non-interest bearing
-- None checking accounts 250 $ 10,544 5.7%
Interest bearing
2.65% None checking accounts 500 22,884 12.3%
Passbook and
3.38% None statement accounts 250 30,731 16.5%
3.01% None IRA Passbook accounts 100 646 0.3%
---------- ------------ -----------
$ 64,805 34.8%
Certificates of Deposit
------------------------
4.81% 1 - 5 months Fixed term, fixed rate 1,000 $ 97 0.1%
4.58% 6 - 11 months Fixed term, fixed rate 500 11,113 6.0%
5.22% 12 - 17 months Fixed term, fixed rate 500 19,804 10.6%
5.75% 18 - 29 months Fixed term, fixed rate 500 26,335 14.2%
6.10% 30 - 35 months Fixed term, fixed rate 500 6,562 3.5%
6.00% 36 - 59 months Fixed term, fixed rate 500 7,821 4.2%
5.67% (a) IRA accounts 500 10,806 5.8%
5.57% (a) Jumbo 100,000 28,328 15.2%
6.02% + 60 months 500 10,350 5.6%
----------- ------------ -----------
121,216 65.2%
$ 186,021 100.0%
============ ===========
</TABLE>
(a) IRA accounts and jumbo certificates of deposits are generally offered with
various maturities from seven days to over 60 months.
24
<PAGE>
Time Deposits by Rates. The following table sets forth the time deposits
classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
Weighted Average Rate 1997 1996 1995
<S> <C> <C> <C>
0.00 - 3.99% $ -- $ -- $ 715
4.00 - 6.00% 89,533 87,995 69,617
6.01 - 8.00% 31,673 24,593 30,076
8.01 - 10.00% 10 18 199
============= ============= ============
$121,216 $112,606 $100,607
============= ============= ============
</TABLE>
Time Deposit Maturity Schedule. The following table sets forth the amount and
maturities of time deposits at December 31, 1997.
<TABLE>
<CAPTION>
Less than 1 - 2 2 - 3 After
Weighted Average Rate One Year Years Years 3 Years Total
(In thousands)
<S> <C> <C> <C> <C> <C>
0.00 - 3.99% $ -- $ -- $ -- $ -- $ --
4.00 - 6.00% 66,637 15,773 5,111 2,012 89,533
6.01 - 8.00% 11,507 15,784 3,301 1,081 31,673
8.01 - 10.00% 1 4 5 -- 10
================== ============= ============= ============ =============
$ 78,145 $ 31,561 $ 8,417 $ 3,093 $121,216
================== ============= ============= ============ =============
</TABLE>
Time Deposits. The following table indicates the amount of jumbo certificates
of deposits (i.e. $100,000 or greater balance) by time remaining until maturity
as of December 31, 1997.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
(in thousands)
<S> <C>
Three months or less $ 14,136
Three through six months 5,668
Six through twelve months 2,801
Over twelve months 5,723
=============
Total $ 28,328
=============
</TABLE>
25
<PAGE>
Deposit Activity. The following table sets forth the deposit activities for the
periods indicated. Balances are reported in thousands.
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Deposits $1,273,895 $1,030,642 $755,574
Withdrawals 1,269,871 1,027,570 767,338
--------------- -------------- ------------
Net increase (decrease)
before interest credited 4,024 3,072 (11,764)
Interest credited 5,373 5,462 5,926
--------------- -------------- ------------
Net increase (decrease)
in deposits $9,397 $8,534 $(5,838)
=============== ============== ============
</TABLE>
In the unlikely event of liquidation of either of the Banks, depositors
will be entitled to full payment of their deposit accounts prior to any payment
being made to the Company as sole stockholder of the Banks.
Borrowings. Deposits are the primary source of funds of the Banks'
lending and investment activities and for its general business purposes. The
Banks, if the need arises, may rely upon advances from the FHLB of Indianapolis
and the Federal Reserve Bank discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. Advances from the
FHLB are secured by a blanket collateral pledge of the unpaid principal balance
of permanent 1-4 family residential loans. At December 31, 1997, the Banks had
$27,000,000 of advances outstanding from the FHLB of Indianapolis.
The FHLB of Indianapolis functions as a central reserve bank providing
credit for the Bank and other member financial institutions. All members are
required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities which are obligations of, or guaranteed
by, the United States) provided certain standards related to creditworthiness
have been met. Advances are made pursuant to several different programs. Each
credit program has its own interest rate and range of maturities.
Short-term Borrowings. The Banks also obtain funds through the offering
of retail repurchase agreements. Retail repurchase agreements represent
overnight borrowings from deposit customers secured by debt securities under the
control of the Banks. As of December 31, 1997, the Banks had $12.1 million of
retail repurchase agreements outstanding. In addition, Community Bank maintains
a $2,000,000 line of credit with the FHLB of Indianapolis in the event of a need
for funds in an overnight capacity.
26
<PAGE>
The following table sets forth certain information regarding borrowings
by the Company at the end of and during the periods indicated:
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
<S> <C> <C> <C>
Weighted average rate paid on:
FHLB advances 5.77% 5.65% 5.68%
Retail repurchase agreements 4.77% 4.47% --
</TABLE>
<TABLE>
<CAPTION>
During the Year Ended
December 31,
1997 1996 1995
<S> <C> <C> <C>
Maximum amount of borrowings Outstanding at any month end:
FHLB Advances $29,500 $23,000 $ 21,099
Retail repurchase agreements $15,165 $12,496 --
Approximate average short-term
Borrowings outstanding with Respect to :
FHLB Advances(1) $12,625 $ 10,550 $ 9,354
Retail repurchase agreements $12,100 $1,797 --
</TABLE>
(1) Average balances are derived from month-end balances.
Competition
There is strong competition both in attracting deposits and in
originating real estate and other loans. The most direct competition for
deposits has come historically from commercial banks, other savings associations
and credit unions in the Banks' market area. The Banks expect continued strong
competition from such financial institutions in the foreseeable future. The
Banks' market area includes branches of several commercial banks which are
substantially larger than the Banks in terms of state-wide deposits. The Banks
compete for savings by offering depositors a high level of personal service
together with a wide range of financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions choosing to compete in the Banks'
market area.
The Banks compete for loans primarily through the interest rates and
loan fees charged and the efficiency and quality of services provided to
borrowers, real estate brokers and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels and
volatility of the mortgage markets.
27
<PAGE>
Regulation
As state chartered commercial banks, Community and Heritage are subject
to examination, supervision and extensive regulation by the FDIC and the Indiana
Department of Financial Institutions (DFI). Community is a member of and owns
stock in the FHLB of Indianapolis, which is one of the twelve regional banks in
the Federal Home Loan Bank System. Both Banks also are subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters.
The FDIC and DFI regularly examine the Banks and prepares a report for
the consideration of each Bank's Board of Directors on any deficiencies that it
may find in the Banks' operations. Each Bank's relationship with its depositors
and borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents.
Federal Regulation of Savings Banks. The FDIC has extensive authority
over the operations of all insured commercial banks. As part of this authority,
the Banks are required to file periodic reports with the FDIC and DFI and are
subject to periodic examinations by both agencies. When these examinations are
conducted, the examiners may require the Banks to provide for higher general
loan loss reserves. Financial institutions in various regions of the United
States have been called upon by examiners to write down assets and to establish
increased levels of reserves, primarily as a result of perceived weaknesses in
real estate values and a more restrictive regulatory climate.
The investment and lending authority of a state chartered bank is
prescribed by federal laws and regulations, and it is prohibited from engaging
in any activities not permitted by such laws and regulations. These laws and
regulations generally are applicable to all state chartered banks.
State banks are subject to the same current national bank limits on
maximum loans to one borrower. Generally, banks may not lend to a single or
related group of borrowers on an unsecured basis an amount in excess of the
greater of $500,000 or 15 percent of the bank's unimpaired capital and surplus.
An additional amount may be lent, equal to 10 percent of unimpaired capital and
surplus, if such loan is secured by readily marketable collateral, which is
defined to include certain securities, but generally does not include real
estate. See "Lending Activities -- Loans to One Borrower" for a discussion of
the effect of this requirement on the Bank.
Proposed Federal Legislation. Currently, Congress has under
consideration a proposal which, if implemented, could have a material effect on
financial institutions in general, and the Banks in particular. Consolidation of
the four Federal banking agencies (the Federal Reserve Board, OTS, FDIC and the
Office of the Comptroller of the Currency) has been and will continue to be
considered. The outcome of this proposal is uncertain and the Company is unable
to determine the extent to which the legislation if enacted, would affect its
business.
Federal Regulations
Section 22(h) and (g) of the Federal Reserve Act places restrictions on
loans to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer and to a greater than 10%
stockholder of a bank, and certain affiliated interest of either, may not
exceed, together with all other outstanding loans to such person and affiliated
interests, the institution's loans to one borrower limit (generally equal to 15%
of the institution's unimpaired capital and surplus). Section 22(h) also
requires that loans to directors, executive officers and principal stockholders
28
<PAGE>
be made on terms substantially the same as offered in comparable transactions
to other persons and also requires prior board approval for certain loans. In
addition, the aggregate amount of extensions of credit to all insiders cannot
exceed the institution's unimpaired capital and surplus. At December 31, 1997
the Bank was in compliance with the above restrictions.
Safety and Soundness. On November 18, 1993, a joint notice of proposed
rulemaking was issued by the OTS, the FDIC, the Office of the Comptroller of the
Currency and the Federal Reserve Board (collectively, the "agencies") concerning
standards for safety and soundness required to be prescribed by regulation
pursuant to Section 39 of the FDIA. In general, the standards relate to (1)
operational and managerial matters; (2) asset quality and earnings; and (3)
compensation. The operational and managerial standards cover (a) internal
controls and information systems, (b) internal audit system, (c) loan
documentation, (d) credit underwriting, (e) interest rate risk exposure, (f)
asset growth, and (g) compensation, fees and benefits. Under the proposed asset
quality and earnings standards, the Bank would be required to maintain (1) a
maximum ratio of classified assets (assets classified substandard, doubtful and
to the extent that related losses have not been recognized, assets classified
loss) to total capital of 1.0, and (2) minimum earnings sufficient to absorb
losses without impairing capital. The last ratio concerning market value to book
value was determined by the agencies not to be feasible. Finally, the proposed
compensation standard states that compensation will be considered excessive if
it is unreasonable or disproportionate to the services actually performed by the
individual being compensated. If an insured depository institution or its
holding company fail to meet any of the standards promulgated by regulation,
then such institution or company will be required to submit a plan within 30
days to the FDIC specifying the steps it will take to correct the deficiency. In
the event that an institution or company fails to submit or fails in any
material respect to implement a compliance plan within the time allowed by the
agency, Section 39 of the FDIA provides that the FDIC must order the institution
or company to correct the deficiency and may (1) restrict asset growth; (2)
require the institution or company to increase its ratio of tangible equity to
assets; (3) restrict the rates of interest that the institution or company may
pay; or (4) take any other action that would better carry out the purpose of
prompt corrective actions.
Regulatory Capital. The Company and subsidiary Banks are subject to
various regulatory capital requirements administered by the federal banking
agencies. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company must meet specific capital guidelines.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and subsidiaries to maintain minimum amounts and
ratios of total and Tier I Capital to risk weighted assets and of Tier I capital
to average assets. As of December 31, 1997, the Company met all capital adequacy
requirements to which it is subject.
29
<PAGE>
The following table sets forth the Company's capital position at
December 31, 1997, as compared to the minimum capital requirements.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes: Excess
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets):
Consolidated $ 28,441 21.7% $ 10,475 8.0% $ 17,966 13.7%
Tier I Capital (to Risk
Weighted Assets):
Consolidated $ 27,604 21.1% $ 5,238 4.0% $ 22,366 17.1%
Tier I Capital (to average
Assets):
Consolidated $ 27,604 11.7% $ 9,442 4.0% $ 18,162 7.7%
</TABLE>
The FDIC generally is authorized to take enforcement action against a
financial institution that fails to meet its capital requirements, which action
may include restrictions on operations and banking activities, the imposition of
a capital directive, a cease and desist order, civil money penalties or harsher
measures such as the appointment of a receiver or conservator or a forced merger
into another institution. In addition, under current regulatory policy, an
institution that fails to meet its capital requirements is prohibited from
paying any dividends. Except under certain circumstances, further disclosure of
final enforcement action by the FDIC is required.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
Improvement Act, each federal banking agency was required to implement a system
of prompt corrective action for institutions which it regulates. The federal
banking agencies, including the FDIC, adopted substantially similar regulations
to implement Section 38 of the FDIA, effective as of December 19, 1992. Under
the regulations, an institution is deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio
of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital
ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less
than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% ( 3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0%, and (v) "critically undercapitalized" if it has a
ratio of tangible equity to total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the regulations promulgated thereunder also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At December 31, 1997, the Bank was deemed well
capitalized for purposes of the above regulations.
30
<PAGE>
Federal Home Loan Bank System. Community is a member of the FHLB of
Indianapolis, which is one of the 12 regional FHLB's that, prior to the
enactment of FIRREA, were regulated by the FHLBB. FIRREA separated the home
financing credit function of the FHLB's from the regulatory functions of the
FHLB's regarding savings institutions and their insured deposits by transferring
oversight over the FHLB's from the FHLBB to a new federal agency, the Federal
Home Financing Board ("FHFB").
As a member of the FHLB Bank of Indianapolis, Community is required to
purchase and maintain stock in the FHLB of Indianapolis in an amount equal to
the greater of one percent of its aggregate unpaid residential mortgage loans,
home purchase contracts or similar obligations at the beginning of each year, or
1/20 (or such greater fraction as established by the FHLB) of outstanding FHLB
advances. At December 31, 1997, Community had $1.58 million in FHLB of
Indianapolis stock, which was in compliance with this requirement. In past
years, Community has received dividends on its FHLB stock. Certain provisions of
FIRREA require all 12 FHLB's to provide financial assistance for the resolution
of troubled savings institutions and to contribute to affordable housing
programs through direct loans or interest subsidies on advances targeted for
community investment and low-and moderate-income housing projects. These
contributions could cause rates on the FHLB advances to increase and could
affect adversely the level of FHLB dividends paid and the value of FHLB stock in
the future.
Each FHLB serves as a reserve or central bank for its members within
its assigned region. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB. At December 31, 1997, the Company had $27 million in
advances from the FHLB.
Accounting. An FDIC policy statement applicable to all banks clarifies
and re-emphasizes that the investment activities of a bank must be in compliance
with approved and documented investment policies and strategies, and must be
accounted for in accordance with GAAP. Under the policy statement, management
must support its classification of and accounting for loans and securities
(i.e., whether held to maturity, available for sale or available for trading)
with appropriate documentation. The Bank is in compliance with these amended
rules.
Insurance of Accounts. Each Bank's deposits are insured up to $100,000
per insured member (as defined by law and regulation). Community's deposits are
insured by the Savings Association Insurance Fund (SAIF) and Heritage's deposits
are insured by the Bank Insurance Fund (BIF). This insurance is backed by the
full faith and credit of the United States Government. The SAIF and the BIF are
administered and managed by the FDIC. As insurer, the FDIC is authorized to
conduct examinations of and to require reporting by SAIF and BIF insured
institutions. It also may prohibit any insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious threat to
either fund. The FDIC also has the authority to initiate enforcement actions
against financial institutions. The annual assessment for deposit insurance is
based on a risk related premium system. Each insured institution is assigned to
one of three capital groups, well capitalized, adequately capitalized or under
capitalized. Within each capital group, institutions are assigned to one of
three subgroups (A, B, or C) on the basis of supervisory evaluations by the
institution's primary federal supervisor and if applicable, state supervisor.
Assignment to one of the three capital groups, coupled with assignment to one of
three supervisory subgroups, will determine which of the nine risk
classifications is appropriate for an institution. Institutions are assessed
insurance rates based on their assigned risk classifications. The well
capitalized, subgroup "A" category institutions are assessed the lowest
insurance rate, while institutions assigned to the under
31
<PAGE>
capitalized subgroup "C" category are assessed the highest insurance rate. As of
December 31, 1997 both banks were assigned to the well capitalized, subgroup "A"
category. During 1997, Community Bank paid an annual insurance rate of 6.3 cents
per $100 of deposits, while Heritage Bank paid an annual insurance rate of 1.26
cents per $100 of deposits.
In August 1995, the FDIC substantially reduced the deposit insurance
premiums for well-capitalized, well-managed financial institutions that are
members of the BIF. Under the new assessment schedule, approximately 92% of BIF
members paid a minimum assessment of $1,000 per year while SAIF members
continued to be assessed under the existing rate schedule of 23 cents to 31
cents per $100 of insured deposits.
On September 30, 1996, all SAIF member institutions were charged a one
time assessment to increase SAIF's reserves to $1.25 per $100 of insured
deposits. Community Bank's charge amounted to $1.2 million with an after tax
impact of approximately $678,000.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines, after a hearing, that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation,
order or any condition imposed by an agreement with the FDIC. The FDIC also may
suspend deposit insurance temporarily for any financial institution during the
hearing process for the permanent termination of insurance, if the Bank has no
tangible capital. If insurance of accounts is terminated, the insured accounts
at the institution at the time of the termination, less subsequent withdrawals,
shall continue to be insured for a period of six months to two years, as
determined by the FDIC.
The FDIC has passed regulations, under the Federal Deposit Insurance
Act, that generally prohibit payments to directors, officers and employees
contingent upon termination of their affiliation with an FDIC-insured
institution or its holding company (i.e., "golden parachute payments") if the
payment is received after or in contemplation of, among other things,
insolvency, a determination that the institution or holding company is in
"troubled condition", or the assignment of a composite examination rating of "4"
or "5" for the institution. Certain types of employee benefit plans are not
subject to the prohibition. The regulations, which are not currently applicable
to the Company, would also generally prohibit certain indemnification payments
regarding any administrative proceeding instituted against a person that results
in a final order pursuant to which the person is assessed civil money penalties
or subjected to other enforcement action. The Company has no such agreements
with any directors or employees.
The Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
and non-personal time deposits. As of December 31, 1997, no reserves were
required to be maintained on the first $4.3 million of transaction accounts,
reserves of 3% were required to be maintained against the next $52.0 million of
net transaction accounts (with such dollar amounts subject to adjustment by the
Federal Reserve Board), and a reserve of 10% (which is subject to adjustment by
the Federal Reserve Board to a level between 8% and 14%) against all remaining
net transaction accounts. Because required reserves must be maintained in the
form of vault cash or a noninterest-bearing account at a Federal reserve Bank,
the effect of this reserve requirement is to reduce an institution's earning
assets.
32
<PAGE>
Banks are authorized to borrow from the Federal Reserve Bank "discount
window," but Federal Reserve Board regulations require banks to exhaust other
reasonable alternative sources of funds, including FHLB advances, before
borrowing from the Federal Reserve Bank.
Federal Taxation. For federal income tax purposes, the Company and its
subsidiaries file a consolidated federal income tax return on a calendar year
basis. Consolidated returns have the effect of eliminating intercompany
distributions, including dividends, from the computation of consolidated taxable
income for the taxable year in which the distributions occur.
The Company and its subsidiaries are subject to the rules of federal
income taxation generally applicable to corporations under the Internal Revenue
Code of 1986, as amended (the "Code").
The Company is subject to the corporate alternative minimum tax which
is imposed to the extent it exceeds the Company's regular income tax for the
year. The alternative minimum tax will be imposed at the rate of 20 percent of a
specially computed tax base. Included in this base will be a number of
preference items, including the following: (i) 100 percent of the excess of a
financial institution's bad debt deduction over the amount that would have been
allowable on the basis of actual experience; (ii) interest on certain tax-exempt
bonds issued after August 7, 1986; and (iii) for years beginning in 1988 and
1989 an amount equal to one-half of the amount by which a institution's "book
income" (as specially defined) exceeds its taxable income with certain
adjustments, including the addition of preference items (for taxable years
commencing after 1989 this adjustment item is replaced with a new preference
item relating to "adjusted current earnings" as specially computed). In
addition, for purposes of the new alternative minimum tax, the amount of
alternative minimum taxable income that may be offset by net operating losses is
limited to 90 percent of alternative minimum taxable income.
Effective with the year ended December 31, 1993, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. This statement requires a liability approach for measuring
deferred tax assets and liabilities based on temporary differences existing at
each balance sheet date using enacted tax rates in effect when those differences
are expected to reverse. The cumulative effect of adopting Statement No. 109 at
January 1, 1993 is included in income tax expense in the accompanying
Consolidated Statement of Operations. (See Item 14 (a) 1 -Financial Statements)
The Company has not been audited by the Internal Revenue Service for
the past ten years.
Indiana Taxation. Effective January 1, 1990, the State of Indiana
imposed a franchise tax assessed on net income (adjusted gross income as defined
in the statute) of financial institutions. The new tax replaced the gross
receipts tax, excise tax and supplemental net income tax imposed prior to 1990.
This new financial institution's tax is imposed at the rate of 8.5 percent of
the Banks' adjusted gross income. In computing adjusted gross income, no
deductions are allowed for municipal interest, U.S. government interest and
pre-1990 net operating losses.
33
<PAGE>
Personnel
As of December 31, 1997, the Company had 80 full-time employees.
Community Bank employed 41 full-time and 6 part-time employees as of December
31, 1997. Heritage Bank employed 12 full-time employees as of December 31, 1997.
Neither entity's employees are represented by a collective bargaining group. The
Company and two subsidiary Banks believe their respective relationships with
their employees to be good.
ITEM 2. PROPERTIES
The Company conducts its business through the main office and an operations
center located in New Albany, Indiana, and seven branch offices of its
subsidiaries Community Bank and Heritage Bank located in Clark and Floyd
Counties, Indiana. The following table sets forth certain information concerning
the main offices and each branch office at December 31, 1997. The aggregate net
book value of premises and equipment was $3.7 million at December 31, 1997.
<TABLE>
<CAPTION>
Lease Expiration
Location Year Opened Owned or Leased Date
<S> <C> <C> <C>
Community Bank of Southern Indiana:
202 East Spring St. - Main Branch 1937 Owned ---
New Albany, IN 47150
147 East Spring Street - Operations Center 1990 Leased Month to month
New Albany, IN 47150
2626 Charlestown Road 1995 Owned ---
New Albany, IN 47150
480 New Albany Plaza 1974 Leased 1999
New Albany, IN 47130
901 East Highway 131 1981 Owned ---
Clarksville, IN 47130
701 Highlander Point Drive 1990 Owned ---
Floyds Knobs, IN 47119
102 Heritage Square 1992 Owned ---
Sellersburg, IN 47172
Community Bank Shares of Indiana, Inc.:
201 W. Court Ave. 1996 Owned ---
Jeffersonville, IN 47130
Heritage Bank of Southern Indiana:
5112 Highway 62 1997 Owned ---
Jeffersonville, IN 47130
</TABLE>
34
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are various claims and law suits in which the Company or its
subsidiaries are periodically involved, such as claims to enforce liens,
condemnation proceedings on properties in which the Banks hold security
interests, claims involving the making and servicing of real property loans and
other issues incident to the Banks' business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of Community Bank Shares of Indiana, Inc. is traded
over the counter under the NASDAQ Small Cap symbol of CBIN.
Quarterly Dividends and Market Price Summary
<TABLE>
<CAPTION>
Cash
Dividends
Paid Per
High Low Share
------------- ------------ ------------
<S> <C> <C> <C>
1996
--------------------
First Quarter $ 14.75 $ 13.75 $ 0.085
Second Quarter 14.75 12.25 0.085
Third Quarter 13.75 11.75 0.085
Fourth Quarter 13.25 11.75 0.085
1997
--------------------
First Quarter 15.00 12.25 $ 0.105
Second Quarter 15.25 14.25 0.105
Third Quarter 23.50 14.25 0.105
Fourth Quarter 23.50 19.00 0.105
</TABLE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
See pages 6 - 8 of the 1997 Annual Report to Stockholders incorporated
herein as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See pages 9 - 16 of the 1997 Annual Report to Stockholders incorporated
herein as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS
See pages 20 - 24 of the 1997 Annual Report to Stockholders
incorporated herein as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting
a change of accountants and/or reporting disagreements on any matter of
accounting principle or financial statement disclosure.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information concerning Directors and executive officers of the Registrant
is incorporated herein by reference from the Bank's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on April 28, 1998 a copy of
which will be filed no later than 120 days after the close of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Bank's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on April 28, 1998 a copy of which will be filed no later
than 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain owners and management
is incorporated herein by reference from the Bank's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on April 28, 1998 a copy of
which will be filed no later than 120 days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference from the Bank's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on April 28, 1998 a copy of which will be
filed no later than 120 days after the close of the fiscal year.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements
The following information appearing in the Registrant's Annual Report to
Stockholders for the year ended December 31, 1997, is incorporated herein as
Exhibit 13 in this Annual Report on Form 10-K.
Annual Report Section Pages in Annual Report
Selected Financial Data 6 - 8
Management's Discussion and Analysis 9 - 16
of Financial Condition and Results
of Operations
Report of Independent Auditor 20
Consolidated Balance Sheets 21
Consolidated Statements of Income 23
Consolidated Statements of Cash Flows 24
Consolidated Statement of
Stockholders' Equity 22
Notes to Consolidated Financial 25 - 41
Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
37
<PAGE>
(a) (3) Exhibits
Exhibit Number Document
3.1 Articles of incorporation *
3.2 Bylaws *
4 Common Stock Certificate *
10 Stock Option Plan **
13 Form of Annual Report to Security Holders
21 Subsidiaries of Registrant
27 Financial Data Schedule
* Incorporated herein by reference to Registration Statement on Form S-1
dated December 9, 1994, Registration No. 33-87228.
** Incorporated herein by reference to the Definitive Proxy Statement filed
March 25, 1997.
(b) Reports on Form 8-K:
A Form 8-K was filed on December 18, 1997 to report the execution of a
definitive agreement providing for the affiliation of NCF Financial Corp. of
Bardstown, Kentucky, with Community Bank Shares of Indiana, Inc.
38
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMUNITY BANK SHARES OF INDIANA
Date: March 31, 1997 By: \s\ Robert E. Yates
ROBERT E. YATES
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: \s\ C. Thomas Young By: \s\ Gordon L. Huncilman
C. THOMAS YOUNG GORDON L. HUNCILMAN
Chairman of the Board Director
of Directors
Date: March 27, 1998 Date: March 27, 1998
By: \s\ Robert J. Koetter, Sr. By: \s\ Steven Stemler
ROBERT J. KOETTER, SR., STEVEN STEMLER
Director Director
Date: March 27, 1998 Date: March 27, 1998
By: \s\ Gary L. Libs By: \s\ Dale Orem
GARY L. LIBS, DALE OREM
Director Director
Date: March 27, 1998 Date: March 27, 1998
By: \s\ James W. Robinson By: \s\ James Stutsman
JAMES W. ROBINSON, JAMES M. STUTSMAN
Director Senior Vice President
and Chief Financial Officer
Date: March 27, 1998 Date: March 27, 1997
By: \s\ Timothy T. Shea By: \s\ M. Diane Murphy
TIMOTHY T. SHEA, M. DIANE MURPHY,
Director Senior Vice President and
Corporate Secretary
Date: March 27, 1998 Date: March 27, 1997
By: \s\ Kerry M. Stemler By: \s\ Stan Krol
KERRY M. STEMLER STAN KROL,
Director Chief of Operations
Date: March 27, 1998 Date: March 27, 1997
39
<PAGE>
Exhibit 21
Name of Subsidiary Community Bank of Southern Indiana,
Address of Subsidiary 202 East Spring Street
New Albany, Indiana 47150
State of Incorporation Indiana
Currently doing business as Community Bank of Southern Indiana
Name of Subsidiary First Community Service Corporation
Address of Subsidiary 202 East Spring Street
New Albany, Indiana 47150
State of Incorporation Indiana
Currently doing business as First Community Service Corporation.
Name of Subsidiary Heritage Bank of Southern Indiana,
Address of Subsidiary 201 West Court Avenue
Jeffersonville, Indiana 47131
State of Incorporation Indiana
Currently doing business as Heritage Bank of Southern Indiana
<PAGE>
Exhibit 13
COMMUNITY BANK SHARES OF INDIANA, INC.
ANNUAL REPORT 1997
TABLE OF CONTENTS
Vision Statement - Community Bank Shares of Indiana, Inc.......................2
Listing of Members of the Board of Directors and Officers......................3
Review of Operations 1997......................................................4
Selected Consolidated Financial and Other Data.................................6
Summary of Operations..........................................................8
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................9
Pending Merger................................................................16
Year 2000 Compliance..........................................................16
Description of Directors and Officers.........................................17
Stockholder Information.......................................................18
Affiliate Directors and Officers..............................................19
Independent Auditor's Report..................................................20
Consolidated Balance Sheets...................................................21
Consolidated Statements of Stockholders' Equity...............................22
Consolidated Statements of Income.............................................23
Consolidated Statements of Cash Flows.........................................24
Notes to Consolidated Financial Statements....................................25
1
<PAGE>
VISION STATEMENT
COMMUNITY BANK SHARES OF INDIANA, INC.
NEW ALBANY, INDIANA
Vision:
* An interstate holding company of community banks and financial service
companies.
Community Bank Shares endeavors to achieve its vision by partnering with
financial institutions who understand the competitive benefits of cost
effective access to operational scope, product services diversity,
liquidity, and capital, which may be best attained from a holding company
structure, but who also wish to maintain their competitive niche as a
community directed and lead bank.
Business Philosophy:
* In pursuit of its corporate vision and the implementation of its annual
business plan, Community Bank Shares of Indiana's foremost concerns and
those of its associate affiliates will always be: asset quality; the
safety of depositors funds; capital adequacy; the economic viability of
its shareholders equity investment; and the general economic welfare of
the customers and the communities served.
2
<PAGE>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
C. Thomas Young Timothy T. Shea
Chairman of the Board Vice Chairman
Chairman Executive Committee
Robert E. Yates Gary L. Libs
President/CEO/Director Director
Robert J. Koetter, Sr. James W. Robinson
Director Director
Kerry M. Stemler Dale Orem
Director Director
Gordon L. Huncilman Steven Stemler
Director Director
SPECIAL CONSULTANT TO THE BOARD OF DIRECTORS
Edward Pinaire
EXECUTIVE OFFICERS
Robert E. Yates James M. Stutsman
President/CEO Senior Vice President
Stanley L. Krol Gray Ball
Senior Vice President Senior Vice President
M. Diane Murphy
Senior Vice President
Corporate Secretary
CORPORATE OFFICERS
Thomas M. Jones Linda Brock
Vice President Vice President
Business Services Internal Audit,
Security Officer
Pamela P. Echols Paul Chrisco
Assistant Corporate Secretary Vice President
Debra Frederick Charles T. Gill
Credit Operations Officer Credit Officer
Theresa Matthews Becky Jaggers
Administrative Officer, Operations Officer
Secondary Market
COUNSEL
GENERAL COUNSEL
Young, Lind, Endres, and Kraft
126 W. Spring St.
New Albany, Indiana 47150
SPECIAL COUNSEL, WASHINGTON, D.C.
Elias, Matz, Tiernan, and Herrick, L.L.P.
734 15th St., N.W.
Washington, D.C. 20005
3
<PAGE>
Review of Operations - 1997
Dear Fellow Shareholders:
We are pleased to report that 1997 was a record year for your company in a
number of important areas.
Community Bank Shares net consolidated after tax income was a record $2,386,000
or $1.21 per share, up 47.8% over 1996's consolidated income of $1,614,000, or
$.82 per share.*
The Company's consolidated assets, as of December 31, 1997 reached a record
$254.1 million, up 6.9% from December 31, 1996's record high of $237.6 million.
As of December 31, 1997, the company's consolidated capital was $27.7 million,
up 6.1% over December 31, 1996's capital total of $26.1 million.
The following table highlights earnings per share for the year ended
December 31, 1997:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Earnings Per Share $1.21 $0.82 $0.96 $0.83 $0.98
Earnings per share
excluding special SAIF
assessment and effect
of income tax change* $1.21 $1.16 $0.96 $0.83 $0.98
</TABLE>
Community Bank Center Building Construction Gets Underway. In October, 1997, the
dirt flew, as work got underway on our long planned "Community Bank Center"
plaza and building. (See the rendering of our new corporate center on the cover
of this report.) The five story commercial center is located immediately
adjacent to a municipally owned multi-story 270 space parking garage that is
currently under construction.
The Center, when completed in early 1999, will house Community Bank's main
commercial and retail banking center, Community Bank Shares operations and
support service center, and Community Bank Shares and Community Bank's corporate
and administrative offices. The center will also contain over 15,000 square feet
of prime commercial office space available for corporate and commercial tenants.
Community Bank of Southern Indiana ended 1997 with total assets of $218.1
million, up 4.6% from 1996's year end total of $208.5 million. Earnings at
Community Bank, for 1997, were a record $2,301,000, fueled by a strong growth in
commercial/business loans and deposits.
Community Bank remains the largest locally owned financial institution
headquartered in the five county Harrison, Floyd, Clark, Scott and Jefferson
County, Indiana services area.
Heritage Bank of Southern Indiana, our Clark County headquartered banking
affiliate, ended its second full year of operations with assets of $35.4
million, up 23.8% from its inaugural year-end asset total of $28.6 million.
Heritage's net operating profit for the 1997 was $209,000, 458.2% over 1996's
total. Heritage's asset growth and profit performance has been significantly
above our original projection for the start up period and, in the case of
profitability, substantially above average for de-novo banks in the three year
old or less category.
In late 1997, Heritage began construction, after a five month delay, of its
first branch banking center. The new center, which opened in January of 1998, is
located in Clark County, at the corner of Utica Sellersburg Road and Route 62.
The new center is positioned to serve the burgeoning Clark Maritime Center and
the growing Eastern Clark County Route 62, Jeffersonville Charlestown corridor.
* Heritage Financial Services adds full service brokerage. In 1997, Heritage
Financial Services, our individual financial and general retirement planning
arm, added full service brokerage as yet another service to its portfolio of
special financial service products. Heritage brokerage services are provided
through AAG Securities.
Heritage Financial Services draws its client base from Community Bank Shares
banking affiliates and Southern Indiana businesses and professionals. HFS ended
1997 with over $22,000,000 in assets under management on behalf of a customer
base of over 1100 clients.
For financial or retirement planning or employee retirement plans, as well as
401k's, a wide range of deferred variable and fixed term annuities, the mutual
fund of your choice, IRA's, and more, for your future, think Heritage Financial
Services.
- --------------------------------------------------------------------------------
*Note: For comparison purposes, 1996's consolidated income of $1,614,000 was
impacted by two adjustments: an after tax charge of $678,000 for a one time
industry wide special deposit insurance assessment for the "SAIF" insurance
fund, and a positive adjustment to earnings from a non-recurring change in our
deferred income tax account resultant from a 1996 tax law change. 1996
consolidated earnings, exclusive of both adjustments would have been $2,023,000,
versus the $1,614,000 that was reported under generally accepted accounting
practices. The area in black on all graphs reflects the impact of the deposit
insurance assessment and /or the deferred income tax change.
4
<PAGE>
Community Bank hits the Internet. Community Bank established its own web-site in
mid 1997. Our internet address is www.communitybanksi.com. The site contains a
lot of information, including updated quotes on Community Bank Shares' stock
price. Remember, when accessing the site, the address is all lower case letters
and there are no blank spaces. Enjoy the surf.
We expect to have Heritage Bank on line in the first half of 1998. When the site
is up, the address will be www.heritagebanksi.com.
Community Bank Shares of Indiana, Inc. establishes a dividend reinvestment
program. The dividend reinvestment program was offered to shareholders,
beginning with the fourth quarter dividend of 1997. This program is open to all
shareholders whose stock is registered in their own name, simply by completing
an authorization card that can be obtained by contacting the Registrar and
Transfer Company, Dividend Investment Plan, 10 Commerce Drive, Cranford, NJ
07016 Telephone: 1-800-368-5948.
Community Bank Shares stock, which is listed in the NASDAQ SmallCap Market under
the symbol "CBIN", ended the year at $21.25, up from $13.00 at year end 1996.
<TABLE>
<CAPTION>
12/31/97 12/31/96 12/31/95 4/30/95
<S> <C> <C> <C> <C>
Stock Price $21.25 $13.00 $14.25 $12.75
</TABLE>
Community Bank Shares of Indiana, Inc. and NCF Financial Corp. to merge. On
December 17, 1997, NCF Financial Corporation of Bardstown, Kentucky, signed a
definitive merger agreement with Community Bank Shares.
The agreement, subject to ratification by both our shareholders and those of NCF
Financial, requires approval by the Federal Reserve Bank and the State of
Kentucky Department of Financial Institutions. Upon consummation of the merger,
which is planned for early May of 1998, NCF Financial will merge into Community
Bank Shares and NCF Financial's banking affiliate, NCF Bank of Bardstown, will
become Community Bank Shares' third banking affiliate. NCF Bank will continue to
be locally managed, with its own president and board of directors.
We are pleased to announce that, on February 13, 1998, the Federal Reserve Bank
of St. Louis notified us that our merger application had been approved and, on
March 2, 1998, the Kentucky Department of Financial Institutions notified us
that they had approved the merger application that had been filed with them.
We look forward to welcoming NCF's employees, directors, and shareholders into
the Community Bank Shares family.
We would like to thank all of our fellow team members, at Community Bank Shares,
Community Bank of Southern Indiana, Heritage Bank of Southern Indiana, and
Heritage Financial Services. It is their continued dedication to professionalism
and service that make Community Bank Shares a great company to own, and
Community Bank, Heritage Bank, and Heritage Financial Services great places to
do business.
The enthusiasm, involvement, and everyday support of our fellow members of the
board of directors at Community Bank Shares and our partner affiliate banks
define, every day, the meaning of quality community banking. We want to thank
this dedicated group of individuals for their time and effort expended on behalf
of our employees, customers, and shareholders.
And, to you, our fellow shareholders, your ongoing support is always
appreciated, and your comments and suggestions are always welcome. But, a
reminder, banking with a Community Bank Shares bank "pays you dividends."
Sincerely,
COMMUNITY BANK SHARES
OF INDIANA, INC.
/s/ C. Thomas Young /s/ Robert E. Yates
C. THOMAS YOUNG ROBERT E. YATES
Chairman President, CEO
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain information concerning the financial
position of the Company (including consolidated data from operations of its
subsidiary, if applicable) at the dates indicated:*
<TABLE>
<CAPTION>
Financial Condition Data
At December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
(In Thousands)
Total amount of:
<S> <C> <C> <C> <C> <C>
Assets ....................... $254,083 $237,571 $215,726 $204,862 $178,152
Loans receivable, net(1) ..... 143,819 136,835 118,451 108,392 93,273
Securities held to maturity:
Mortgage-backed
securities ................. 23,387 24,724 27,522 39,188 45,514
Other debt securities ......... 66,654 55,346 38,442 29,384 23,513
Securities available for sale . 883 2,532 7,739 5,450 0
Interest earning deposits
with banks .................. 6,504 7,321 14,354 13,415 6,004
Deposits ..................... 186,021 176,624 168,091 173,929 153,806
Repurchase Agreements ........ 12,142 10,702 -- -- --
FHLB advances ................ 27,000 23,000 21,099 15,601 9,618
Stockholders' equity
(substantially restricted)(2) 27,651 26,073 25,351 14,319 12,951
</TABLE>
(1) Includes mortgage loans held for sale.
(2) Consists of capital stock, surplus and appropriated retained earnings,
unappropriated retained earnings, and unrealized gain or loss on securities
available for sale.
* Please note that the information for 1995-1997 is for the Company and that
the information for 1993-1994 is the consolidated data for Community Bank
Shares, M.H.C., since the Company was not formed until 1995.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Return on average assets 0.96% 0.71% 0.92% 0.88% 1.09%
Return on average assets
excluding special SAIF
assessment and effect
of income tax change* 0.96% 1.00% 0.92% 0.88% 1.09%
</TABLE>
* See note at bottom of page 4.
6
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Return on average equity 8.80% 6.30% 7.63% 11.96% 15.73%
Return on average equity
excluding special SAIF
assessment and effect
of income tax change* 8.80% 8.93% 7.63% 11.96% 15.73%
</TABLE>
* See note at bottom of page 4.
Key Operating Ratios
The table below sets forth certain performance ratios of the Company for the
periods indicated.*
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Return on average assets (net income
divided by average total assets) .......... .96% .71% .92% .88% 1.09%
Return on average equity
(net income divided by average equity) .... 8.80 6.30 7.63 11.96 15.73
Equity to average assets ratio (average
equity divided by average total assets) .. 10.88 11.21 12.01 7.38 7.31
Equity to assets at period end ............. 10.88 10.97 11.75 6.99 7.26
Net interest rate spread ................... 2.77 2.63 2.49 2.84 3.02
Net yield on average interest-earning assets 3.14 3.05 2.94 3.03 3.14
Non-performing loans to total loans ........ .50 .30 .10 .53 .82
Non-performing assets to total assets ...... .28 .22 .06 .28 .43
Average interest-earning assets to
average interest-bearing liabilities ...... 108.31 109.98 110.88 105.09 103.15
Net interest income after provision for
loan losses, to total other expenses ...... 150.84 116.96 159.07 142.33 131.79
Dividend Payout Ratio....................... 34.92 50.86 22.24 16.28 11.78
Number of full-service offices ............. 8 7 6 6 6
</TABLE>
* Please note that the information for 1995-1997 is for the Company and that
the information for 1993-1994 is the consolidated data for Community Bank
Shares, M.H.C., since the Company was not formed until 1995.
7
<PAGE>
Summary of Operations
The following table summarizes the Company's results of operations for each of
the periods indicated:*
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
(In Thousands Except Per Share Results)
<S> <C> <C> <C> <C> <C>
Interest income ........................ $ 18,102 $ 16,234 $ 14,079 $ 11,969 $ 12,009
Interest expense ....................... 10,617 9,485 8,246 6,563 6,701
Net interest income .................. 7,485 6,749 5,833 5,406 5,308
Provision (credit) for losses on loans . 210 67 58 (70) 206
Net interest income after provision
for losses on loans .................. 7,275 6,682 5,775 5,476 5,102
Non-interest income:
Loan fees and service charges ........ 454 412 366 355 593
Net realized securities gains ........ -- 15 -- 34 114
Net gains on sale of mortgage loans .. 215 102 68 62 535
Net income from real estate operations 11 -- -- 12 254
Service charges on deposit accounts .. 386 366 301 288 253
Commission income .................... 304 341 175 257 305
Miscellaneous income ................... 60 61 75 29 35
Total non-interest income ........... 1,430 1,297 985 1,037 2,089
Non-interest expense:
Compensation and benefits ............ 3,046 2,600 1,958 1,746 1,812
Occupancy and equipment .............. 490 467 358 340 326
Deposit insurance premiums ........... 103 1,485 379 359 300
Data processing services ............. 457 414 316 306 326
Loss on foreclosed real estate ....... -- -- -- 564 502
Other ................................ 711 747 619 532 605
Total non-interest expense ........ 4,807 5,713 3,630 3,847 3,871
Income before income taxes ............. 3,899 2,266 3,130 2,666 3,320
Income tax expense ..................... 1,513 652 1,234 1,023 1,384
Net income ........................ 2,386 1,614 1,896 1,643 1,936
Net income per share ................... $ 1.21 $ .82 $ .96 $ 1.61 $ 1.90
Dividends paid per share ............... $ .42 $ .42 $ .27 $ .26 $ .22
</TABLE>
* Please note that the information for 1995-1997 is for the Company and that
the information for 1993-1994 is the consolidated data for Community Bank
Shares, M.H.C., since the Company was not formed until 1995.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
The operating results of the Company depend primarily upon the subsidiary Banks'
net interest income, which is determined by the difference between interest
income on interest earning assets, principally loans, mortgage-backed securities
and investment securities, and interest expense on interest bearing liabilities,
which principally consist of deposits, retail repurchase agreements, and
advances from the Federal Home Loan Bank of Indianapolis. The affiliate Banks'
net income also is affected by its provision for loan losses, as well as the
level of its non-interest income, including loan fees and service charges, gains
on sales of loan and securities, deposit account service charges, commission
income and other miscellaneous income, and its non-interest expenses, such as
compensation and benefits, occupancy and equipment expense, deposit insurance
premiums and miscellaneous other expenses, and income tax expense.
CHANGES IN FINANCIAL CONDITION
GENERAL. At December 31, 1997, the Company's assets which are primarily those
assets of the affiliate Banks totaled $254.1 million, as compared to $237.6
million and $215.7 million at December 31, 1996 and 1995 respectively. Total
assets increased by $16.5 million or 6.9 % from December 31, 1996 to December
31, 1997 and by $21.8 million or 10.1% from December 31, 1995 to December 31,
1996. The growth rate of the Company in 1996 was attributable to the acquisition
of over $28.5 million in assets by the Heritage Bank affiliate in it's first
year of operations.
CASH AND INTEREST-BEARING DEPOSITS. Cash and interest-bearing deposits with
banks amounted to $11.6 million, $11.0 million and $17.3 million at December 31,
1997, 1996, and 1995, respectively. Short term liquidity remained steady between
1997 and 1996, and were reduced by $6.3 million from 1995 to 1996 by utilizing
Federal Home Loan Bank advances for any short term funding needs.
INVESTMENT SECURITIES. Investment securities (including investment securities
classified as available for sale) consist primarily of U.S. Government and
agency obligations and totaled to $66.7 million, $56.8 million, and $38.7
million at December 31, 1997, 1996, 1995 respectively. Total outstandings
increased by $9.9 million or 17.4%, in 1997 and $18.2 million or 46.9% in 1996
which reflected management's decision to increase the base of intermediate term
liquidity for use in funding high quality loans in the future.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities, which consist primarily
of securities which are insured or guaranteed by the Federal Home Loan Mortgage
Corporation (FHLMC), the Federal National Mortgage Association (FNMA) or the
Government National Mortgage Association (GNMA), decreased by $1.5 million to
$24.3 million during the twelve months ended December 31, 1997 and decreased by
$9.2 million to $25.8 million during the year ended December 31, 1996. The
decline in outstanding balances in 1997 is a direct result of management's
intent to shift the asset mix from mortgage-backed securities into higher
yielding assets in the loan portfolio.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial loan balances $49,732 $37,145 $15,034 $8,855 $5,150
</TABLE>
9
<PAGE>
LOANS RECEIVABLE. Loans Receivable (including loans held for sale) amounted to
$143.8 million at December 31, 1997, $136.8 million at December 31, 1996 and
$118.5 million at December 31, 1995. Increases of $7.0 million in 1997 and $18.4
million in 1996 resulted as the Company continued to focus on increasing the
yield on earning assets by originating and retaining high quality mortgage,
consumer and commercial/76 business loans.
ALLOWANCE FOR LOAN LOSSES. At December 31, 1997, the Company's allowance for
loan losses as required by regulation for the affiliate Banks totaled $837,000,
an increase of $181,000 from the level maintained at December 31, 1996 and a
$236,000 increase from the level maintained at December 31, 1995. At December
31, 1997, the Company's allowance represented .58% of the total loan portfolio
(including loans classified as held for sale).
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial loan balances 0.50% 0.30% 0.10% 0.53% 0.62%
</TABLE>
DEPOSITS. Deposits totaled $186.0 million at December 31, 1997, as compared to
$176.6 million at December 31, 1996, and $168.1 million at December 31, 1995.
The affiliate Banks do not generally engage in sporadic increases or decreases
in interest rates paid or offer the highest rates available in its deposit
market except upon specific occasions when market conditions have created
opportunities to attract longer term deposits.
FEDERAL HOME LOAN BANK ADVANCES. Advances from the FHLB of Indianapolis amounted
to $27.0 million, $23.0 million and $21.1 million at December 31, 1997, 1996,
and 1995 respectively. The increase in FHLB advances during these periods
reflected the attractive rates offered on such advances as well as management's
strategy to occasionally fund specific investments with FHLB advances which are
matched to the term of such investments at a positive interest rate spread. The
weighted average rate on FHLB advances amounted to 5.76%, 5.75%, and 5. 68% at
December 31, 1997, 1996, and 1995. The Banks use FHLB advances to fund lending
and investment activities, withdrawals from deposit accounts and other ordinary
course of business activities.
STOCKHOLDERS' EQUITY. Stockholders' equity increased from $25.4 million at
December 31, 1995 to $ 26.1 million at December 31, 1996, and further increased
to $27.7 million at December 31, 1997.
10
<PAGE>
RESULTS OF OPERATIONS
GENERAL. The earnings of the Company depend primarily on net interest income.
Net interest income is a function of interest rate spread, which is the
difference between the average yield earned on interest earning assets and the
average rate paid on interest bearing liabilities, as well as a function of the
average balance of interest earning assets as compared to interest bearing
liabilities.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income $2,386 $1,614 $1,896 $1,643 $1,936
Net income
excluding special SAIF
assessment and effect
of income tax change* $2,386 $2,292 $1,896 $1,643 $1,936
</TABLE>
* See note at bottom of page 4.
The Company reported net income of $2.4 million, $1.6 million, and $1.9 million
for the years ended December 31, 1997, 1996, and 1995, respectively. Net
interest income has continued to improve each year as the asset and deposit mix
has changed to that of a traditional retail bank structure with higher
concentrations of consumer and small business loans on the asset side and lower
cost transaction accounts on the liability side of the balance sheet. In 1996, a
one time special assessment of $1.1 million was paid to the Savings Association
Insurance Fund (SAIF) as required by all SAIF insured financial institutions.
The after tax impact of this charge reduced earnings for the year by
approximately $678,000.
INTEREST INCOME. The weighted average yield on interest earning assets has
improved from 7.09% for the year 1995 to 7.54% at year end 1997. Interest income
during this period grew from $14.1 million to $16.2 million to $18.1 million in
1995, 1996, and 1997 respectively. Both the volume and yield increases are a
result of the shift in the asset mix from investments to high quality loans.
INTEREST EXPENSE. Controlling the cost of our sources of funds is one of the
Company's primary objectives. The weighted average rate paid on all interest
bearing liabilities has grown from 4.60% in 1995 to 4.81% in 1997. However, the
trend of the overall cost of funds by year-end 1997 was down. At December 31,
1997, the average cost of funds fell to 4.79%. Through the utilization of
strategic pricing and funding alternatives provided by the Federal Home Loan
Bank Advance program, interest expense has been minimized after consideration of
the interest rate risk and balance sheet matching implications.
NET INTEREST INCOME. Net interest income improved each year and totaled $7.5
million, $6.7 million and $5.8 million for 1997, 1996, and 1995, respectively.
The net yield has grown steadily during the past three years, growing from 2.94%
in 1995 to 3.05% in 1996. At the end of 1997, the net yield had grown to 3.14%.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to earnings to
bring the total allowance for loan losses to a level considered appropriate by
management based on historical experience, the volume and type of lending
conducted by the affiliate Banks, the status of past due principal and interest
payments, general economic conditions and inherent credit risk related to the
collectability of the Banks' loan portfolio. During 1997, the allowance for loan
loss account was increased by $210,000, while an addition of $67,000 was applied
in 1996.
11
<PAGE>
NON INTEREST INCOME. The Company's principal sources of non interest income
include loan fees recognized when loans are sold in the secondary market, loan
origination fees, loan servicing income on loans sold where the Company has
retained servicing, miscellaneous fees charged for depository services offered
and commissions earned on the sale of alternative investments. Steady growth in
total non interest income from $985,000 in 1995 to $1,430,000 in 1997 has
occurred. Over 84% of the sustained increase in non interest income revenues
from 1995 to 1997 is attributable to increases in loan related fees and
commissions generated.
NON INTEREST EXPENSES. Total non interest expenses in 1997 decreased by
approximately $906,000 from 1996, and increased by $2,083,000 in 1996 as
compared to 1995. The substantial decrease in expenses from 1996 to 1997 is
attributable to a one time assessment of $1,123,000 on the deposits of Community
Bank of Southern Indiana levied by the Federal Deposit Insurance Corporation to
re-capitalize the Savings Association Insurance Fund (SAIF) to required levels.
Excluding this assessment, non interest expenses increased $217,000 from 1996 to
1997. The large increase from 1995 to 1996 is attributable to the SAIF
assessment and over $950,000 in non-interest expenses that were incurred by the
Heritage Bank of Southern Indiana affiliate in 1996 during it's first year of
operations.
The principal category of the Company's non interest expenses is compensation
and benefits, which increased by $446,000 or 17.1% during 1997and by $642,000 or
32.8% during 1996. The increase in 1997 compensation and benefits was primarily
attributable to two factors. First, the Company recognized increased expense
associated with the curtailment of its defined benefit pension plan. Second, new
employees were hired in the areas of: business services, marketing, and internal
audit. The majority of the 1996 increase occurred as a direct result of
operations commencing at the Heritage Bank affiliate.
In 1997, occupancy and equipment expenses rose only 22,000, or 4.4%. In 1996,
the Company installed and updated computer systems at the Heritage Bank and
Community Bank affiliates and holding company support areas. Although purchased
in 1995, the Heritage Bank facility had a full year of occupancy expenses in
1996. Because of these two situations, occupancy and equipment expenses rose by
30.6% or approximately 110,000 in 1996.
The Company experienced no losses on foreclosed real estate in 1997, 1995, or
1996.
Continued efforts to utilize automation and electronic methods of operation
resulted in an increase of 10.6% or $44,000 in data processing service expense
in 1997. This increase was less than the previous year's increase, however,
which was impacted by the initial systems installation at the Heritage Bank
affiliate. The data processing expenditure increase for 1996 amounted to
$98,000, or 31.0%.
Other expenses including advertising, postage, forms and supplies, professional
fees and supervisory assessments decreased by $36,000 in 1997 and increased by
$128,000 in 1996.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
(In thousands)
<S> <C> <C> <C> <C> <C>
Efficiency ratio 55.22% 71.60% 53.70% 59.07% 53.83%
Efficiency ratio
excluding special SAIF
assessment and effect
of income tax change* 55.22% 57.52% 53.70% 59.07% 53.83%
</TABLE>
* See note at bottom of page 4.
INCOME TAXES. Federal and state income tax expense totaled $1,513,000 in 1997,
and $652,092 in 1996. The effective tax rates amounted to 38.8% and 28.8% in
1997 and 1996, respectively. The lower tax rate in 1996 was attributable to a
deferred income tax credit of $213,000 due to a change in the method of
accounting for the bad debt deduction. Without this credit, 1996's tax rate was
38.2%.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity levels are adjusted in order to meet funding needs for deposit
outflows, payment of real estate taxes escrowed on mortgage loans, repayment of
borrowings, loan commitments and to meet asset/liability objectives. The Banks
primary sources of funds are deposits, amortization of loan and mortgage backed
securities, FHLB of Indianapolis advances, maturities of investment securities
and other short term investments and funds from operations. While scheduled loan
and mortgage backed securities repayments are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Banks manage the
pricing of their deposits to maintain a steady deposit balance.
The Banks' liquidity, represented by cash and cash equivalents, is a product of
its operating, investing and financing activities. The primary source of cash
was derived from financing activities.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
(In Thousands)
<S> <C> <C>
Net Income ......................................... $ 2,386 $ 1,614
Adjustments to reconcile net income
to net cash provided by operating activities ...... 257 229
Net cash provided by operating activities .......... 2,643 1,843
Net cash used in investing activities .............. (15,235) (21,322)
Net cash provided by financing activities .......... 14,032 20,191
Net increase (decrease) in cash and cash equivalents 1,440 712
Cash and cash equivalents at beginning of period ... 3,655 2,943
Cash and cash equivalents at end of period ......... 5,095 3,655
</TABLE>
Liquidity management is both a daily and long term function of business
management. If the Banks require funds beyond their ability to generate them
internally, borrowing agreements exist with the Federal Home Loan Bank (FHLB) of
Indianapolis which provides an additional source of funds. At December 31, 1997,
Community Bank had $27.0 million in outstanding advances from the FHLB of
Indianapolis.
As of December 31, 1997, the Federal Deposit Insurance Corporation categorized
the subsidiary Banks as well capitalized under the established capital adequacy
guidelines. Both affiliate Banks exceeded the required capital to risk weighted
assets, Tier 1 capital to risk weighted assets, and Tier 1 capital to average
assets ratios.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Holding Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which requires the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Banks' operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Banks are monetary. As a result, interest rates have a
greater impact on the Banks' performances than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
NO CHANGE OF ACCOUNTANTS
There has been no Current Report on Form 8-K filed within 24 months prior to the
date of the most recent financial statements reporting a change of accountants
and/or reporting disagreements on any matter of accounting principle or
financial statement disclosure.
13
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and 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, when
available. Management does not believe that the use of month-end balances
instead of daily average balances has caused any material difference in the
information presented.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ----------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan portfolio (1) ............... 142,558 11,761 8.25% 128,034 10,346 8.08% 116,279 9,096 7.82%
Mortgage-backed
securities .................... 24,117 1,524 6.32 30,837 1,969 6.39 37,153 2,393 6.44
Other securities ............... 61,471 4,149 6.75 53,656 3,459 6.45 36,932 2,107 5.71
Interest-bearing deposits
banks ............................ 11,818 668 5.65 8,442 459 5.44 8,219 483 5.88
Total interest-earning
assets ....................... 239,269 18,102 7.54 220,969 16,234 7.35 198,583 14,079 7.09
Non-interest-earning
assets ........................... 9,305 7,994 8,230
Total assets ..................... 249,269 228,963 206,813
Interest-bearing
liabilities:
Deposits ...................... 183,875 8,596 4.67 179,914 8,305 4.62 163,113 7,372 4.52
Borrowings .................... 36,664 2,021 5.51 20,995 1,179 5.62 15,982 874 5.47
Total interest-bearing
liabilities ................... 220,539 10,617 4.81 200,910 9,484 4.72 179,095 8,246 4.60
Non-interest-bearing
liabilities ................. 1,615 2,398 2,874
Total liabilities ............ 222,154 203,308 181,970
Stockholders' equity ............. 27,115 25,655 24,843
Total liabilities and
stockholders' equity......... 249,269 228,963 206,813
Net interest income .............. 7,485 6,750 5,833
Interest rate spread(2) .......... 2.73% 2.63% 2.49%
Net yield on interest-
earning assets(3) ............. 3.12% 3.05% 2.94%
Ratio of average interest-
earning assets to
average interest-bearing
liabilities ................... 108.81% 109.98% 110.88%
</TABLE>
(1) Average balances include non-accrual loans.
(2) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
14
<PAGE>
YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, the weighted
average yields earned on the Company's assets, the weighted average interest
rates paid on the Company's liabilities, together with the net yield on
interest-earning assets.
<TABLE>
<CAPTION>
At December 31, Year Ended December 31,
--------------- -----------------------
1997 1997 1996 1995
--------------- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield on loans ................ 8.24% 8.25% 8.08% 7.82%
Weighted average yield on mortgage-backed
securities .................................... 6.52 6.32 6.39 6.44
Weighted average yield on investment
securities .................................... 6.79 6.75 6.45 5.71
Weighted average yield on other
interest-earning assets ....................... 5.68 5.65 5.44 5.88
Weighted average yield on all
interest-earning assets ....................... 7.60 7.54 7.35 7.09
Weighted average rate paid on deposits ......... 4.65 4.67 4.62 4.52
Weighted average rate paid on borrowings ....... 5.46 5.51 5.62 5.47
Weighted average rate paid on all
interest-bearing liabilities .................. 4.79 4.81 4.72 4.60
Interest rate spread (spread between weighted
average rate on all interest-earning assets
and all interest-bearing liabilities) ......... 2.81 2.73 2.63 2.49
Net yield (net interest income as a
percentage of average interest-earning assets.) 3.18 3.12 3.05 2.94
</TABLE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Banks for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(change in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume); and (iv) the net
change.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 vs. 1996 1996 vs. 1995
Increase(Decrease) Due to Increase(Decrease) Due to
Net Net
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans ...................................... $ 1,174 217 24 1,415 $ 920 300 30 1,250
Mortgage-backed securities ................. $ (429) (20) 4 (445) $ (407) (21) 4 (424)
Other debt securities ...................... $ 504 163 23 690 $ 954 274 124 1,353
Interest bearing deposits with
banks.................................. $ 184 18 7 209 $ 13 (36) (1) (24)
Total interest-earning assets .............. $ 1,433 378 58 1,869 $ 1,480 517 157 2,155
Interest Expense:
Deposits .................................. $ 183 106 2 291 $ 759 157 16 933
Borrowings ................................. $ 880 (22) (16) 842 $ 274 24 7 305
Total interest-bearing liabilities........ $ 1,063 84 (14) 1,133 $ 1,033 181 23 1,238
Net interest income ........................ $ 370 294 72 736 $ 447 336 134 917
</TABLE>
15
<PAGE>
PENDING MERGER
On December 17, 1997, the Company entered into an agreement to merge with NCF
Financial Corporation (NCF), located in Bardstown, Kentucky. This agreement
calls for an exchange of 0.935 shares of the Company's common stock for each
share of NCF common stock. NCF is the parent company of NCF Bank and Trust Co.,
a Kentucky state-chartered commercial bank. The transaction is subject to
regulatory and shareholder approvals. The transaction is expected to be
completed in the second quarter of 1998. For further information regarding the
pending merger please see Note 2 to the Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
The Company has developed a plan of action to ensure that its operational and
financial systems will not be adversely affected by software or hardware
failures caused by the inability of such software and hardware to handle
calculations involving dates after December 31, 1999. While the Company believes
that it is doing everything possible to ensure Year 2000 compliance, it is to
some extent dependent upon vendor cooperation. The Company is requiring its
computer hardware and software vendors to represent that their products are or
will be Year 2000 compliant. At this time the Company estimates that it will
incur $300,000 in expenses related to Year 2000 compliance. Any hardware or
software failures due to Year 2000 noncompliance could result in additional,
unestimable expenses to the Company. The Company does not internally program any
major operating system of the Company.
16
<PAGE>
DIRECTORS AND OFFICERS OF COMMUNITY BANK SHARES OF INDIANA, INC.
Community Bank Shares of Indiana, Inc. has always taken its responsibility as a
corporate citizen to heart. The following section offers a look at some of the
ways in which our directors and officers are involved in the communities we
serve.
C. THOMAS YOUNG has served as the Chairman of the Board of the Holding Company
and Community Bank since April, 1991 and was initially appointed to the Board of
Directors of Community Bank in 1985. Mr. Young has been a partner of Young,
Lind, Endres & Kraft, Attorneys at Law, New Albany, Indiana, (which serves as
general counsel to the Holding Company ) since 1968, and a partner in Shea and
Young, a real estate investment company, located in New Albany, Indiana, since
January, 1993. Mr. Young has also been a member of the Board of Directors of
Heritage Bank of Southern Indiana since its formation.
ROBERT E. YATES has served as President and Chief Executive Officer, and
Director of Community Bank since 1988 and of the Holding Company since its
formation. Mr. Yates has also been a member of the Board of Directors of
Heritage Bank of Southern Indiana, and has served as its President and Chief
Executive Officer since its formation.
GARY L. LIBS was initially elected to the Board of Directors of Community Bank
in 1989 and has served on the Board of Directors of the Holding Company since
its formation. Mr. Libs has been the President of Libs Paving Co., Inc., Floyds
Knobs, Indiana, since 1972, and has been the President and Chief Executive
Officer of Asphalt Supply Co., Jeffersonville, Indiana, since April, 1992.
JAMES W. ROBINSON was initially elected to the Board of Directors of Community
Bank in 1987 and has been a director of the Holding Company since its formation.
Mr. Robinson is the Chairman, a director and stockholder of Caldwell Tanks,
Inc., a tank manufacturer located in Louisville, Kentucky, and is the Secretary
and a director of Stem Wood Corp., a lumber and veneer manufacturer located in
New Albany, Indiana. Mr. Robinson is also a stockholder, director, and retired
Chairman of Robinson-Nugent, an electronics hardware manufacturer located in New
Albany, Indiana, and is the Chairman and a director of C.T. Services, Inc., an
engineering company located in Jeffersonville, Indiana. He is a director of The
Hughes Group, a Jeffersonville, Indiana holding company for construction related
companies, Vice President of Norwec, Inc., a Toronto, Canada subsidiary of the
Caldwell Group, Ltd., and is a director and Chairman of CTI Acquisition, Inc. of
Louisville, Kentucky.
TIMOTHY T. SHEA was initially elected to the Board of Directors of Community
Bank in 1986 and has been a director in the Holding Company since its formation.
Mr. Shea is currently the President and Chief Operating Officer of Vermont
American Corp., a manufacturer and marketer of power tool accessories and home
storage products located in Louisville, Kentucky. He previously served as
Vermont American's Vice President and Chief Financial Officer, and has been
associated with Vermont American Corp. since 1978. He has also been a partner in
Shea and Young, a real estate investment company, located in New Albany,
Indiana, since 1993.
ROBERT J. KOETTER, SR. was initially elected to the Board of Directors of
Community Bank in 1990 and has been on the Board of Directors of the Holding
Company since its formation. Mr. Koetter has been a 38% owner of the Koetter
Construction Company, Floyd Knobs, Indiana, since 1960, a 50% owner of M.E.K.A.,
Inc., a development company in Floyd Knobs, Indiana, since 1989, and is a 50%
owner in KP Property, a 50% owner of the Floyds Knobs, Indiana Highlander Point
Our Own Hardware Store, and a partner in Koetter Development, Floyds Knobs,
Indiana.
GORDON HUNCILMAN was initially elected to the Board of Directors in 1997. He has
been associated with Bert R. Huncilman & Son, Inc., a manufacturing company
located in New Albany, Indiana, since 1978, most recently as President.
KERRY M. STEMLER was initially elected to the Board of Directors in 1997. He is
the President of KM Stemler Co., Inc., a construction company, located in New
Albany, Indiana, since 1981.
DALE OREM is the Chairman of the Board of Directors of Heritage Bank. He is a
former mayor of Jeffersonville, Indiana. Mr. Orem is a member of the officiating
team for the National Football League. He is the owner of The Locker Room, a
sporting goods store located in Jeffersonville.
STEVEN STEMLER is the President of Stemler and Sons, Inc., a plumbing supply
business located in Jeffersonville, Indiana, and is President of Stemler
Irrigation, Inc. which is also located in Jeffersonville.
JAMES M. STUTSMAN has served as Senior Vice President of Community Bank since
1990 and Chief Financial Officer since 1989. He has been affiliated with
Community Bank since 1978.
M. DIANE MURPHY has served as Senior Vice President and Secretary of Community
Bank since November, 1994. She has been affiliated with Community Bank since
1967.
STANLEY L. KROL, Senior Vice President and Senior Operations Officer of the
Company, is a CPA with 24 years of experience in the financial services
industry. He joined the Company on March 18, 1996.
GRAY BALL, Senior Vice President and Earning Assets Administrator, has been in
the financial services industry for 31 years, and joined Community Bank Shares
in 1998.
17
<PAGE>
DIRECTORS AND OFFICERS OF COMMUNITY BANK OF SOUTHERN INDIANA, INC.
The individuals listed on the previous page as officers and directors of
Community Bank Shares of Indiana, Inc., with the exception of Gray Ball, Steven
Stemler, and Dale Orem, are also officers and directors of Community Bank of
Southern Indiana.
GERALD KOETTER also serves on the board of directors of Community Bank. He is a
Vice President in Charge of Purchasing at Koetter Woodworking, and has been
associated with Koetter Woodworking for 19.5 years.
DIRECTORS OF HERITAGE BANK OF SOUTHERN INDIANA
In addition to Mr. Young, Mr. Yates, Mr. Steven Stemler, and Mr. Orem, who are
listed above, the following individuals are members of the Board of Directors of
Heritage Bank:
ROBERT PULLEN is the President of APEX Trailer Service, Inc. in Jeffersonville,
Indiana.
LARRY BURKE is the President, CEO, and a director of Robinson Nugent, Inc. of
New Albany, Indiana. He also serves as a director on the Floyd Memorial Hospital
Foundation in New Albany, Indiana.
R. WAYNE ESTOPINAL is the President of The Estopinal Group Architects in
Jeffersonville, Indiana.
GREG HUBER is the Chief Executive Officer of Huber Orchard and Winery, Inc. in
Galena, Indiana.
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held at 1:30 p.m., Tuesday, April 28,
1998, at the Robert E. Lee Retirement Inn, 201 East Elm, New Albany, Indiana.
General Counsel Special Counsel
Young, Lind, Endres & Kraft Elias, Matz, Tiernan, and Herrick, L.L.P.
126 W. Spring Street 734 15th St., N.W.
New Albany, Indiana 47150 Washington, D.C. 20005
Independent Auditor Transfer Agent
Monroe Shine & Co., Inc. Registrar and Transfer Company
222 East Market Street 10 Commerce Drive
New Albany, Indiana 47150 Cranford, New Jersey 07016
The common stock of Community Bank Shares of Indiana, Inc. is traded over the
counter under the NASDAQ Small Cap symbol of CBIN.
General Inquiries and Reports
The Holding Company is required to file an Annual Report on Form 10-K for its
fiscal year ended December 31, 1997 with the Securities Exchange Commission.
Shareholders may obtain copies of this annual report and the Holding Company's
quarterly reports, without charge, by contacting:
Pamela P. Echols
Director, Shareholder Relations
Community Bank Shares of Indiana, Inc.
P.O. Box 939
New Albany, Indiana 47151
(812)944-2224
In addition, shareholders may access the above referenced financial
information at the Securities and Exchange Commission's (SEC) internet site,
which is www.sec.gov.
18
<PAGE>
AFFILIATE BANKS:
COMMUNITY BANK OF
SOUTHERN INDIANA
Main Office Banking Center Highlander Point Banking Center
202 East Spring St. 701 Highlander Point Drive
New Albany, IN Floyds Knobs, IN
State Street Banking Center Clarksville Banking Center
480 New Albany Plaza 901 E. Highway 131
New Albany, IN Clarksville, IN
Charlestown Road Banking Center Heritage Square Banking Center
2626 Charlestown Road 102 Heritage Square
New Albany, IN Sellersburg, IN
BOARD OF DIRECTORS OF
COMMUNITY BANK OF SOUTHERN INDIANA
C. Thomas Young Gary L. Libs
Chairman of the Board Vice Chairman
Timothy T. Shea Robert J. Koetter Sr.
Director Director
James W. Robinson Gordon L. Huncilman
Director Director
Robert E. Yates Kerry M. Stemler
Director Director
Gerald Koetter
Director
SPECIAL CONSULTANT TO THE BOARD OF DIRECTORS
Edward Pinaire
OFFICERS OF
COMMUNITY BANK OF SOUTHERN INDIANA
Robert E. Yates James M. Stutsman
President and CEO Senior Vice President
Thomas Jones Stanley L. Krol
Senior Vice President, Senior Vice President
Business Services Secrecy Act Officer
M. Diane Murphy Pamela P. Echols
Senior Vice President, Secretary Assistant Secretary
Brian Brinkworth Linda Brock
Vice President, Internal Audit and
Business Services Security Officer
Vicki Rough Kathy Heckman
Assistant Vice President Business Services Officer
Jeff Cash Wanda Very
Assistant Vice President Assistant Vice President
Andrea Bogdon
Retail Banking Officer
HERITAGE BANK OF
SOUTHERN INDIANA
Main Office Banking Center Branch Banking Center
201 W. Court Avenue 5112 Highway 62
Jeffersonville, IN Jeffersonville, IN
BOARD OF DIRECTORS OF
HERITAGE BANK OF SOUTHERN INDIANA
Dale Orem Steven Stemler
Chairman Vice Chairman
Robert E. Yates Robert Pullen
Director Director
Larry W. Burke C. Thomas Young
Director Director
R. Wayne Estopinal Greg Huber
Director Director
OFFICERS OF HERITAGE BANK
OF SOUTHERN INDIANA
Dale Orem Pamela P. Echols
Corporate Secretary Assistant Corporate
Secretary
Robert E. Yates Margie Small
President, C.E.O., Assistant Vice President,
Treasurer Cashier, Security
Officer, Assistant
Corporate Secretary
Patrick Daily James Boone
Senior Vice President, Vice President,
Chief Credit Officer Compliance Officer
Lisa Lutgring Mary Pat Boone
Assistant Banking Center Manager, Vice President,
Credit Officer Heritage Financial
Services
Deanna Bielata
Operations Officer,
Heritage Financial Services
19
<PAGE>
MONROE SHINE & CO, INC.
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS
P.O. Box 1407
22 E. Market Street
New Albany, IN 47150
(812) 945-2311
Board of Directors and Stockholders
Community Bank Shares of Indiana, Inc.
New Albany, Indiana
We have audited the accompanying consolidated balance sheets of Community Bank
Shares of Indiana, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community Bank
Shares of Indiana, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Monroe Shine & Co., Inc.
MONROE SHINE & CO., INC.
February 2, 1998
20
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
ASSETS
<S> <C> <C>
Cash and due from banks ............................................... $ 5,094,458 $ 3,654,788
Interest bearing deposits with banks .................................. 6,504,281 7,321,191
Securities available for sale, at fair value:
Mortgage-backed securities .......................................... 882,691 1,029,384
Other debt securities ............................................... -- 1,502,144
Securities held to maturity:
Mortgage-backed securities (fair value $23,584,625; 1996 $24,689,307) 23,386,478 24,724,388
Other debt securities (fair value $66,675,123; 1996 $54,845,668) .... 66,653,946 55,345,643
Loans receivable, net.................................................. 143,819,161 136,835,108
Federal Home Loan Bank stock, at cost.................................. 1,575,000 1,250,000
Foreclosed real estate ................................................ -- 100,801
Premises and equipment ................................................ 3,685,415 3,543,620
Accrued interest receivable:
Loans ............................................................... 904,201 791,846
Mortgage-backed securities .......................................... 129,278 131,367
Other debt securities ............................................... 1,249,189 947,825
Other assets .......................................................... 199,006 393,213
Total Assets ...................................................... $ 254,083,104 $ 237,571,318
LIABILITIES
Deposits:
Non-interest bearing demand deposits ................................ $ 10,544,274 $ 13,802,911
Savings and interest bearing demand deposits ........................ 54,261,176 50,214,873
Time deposits ....................................................... 121,215,925 112,606,488
Total deposits .................................................... 186,021,375 176,624,272
Borrowed funds ........................................................ 39,141,859 33,701,568
Advance payments by borrowers for taxes and insurance.................. 192,486 207,564
Accrued interest payable on deposits .................................. 93,580 66,773
Other liabilities ..................................................... 982,650 898,074
Total Liabilities.................................................. 226,431,950 211,498,251
STOCKHOLDERS' EQUITY
Preferred stock without par value,
Authorized 5,000,000 shares, none issued ............................ -- --
Common stock of $.10 par value per share
Authorized 10,000,000 shares; issued 1,983,720 shares ............... 198,372 198,372
Additional paid-in capital ............................................ 11,792,988 11,785,829
Retained earnings-substantially restricted ............................ 15,721,323 14,165,902
Unrealized gain (loss) on securities available for sale, net of tax ... 2,752 (1,466)
Unallocated shares held by Employee Stock Ownership Plan
(ESOP) Trust ........................................................ (64,281) (75,570)
Total Stockholders' Equity ...................................... 27,651,154 26,073,067
Total Liabilities and Stockholders' Equity ...................... $ 254,083,104 $ 237,571,318
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Net
Unrealized
Gain
Common Common (Loss) on Unallocated
Stock Stock Additional Securities Shares Held
$.50 Par $.10 Par Paid-In Retained Available By ESOP
Value Value Capital Earnings For Sale Trust Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 $ 510,000 $ -- $ 1,918,694 $ 11,897,944 $ (7,999) $ -- $ 14,318,639
Net income -- -- -- 1,895,788 -- -- 1,895,788
Dividends to
minority stockholders
of Bank ($.25 per share) -- -- -- (125,000) -- -- (125,000)
Changes pursuant to conversion
and reorganization:
Exchange of 500,000
minority stockholder
shares of Bank for
972,007 common shares (250,000) 97,201 152,799 -- -- -- --
Cancellation of 520,000
common shares held by
Community Bank Shares,
M.H.C. and merger
with Bank (260,000) -- 265,859 -- -- -- 5,859
Issuance of 7,940 common
shares to ESOP Trust -- 794 78,606 -- -- (79,400) --
Issuance of 1,003,773
common shares -- 100,377 9,360,916 -- -- -- 9,461,293
Dividends paid ($.15 per share) -- -- -- (296,089) -- -- (296,089)
Shares released by ESOP Trust -- -- 5,955 -- -- 15,880 21,835
Net change in unrealized gain
(loss) on securities
available for sale -- -- -- -- 68,704 -- 68,704
Balances at December 31, 1995 -- 198,372 11,782,829 13,372,643 60,705 (63,520) 25,351,029
Net income -- -- -- 1,614,120 -- -- 1,614,120
Purchase of 2,000 common
shares of ESOP Trust -- -- -- -- -- (24,500) (24,500)
Dividends paid ($.42 per share) -- -- -- (820,861) -- -- (820,861)
Shares released by ESOP Trust -- -- 3,000 -- -- 12,450 15,450
Net change in unrealized gain
(loss) on securities
available for sale -- -- -- -- (62,171) -- (62,171)
Balances at December 31, 1996 -- 198,372 11,785,829 14,165,902 (1,466) (75,570) 26,073,067
Net income -- -- -- 2,385,762 -- -- 2,385,762
Dividends paid ($.42 per share) -- -- -- (830,341) -- -- (830,341)
Shares released by ESOP Trust -- -- 6,719 -- -- 11,729 18,448
Net change in unrealized gain
(loss) on securities
available for sale -- -- -- -- 4,218 -- 4,218
Balances at December 31, 1997 $ -- $ 198,372 $ 11,792,548 $15,721,323 $ 2,752 $ (63,841) $ 27,651,154
</TABLE>
See Notes to Consolidated Financial Statements
22
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
INTEREST INCOME
<S> <C> <C> <C>
Loans receivable .................................... $11,760,833 $10,346,456 $ 9,095,611
Securities:
Mortgage-backed securities ........................ 1,524,082 1,969,458 2,392,624
Tax exempt debt securities ........................ 138,194 81,995 51,943
Other debt securities ............................. 3,898,510 3,280,551 1,958,260
Federal Home Loan Bank dividends .................... 112,453 96,580 96,978
Interest bearing deposits with banks ................ 668,291 458,993 483,489
Total interest income ........................... 18,102,363 16,234,033 14,078,905
INTEREST EXPENSE
Deposits ............................................ 8,596,319 8,304,909 7,372,345
Customer repurchase agreements ...................... 586,867 94,516 --
Other borrowed funds ................................ 1,433,770 1,085,046 873,786
Total interest expense .......................... 10,616,956 9,484,471 8,246,131
Net interest income ............................. 7,485,407 6,749,562 5,832,774
Provision for loan losses ........................... 210,000 67,450 57,900
Net interest income after provision
for loan losses................................ 7,275,407 6,682,112 5,774,874
NON-INTEREST INCOME
Loan fees and service charges ....................... 454,486 411,997 365,546
Net realized securities gain ........................ -- 14,690 --
Net gain on sales of mortgage loans ................. 214,754 102,342 68,219
Service charges on deposit accounts ................. 385,810 366,387 301,487
Commission income ................................... 304,051 340,969 174,594
Net gain on sale of foreclosed real estate .......... 10,956 -- --
Other income ........................................ 60,117 60,605 75,541
Total non-interest income ....................... 1,430,174 1,296,990 985,387
NON-INTEREST EXPENSES
Compensation and benefits ........................... 3,046,162 2,600,041 1,958,152
Net occupancy........................................ 247,077 259,707 224,397
Equipment ........................................... 242,700 207,714 133,406
Deposit insurance premiums .......................... 102,561 1,484,508 379,359
Data processing service ............................. 457,473 413,783 315,631
Other ............................................... 710,904 747,212 619,436
Total non-interest expenses ..................... 4,806,877 5,712,965 3,630,381
Income before income taxes .......................... 3,898,704 2,266,137 3,129,880
Income tax expense .................................. 1,512,942 652,017 1,234,092
Net Income ...................................... $ 2,385,762 $ 1,614,120 $ 1,895,788
Net Income Per Common Share ..................... $ 1.21 $ .82 $ .96
Average Common Shares Outstanding ............... 1,977,697 1,977,626 1,976,950
</TABLE>
See Notes to Consolidated Financial Statements
23
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 2,385,762 $ 1,614,120 $ 1,895,788
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums and accretion of discounts
on securities, net .............................................. (98,477) (41,019) 148,317
Net realized securities gain ...................................... -- (14,690) --
Provision for loan losses ........................................ 210,000 67,450 57,900
Proceeds from mortgage loan sales ................................. 12,007,593 8,967,130 5,808,777
Mortgage loans originated for resale .............................. (11,822,791) (8,621,968) (5,740,434)
Net gain on sales of mortgage loans ............................... (214,754) (102,342) (68,219)
Gain on sale of foreclosed real estate ............................ 10,956 -- --
Depreciation expense .............................................. 294,956 247,684 170,903
ESOP compensation expense ......................................... 18,448 15,450 21,835
Increase in accrued interest receivable ........................... (411,630) (403,908) (228,352)
Increase (decrease) in accrued interest payable ................... 26,807 (34,488) (1,915)
(Increase) decrease in other assets ............................... 194,207 (12,477) 346,185
Increase in other liabilities ..................................... 42,135 162,100 127,263
Net Cash Provided By Operating Activities ..................... 2,643,212 1,843,042 2,538,048
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits in banks ....... 816,910 7,032,888 (939,007)
Proceeds from sales of securities available for sale ................ -- 4,396,492 --
Proceeds from maturities of securities available for sale ........... 1,500,000 15,100,000 5,469,805
Purchases of securities available for sale .......................... -- (1,500,000) --
Proceeds from maturities of securities held to maturity ............. 33,185,925 3,000,000 9,750,000
Purchase of securities held to maturity ............................. (48,050,130) (34,986,496) (19,084,987)
Principal collected on securities available for sale ................ 155,822 2,281,971 --
Principal collected on securities held to maturity .................. 4,992,288 2,762,357 4,149,314
Loan originations and principal payments on loans, net .............. (7,307,048) (18,839,842) (10,118,957)
Purchase of Federal Home Loan Bank stock ............................ (325,000) (18,700) --
Proceeds from sale of foreclosed real estate ........................ 232,792 44,533 104,462
Proceeds from sale of premises and equipment ........................ 300,770 -- --
Acquisition of premises and equipment ............................... (737,521) (596,017) (977,038)
Net Cash Used By Investing Activities ......................... (15,235,192) (21,322,814) (11,646,408)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits .............. 787,666 (3,465,782) (13,028,370)
Net increase in time deposits ....................................... 8,609,437 11,999,478 7,190,029
Net increase (decrease) in advance payments by borrowers
for taxes and insurance ........................................... (15,078) (99,665) 1,284
Net increase in retail repurchase agreements ........................ 1,440,291 10,701,568 --
Repayment of advances from Federal Home Loan Bank ................... (12,000,000) (13,099,044) (17,281,650)
Advances from Federal Home Loan Bank ................................ 16,000,000 15,000,000 22,780,000
Purchase of common stock by ESOP Trust .............................. -- (24,500) --
Issuance of common stock ............................................ -- -- 9,461,293
Cash received on merger of mutual holding company with Bank ......... -- -- 5,859
Dividends paid ...................................................... (790,666) (820,861) (421,089)
Net Cash Provided By Financing Activities ....................... 14,031,650 20,191,194 8,707,356
Net Increase (Decrease) in Cash and Due From Banks .................... 1,439,670 711,422 (401,004)
Cash and due from banks at beginning of year .......................... 3,654,788 2,943,366 3,344,370
Cash and Due From Banks at End of Year ................................ $ 5,094,458 $ 3,654,788 $ 2,943,366
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONVERSIONS, PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
On April 7, 1995, Community Bank of Southern Indiana (Community Bank) and its
parent, Community Bank Shares, M.H.C., a federal mutual holding company,
completed a conversion and reorganization whereby all stock of the bank was
issued to Community Bank Shares of Indiana, Inc. (the Company), a bank holding
company formed in the conversion. Simultaneously, the Company completed an
offering and sale of its common stock. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries, Community
Bank and Heritage Bank of Southern Indiana (Heritage Bank). All material
intercompany balances and transactions have been eliminated.
Heritage Bank, a newly organized state chartered commercial bank, began
operations on January 8, 1996.
On December 2, 1996, Community Bank completed a charter conversion from a
federal stock savings bank to a state chartered commercial bank.
In addition to general commercial banking, the bank subsidiaries engage in
mortgage banking and the sale of annuity investments and mutual funds through
seven offices in southern Indiana.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company has defined cash and
cash equivalents as those amounts included in the balance sheet caption "Cash
and due from banks."
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
foreclosed real estate, management obtains independent appraisals for
significant properties.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt securities not classified as held
to maturity and are stated at fair value. Amortization of premium and accretion
of discount are recognized in interest income using the interest method over the
remaining period to maturity, adjusted for anticipated prepayments. Unrealized
gains and losses, net of tax, on securities available for sale are reported as a
separate component of stockholders' equity until realized. Realized gains and
losses on the sale of securities available for sale are determined using the
specific identification method.
SECURITIES HELD TO MATURITY
Debt securities for which the Company has the positive intent and ability to
hold to maturity are carried at cost, adjusted for amortization of premium and
accretion of discount using the interest method over the remaining period to
maturity, adjusted for anticipated prepayments.
25
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(1 - continued)
MORTGAGE LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or approximate market value. Net
unrealized losses are recognized through a valuation allowance by charges to
income. Realized gains on sales of mortgage loans are included in non-interest
income.
LOANS
Loans receivable are stated at unpaid principal balances, less net deferred loan
fees and the allowance for loan losses. The real estate loan portfolio consists
primarily of long-term loans, collateralized by first mortgages on single-family
and multi-family residential properties located in the southern Indiana area and
commercial real estate loans. In addition to real estate loans, the Bank makes
commercial loans and consumer loans.
Loan origination fees and certain direct costs of underwriting and closing loans
are deferred and the net deferred fees and costs are recognized over the
contractual life of the underlying loans as an adjustment to interest income
using the interest method.
The accrual of interest is discontinued on a loan when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. The subsidiary banks do not accrue
interest on loans past due 90 days or more except when the estimated value of
collateral and collection efforts are deemed sufficient to ensure full recovery.
When a loan is placed on non-accrual status, previously accrued but unpaid
interest is deducted from interest income.
Interest payments received on nonaccrual loans, including specific impaired
loans, are recorded as a reduction of the loan principal balance, and interest
income is only recorded once principal recovery is reasonably assured.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specified impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense, and reduced by charge-offs, net of recoveries. Changes in
the allowance relating to impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties inherent in the estimation
process, management's estimate of credit losses inherent in the loan portfolio
and the related allowance may change in the near term.
LOAN SERVICING
Loan servicing fees are credited to income as monthly principal and interest
payments are collected on mortgages. Costs of loan servicing are charged to
expense as incurred.
FORECLOSED REAL ESTATE
Foreclosed real estate held for sale is carried at the lower of fair value minus
estimated costs to sell or cost. Costs of holding foreclosed real estate are
charged to expense in the current period, except for significant property
improvements, which are capitalized. Valuations are periodically performed by
management and an allowance is established by a charge to non-interest expense
if the carrying value exceeds the fair value minus estimated costs to sell. The
net income from operations of
foreclosed real estate held for sale is reported in non-interest income.
26
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(1 - continued)
PREMISES AND EQUIPMENT
The Company uses the straight line and accelerated methods of computing
depreciation at rates adequate to amortize the cost of the applicable assets
over their useful lives. Items capitalized as part of premises and equipment are
valued at cost. Maintenance and repairs are expensed as incurred. The cost and
related accumulated depreciation of assets sold, or otherwise disposed of, are
removed from the related accounts and any gain or loss is included in earnings.
MORTGAGE SERVICING RIGHTS
Effective January 1, 1996, the Company adopted SFAS No. 122, Accounting for
Mortgage Servicing Rights. This standard requires the recognition of rights to
service mortgage loans for others as separate assets, whether those rights are
acquired through loan origination activities or through purchase activities.
Additionally, capitalized mortgage servicing rights must be periodically
assessed for impairment based on the fair value of those rights. Capitalized
mortgage servicing rights are amortized in proportion to, and over the period
of, estimated net servicing income.
INCOME TAXES
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of available for sale
securities, allowance for loan losses, accumulated depreciation, prepaid pension
costs and accrued income and expenses for financial and income tax reporting.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled.
BENEFIT PLANS
The Company has a defined benefit pension plan covering all eligible employees.
The Company's policy is to fund pension costs accrued. The Company also provides
a qualified salary reduction plan and an employee stock ownership plan available
to all eligible employees.
STOCK-BASED COMPENSATION
Under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
the Company will measure and recognize compensation cost related to stock-based
compensation plans using the intrinsic value method and disclose the pro forma
effect of applying the fair value method contained in SFAS No. 123. Accordingly,
no compensation costs will be charged against earnings for stock options granted
under the Company's stock incentive plan.
ADVERTISING
Advertising costs are charged to operations when incurred.
NET INCOME PER COMMON SHARE
Net income per common share was calculated on the basis of the weighted average
number of common shares outstanding during each year. For 1995, net income per
common share was calculated as though the conversion and reorganization had
occurred on January 1, 1995. Unallocated shares held by the ESOP Trust are not
considered as outstanding for this purpose.
27
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(2) ACQUISITION
On December 17, 1997, the Company entered into an agreement to merge with NCF
Financial Corporation (NCF), located in Bardstown, Kentucky. Terms of the
agreement call for an exchange of 0.935 shares of the Company's common stock for
each share of NCF common stock. NCF is the parent company of NCF Bank and Trust
Co., a state-chartered commercial bank. NCF had total assets of $35.6 million
and stockholders' equity of $12.3 million at December 31, 1997 and net income of
$276,000 for the six months ended December 31, 1997. The transaction is subject
to regulatory and shareholder approvals. The transaction is expected to be
completed in the second quarter of 1998 and will be accounted for as a pooling
of interests.
NCF reported net income of $327,661, $397,790 and $316,553 for its fiscal years
ended June 30, 1997, 1996 and 1995, respectively. The following represents the
unaudited pro forma condensed combined balance sheet for the Company and NCF as
of December 31, 1997:
<TABLE>
<CAPTION>
Pro Forma Condensed Combined Balance Sheet (Unaudited)
(In thousands)
Assets:
<S> <C>
Cash and due from banks .................... $ 5,495
Interest bearing deposits with banks ....... 11,919
Securities ................................. 91,035
Loans receivable, net 171,829
Other assets ............................... 9,382
Total assets ............................. $289,660
Liabilities:
Deposits ................................... $209,005
Borrowings ................................. 39,142
Other liabilities .......................... 1,815
Total liabilities ........................ 249,962
Stockholders' equity ......................... 39,698
Total liabilities and stockholders' equity $289,660
</TABLE>
(3) RESTRICTION ON CASH AND DUE FROM BANKS
The subsidiary banks are required to maintain reserve balances on hand and with
the Federal Reserve Bank which are noninterest bearing and unavailable for
investment. During 1997, the average balance maintained to meet this requirement
was approximately $1,048,000.
28
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(4) DEBT SECURITIES
Debt securities have been classified in the consolidated balance sheets
according to management's intent.
The investment in debt securities at December 31, 1997 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1997:
<S> <C> <C> <C> <C>
Securities available for sale:
Mortgage-backed securities:
FNMA and GNMA certificates .......... $ 878,133 $ 4,558 $ -- $ 882,691
Securities held to maturity:
Mortgage-backed securities:
FHLMC, FNMA and
GNMA certificates ................. $ 1,722,053 $ 17,766 $ -- $ 1,739,819
Collateralized mortgage obligations . 3,340,927 22,657 33 3,363,551
FHLMC and FNMA REMIC ................ 18,323,498 201,843 44,086 18,481,255
23,386,478 242,266 44,119 23,584,625
Other debt securities:
Federal agency ...................... 64,005,973 129,304 199,429 63,935,848
Municipal ........................... 2,647,973 91,302 -- 2,739,275
66,653,946 220,606 199,429 66,675,123
Total securities held to maturity . $90,040,424 $ 462,872 $ 243,548 $90,259,748
December 31, 1996:
Securities available for sale:
Mortgage-backed securities:
FNMA and GNMA certificates .......... $ 1,033,955 $ 805 $ 5,376 $ 1,029,384
Other debt securities:
Federal agency ...................... 1,500,000 2,144 -- 1,502,144
Total securities available for sale $ 2,533,955 $ 2,949 $ 5,376 $ 2,531,528
Securities held to maturity:
Mortgage-backed securities:
FHLMC, FNMA and
GNMA certificates ................. $ 2,666,434 $ 11,129 $ 8,470 $ 2,669,093
Collateralized mortgage obligations . 498,564 10,845 -- 509,409
FHLMC and FNMA REMIC ................ 21,559,390 93,151 141,736 21,510,805
24,724,388 115,125 150,206 24,689,307
Other debt securities:
Federal agency ...................... 52,696,958 21,498 559,049 52,159,407
Municipal ........................... 2,648,685 47,934 10,358 2,686,261
55,345,643 69,432 569,407 54,845,668
Total securities held to maturity . $80,070,031 $ 184,557 $ 719,613 $79,534,975
</TABLE>
Federal agency securities include notes and debentures issued by FHLMC, FNMA,
FHLB, FFCB and SLMA.
At December 31, 1997 federal agency securities with an amortized cost of
$1,500,000 and a fair value of $1,505,156 were pledged to secure public
deposits.
Certain debt securities were pledged to secure retail repurchase agreements and
advances from the Federal Home Loan Bank at December 31, 1997. (See Note 8)
29
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(4 - continued)
The amortized cost and fair value of debt securities as of December 31, 1997, by
contractual maturity, are shown below. Expected maturities of mortgage-backed
securities may differ from contractual maturities because the mortgages
underlying the obligations may be prepaid without penalty.
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less .............. -- $ -- $ 4,500,000 $ 4,489,695
Due after one year through five years -- -- 10,134,640 10,078,206
Due after five years through ten years -- -- 38,005,974 38,061,094
Due after ten years .................. -- -- 14,013,332 14,046,128
-- -- 66,653,946 66,675,123
Mortgage-backed securities ........... 878,133 882,691 23,386,478 23,584,625
$ 878,133 $ 882,691 $90,040,424 $90,259,748
</TABLE>
Proceeds from sales of debt securities available for sale during the year ended
December 31, 1997 were $4,396,492. Gross gains of $19,896 and gross losses of
$5,206 were realized on those sales.
In November, 1995, the Financial Accounting Standards Board issued
implementation guidance on accounting for certain investments in debt and equity
securities. In accordance with this guidance, the Company reassessed the
appropriateness of the classification of all securities held at December 31,
1995. As a result of this reassessment, management made a one time
reclassification of certain federal agency and mortgage-backed securities from
the held to maturity category to the available for sale category. The amortized
cost of securities transferred to the available for sale category was
$7,638,017. The unrealized gain recognized on this transfer, net of tax, was
$60,705.
(5) LOANS RECEIVABLE
Loans receivable at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
Real estate loans:
<S> <C> <C>
Residential ................................ $ 82,183,808 $ 89,097,029
Residential construction ................... 1,981,350 3,184,086
Commercial real estate ..................... 21,802,911 16,954,367
Home equity lines of credit .................. 6,845,601 5,215,455
Commercial loans ............................. 27,929,434 20,190,907
Loans secured by deposit accounts ............ 873,837 593,238
Consumer loans ............................... 3,897,239 3,510,328
Gross loans receivable ................. 145,514,180 138,745,410
Less:
Undisbursed portion of loans in process .... 836,065 1,245,096
Deferred loan origination fees, net ........ 22,277 10,212
Allowance for loan losses .................. 836,676 654,994
1,695,018 1,910,302
Loans receivable, net ........................ $143,819,162 $136,835,108
</TABLE>
<TABLE>
<CAPTION>
Loans serviced for the benefit of others were as follows:
<S> <C>
December 31, 1997 $ 45,879,809
December 31, 1996 49,884,673
December 31, 1995 52,409,929
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $157,261 and $179,955 at December 31, 1997 and 1996,
respectively.
30
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(5 - continued)
<TABLE>
<CAPTION>
An analysis of the allowance for loan losses is as follows:
1997 1996 1995
<S> <C> <C> <C>
Beginning balances ............. $ 654,994 $ 600,291 $ 540,733
Provision ...................... 210,000 67,450 57,900
Recoveries ..................... 9,306 4,360 2,236
Loans charged-off .............. (37,624) (17,107) (578)
Ending balances ................ $ 836,676 $ 654,994 $ 600,291
</TABLE>
The subsidiary banks had no loans specifically classified as impaired at
December 31, 1997 and 1996.
The subsidiary banks have entered into loan transactions with certain directors,
officers and their affiliates (related parties). In management's opinion, such
indebtedness was incurred in the ordinary course of business on substantially
the same terms as those prevailing at the time for comparable transactions with
other persons and does not involve more than normal risk of collectibility or
present other unfavorable features.
<TABLE>
<CAPTION>
The following table represents the aggregate activity for related party loans
which exceeded $60,000 in total:
<S> <C>
Balance at December 31, 1996 ........................... $ 8,319,326
Adjustments ............................................ (134,172)
New loans .............................................. 5,484,232
Repayments ............................................. (5,719,681)
Balance at December 31, 1997 ........................... $ 7,949,705
</TABLE>
(6) PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Premises and equipment consisted of the following:
1997 1996
<S> <C> <C>
Land and land improvements ................... $ 965,247 $1,264,372
Office buildings ............................. 3,047,189 2,458,156
Furniture, fixtures and equipment ............ 1,139,499 1,108,492
Leasehold improvements ....................... 168,958 168,958
5,320,893 4,999,978
Less accumulated depreciation ................ 1,635,478 1,456,358
Net premises and equipment ............... $3,685,415 $3,543,620
</TABLE>
(7) DEPOSITS
The aggregate amount of time deposit accounts with balances of $100,000 or more
was approximately $29,566,000 and $32,086, 000 at December 31, 1997 and 1996,
respectively.
At December 31, 1997, scheduled maturities of time deposits were as follows:
<TABLE>
<CAPTION>
Year ending December 31:
(In thousands)
<S> <C>
1998 $ 78,145
1999 31,561
2000 8,417
2001 1,951
2002 and thereafter 1,142
Total $ 121,216
</TABLE>
31
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(7 - continued)
The subsidiary banks held deposits of approximately $3,545,000 for related
parties at December 31, 1997.
(8) BORROWED FUNDS
<TABLE>
<CAPTION>
Borrowed funds are summarized as follows:
1997 1996
---------------------- ----------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Retail repurchase agreements 4.77% $ 12,141,859 4.47% $ 10,701,568
Fixed rate advances from
Federal Home Loan Bank
maturing during the year
ending December 31:
1997 - - 5.75% 12,000,000
1998 5.75% 14,500,000 6.02% 10,000,000
1999 6.03% 3,500,000 5.50% 1,000,000
2000 5.68% 4,000,000 - -
2002 5.68% 5,000,000 - -
Totals $ 39,141,859 $ 33,701,568
</TABLE>
<TABLE>
<CAPTION>
Information concerning borrowings in 1997 and 1996 under retail repurchase
agreements is summarized as follows:
1997 1996
<S> <C> <C>
Weight average interest rate during the year 4.83% 4.11%
Average daily balance $12,140,694 $ 2,301,428
Maximum month-end balance during the year $13,913,000 $10,701,568
</TABLE>
Federal agency debt securities underlying the agreements at December 31, 1997:
Amortized cost $ 20,007,188
Fair value $ 19,955,573
Retail repurchase agreements represent overnight borrowings from deposit
customers and the debt securities sold under the repurchase agreements were
under the control of the subsidiary banks at December 31, 1997.
Community Bank has an overdraft line of credit agreement with the Federal Home
Loan Bank which provides a line of credit not to exceed $2,000,000. This
agreement expires on November 4, 1998. At December 31, 1997, Community Bank had
no borrowings under this agreement.
The advances and overdraft line of credit are secured under a blanket collateral
agreement. At December 31, 1997, eligible collateral included residential
mortgage loans with a carrying value of $71,313,019 and mortgage-backed and
other debt securities with an amortized cost of $58,023,930 and fair value of
$58,189,682 which were pledged as security under the agreement.
(9) BENEFIT PLANS
DEFINED BENEFIT PLAN:
The Company has a defined benefit pension plan covering substantially all
employees. The benefits are based on years of service and the employees' highest
average of total compensation for five consecutive years of employment. The
funding policy is to contribute annually at least the minimum amount required by
the Employee Retirement Income Security Act of 1974. Contributions are intended
to provide not only for benefits attributed to service to date but also for
those expected to be earned in the future. Contributions of $50,723 and $65,000
were made to the plan for the years ended December 31, 1996 and 1995,
respectively. No contribution was made to the plan for 1997.
32
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(9 - continued)
On August 31, 1997, the plan was amended whereby participation in the plan was
terminated effective as of that date. Vested benefits will be distributed to
participants in 1998. A loss of $29,649 associated with the curtailment of the
plan was recognized in 1997.
<TABLE>
<CAPTION>
Plan assets are stated at fair value and consist of the following:
1997 1996
<S> <C> <C>
Mutual fund investments ........................................................ -- $ 777,077
Certificate of deposit-Heritage Bank ........................................... 61,867 100,000
Cash equivalents ............................................................... 935,282 --
$ 997,149 $ 877,077
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth the plan's funded status and amounts recognized
in the consolidated financial statements based upon actuarial computations as of
December 31 for each year:
1997 1996
Actuarial present value of obligations:
<S> <C> <C>
Vested benefits .............................................................. $1,000,362 $ 673,691
Accumulated benefits ......................................................... $1,000,362 $ 699,431
Projected benefit obligation of service rendered to date ....................... $1,000,362 $ 936,089
Plan assets at fair value ...................................................... 997,149 877,077
Funded status-plan assets less than projected benefit obligation ............... 3,213 59,012
Unrecognized prior service credit .............................................. -- 22,327
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions ...................... -- (276,751)
Unrecognized net transition asset being amortized over 14 years ................ -- 97,978
Accrued (prepaid) pension expense $ ...................................... 3,213 $ (97,434)
</TABLE>
<TABLE>
<CAPTION>
The components of net pension expense for the years ended December 31 are as
follows:
1997 1996 1995
<S> <C> <C> <C>
Service cost-benefits earned during the period ................................. $ 84,651 $ 60,434 $ 47,448
Interest cost on projected benefit obligation .................................. 70,973 62,178 56,662
Actual return on plan assets ................................................... (159,757) (94,954) (60,963)
Net amortization and deferral .................................................. 75,131 32,254 (1,017)
Net pension expense $ ...................................................... 70,998 $ 59,912 $ 42,130
</TABLE>
<TABLE>
<CAPTION>
Assumptions used in determining the actuarial present value of the projected
benefit obligations and net pension expense were as follows:
1997 1996 1995
<S> <C> <C> <C>
Weighted average discount rate ................................................. 7.00% 7.00% 7.00%
Rate of increase in future compensation levels ................................. 4.50% 4.50% 4.50%
Long-term rate of return on assets ............................................. 9.00% 9.00% 9.00%
</TABLE>
33
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(9 - continued)
EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has established a leveraged employee stock ownership plan (ESOP)
covering substantially all employees. The ESOP Trust has acquired shares of
company common stock financed by term loans with the Company. These employer
loans and the related interest income are not recognized in the consolidated
financial statements as the debt is serviced from Company contributions and all
dividends on shares held by the ESOP Trust. Dividends payable on allocated
shares are charged to retained earnings and are satisfied by the release of
shares to participant accounts. Dividends payable on unallocated shares are not
considered dividends for financial reporting purposes. Shares held by the ESOP
Trust are allocated to participant accounts based on the ratio of the current
year principal and interest payments to the total of the current year and future
years principal and interest to be paid on the employer loans.
Compensation expense is recognized in the consolidated financial statements
based on the average fair value of shares allocated to participant accounts
during the year with a corresponding credit to stockholders' equity.
Compensation expense recognized for 1997 and 1996 amounted to $18,448 and
$15,450, respectively.
<TABLE>
<CAPTION>
Company common stock held by the ESOP Trust at December 31, were as follows:
1997 1996
<S> <C> <C>
Shares released for allocation ...... 3,827 2,788
Shares committed to be released ..... 1,039 965
Unallocated shares .................. 5,035 6,187
Total shares held by ESOP Trust 9,901 9,940
Fair value of unallocated shares .... $106,994 $ 79,658
</TABLE>
Defined Contribution Plan:
The Company has a contributory defined contribution plan available to all
eligible employees. The Company contributed $23,095, $15,856 and $10,704 to the
plan for the years ended December 31, 1997, 1996 and 1995, respectively.
(10) STOCK-BASED COMPENSATION PLAN
In 1997, the Company adopted a stock incentive plan (the "Plan") that provides
for the granting of incentive stock options, nonqualified stock options, stock
appreciation rights and performance share awards. A total of 198,372 shares of
common stock are available for grant under the Plan at December 31, 1997. Awards
under the Plan are available for grant to directors and key employees.
STOCK OPTIONS:
Under the Plan, incentive and nonqualified stock options are granted at exercise
prices not less than the fair market value of the common stock on the date of
grant. All options granted under the Plan shall become vested and exercisable at
the rate determined by the Board of Directors at the date of grant. Options
granted under the Plan expire not more than ten years after the date of grant.
Payment of the option price may be in cash or shares of common stock at fair
market value on the exercise date. Non-employee directors are eligible to
receive only nonqualified stock options. At December 31, 1997, no options had
been granted under the Plan.
STOCK APPRECIATION RIGHTS:
The Plan provides for the grant of stock appreciation rights to optionees
whereby an optionee may surrender any exercisable stock option, or portion
thereof, in return for payment in cash and/or common stock at fair market value.
Stock appreciation rights relating to incentive stock options must be granted
concurrently with the incentive stock options. Stock appreciation rights
relating to nonqualified stock options may be granted concurrently with the
option or any time thereafter which is prior to the exercise or expiration of
such options. Compensation cost will be recognized each year representing the
appreciation in the value of such rights over the periods in which they become
exercisable.
34
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(10 - continued)
PERFORMANCE SHARE AWARDS:
Pursuant to the Plan, the company may grant performance share awards to
employees for up to 20,000 shares of common stock. The level of performance
shares eventually distributed is contingent upon the achievement of specific
performance criteria within a specified award period set at the grant date.
The compensation cost attributable to these awards is based on the fair market
value of the shares distributed at the end of the specified performance period.
In lieu of shares of common stock, the Company may distribute cash in an amount
equal to the fair market value of the common stock award. The compensation cost
is recognized over the specified performance period. At December 31, 1997, no
awards had been granted.
(11) INCOME TAXES
The Company files consolidated income tax returns with its subsidiaries, with
each charged or given credit for applicable tax as though separate returns were
filed.
<TABLE>
<CAPTION>
The components of income tax expense were as follows:
1997 1996 1995
<S> <C> <C> <C>
Current ........................................... $ 1,643,976 $ 961,298 $ 1,108,683
Deferred (credit) ................................. (131,034) (309,281) 125,409
Totals ........................................ $ 1,512,942 $ 652,017 $ 1,234,092
Tax expense applicable to security transactions $ -- $ 5,819 $ --
</TABLE>
<TABLE>
<CAPTION>
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1997 and 1996 were as follows:
1997 1996
Deferred tax (assets) liabilities:
<S> <C> <C>
Deferred loan fees and costs .............................. $ 45,239 $ 49,623
Prepaid pension expense ................................... -- 38,594
Mortgage servicing rights ................................. 20,578 11,954
Deferred start-up costs for tax purposes .................. (18,626) (24,835)
Allowance for loan losses and tax bad debt reserve ........ (262,465) (190,770)
Depreciation .............................................. 144,427 178,593
Net unrealized gain (loss) on securities available for sale 1,805 (961)
Other ..................................................... 5,158 4,952
Net deferred tax (asset) liability ...................... $ (63,884) $ 67,150
</TABLE>
The reconciliation of income tax expense with the amount which would have been
provided at the federal statutory rate of 34 percent follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Provision at statutory rate ...................... $ 1,325,559 $ 770,487 $ 1,064,159
State income tax-net of federal tax benefit ...... 222,997 109,575 169,885
Nontaxable interest and dividend income .......... (42,639) (25,114) (28,098)
Tax effect of change in tax law related to the
allowance for loan losses and bad debt deduction -- (212,589) --
Other ............................................ 7,025 9,658 28,146
Net provision for income taxes ............. $ 1,512,942 $ 652,017 $ 1,234,092
Effective tax rate ............................... 38.8% 28.8% 39.4%
</TABLE>
35
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(11 - continued)
Prior to January 1, 1996, Community Bank was permitted by the Internal Revenue
Code to deduct from taxable income an annual addition to a statutory bad debt
reserve subject to certain limitations. Retained earnings at December 31, 1997
includes approximately $4,291,000 of cumulative deductions for which no deferred
federal income tax liability has been recorded. Reduction of these reserves for
purposes other than tax bad debt losses or adjustments arising from carryback of
net operating losses would create income for tax purposes subject to the then
current corporate income tax rate. The unrecorded deferred liability on these
amounts was approximately $1,459,000 at December 31, 1997.
Recently enacted federal legislation repealed the reserve method of accounting
for bad debts by qualified thrift institutions for tax years beginning after
December 31, 1996. As a result, Community Bank will no longer be able to
calculate the annual addition to the statutory bad debt reserve using the
percentage-of-taxable-income method. Instead, Community Bank will be required to
compute its federal tax bad debt deduction based on actual loss experience over
a period of years. The legislation requires Community Bank to recapture into
taxable income over a six-year period its post-1987 additions to the statutory
bad debt reserve, thereby generating additional tax liability. At December 31,
1997, the remaining balance of the post-1987 reserves totaled $143,977 for which
a deferred tax liability of $48,952 has been recorded.
The legislation also provides that Community Bank will not be required to
recapture its pre-1988 statutory bad debt reserves if it ceases to meet the
qualifying thrift definitional tests and if the Bank continues to qualify as a
"bank" under existing provisions of the Internal Revenue Code.
(12) STOCKHOLDERS' EQUITY AND DIVIDENDS
The dividends which the subsidiary banks may pay to the Company are subject to
various legal and regulatory restrictions. At December 31, 1996, retained
earnings of Community Bank available for the payment of dividends without
approval by the state regulatory authority were approximately $2,026,000.
Heritage Bank does not intend to pay dividends during its first three years of
operations.
On April 7, 1995, upon completion of the conversion and reorganization,
Community Bank established a liquidation account in an amount equal to 51
percent of stockholders' equity at September 30, 1994 totaling $7,114,284. The
liquidation account will be maintained for the benefit of depositors as of the
September 30, 1994 eligibility record date (or the December 31, 1994
supplemental eligibility record date) who maintain their deposits in Community
Bank after conversion. In the event of complete liquidation, and only in such an
event, each eligible depositor will be entitled to receive a liquidation
distribution from the liquidation account in the proportionate amount of the
then current adjusted balance for deposits held, before any liquidation
distribution may be made with respect to the stockholders. Except for the
repurchase of stock and payment of dividends by Community Bank, the existence of
the liquidation account does not restrict the use or application of retained
earnings of Community Bank.
(13) REGULATORY MATTERS
The Company and its subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company must meet specific capital guidelines that involve quantitative
measures of the assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to quantitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiaries to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Company and its subsidiaries meet all capital adequacy
requirements to which it is subject.
36
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(13 - continued)
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the subsidiary banks as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the subsidiary banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below. There
are no conditions or events since that notification that management believes
have changed the institutions' categories.
The actual capital amounts and ratios are also presented in the table. No
amounts were deducted from capital for interest-rate risk in either year.
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
<S> <C> <C> <C> <C> <C> <C>
Consolidated ......... $28,441 21.7% $10,475 8.0% N/A
Community Bank ....... $23,034 21.1% $ 8,723 8.0% $10,904 10.0%
Heritage Bank ........ $ 4,481 21.1% $ 1,703 8.0% $ 2,129 10.0%
Tier I Capital (to Risk
Weighted Assets):
Consolidated ......... $27,604 21.1% $ 5,238 4.0% N/A
Community Bank ....... $22,335 0.5% $ 4,362 4.0% $ 6,542 6.0%
Heritage Bank ........ $ 4,343 20.4% $ 852 4.0% $ 1,277 6.0%
Tier I Capital (to Average
Assets):
Consolidated ......... $27,604 11.7% $ 9,442 4.0% N/A
Community Bank ....... $22,335 11.2% $ 7,958 4.0% $ 9,948 5.0%
Heritage Bank ........ $ 4,343 11.9% $ 1,095 3.0% $ 1,825 5.0%
(Dollars in thousands)
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets):
Consolidated ......... $26,675 22.6% $ 9,446 8.0% N/A
Community Bank ....... $21,644 20.9% $ 8,269 8.0% $10,337 10.0%
Heritage Bank ........ $ 4,152 29.4% $ 1,129 8.0% $ 1,411 10.0%
Tier I Capital (to Risk
Weighted Assets):
Consolidated ......... $26,020 22.0% $ 4,723 4.0% N/A
Community Bank ....... $21,009 20.3% $ 4,135 4.0% $ 6,202 6.0%
Heritage Bank ........ $ 4,132 29.3% $ 565 4.0% $ 847 6.0%
Tier I Capital (to Average
Assets):
Consolidated ......... $26,020 10.9% $ 9,571 4.0% N/A
Community Bank ....... $21,009 10.1% $ 8,341 4.0% $10,426 5.0%
Heritage Bank ........ $ 4,132 13.7% $ 905 3.0% $ 1,509 5.0%
</TABLE>
37
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(14) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding various commitments and
contingent liabilities, such as commitments to extend credit and legal claims,
which are not reflected in the financial statements.
During the year ended December 31, 1997, the Company began construction of a new
main office facility and a branch facility. The estimated cost to complete these
facilities was approximately $4,035,000 at December 31, 1997.
<TABLE>
<CAPTION>
The following is a summary of the commitments to extend credit at December 31,
1997:
Fixed Rate Adjustable Rate
Weighted Weighted
Average Average Total
Rate Amount Rate Amount Amount
<S> <C> <C> <C> <C> <C>
Consumer and commercial
loans with 6 to 240 month terms .................. 6.19% $ 2,091,500 8.99%$ 1,541,100 $ 3,632,600
Undisbursed commercial and personal lines of credit 24,012,750
Undisbursed portion of construction loans in process 836,065
Total commitments to extend credit ........... $28,481,415
</TABLE>
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The subsidiary banks are party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheet.
The exposure to credit loss in the event of nonperformance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual notional amount of those instruments
(see Note 14). The subsidiary banks use the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount and type of
collateral obtained, if deemed necessary upon extension of credit, varies and is
based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the subsidiary
banks to guarantee the performance of a customer to a third party. Standby
letters of credit generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The policy for obtaining collateral, and the nature of
such collateral, is essentially the same as that involved in making commitments
to extend credit.
The subsidiary banks have not been required to perform on any financial
guarantees and have not incurred any losses on their commitments during the past
three years.
38
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of financial instruments at December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
(In thousands)
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks .............. $ 5,094 $ 5,094 $ 3,655 $ 3,655
Interest bearing deposits in banks ... 6,504 6,504 7,321 7,321
Securities available for sale ........ 883 883 2,532 2,532
Securities held to maturity .......... 90,040 90,260 80,070 79,535
Loans receivable ..................... 144,656 137,490
Less: allowance for loan losses ..... 837 655
Loans receivable, net .............. 143,819 143,401 136,835 136,582
Federal Home Loan Bank stock ......... 1,575 1,575 1,250 1,250
Financial liabilities:
Deposits ............................. 186,021 186,482 176,624 176,989
Borrowed funds:
Advances from Federal Home
Loan Bank ........................ 27,000 26,983 23,000 22,916
Retail repurchase agreements ....... 12,142 12,142 10,702 10,702
Unrecognized financial instruments:
Commitments to extend credit ......... -- -- -- 4
Standby letters of credit ............ -- -- -- 9
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
CASH AND SHORT-TERM INVESTMENTS
For short-term investments, including cash and due from banks and interest
bearing deposits with banks, the carrying amount is a reasonable estimate of
fair value.
DEBT AND EQUITY SECURITIES
For debt securities, including mortgage-backed securities, the fair values are
based on quoted market prices. For restricted equity securities held for
investment, the carrying amount is a reasonable estimate of fair value.
MORTGAGE LOANS HELD FOR SALE
For mortgage loans held for sale, the fair values are based on market price
quotations from dealers.
LOANS RECEIVABLE
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
DEPOSITS
The fair value of demand deposits, savings accounts, money market deposit
accounts and other transaction accounts is the amount payable on demand at the
balance sheet date. The fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently offered
for deposits of similar remaining maturities.
39
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(16 - continued)
BORROWED FUNDS
The fair value of retail repurchase agreements is the amount payable at the
balance sheet date.
The fair value of advances from Federal Home Loan Bank is estimated by
discounting the future cash flows using the current rates at which similar loans
with the same remaining maturities could be obtained.
COMMITMENTS TO EXTEND CREDIT
The majority of commitments to extend credit and standby letters of credit would
result in loans with a market rate of interest if funded. The fair value of
these commitments are the fees that would be charged to customers to enter into
similar agreements. For fixed rate loan commitments, the fair value also
considers the difference between current levels of interest rates and the
committed rates.
(17) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for Community Bank Shares of Indiana, Inc.
(parent company only) for the years ended December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
BALANCE SHEETS
(In Thousands)
1997 1996
Assets:
<S> <C> <C>
Cash on deposit with subsidiary .............. $ 441 $ 122
Receivables from subsidiaries ................ 109 365
Investment in subsidiaries ................... 26,729 25,192
Premises and equipment ....................... 610 624
Other assets ................................. 10 13
Total Assets ............................. $27,899 $26,316
Liabilities and Stockholders' Equity:
Other liabilities ............................ $ 248 $ 243
Stockholders' equity ......................... $27,651 $26,073
Total Liabilities and Stockholders' Equity $27,899 $26,316
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
(In Thousands)
1997 1996 1995
Income:
<S> <C> <C> <C>
Dividends from subsidiary ...................... $ 975 $ 925 $ 494
Management and other fees from subsidiaries .... 1,462 1,441 --
Interest income from subsidiaries .............. -- -- 167
Total income ............................... 2,437 2,366 661
Expense:
Operating expenses ............................. 1,660 1,513 50
Income before income taxes and equity in
undistributed net income of subsidiaries ....... 777 853 611
Income tax credit ................................ (76) (24) 46
Income before equity in undistributed net income
of subsidiaries ................................ 853 877 565
Equity in undistributed net income of subsidiaries 1,533 737 1,331
Net Income ................................. $ 2,386 $ 1,614 $ 1,896
</TABLE>
40
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997, 1996 AND 1995
(17 - continued)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(In Thousands)
1997 1996 1995
Operating Activities:
<S> <C> <C> <C>
Net income ................................................ $ 2,386 $ 1,614 $ 1,896
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income subsidiaries ........... (1,533) (737) (1,331)
Decrease in other assets and liabilities, net ............. 225 278 (409)
Net Cash Provided By Operating Activities ........... 1,078 1,155 156
Investing Activities:
(Increase) decrease in securities under agreement to resell -- 4,000 (4,000)
Investment in subsidiaries ................................ -- (4,150) (4,771)
Net (increase) decrease in premises and equipment ......... 14 (89) (535)
Net Cash Provided (Used) By Investing Activities .... 14 (239) (9,306)
Financing Activities:
Issuance of common stock .................................. -- -- 9,461
Purchase of common stock by ESOP Trust .................... -- (25) --
Shares released by ESOP Trust ............................. 18 15 22
Dividends paid ............................................ (791) (821) (296)
Net Cash Used By Financing Activities ............... (773) (831) 9,187
Net increase in cash ........................................ 319 85 37
Cash at beginning of year ................................... 122 37 --
Cash at End of Year ......................................... $ 441 $ 122 $ 37
</TABLE>
(18) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
Cash payments for:
<S> <C> <C> <C>
Interest ................................. $10,579,541 $ 9,513,288 $ 8,248,046
Taxes .................................... 1,318,350 1,011,338 1,049,742
Noncash Investing Activities:
Securities transferred from held to maturity
to available for sale .................... $ -- $ -- $ 7,638,017
Transfers from loans to real estate acquired
through foreclosure $ .................... -- $ 100,801 --
Noncash Financing Activity:
Issuance of common stock to ESOP Trust ..... $ -- $ -- $ 79,400
</TABLE>
(19) FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. The Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings based on a control-oriented "financial-components" approach. Under
this approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and liabilities it has incurred,
derecognizes financial assets when control has been surrendered and derecognizes
liabilities when extinguished. The provisions of SFAS No. 125 are effective for
transactions occurring after December 31, 1996, except those provisions relating
to repurchase agreements, securities lending, and other similar transactions and
pledged collateral, which have been delayed until after December 31, 1997 by
SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125, an amendment of FASB Statement No. 125. The adoption of these
statements has no material impact on financial position or results of
operations.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,094
<INT-BEARING-DEPOSITS> 6,504
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 883
<INVESTMENTS-CARRYING> 90,040
<INVESTMENTS-MARKET> 90,260
<LOANS> 143,819
<ALLOWANCE> 837
<TOTAL-ASSETS> 254,083
<DEPOSITS> 186,021
<SHORT-TERM> 24,642
<LIABILITIES-OTHER> 1,269
<LONG-TERM> 14,500
0
0
<COMMON> 198
<OTHER-SE> 27,453
<TOTAL-LIABILITIES-AND-EQUITY> 254,083
<INTEREST-LOAN> 11,761
<INTEREST-INVEST> 5,561
<INTEREST-OTHER> 781
<INTEREST-TOTAL> 18,103
<INTEREST-DEPOSIT> 8,596
<INTEREST-EXPENSE> 10,617
<INTEREST-INCOME-NET> 7,486
<LOAN-LOSSES> 210
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,807
<INCOME-PRETAX> 3,899
<INCOME-PRE-EXTRAORDINARY> 3,899
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,386
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.21
<YIELD-ACTUAL> 3.12
<LOANS-NON> 125
<LOANS-PAST> 294
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 483
<ALLOWANCE-OPEN> 655
<CHARGE-OFFS> 38
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 837
<ALLOWANCE-DOMESTIC> 837
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
