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, 1998
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 30, 1999, there were issued and outstanding 2,728,298 shares of the
Registrant's Common Stock.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the asked price of $15.50 per share of such
stock as of March 4, 1998, was approximately $42.3 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, 1998.
Part III of Form 10-K - Proxy Statement for the 1999 Annual Meeting of
Stockholders.
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<TABLE>
<CAPTION>
Form 10-K
Index
<S> <C>
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Part I: Page
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Item 1. Business 3
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Item 2. Properties 25
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Item 3. Legal Proceedings 25
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Item 4. Submission of Matters to a Vote of Security Holders 25
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Part II:
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Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 26
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Item 6. Selected Financial Data 26
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 26
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
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Item 8. Financial Statements and Supplementary Data 26
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 26
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Part III:
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Item 10. Directors and Executive Officers of the Registrant 26
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Item 11. Executive Compensation 26
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Item 12. Security Ownership of Certain Beneficial Owners and Management 26
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Item 13. Certain Relationships and Related Transactions 27
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Part IV:
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 27
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Signatures 29
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</TABLE>
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PART I
ITEM 1. BUSINESS
General
Community Bank Shares of Indiana, Inc. (the Company) is a multi-bank
holding company headquartered in New Albany, Indiana. The Company's wholly-owned
banking subsidiaries are Community Bank of Southern Indiana (Community),
Heritage Bank of Southern Indiana (Heritage), and NCF Bank and Trust Company
(NCF Bank). Community, Heritage, and NCF are state-chartered stock commercial
banks headquartered in New Albany, Indiana, Jeffersonville, Indiana, and
Bardstown, Kentucky, respectively. Community and Heritage are regulated by the
Indiana Department of Financial Institutions and the Federal Deposit Insurance
Corporation. NCF Bank is regulated by the Kentucky Department of Financial
Institutions and the Federal Deposit 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 two banking offices in Jeffersonville, Indiana. Heritage joined the
Federal Home Loan Bank system in 1998.
On May 6, 1998, the Company completed its acquisition of NCF Bank and
Trust (NCF Bank) located in Bardstown, Kentucky through a merger with NCF
Financial Corporation (NCF). NCF Bank, a state chartered commercial bank with
total assets of $37.0 million and $35.6 million at May 6, 1998 and December 31,
1997, respectively, became a wholly-owned subsidiary of the Company through the
exchange of 740,974 shares of the Company's common stock for all the outstanding
common stock of NCF. The acquisition was accounted for as a pooling of
interests.
The Company had total assets of $331.9 million, total deposits of
$212.9 million, and stockholders' equity of $41.4 million as of December 31,
1998. 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.
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,
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 expenses; and (4) broadening the scope of services offered
to its customers.
The Company's three subsidiaries are community-oriented financial
institutions offering a variety of financial services to their local market
areas. The subsidiaries are engaged primarily in the business of attracting
deposits from the general public and using such funds to 1) originate 15- and
30-year fixed- and adjustable-rate ("ARM") mortgage loans for the purchase of
single-family homes in Floyd and Clark Counties, Indiana, Nelson County,
Kentucky, and, to a lesser extent, surrounding counties, and 2) originate
secured and unsecured business loans of various terms to local businesses and
professional organizations. Depending on each subsidiary's liquidity, interest
rate risk and balance sheet positions, fixed-rate mortgage loans are originated
either for inclusion in the retained loan portfolio or for sale in the secondary
market, while ARM loans are originated primarily for retention in each
subsidiary's loan portfolio. To a lesser extent, the subsidiaries make home
equity loans secured by the borrower's principal residence and other types of
consumer loans such as auto loans. Although Community holds a
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small amount of multi-family residential real estate loans in its portfolio, the
Company does not emphasize the origination of such loans. 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.
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, the formation of a second
subsidiary bank, Heritage Bank of Southern Indiana, which in addition to
traditional banking services sells alternative financial products, and the
acquisition of NCF Bank and Trust which allowed for expansion into Kentucky.
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 secondary market is Nelson County, which is located
approximately 40 miles south east of Louisville, Kentucky. The population of the
Company's secondary market area is approximately 35,000. Surrounding counties of
the Company's Secondary Market include Spencer, Anderson, Hardin, Washington,
Marion, Larue, and Bullitt counties, which together have a population in excess
of 135,000. The Company's headquarters are in New Albany, Indiana, a city of
45,000 located approximately three miles from the center of Louisville.
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, 1998, the Company's net portfolio of loans
receivable (excluding loans classified as held for sale) totaled $199.6 million,
representing approximately 60.1% 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.)
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 amount of commercial business loans as a percent of its total loan
portfolio.
The Company continues to actively originate fixed-rate mortgage loans,
generally with terms to maturity of between 15- to 30- year 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.
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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.
<TABLE>
<CAPTION>
Analysis of Loan Portfolio
At December 31,
-------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Conventional real estate loans:
Residential interim
Construction loans $ 578 0.29% $ 5,654 3.31% $ 6,498 3.92%
Residential 104,670 52.45% 106,082 62.08% 114,910 69.35%
Commercial real estate 35,424 17.75% 22,432 13.13% 17,269 10.42%
------------- ---------- -------------- ----------- ------------ -----------
Total real estate loans $ 140,672 70.49% $ 134,168 78.52% $ 138,677 83.69%
Commercial business loans (1) $ 48,057 24.08% $ 27,929 16.35% $ 20,191 12.18%
Consumer Loans:
Savings account loans 2,049 1.02% 874 0.51% 593 0.36%
Equity lines of credit (2) 6,760 3.39% 6,846 4.00% 5,215 3.15%
Automobile loans 1,824 0.91% 1,570 0.92% 1,344 0.81%
Other (2) (3) 3,330 1.67% 2,490 1.46% 2,236 1.35%
------------- ---------- -------------- ----------- ------------ -----------
Total consumer loans $ 13,963 6.99% $ 11,780 6.89% $ 9,388 5.67%
Less:
Loans in process 1,844 0.92% 1,969 1.15% 1,726 1.04%
Deferred loan origination fees
and costs, net (3) 0.00% 29 .02% 18 0.01%
Allowance for loan losses 1,276 0.64% 1,014 .59% 816 0.49%
------------- ---------- -------------- ----------- ------------ -----------
Total loans, net $ 199,575 100.00% $ 170,865 100.00% $ 165,696 100.00%
============= ========== ============== =========== ============ ===========
</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.
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<TABLE>
<CAPTION>
Type of Security
At December 31,
-------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Type of Security (Dollars in Thousands)
Residential real estate:
<S> <C> <C> <C> <C> <C> <C>
1 to 4 family (1) $101,481 50.85% $107,968 63.19% $117,753 71.06%
Other dwelling units 3,767 1.89% 3,768 2.20% 3,655 2.20%
Commercial real estate 35,424 17.75% 22,432 13.13% 17,269 10.42%
Equity lines of credit 6,760 3.39% 6,846 4.01% 5,215 3.15%
Commercial business 48,057 24.08% 27,929 16.34% 20,191 12.19%
Savings accounts 2,049 1.02% 874 0.51% 593 0.36%
Automobile loans 1,824 0.91% 1,570 0.92% 1,344 0.81%
Other (2) 3,330 1.67% 2,490 1.46% 2,236 1.35%
------------- ----------- -------------- ------------ ------------- ----------
Total $202,692 101.56% $173,877 101.76% $168,256 101.54%
Less:
Loans in process 1,844 0.92% 1,969 1.15% 1,726 1.04%
Deferred loan origination fees
and costs, net (3) 0.00% 29 0.02% 18 0.01%
Allowance for loan losses 1,276 0.64% 1,014 0.59% 816 0.49%
------------- ----------- -------------- ------------ ------------- ----------
Total loans, net $199,575 100.00% $170,865 100.00% $165,696 100.00%
============= =========== ============== ============ ============= ==========
</TABLE>
(1) Includes construction loans converted to permanent loans.
(2) Includes unsecured personal loans, education loans and home improvement
loans.
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Related Party Transactions
The following table represents the indebtedness of certain directors,
officers and their associates as of December 31, 1998. 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 Credit/Loan Line of Credit
Name Position Total Available Disbursed
- -------------------------- ----------------------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Robert J. Koetter, Sr. Director 790,468 790,468
Gary L. Libs Director 3,666,672 3,366,672
Gerald Koetter Director 100,000 97,000
James Robinson Director 1,100,000 675,000
Kerry M. Stemler Director 3,293,881 2,187,281
Tim Shea Director 478,147 407,148
C. Thomas Young Chairman of Board of Directors 694,890 521,837
Gordon Huncilman Director 99,225 99,225
Greg Huber Director 500,000 91,000
Dale Orem Director 226,663 216,980
Steven Stemler Director 536,192 356,192
Robert Pullen Director 3,833,732 3,733,732
R. W. Estopinal Director 478,886 144,674
Richard Heaton Director 334,251 334,251
Guthrie Wilson Director 12,410 12,410
M. Diane Murphy Senior Vice President 99,532 68,566
James M. Stutsman Senior Vice President 133,028 125,931
Patrick Daily President 82,259 82,259
Mary Pat Boone Senior Vice President 86,175 82,235
Paul Chrisco Vice President 5,500 5,379
Linda Brock Vice President 65,000 10,177
Brian Brinkworth Vice President 25,000 6,820
Jeff Cash Vice President 72,000 72,000
</TABLE>
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Loan Maturity Schedule
The following table sets forth certain information at December 31, 1998,
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
-------------------------------------------------------------------------------------------
Real estate mortgages:
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustable ................ $ 2,336 $ 18,256 $ 14,096 $ 13,140 $ 17,914 $ 4,715 $ 70,457
Fixed ..................... 797 6,613 3,118 11,811 10,095 1,406 33,840
Second mortgages ........... 19 379 267 173 114 -- 952
Installment ................ 141 5,217 2,393 3,354 2,803 54 13,962
Commercial business,
financial and agricultural 4,479 34,933 8,276 11,758 22,417 1,618 83,481
--------- --------- --------- --------- --------- --------- ---------
Total ........... $ 7,772 $ 65,398 $ 28,150 $ 40,236 $ 53,343 $ 7,793 $202,692
========= ========= ========= ========= ========= ========= =========
</TABLE>
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The following table sets forth the dollar amount of all loans due after
December 31, 1998, 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 $ 35,570 $ 69,679 $ 105,249
Commercial business loans 23,034 60,447 83,481
Consumer 12,121 1,841 13,962
----------------- ------------------- -----------------
Total $ 70,725 $131,967 $ 202,692
================= =================== =================
</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, 1998, the
Company had $101.5 million, or 50.9 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 continuously 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, can 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 for 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 two percentage points per year and six 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 interest rate
equal to the maximum annual rate increase added to the current index. ARM loans
totaled $70.5 million, or 35.3 percent of the Bank's total loan portfolio at
December 31, 1998.
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, $8.1 million was still outstanding as of December 31,
1998. 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
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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 savings associations and mortgages companies. Of this
original $15 million, $4.8 million was still outstanding as of December 31,
1998. 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.
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.
Construction Loans. The Company originates loans to finance the
construction of owner-occupied residential property. At December 31, 1998, the
Company had $578,000 or 0.3 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 institution.
Commercial Real Estate Loans. Loans secured by commercial real estate
constituted approximately $35.4 million, or 17.8 percent, of the Company's total
net loan portfolio at December 31, 1998. 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. The Company has increased its
origination of multi-family residential or commercial real estate loans over the
last few years, but feels that it is well protected against the increased credit
risk associated with these loans through its underwriting standards of imposing
stringent loan-to-value ratios, requiring conservative debt coverage ratios, and
continually monitoring 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 $48.1 million or 24.1
percent of the Company's loan portfolio of December 31, 1998. This type of
commercial loan has been offered at both variable rates and fixed rates with
balloon payments required at maturity.
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<PAGE>
The Company has increased its origination of commercial business loans
over the last few years. 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, 1998, consumer loans totaled $14.0 million or
7.0 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 credit
are generally secured by the borrower's principal residence and a personal
guarantee. At December 31, 1998, equity lines of credit totaled $ 6.8 million,
or 48.4 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.
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
with specified terms and conditions 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, 1998, the Company
had commitments to originate loans of $4.9 million, as well as commitments to
fund the undisbursed portion of construction loans in process of $1.8 million
and commitments to fund commercial and personal lines of credit of $34.8
million.
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 issued SFAS No. 91 ") in December 1986 that
deals with 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 in income immediately upon the sale of
the related loan. At December 31, 1998, the Company had $3,000 of outstanding
net deferred loan fees and costs.
11
<PAGE>
In addition to loan origination fees, the Company also receives other
fees and service charges that 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 $203,000, $214,000, and $220,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
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 $3.6 million, $690,000, and $1.3 million at
December 31, 1998, for Community Bank, Heritage Bank, and NCF 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 in 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
costs 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, 1998, the Company owns $200,000 in property acquired as the result
of foreclosure or by deed in lieu or foreclosure.
The following table sets forth information regarding non-accrual loans
and other non-performing assets at the dates indicated. At December 31, 1998,
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,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
Loans accounted for on a non-accrual basis:
<S> <C> <C> <C> <C> <C>
Residential mortgage loans $ 102 $ 294 $ 1,557 $ 27 $ 1,203
Commercial real estate 368 - - - -
Consumer - 22 - - 2
============ ============ ============= ============= =============
Total $ 470 $ 316 $ 1,557 $ 27 $ 1,205
============ ============ ============= ============= =============
Non-accrual loans as a
percentage of total loans 0.23% 0.18% 0.93% 0.02% 0.91%
============ ============ ============= ============= =============
Foreclosed real estate (1) $ 200 $ 724 $ 101 $ -- $ 102
============ ============ ============= ============= =============
</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.
12
<PAGE>
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)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Gross interest income that would
have been recorded if all non-accrual
loans were on a current basis $ 28 $ 111 $ 29
============ ============ =============
Gross interest income actually recorded $ - $ - $ 63
============ ============ =============
</TABLE>
The following table sets forth information with respect to loans which
are still accruing interest but are contractually past due 90 days or more at
December 31, 1998:
<TABLE>
<CAPTION>
At December 31, 1998 Number of loans
-------------------------- --------------------
(In thousands)
<S> <C> <C>
Residential real estate $ 267 3
Commercial real estate and business 0 0
Consumer loans 0 0
========================== ====================
Total $ 267 3
========================== ====================
</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 that 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 regularly review the loan portfolio to
determine whether any loans require classification in accordance with applicable
regulations.
At December 31, 1998, the Banks had $1.7 million classified as special
mention assets, $636,000 classified as substandard assets, and $158,000
classified as impaired assets.
13
<PAGE>
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.
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,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Total loans outstanding $199,575 $170,866 $165,696
Average loans outstanding 193,725 169,651 156,895
Balance at beginning of period $ 1,014 $ 816 $ 700
Adjustment to conform pooled
affiliate's fiscal year end 8 --- ---
Provisions
Residential 88 86 68
Commercial 242 132 17
Consumer 24 8 43
------------- ------------- ------------
354 226 128
------------- ------------- ------------
Charge-offs
Residential (32) (11) -
Commercial (52) (10) -
Consumer (20) (13) (17)
------------- ------------- ------------
(104) (34) (17)
------------- ------------- ------------
Recoveries
Residential 1 - 4
Commercial 3 - -
Consumer - 6 1
------------- ------------- ------------
4 6 5
------------- ------------- ------------
Balance at end of period $ 1,276 $ 1,014 $ 816
============= ============= ============
Allowance for loans losses as a percent
of total loans outstanding .64% .59% 0.49%
Net loans charged off as a percent
of average loans outstanding .05% .02% 0.01%
</TABLE>
14
<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,
1998 1997 1996
---- ---- ----
(dollars in thousands)
Percent of Percent of Percent of
Loans in Loans in Loans in
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
<S> <C> <C> <C> <C> <C> <C>
Residential loans $ 425 51.9% $ 360 64.2% $ 358 72.1%
Commercial loans 754 41.2% 561 29.0% 393 22.3%
Consumer loans 97 6.9% 93 6.8% 65 5.6%
============================= ============================ ============================
Total $ 1,276 100.0% $ 1,014 100.0% $ 816 100.0%
============================= ============================ ============================
</TABLE>
Investment Activities
In recent years, the Company has 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 Company's 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.
Each subsidiary banks' investment securities portfolio is managed by
the president of each bank 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 Company's Asset and Liability Committee. The
Company's investment securities currently consist primarily of U.S. agency and
government securities.
Liquidity levels may be increased or decreased depending upon the yields on
available 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 yields 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
each banks' loan origination and other activities.
15
<PAGE>
Securities Analysis
The following table sets forth the securities portfolio as of
December 31 for the years indicated.
<TABLE>
<CAPTION>
1998 1997
-------------------------------- -------------------------------
Weighted Weighted
Fair Amortized Average Fair Amortized Average
Value Cost Yield Value Cost Yield
Securities Held to Maturity (1)
Debt securities:
Federal Agency:
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $994 $1,000 2.95% $6,434 $6,500 5.35%
Due after one year through five years $2,979 $3,000 5.57% $7,500 $7,500 6.16%
Due after five years through ten years $39,151 $39,174 6.49% $38,060 $38,006 7.05%
Due after ten years $16,006 $16,085 6.61% $11,942 $12,000 7.39%
Municipal
Due in one year or less $ - $ - 0.00% $ - $ - 0.00%
Due after one year through five years $640 $633 4.05% $635 $635 4.05%
Due after five years through ten years $ - $ - 0.00% $ - $ - 0.00%
Due after ten years $2,806 $2,696 5.59% $2,104 $2,013 5.59%
Mortgage backed securities (3) $29,197 $29,194 6.31% $23,717 $23,519 6.53%
-------------------------------- -------------------------------
Total securities held to maturity $91,773 $91,782 6.34% $90,392 $90,173 6.71%
Securities available for sale(2)
Mortgage backed securities (3) $666 $666 6.38% $883 $878 6.40%
Common stock $250 $250 0.60% $ - $ - 0.00%
-------------------------------- -------------------------------
Total securities available for sale $916 $916 4.80% $883 $878 6.40%
Nonmarketable equity securities
FHLB stock $3,346 $3,346 8.00% $1,575 $1,575 8.00%
</TABLE>
(1) Securities held to maturity are carried at amortized cost.
(2) Securities available for sale are carried at 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.
16
<PAGE>
Sources of Funds
General. The major source of funds for the Company is dividends from
its subsidiary 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, continuing 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 $21.4 million, or 10.1 percent of the Company's total deposit
portfolio at December 31, 1998. 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.
The table below presents the average balance, interest expense, and average rate
paid by period for each major deposit category.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1998 1997 1996
--------------------- ------------------ ----------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Cost Balance Cost
(Dollars
in Thousands)
Deposits:
<S> <C> <C> <C> <C> <C> <C>
Demand deposits 37,843 2.31% 34,799 2.65% 32,476 2.78%
Savings 36,616 3.21 33,899 3.33 34,093 2.82
Time 129,407 5.62 137,449 5.52 136,419 5.54
-------------------- ------------------- ---------------------
Total deposits 203,866 4.58 206,146 4.68 202,987 4.64
-------------------- ------------------- ---------------------
</TABLE>
17
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
(in thousands)
<S> <C>
Three months or less $ 6,150
Three through six months 5,875
Six through twelve months 6,489
Over twelve months 2,912
=============
Total $21,426
=============
</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 Federal Home Loan
Banks (FHLB) of Indianapolis and Cincinnati as well as 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 mortgage loans, the outstanding balance of U.S. Government and
Agency securities (including FHLMC, FNMA, and GNMA mortgage-backed securities),
and the outstanding balance of securities representing a whole interest in 1-4
family residential mortgage loans. At December 31, 1998, the Banks had $56.0
million in advances outstanding from the FHLB's of Indianapolis and Cincinnati.
The FHLB system functions as a central reserve bank providing credit
for the Banks and other member financial institutions. All members are required
to own capital stock in the FHLB and are 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, 1998, the Banks had $19.5 million of
retail repurchase agreements outstanding. In the event of a need for funds in an
overnight capacity, Community Bank maintains a $2.0 million line of credit and
Heritage maintains a $500,000 line of credit with the FHLB of Indianapolis, and
NCF maintains a $500,000 line of credit with the FHLB of Cincinnati.
18
<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,
1998 1997 1996
(Dollars in thousands)
Weighted average rate paid on:
<S> <C> <C> <C>
FHLB advances 5.11% 5.77% 5.65%
Retail repurchase agreements 4.10% 4.77% 4.47%
Amount of retail repurchase agreements $19,499 $12,142 $10,702
</TABLE>
<TABLE>
<CAPTION>
During the Year Ended
December 31,
1998 1997 1996
(Dollars in thousands)
Weighted average rate paid on:
<S> <C> <C> <C>
Retail repurchase agreements 4.59% 4.83% 4.11%
Maximum amount of borrowings outstanding
at any month end:
FHLB Advances $56,000 $29,500 $21,099
Retail repurchase agreements $19,499 $13,913 $12,496
Approximate average short-term
borrowings outstanding with respect to:
FHLB Advances(1) $41,208 $12,625 $ 9,354
Retail repurchase agreements $14,902 $12,141 $2,864
</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 other commercial banks, 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 in
conjunction with a wide range of financial services.
The competition for real estate and other loans comes principally from
other commercial banks, mortgage banking companies and 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.
Regulation
As state chartered commercial banks, Community, Heritage, and NCF Bank
are subject to examination, supervision and extensive regulation by the FDIC and
their respective Departments of Financial Institutions (DFI). Community and
Heritage are members of and own stock in the FHLB of Indianapolis, while NCF
Bank is a member of and owns stock in the FHLB of Cincinnati. The FHLB
institutions located in Indianapolis and Cincinnati are
19
<PAGE>
each one of the twelve regional banks in the Federal Home Loan Bank System.
Community, Heritage, and NCF Bank are also subject to regulation by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), which
governs reserves to be maintained against deposits and regulates certain other
matters.
The FDIC and DFI regularly examine the Banks and prepare a report for
the consideration of each Bank's Board of Directors on any deficiencies that it
may find in the Bank's 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 Commercial 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. In the course of
these examinations 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 to their
fair market values 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 such banks are 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 that, 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
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, 1998
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
20
<PAGE>
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, 1998, the Company met all capital adequacy
requirements to which it is subject.
The following table sets forth the Company's capital position at
December 31, 1998, 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, 1998
Total Capital (to Risk
Weighted Assets):
<S> <C> <C> <C> <C> <C> <C>
Consolidated $42,620 20.4% $16,704 8.0% $25,916 12.4%
Tier I Capital (to Risk
Weighted Assets):
Consolidated $41,344 19.8% $ 8,352 4.0% $32,992 15.8%
Tier I Capital (to Average
Assets):
Consolidated $41,344 12.7% $ 12,958 4.0% $28,386 8.7%
</TABLE>
The FDIC generally is authorized to take enforcement action against a
financial institution that fails to meet its capital requirements; such 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,"
21
<PAGE>
(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, 1998, the Company and each of the
subsidiary Banks was deemed well-capitalized for purposes of the above
regulations.
Federal Home Loan Bank System. Community and Heritage are both members
of the FHLB of Indianapolis, and NCF is a member of the FHLB of Cincinnati. The
FHLB of Indianapolis and the FHLB of Cincinnati are each 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 members of the FHLB Banking system, Community, Heritage, and NCF
Bank are 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, 1998, $2.4 million,
$429,000, and $492,000 of FHLB stock were outstanding for Community, Heritage,
and NCF Bank, respectively, which was in compliance with this requirement. In
past years, Community, Heritage, and NCF Bank have 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, 1998, the Company had $56 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). Deposits of Community and
NCF Bank are insured by the Savings Association Insurance Fund (SAIF), while
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 both 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
capitalized
22
<PAGE>
subgroup "C" category are assessed the highest insurance rate. As of December
31, 1998 all banks were assigned to the well-capitalized, subgroup "A" category.
During 1998, Community Bank paid an annual insurance rate of 6.1 cents per $100
of deposits, Heritage Bank paid an annual insurance rate of 1.22 cents per $100
of deposits, while NCF Bank paid an annual insurance rate of $2.98 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. The aggregate one-time assessment paid by Community Bank and NCF Bank
amounted to $1.3 million with an after tax impact of approximately $779,000.
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, 1998, no reserves were
required to be maintained on the first $4.9 million of transaction accounts,
reserves of 3% were required to be maintained against the next $41.6 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 non-interest-bearing account at a Federal Reserve Bank,
the effect of this reserve requirement is to reduce an institution's earning
assets.
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
23
<PAGE>
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.
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 the 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 Company's 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. The Company's state franchise tax returns have
been audited through the tax year ended December 31, 1997.
Personnel
As of December 31, 1998, the Company had 95 full-time employees.
Community employed 36 full-time and 7 part-time employees as of December 31,
1998. Heritage employed 15 full-time and 1 part-time employees as of December
31, 1998. Finally, NCF Bank employed 10 full-time and 1 part-time employees as
of December 31, 1998. None of these entity's employees are represented by a
collective bargaining group. The Company and three subsidiary Banks believe
their respective relationships with their employees to be good.
24
<PAGE>
ITEM 2. PROPERTIES
The Company conducts its business through the main office and an
operations center located in New Albany, Indiana, and eight branch offices of
its subsidiaries Community Bank and Heritage Bank located in Clark and Floyd
Counties, Indiana, and two branch offices of its NCF Bank subsidiary in Nelson
County, Kentucky. The following table sets forth certain information concerning
the main offices and each branch office at December 31, 1998. The aggregate net
book value of premises and equipment was $7.9 million at December 31, 1998.
<TABLE>
<CAPTION>
Lease Expiration
Location Year Opened Owned or Leased Date
Community Bank of Southern Indiana:
<S> <C> <C> <C>
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
NCF Bank and Trust:
106A West John Rowan Blvd. 1997 Owned ---
Bardstown, KY 40004
119 East Stephen Foster Ave. 1972 Owned ---
Bardstown, KY 40004
</TABLE>
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,
1998.
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
See page 18 of the 1998 Annual Report to Stockholders incorporated
herein as Exhibit 13.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
See pages 7 and 11 of the 1999 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 6-19 of the 1999 Annual Report to Stockholders incorporated
herein as Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages 16-17 of the 1999 Annual Report to Stockholders incorporated
herein as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS
See pages 20-44 of the 1999 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.
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 23, 1999 a copy of
which will be filed no later than 120 days after the close of the fiscal year.
Steven Stemler, a Director of the Registrant, failed to file Form 5 by
February 15, 1999. The appropriate Form 5 was filed on behalf of Mr. Stemler on
March 9, 1999 and reported 2 transactions: 1) the purchase in the open market of
400 shares of common stock of the Registrant on May 18, 1998 for direct
ownership at $23.50 per share, and 2) the purchase in the open market of 300
shares of common stock of the Registrant on May 19, 1998 for direct ownership at
$23.50 per share. After these transactions, Mr. Stemler's total beneficial
ownership amounted to 1,950 shares of common stock
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 23, 1999 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 23, 1999 a copy of
which will be filed no later than 120 days after the close of the fiscal year.
26
<PAGE>
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 23, 1999 a copy of which will be
filed no later than 120 days after the close of the fiscal year.
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, 1998, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
Annual Report Section Pages in Annual Report
Selected Financial Data 7, 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 6 - 19
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
Statements 25 - 44
(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.
27
<PAGE>
(a) (3) Exhibits
Regulation S-K
Exhibit Number Document
3.1 Articles of Incorporation *
3.2 Bylaws *
4.0 Common Stock Certificate *
10.1 Employment Agreement with Michael L. Douglas
10.2 Stock Option Plan **
10.3 1995 Stock Option adopted by NCF Financial Corporation
13.0 Form of Annual Report to Security Holders
21.0 Subsidiaries of Registrant
27.0 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, 1998.
(b) Reports on Form 8-K: No Reports on 8-K were filed during the quarter
ended December 31, 1998.
28
<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, INC.
Date: March 23, 1999 By: \s\ Michael L. Douglas
----------------------
MICHAEL DOUGLAS
President, Chief Executive
Officer and Director
<TABLE>
<CAPTION>
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.
<S> <C> <C> <C>
By: \s\ C. Thomas Young By: \s\ Timothy T. Shea
-------------------- -------------------
C. THOMAS YOUNG, TIMOTHY T. SHEA,
Chairman of the Board Vice Chairman of the Board
of Directors of Directors
Date: March 23,1999 Date: March 23, 1999
By: \s\ Robert J. Koetter, Sr. By: \s\ Steven Stemler
ROBERT J. KOETTER, SR., STEVEN STEMLER,
Director Director
Date: March 23,1999 Date: March 23,1999
By: \s\ Gary L. Libs By: \s\ Dale L. Orem
GARY L. LIBS, DALE L. OREM,
Director Director
Date: March 23,1999 Date: March 23,1999
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 23, 1999 Date: March 23, 1999
By: \s\ Gordon L. Huncilman By: \s\ M. Diane Murphy
GORDON L. HUNCILMAN, M. DIANE MURPHY,
Director Senior Vice President and
Corporate Secretary
Date: March 23, 1999 Date: March 23, 1999
By: \s\ Kerry M. Stemler By: \s\ Stanley L. Krol
KERRY M. STEMLER, STANLEY L. KROL,
Director Chief of Operations
Date: March 23,1999 Date: March 23, 1999
By: \s\ Robert E. Yates
ROBERT E. YATES,
Director
Date: March 23,1999
</TABLE>
29
<PAGE>
EXHIBIT 10.1 -- Employment Agreement with Michael L. Douglas
AGREEMENT
AGREEMENT, effective as of May 20,1998, between Community Bank Shares
of Indiana, Inc., an Indiana corporation (the "Corporation" or the "Employer"),
and Michael L. Douglas (the "Executive").
WITNESSETH
WHEREAS, in order to induce the Executive to continue to serve as the
President and Chief Executive Officer of the Corporation, the Employer and the
Executive desire to enter into this Agreement to specify the terms of the
Executive's employment;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. Definitions. The following words and terms shall have the
meanings set forth below for the purposes of this Agreement:
(a) Average Annual Compensation. The Executive's "Average Annual
Compensation" for purposes of this Agreement shall be deemed to mean the average
level of compensation paid to the Executive by the Employer or any subsidiary
thereof during the most recent three taxable years preceding the Date of
Termination, as reflected in the annual W-2 Wage and Tax Statement provided to
the Executive.
(b) Base Salary. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(c) Cause. Termination of the Executive's employment for "Cause'9 shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
(d) Change in Control of the Corporation. (A) "Change in Control of the
Corporation" shall be deemed to have occurred if (i) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934
("Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities; and (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Corporation cease for any reason to constitute at
least a majority thereof unless the election, or the nomination for election by
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
(e) Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1
<PAGE>
(f) Date of Termination. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(g) Disability. Termination by the Employer of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long4erm disability plan maintained by the Employer or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) Notice of Termination. Any purported termination of the Executive's
employment by the Employer for any reason, including without limitation for
Cause, Disability or Retirement, or by the Executive for any reason, shall be
communicated by written "Notice of Termination" to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a dated notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Executive's employment under the provision
so indicated, (iii) specifies a Date of Termination,. which shall be not less
than thirty (30) nor more than ninety (90) days after such Notice of Termination
is given, except in the case of the Employer's termination of Executive's
employment for Cause, which shall be effective immediately; and (iv) is given in
the manner specified in Section 11 hereof.
(j) Retirement. Termination by the Employer of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employer's retirement policies, including early
retirement, generally applicable to their salaried employees.
2. Term of Employment.
(a) The Employer hereby employs the Executive as President and Chief
Executive Officer and Executive hereby accepts said employment and agrees to
render such services to the Employer on the terms and conditions set forth in
this Agreement. The initial term of employment under this Agreement shall be for
three years, commencing on the date of this Agreement and shall extend each year
for an additional year on the date that is six months prior to the expiration
date for the remaining term of this Agreement unless either party shall notify
the other of its intention to stop such extensions. If the Board of Directors or
the Executive elects not to extend the term, it shall give written notice of
such decision to the other party not less than thirty (30) days prior to any
such annual extension date. If any party gives timely notice that the term will
not be extended as of any annual extension date, then this Agreement shall
terminate at the conclusion of its remaining term. References herein to the term
of this Agreement shall refer both to the initial term and successive terms.
2
<PAGE>
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Employer as may be consistent with his titles and
from time to time assigned to him by the Employer's Board of Directors.
3. Compensation and Benefits.
(a) The employer shall compensate and pay Executive for his services
during the term of this Agreement at a minimum base salary of $150,000 per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Board of Directors of the Employer. In addition to his Base
Salary, the Executive shall be entitled to receive during the term of this
Agreement such bonus payments as may be determined by the Board of Directors of
the Employer.
(b) During the term of the Agreement, Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employer, to the extent commensurate with his then duties and responsibilities,
as fixed by the Board of Directors of the Employer. The Employer shall not make
any changes in such plans, benefits or privileges which would adversely affect
Executive's rights or benefits thereunder, unless such change occurs pursuant to
a program applicable to all executive officers of the Employer. Nothing paid to
Executive under any plan or arrangement presently in effect or made available in
the future shall be deemed to be in lieu of the salary payable to Executive
pursuant to Section 3(a) hereof. Notwithstanding the foregoing, nothing
contained in this Agreement shall require the Executive to participate in any
tax qualified or non-qualified benefit plan of the Employer.
(c) During the term of this Agreement, Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Board of Directors of the Employer.
(d) During the term of this Agreement and continuing after the
expiration of its term, the Employer shall provide continued participation in
the Corporation's group health insurance plan for the Executive and his spouse,
at no cost to the Executive or his spouse, until such time as each shall qualify
for coverage under Medicare (Subchapter XVIII, Health Insurance for Aged and
Disabled of the Federal Social Security Act) or a successor program or system,
if any; provided, however, the Employer shall have no obligation to continue to
provide such benefit if the Executive is terminated for Cause as defined in
Section 1(c) hereof. In the event that the Executive's and/or his spouse's
participation in such health insurance plan is prohibited by the terms of such
plan or by the Employer for legal or other bona fide reasons, or during such
period the plan is discontinued or the benefits thereunder are materially
reduced, the Employer shall arrange to provide the Executive and his spouse with
benefits substantially similar to those which the Executive and his spouse would
have received under the plan or the Corporation shall pay, or reimburse the
Executive, for the cost of the premiums necessary to obtain comparable coverage
under a similar plan for the remainder of such period.
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4. Expenses. The Employer shall reimburse Executive or otherwise
provide for or pay for all reasonable expenses incurred by Executive in
furtherance of, or in connection with the business of the Employer, including,
but not by way of limitation, and traveling expenses, and all reasonable
entertainment expenses (whether incurred at the Executive's residence, while
traveling or otherwise), subject to such reasonable documentation and other
limitations as may be established by the Board of Directors of the Employer. If
such expenses are paid in the first instance by Executive, the Employer shall
reimburse the Executive therefor.
5. Termination.
(a) The Employer shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder for any reason,
including without limitation termination for Cause, Disability or Retirement,
and Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by the
Employer for Cause, Disability or Retirement or in the event of the Executive's
death, or (ii) Executive terminates his employment hereunder other than
following a Change in Control of the Corporation or a material breach of this
Agreement by the Employer which has not been cured in accordance with the terms
of this Agreement, Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination except as provided for pursuant to Section 3(d) hereof.
(c) In the event that Executive's employment is terminated by the
Employer for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Employer which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
Employer, and as of Executive's Date of Termination no Change in Control of the
Corporation has occurred, no written agreement which contemplates a Change in
Control of the Corporation and which still is in effect has been entered into by
the Employer and no discussions and/or negotiations are being conducted which
relate to the same, then the Employer shall, subject to the provisions of
Section 6 hereof, if applicable:
(A) pay to the Executive, in equal monthly installments
beginning with the first business day of the month following
the Date of Termination, a cash severance amount equal to the
Base Salary which the Executive would have earned over the
remaining term of this Agreement as of his Date of
Termination, and
(B) maintain and provide for a period ending at the earlier of
(i) the expiration of the remaining term of the Executive's
employment which remained immediately prior to the Executive's
Date of Termination or (ii) the date of the Executive's
full-time employment by another employer (provided that the
Executive is entitled under the terms of such employment to
benefits substantially similar to those described in this
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subparagraph (B)), at no cost to the Executive, the
Executive's continued participation in all group insurance,
life insurance, health and accident and disability plans in
which the Executive was entitled to participate immediately
prior to the Date of Termination, provided that in the event
that the Executive's participation in any plan, program or
arrangement as provided in this subparagraph (B) is prohibited
by the terms of the plan or by the Employer for legal or other
bona fide reasons, or during such period any such plan,
program or arrangement is discontinued or the benefits
thereunder are materially reduced for all employees, the
Employer shall arrange to provide the Executive with benefits
substantially similar to those which the Executive would have
received had his employment continued throughout such period
to the extent such benefits can be provided at a commercially
reasonable cost. In the event such benefits cannot be provided
at a commercially reasonable cost, the Employer shall pay the
Executive that portion of the premiums or other costs of such
plans allocable to the Executive in the year prior to the Date
of Termination for the period set forth in this subparagraph
(B). In no event, however, shall these benefits terminate or
reduce the benefits that the Executive is entitled to pursuant
to Section 3(d) hereof. Nothing provided for in this
subparagraph (B) shall be construed as to provide for
continued participation by the Executive in any stock option
or restricted stock plan or any cash incentive or bonus plan
of the Employer.
6. Change in Control of the Corporation. In the event of a Change in
Control of the Corporation, then the Employer shall, subject to the provisions
of Section 7 hereof, if applicable:
(A) immediately pay to the Executive, in a single lump sum
payment, a cash amount equal to three (3) times the
Executive's Average Annual Compensation as of the date of the
Change in Control of the Corporation, minus one dollar, and
(B) maintain and provide for a period ending at the earlier
of(i) the expiration of thirty-six (36) months from the date a
Change in Control of the Corporation has occurred or (ii) the
date of the Executive's full-time employment by another
employer provided that the Executive is entitled under the
terms of such employment to benefits substantially similar to
those described in this subparagraph (B)), at no cost to the
Executive, the Executive's continued participation in all
group insurance, life insurance, health and accident and
disability plans in which the Executive was entitled to
participate immediately prior to the date of the occurrence of
the Change in Control of the Corporation, provided that in the
event that the Executive's participation in any plan, program
or arrangement as provided in this subparagraph (B) is
prohibited by the terms of the plan or by the Employer for
legal or other bona fide reasons, or during such period any
such plan, program or arrangement is discontinued or the
benefits thereunder are materially reduced for all employees,
the Employer shall arrange to provide the Executive with
benefits substantially similar to those which the Executive
would have received had his employment continued throughout
such period to the extent such benefits can be provided at a
commercially
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reasonable cost. In the event such benefits cannot be provided
at a commercially reasonable cost, the Employer shall pay the
Executive that portion of the premiums or other costs of such
plans allocable to the Executive in the year prior to the Date
of Termination for the period set forth in this subparagraph
(B). In no event, however, shall these benefits terminate or
reduce the benefits that the Executive is entitled to pursuant
to Section 3(d) hereof. Nothing provided for in this
subparagraph (B) shall be construed as to provide for
continued participation by the Executive in any stock option
or restricted stock plan or any cash incentive or bonus plan
of the Employer.
7. Limitation of Benefits under Certain Circumstances. If the payments
and benefits pursuant to Section 6 hereof, either alone or together with other
payments and benefits which Executive has the right to receive from the
Employer, would constitute a "parachute payment" under Section 280G of the Code,
the payments and benefits pursuant to Section 6 hereof shall be reduced, in the
manner determined by the Executive, by the amount, if any, which is the minimum
necessary to result in no portion of the payments and benefits under Section 6
being non-deductible to the Employer pursuant to Section 280G of the Code and
subject to the excise tax imposed under Section 4999 of the Code. The
determination of any reduction in the payments and benefits to be made pursuant
to Section 6 shall be based upon the opinion of independent tax counsel selected
by the Employers' independent public accountants and paid by the Employer. Such
counsel shall be reasonably acceptable to the Employer and the Executive; shall
promptly prepare the foregoing opinion, but in no event later than thirty (30)
days from the Date of Termination; and may use such actuaries as such counsel
deems necessary or advisable for the purpose. In the event that the Employer
and/or the Executive do not agree with the opinion of such counsel, (i) the
Employer shall pay to the Executive the maximum amount of payments and benefits
pursuant to Section 5, as selected by the Executive, which such opinion
indicates that there is a high probability do not result in any of such payments
and benefits being non-deductible to the Employer and subject to the imposition
of the excise tax imposed under Section 4999 of the Code and (ii) the Employer
may request, and Executive shall have the right to demand that the Employer
request, a ruling from the IRS as to whether the disputed payments and benefits
pursuant to Section 6 hereof have such consequences. Any such request for a
ruling from the IRS shall be promptly prepared and filed by the Employer, but in
no event later than thirty (30) days from the date of the opinion of counsel
referred to above, and shall be subject to Executive's approval prior to filing,
which shall not be unreasonably withheld. The Employer and Executive agree to be
bound by any ruling received from the IRS and to make appropriate payments to
each other to reflect any such rulings, together with interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained
herein shall result in a reduction of any payments or benefits to which the
Executive may be entitled upon termination of employment under any circumstances
other than as specified in this Section 7, or a reduction in the payments and
benefits specified in Section 6 below zero.
8. Mitigation; Covenant Not To Compete; Exclusivity of Benefits.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
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(b) The Executive hereby agrees that, following the termination of his
employment under this Agreement for any reason, other than following a Change in
Control of the Corporation, he will not, for a period of time equal to what
would have been the then remaining term of this Agreement absent his termination
of employment, directly or indirectly and in any way, whether as principal or as
director, officer, employee, consultant, agent, partner or stockholder to
another entity (other than by the ownership of a passive investment interest of
not more than 5% in a company with publicly traded equity securities), (i) own,
manage, operate, control, be employed by, participate in, or be connected in any
manner with the ownership, management, operation or control of any business
located within 50 miles of any of the branch offices of the Corporation's
subsidiary banks that are in existence during the term of this Agreement and
prior to a Change in Control of the Corporation that competes with any business
of the Employer; (ii) interfere with, solicit on behalf of another or attempt to
entice away from the Employer any project, loan, arrangement, agreement,
financing or customer of the Employer or any contract, agreement or arrangement
that the Employer is actively negotiating with any other party, or any
prospective business opportunity that the Employer has identified; or (iii) for
himself or another, hire, attempt to hire, or assist in or facilitate in any way
the hiring of any employee of the Employer.
(c) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or otherwise.
9. Withholding. All payments required to be made by the Employer
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employer may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
10. Assignability. The Employer may assign this Agreement and their
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Employer may hereafter merge or
consolidate or to which the Employer may transfer all or substantially all of
their assets, if in any such case said corporation, bank or other entity shall
by operation of law or expressly in writing assume all obligations of the
Employer hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or their rights and obligations
hereunder. The Executive may not assign or transfer this Agreement or any rights
or obligations hereunder.
11. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
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To the Employer: C. Thomas Young
Chairman of the Board of Directors
Community Bank Shares of Indiana, Inc.
202 East Spring Street
New Albany, Indiana 47150
To the Executive: Michael L. Douglas
4108 Sylvan Drive
Floyds Knob, Indiana 47119
12. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Employer to sign on
their behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of Indiana.
14. Nature of Obligations. Nothing contained herein shall create or
require the Employer to create a trust of any kind to fund any benefits which
may be payable hereunder, and to the extent that the Executive acquires a right
to receive benefits from the Employer hereunder, such right shall be no greater
than the right of any unsecured general creditor of the Employer.
15. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument
18. Regulatory Prohibition. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section l8~) of the Federal Deposit Insurance Act (12 U.S.C. ss.1828(k))
and any regulations promulgated thereunder.
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IN WITNESS WHEREOF, this Agreement has been executed on March 16th,
1999 and is effective as of May 20, 1998.
Attest: Community Bank Shares
of Indiana, Inc.
/s/ M. Diane Murphy By: /s/ C. Thomas Young
- -------------------------- -------------------------
M. Diane Murphy, Secretary C. Thomas Young, Chairman
By: /s/ Michael L. Douglas
-------------------------
Michael L. Douglas
EXHIBIT 10.2 -- 1995 Stock Option adopted by NCF Financial Corporation
Exhibit A
NCF FINANCIAL CORPORATION
1995 STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as the NCF Financial
Corporation ("Corporation") 1995 Stock Option Plan (the "Plan"). The purpose of
the Plan is to attract and retain qualified personnel for positions of
substantial responsibility and to provide additional incentive to officers,
directors, key employees and other persons providing services to the
Corporation, or any present or future parent or subsidiary of the Corporation to
promote the success of the business. The Plan is intended to provide for the
grant of "Incentive Stock Options," within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") and Non-Incentive Stock
Options, options that do not so qualify. The provisions of the Plan relating to
Incentive Stock Options shall be interpreted to conform to the requirements of
Section 422 of the Code.
2. Definitions. As used herein, the following definitions shall apply.
(a) "Award" means the grant by the Committee of an Incentive Stock
Option or a Non-Incentive Stock Option, or any combination thereof, as provided
in the Plan.
(b) "Board" shall mean the Board of Directors of the Corporation, or
any successor or parent corporation thereto.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the Stock Option Committee appointed by
the Board in accordance with paragraph 5(a) of the Plan.
(e) "Common Stock" shall mean common stock, par value $.10 per
share, of the Corporation, or any successor or parent corporation thereto.
(f) "Continuous Employment" or "Continuous Status as an Employee"
shall mean the absence of any interruption or termination of employment with the
Corporation or any present or future Parent or Subsidiary of the Corporation.
Employment shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence approved by the Corporation or in
the case of transfers between payroll locations, of the Corporation or between
the Corporation, its Parent, its Subsidiaries or a successor.
(g) "Corporation" shall mean the NCF Financial Corporation, the
parent corporation for the Savings Association, or any successor or Parent
thereof.
(h) "Director" shall mean a member of the Board of the Corporation,
or any successor or parent corporation thereto.
(i) "Director Emeritus" shall mean a person serving as a director
emeritus, advisory director, consulting director or other similar position as
may be appointed by the Board of Directors of the Savings Association or the
Corporation from time to time.
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(j) "Effective Date" shall mean the date specified in Section 15
hereof.
(k) "Employee" shall mean any person employed by the Corporation or
any present or future Parent or Subsidiary of the Corporation.
(l) "Fair Market Value" shall mean: If the Common Stock is traded
otherwise than on a national securities exchange, then the Fair Market Value
shall be not less than the mean between the last reported bid and ask price on
the date of valuation or, if there is no bid and ask price on said date, then on
the next prior business day on which there was a bid and ask price. If no such
bid and ask price is available, then the Fair Market Value shall be determined
by the Committee in good faith. If the Common Stock is listed on a national
securities exchange on the date of valuation, then the Fair Market Value shall
be not less than the average of the highest and lowest selling price of the
Common Stock on such exchange on the date of valuation or, if there were no
sales on said date, then the Fair Market Value shall be not less than the mean
between the bid and ask price on such date.
(m) "Incentive Stock Option" or "ISO" shall mean an option to
purchase Shares granted by the Committee pursuant to Section 8 hereof which is
subject to the limitations and restrictions of Section 8 hereof and is intended
to qualify under Section 422 of the Code.
(n) "Non-Incentive Stock Option" or "Non-ISO" shall mean an option
to purchase Shares granted pursuant to Section 9 hereof, which option is not
intended to qualify under Section 422 of the Code.
(o) "Option" shall mean an Incentive or Non-Incentive Stock Option
granted pursuant to this Plan providing the holder of such Option with the right
to purchase Common Stock.
(p) "Optioned Stock" shall mean stock subject to an Option granted
pursuant to the Plan.
(q) "Optionee" shall mean any person who receives an Option or Award
pursuant to the Plan.
(r) "Parent" shall mean any present or future corporation which
would be a "parent corporation" as defined in Subsections 424(e) and (g) of the
Code.
(s) "Participant" means any director, officer or key employee of the
Corporation or any Parent or Subsidiary of the Corporation or any other person
providing a service to the Corporation who is selected by the Committee to
receive an Award, or who by the express terms of the Plan is granted an Award.
(t) "Plan" shall mean the NCF Financial Corporation 1995 Stock
Option Plan.
(u) "Savings Association" shall mean Nelson County Federal Savings
and Loan Association, or any successor corporation thereto.
(v) "Share" shall mean one share of the Common Stock.
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(w) "Subsidiary" shall mean any present or future corporation which
constitutes a "subsidiary corporation" as defined in Subsections 424(f) and (g)
of the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 13 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 77,050. Such
Shares may either be authorized but unissued shares, treasury shares or shares
purchased in the market for Plan purposes.
An Award shall not be considered to be made under the Plan with respect to
any Option which terminates prior to its exercise, and new Awards may be granted
under the Plan with respect to the number of Shares as to which such termination
has occurred.
4. Six Month Holding Period.
------------------------
Subject to vesting requirements, if applicable, except in the event
of death or disability of the Optionee, a minimum of six months must elapse
between the date of the grant of an Option and the date of the sale of Common
Stock received through the exercise of such Option.
5. Administration of the Plan.
--------------------------
(a) (i) Composition of the Committee. Except as indicated in
paragraph 5(a)(ii) below, the Plan shall be administered by the Committee which
shall consist of at least three non-employee Directors of the Corporation
appointed by the Board and serving at the pleasure of the Board. All persons
designated as members of the Committee shall be "disinterested persons" within
the meaning of Rule 16b-3 under the Securities Exchange Act of 1934.
(ii) For the purpose of granting Awards to directors, the
selection of any Director to whom Awards may be granted, as well as the number
of Shares subject to Awards, must be determined by a "disinterested committee",
as defined in Rule 16b-3 under the Securities Exchange Act of 1934.
(b) Powers of the Committee. The Committee is authorized (but only
to the extent not contrary to the express provisions of the Plan or to
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The President of the Corporation and such other officers as shall be
designated by the Committee are hereby authorized to execute instruments
evidencing Awards on behalf of the Corporation and to cause them to be delivered
to the Participants.
(c) Effect of Committee's Decision. All decisions, determinations
and interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
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6. Eligibility.
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(a) The Committee shall from time to time determine the
officers, Directors, key employees and other persons who shall be granted Awards
under the Plan, the number of Awards to be granted to each such officer,
Director, key employee and other persons under the Plan, and whether Awards
granted to each such Participant under the Plan shall be Incentive and/or
Non-Incentive Stock Options. In selecting Participants and in determining the
number of Shares of Common Stock to be granted to each such Participant, the
Committee may consider the nature of the services rendered by each such
Participant, each such Participant's current and potential contribution to the
Corporation and such other factors as the Committee may, in its sole discretion,
deem relevant. Participants who have been granted an Award may, if otherwise
eligible, be granted additional Awards.
(b) The aggregate Fair Market Value (determined as of the date
the Option is granted) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by each Employee during any calendar
year (under all Incentive Stock Option plans, as defined in Section 422 of the
Code, of the Corporation or any present or future Parent or Subsidiary of the
Corporation) shall not exceed $100,000. Notwithstanding the prior provisions of
this Section 6, the Committee may grant Options in excess of the foregoing
limitations, provided said Options shall be clearly and specifically designated
as not being Incentive Stock Options.
(c) In no event shall Shares subject to Options granted to
non-employee Directors in the aggregate under this Plan exceed more than 30% of
the total number of Shares authorized for delivery under this Plan pursuant to
Section 3 herein or more than 5% to any individual non-employee Director. In no
event shall Shares subject to Options granted to any Employee exceed more than
25% of the total number of Shares authorized for delivery under the Plan.
7. Term of the Plan. The Plan shall continue in effect for a term of ten
(10) years from the Effective Date, unless sooner terminated pursuant to Section
18 hereof. No Option shall be granted under the Plan after ten (10) years from
the Effective Date.
8. Terms and Conditions of Incentive Stock Options. Incentive Stock
Options may be granted only to Participants who are Employees. Each Incentive
Stock Option granted pursuant to the Plan shall be evidenced by an instrument in
such form as the Committee shall from time to time approve. Each Incentive Stock
Option granted pursuant to the Plan shall comply with, and be subject to, the
following terms and conditions:
(a) Option Price.
(i) The price per Share at which each Incentive Stock Option
granted under the Plan may be exercised shall not, as to any particular
Incentive Stock Option, be less than the Fair Market Value of the Common Stock
at the time such Incentive Stock Option is granted.
(ii) In the case of an Employee who owns Common Stock
representing more than ten percent (10%) of the outstanding Common Stock at the
time the Incentive Stock Option is granted, the Incentive Stock Option exercise
price shall not be less than one hundred and ten percent (110%) of the Fair
Market Value of the Common Stock at the time the Incentive Stock Option is
granted.
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(b) Payment. Full payment for each Share of Common Stock purchased
upon the exercise of any Incentive Stock Option granted under the Plan shall be
made at the time of exercise of each such Incentive Stock Option and shall be
paid in cash (in United States Dollars), Common Stock or a combination of cash
and Common Stock. Common Stock utilized in full or partial payment of the
exercise price shall be valued at its Fair Market Value at the date of exercise.
The Corporation shall accept full or partial payment in Common Stock only to the
extent permitted by applicable law. No Shares of Common Stock shall be issued
until full payment therefor has been received by the Corporation, and no
Optionee shall have any of the rights of a stockholder of the Corporation until
Shares of Common Stock are issued to him.
(c) Term of Incentive Stock Option. The term of exercisability of
each Incentive Stock Option granted pursuant to the Plan shall be not more than
ten (10) years from the date each such Incentive Stock Option is granted,
provided that in the case of an Employee who owns stock representing more than
ten percent (10%) of the Common Stock outstanding at the time the Incentive
Stock Option is granted, the term of the Incentive Stock Option shall not exceed
five (5) years.
(d) Exercise Generally. Except as otherwise provided in Section 10
hereof, no Incentive Stock Option may be exercised unless the Optionee shall
have been in the employ of the Corporation at all times during the period
beginning with the date of grant of any such Incentive Stock Option and ending
on the date three (3) months prior to the date of exercise of any such Incentive
Stock Option. The Committee may impose additional conditions upon the right of
an Optionee to exercise any Incentive Stock Option granted hereunder which are
not inconsistent with the terms of the Plan or the requirements for
qualification as an Incentive Stock Option. Except as otherwise provided by the
terms of the Plan or by action of the Committee at the time of the grant of the
Options, the Options will be first exercisable at the rate of 20% on the one
year anniversary of the date of grant and 20% annually thereafter during such
periods of service as an Employee, Director or Director Emeritus.
(e) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held an Incentive Stock Option for at least six
months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee gives the Corporation written notice of the exercise of
the Option together with an order to a registered broker-dealer or equivalent
third party, to sell part or all of the Optioned Stock and to deliver enough of
the proceeds to the Corporation to pay the Option exercise price and any
applicable withholding taxes. If the Optionee does not sell the Optioned Stock
through a registered broker-dealer or equivalent third party, the Optionee can
give the Corporation written notice of the exercise of the Option and the third
party purchaser of the Optioned Stock shall pay the Option exercise price plus
any applicable withholding taxes to the Corporation.
(f) Transferability. Any Incentive Stock Option granted pursuant to
the Plan shall be exercised during an Optionee's lifetime only by the Optionee
to whom it was granted and shall not be assignable or transferable otherwise
than by will or by the laws of descent and distribution.
9. Terms and Conditions of Non-Incentive Stock Options. Each
Non-Incentive Stock Option granted pursuant to the Plan shall be evidenced by an
instrument in such form as the Committee shall from time to time approve. Each
Non-Incentive Stock Option granted pursuant to the Plan shall comply with and be
subject to the following terms and conditions.
(a) Options Granted to Directors. Subject to the limitations of
Section 6(c), Non- Incentive Stock Options to purchase 3,852 shares of Common
Stock will be granted to each Director who
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is not an Employee as of the Effective Date, at an exercise price equal to the
Fair Market Value of the Common Stock on such date of grant. Options may be
granted to newly appointed or elected non-employee Directors within the sole
discretion of the Committee. The Options will be exercisable at the rate of 20%
on the one year anniversary of the Effective Date of the Plan and 20% annually
thereafter during such periods of service as director or director emeritus. Upon
the death or disability of the director or director emeritus, or upon a change
or control of the Savings Association or the Corporation as provided at Section
13(b) herein, such Option shall be deemed immediately 100% exercisable. The
exercise price per Share of such Options granted shall be equal to the Fair
Market Value of the Common Stock at the time such Options are granted. Such
Options shall continue to be exercisable for a period of ten years following the
date of grant during periods of continued services of such Directors as a
Director or Director Emeritus; provided however that such Options shall cease to
be exerciseable following the date that is two years after the date of
Disability or death, or one year after the date of termination of service as a
Director or Director Emeritus, if earlier. In the event of the Optionee's death,
such Options may be exercised by the personal representative of his estate or
person or persons to whom his rights under such Option shall have passed by will
or by laws of descent and distribution. Unless otherwise inapplicable, or
inconsistent with the provisions of this paragraph, the Options to be granted to
Directors hereunder shall be subject to all other provisions of this Plan.
(b) Option Price. The exercise price per Share of Common Stock for
each Non-Incentive Stock Option granted pursuant to the Plan, other than Options
granted pursuant to Section 9(a) herein, shall be at such price as the Committee
may determine in its sole discretion, but in no event less than the Fair Market
Value of such Common Stock on the date of grant as determined by the Committee
in good faith.
(c) Payment. Full payment for each Share of Common Stock purchased
upon the exercise of any Non-Incentive Stock Option granted under the Plan shall
be made at the time of exercise of each such Non-Incentive Stock Option and
shall be paid in cash (in United States Dollars), Common Stock or a combination
of cash and Common Stock. Common Stock utilized in full or partial payment of
the exercise price shall be valued at its Fair Market Value at the date of
exercise. The Corporation shall accept full or partial payment in Common Stock
only to the extent permitted by applicable law. No Shares of Common Stock shall
be issued until full payment therefor has been received by the Corporation and
no Optionee shall have any of the rights of a stockholder of the Corporation
until the Shares of Common Stock are issued to him.
(d) Term. The term of exercisability of each Non-Incentive Stock
Option granted pursuant to the Plan shall be not more than ten (10) years from
the date each such Non-Incentive Stock Option is granted.
(e) Exercise Generally. The Committee may impose additional
conditions upon the right of any Participant to exercise any Non-Incentive Stock
Option granted hereunder which is not inconsistent with the terms of the Plan.
(f) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held a Non-Incentive Stock Option for at least
six months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee gives the Corporation written notice of the exercise of
the Option together with an order to a registered broker-dealer or equivalent
third party, to sell part or all of the Optioned Stock and to deliver enough of
the proceeds to the Corporation to pay the Option exercise price and any
applicable withholding taxes. If the Optionee does not sell the Optioned Stock
A-6
<PAGE>
through a registered broker-dealer or equivalent third party, the Optionee can
give the Corporation written notice of the exercise of the Option and the third
party purchaser of the Optioned Stock shall pay the Option exercise price plus
any applicable withholding taxes to the Corporation.
(g) Transferability. Any Non-Incentive Stock Option granted pursuant
to the Plan shall be exercised during an Optionee's lifetime only by the
Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
10. Effect of Termination of Employment, Disability or Death on Incentive
---------------------------------------------------------------------
Stock Options.
- --------------
(a) Termination of Employment. In the event that any Optionee's
employment with the Corporation shall terminate for any reason, other than
Permanent and Total Disability (as such term is defined in Section 22(e)(3) of
the Code) or death, all of any such Optionee's Incentive Stock Options, and all
of any such Optionee's rights to purchase or receive Shares of Common Stock
pursuant thereto, shall automatically terminate on the earlier of (i) the
respective expiration dates of any such Incentive Stock Options, or (ii) the
expiration of not more than three (3) months after the date of such termination
of employment, or (iii) at such later date as determined by the Committee at the
time of the grant of such Award, based upon the Optionee's continuing status as
a Director or Director Emeritus of the Savings Association or the Corporation,
but only if, and to the extent that, the Optionee was entitled to exercise any
such Incentive Stock Options at the date of such termination of employment, and
further that such Award shall thereafter be deemed a Non-Incentive Stock Option.
In the event that a Subsidiary ceases to be a Subsidiary of the Corporation, the
employment of all of its employees who are not immediately thereafter employees
of the Corporation shall be deemed to terminate upon the date such Subsidiary so
ceases to be a Subsidiary of the Corporation.
(b) Disability. In the event that any Optionee's employment with the
Corporation shall terminate as the result of the Permanent and Total Disability
of such Optionee, such Optionee may exercise any Incentive Stock Options granted
to him pursuant to the Plan at any time prior to the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the date
which is one (1) year after the date of such termination of employment, but only
if, and to the extent that, the Optionee was entitled to exercise any such
Incentive Stock Options at the date of such termination of employment.
(c) Death. In the event of the death of an Optionee, any Incentive
Stock Options granted to such Optionee may be exercised by the person or persons
to whom the Optionee's rights under any such Incentive Stock Options pass by
will or by the laws of descent and distribution (including the Optionee's estate
during the period of administration) at any time prior to the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the date
which is two (2) years after the date of death of such Optionee but only if, and
to the extent that, the Optionee was entitled to exercise any such Incentive
Stock Options at the date of death. For purposes of this Section 10(c), any
Incentive Stock Option held by an Optionee shall be considered exercisable at
the date of his death if the only unsatisfied condition precedent to the
exercisability of such Incentive Stock Option at the date of death is the
passage of a specified period of time. At the discretion of the Committee, upon
exercise of such Options the Optionee may receive Shares or cash or combination
thereof. If cash shall be paid in lieu of Shares, such cash shall be equal to
the difference between the Fair Market Value of such Shares and the exercise
price of such Options on the exercise date.
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<PAGE>
(d) Incentive Stock Options Deemed Exercisable. For purposes of
Sections 10(a), 10(b) and 10(c) above, any Incentive Stock Option held by any
Optionee shall be considered exercisable at the date of termination of his
employment if any such Incentive Stock Option would have been exercisable at
such date of termination of employment without regard to the Permanent and Total
Disability or death of the Participant.
(e) Termination of Incentive Stock Options. Except as may be
specified by the Committee at the time of grant of an Option, to the extent that
any Incentive Stock Option granted under the Plan to any Optionee whose
employment with the Corporation terminates shall not have been exercised within
the applicable period set forth in this Section 10, any such Incentive Stock
Option, and all rights to purchase or receive Shares of Common Stock pursuant
thereto, as the case may be, shall terminate on the last day of the applicable
period.
11. Effect of Termination of Employment, Disability or Death on
Non-Incentive Stock Options. The terms and conditions of Non-Incentive Stock
Options relating to the effect of the termination of an Optionee's employment or
service, disability of an Optionee or his death shall be such terms and
conditions as the Committee shall, in its sole discretion, determine at the time
of termination of service, unless specifically provided for by the terms of the
Agreement at the time of grant of the Award; provided however that such Options
shall cease to be exerciseable not later than the date that is two years after
the date of Disability or death, or one year after the date of termination of
service as an Employee, Director or Director Emeritus.
12. Allocation of Plan Expenses. The Corporation shall reimburse the
Savings Association for all expenses associated with Awards under the Plan with
respect to: a) the vesting of Awards made in accordance with Section 9(a) to the
extent that such vesting occurs after the date that such Participant is no
longer serving as a director of the Savings Association, and b) the vesting of
Awards held by former Employees that continue to serve as a Director or Director
Emeritus to the extent that such vesting shall occur after the last date of
service as an Employee of the Savings Association and the level of Awards that
vest shall exceed the amount that such Participant would have received had he or
she been solely a director of the Savings Association and not an Employee as of
the Effective Date.
13. Recapitalization, Merger, Consolidation, Change in Control and Other
----------------------------------------------------------------------
Transactions.
- -------------
(a) Adjustment. Subject to any required action by the stockholders
of the Corporation, within the sole discretion of the Committee, the aggregate
number of Shares of Common Stock for which Options may be granted hereunder, the
number of Shares of Common Stock covered by each outstanding Option, and the
exercise price per Share of Common Stock of each such Option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt of consideration by the Corporation (other than
Shares held by dissenting stockholders).
(b) Change in Control. All outstanding Awards shall become
immediately exercisable in the event of a change in control of the Corporation,
as determined by the Committee, provided that such accelerated vesting is not
inconsistent with applicable regulations of the Office of
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<PAGE>
Thrift Supervision at the time of such change in control. In the event of such a
change in control, the Optionee shall, at the discretion of the Committee, be
entitled to receive cash in an amount equal to the Fair Market Value of the
Common Stock subject to any Incentive or Non-Incentive Stock Option over the
Option Price of such Shares, in exchange for the surrender of such Options by
the Optionee on that date in the event of a change in control of the
Corporation. For purposes of this Section 13, "change in control" shall mean:
(i) the execution of an agreement for the sale of all, or a material portion, of
the assets of the Corporation; (ii) the execution of an agreement for a merger
or recapitalization of the Corporation or any merger or recapitalization whereby
the Corporation is not the surviving entity; (iii) a change of control of the
Corporation, as otherwise defined or determined by the Office of Thrift
Supervision or regulations promulgated by it; or (iv) the acquisition, directly
or indirectly, of the beneficial ownership (within the meaning of that term as
it is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder) of twenty-five percent (25%) or more of
the outstanding voting securities of the Corporation by any person, trust,
entity or group. This limitation shall not apply to the purchase of shares by
underwriters in connection with a public offering of Corporation stock, or the
purchase of shares of up to 25% of any class of securities of the Corporation by
a tax-qualified employee stock benefit plan which is exempt from the approval
requirements, set forth under 12 C.F.R. ss.574.3(c)(1)(vi) as now in effect or
as may hereafter be amended. The term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Committee as to whether a change
in control has occurred shall be conclusive and binding.
(c) Extraordinary Corporate Action. Notwithstanding any provisions
of the Plan to the contrary, subject to any required action by the stockholders
of the Corporation, in the event of any change in control, recapitalization,
merger, consolidation, exchange of Shares, spin-off, reorganization, tender
offer, partial or complete liquidation or other extraordinary corporate action
or event, the Committee, in its sole discretion, shall have the power, prior or
subsequent to such action or event to:
(i) appropriately adjust the number of Shares of Common Stock
subject to each Option, the exercise price per Share of Common Stock, and the
consideration to be given or received by the Corporation upon the exercise of
any outstanding Option;
(ii) cancel any or all previously granted Options, provided
that appropriate consideration is paid to the Optionee in connection therewith;
and/or
(iii) make such other adjustments in connection with the Plan
as the Committee, in its sole discretion, deems necessary, desirable,
appropriate or advisable; provided, however, that no action shall be taken by
the Committee which would cause Incentive Stock Options granted pursuant to the
Plan to fail to meet the requirements of Section 422 of the Code without the
consent of the Optionee.
Except as expressly provided in Sections 13(a) and 13(b) hereof, no
Optionee shall have any rights by reason of the occurrence of any of the events
described in this Section 13. Notwithstanding anything herein at Section 13(c)
to the contrary, no action of the Board or the Committee with respect to
administration of the Plan or Awards thereunder shall be taken which shall be in
violation of applicable law, or applicable regulations or policies of the OTS in
effect at the time of such action.
A-9
<PAGE>
(d) Acceleration. The Committee shall at all times have the power to
accelerate the exercise date of Options previously granted under the Plan;
provided that such action is not contrary to regulations of the OTS then in
effect.
14. Time of Granting Options. The date of grant of an Option under the
Plan shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option, but in no event prior to the Effective
Date. Notice of the grant of an Option shall be given to each individual to whom
an Option is so granted within a reasonable time after the date of such grant in
a form determined by the Committee.
15. Effective Date. The Plan shall become effective upon the date of
approval of the Plan by the stockholders of the Corporation, subject to approval
or non-objection by the Office of Thrift Supervision, if applicable.
16. Approval by Stockholders. The Plan shall be approved by stockholders
of the Corporation within twelve (12) months before or after the date the Plan
is approved by the Board.
17. Modification of Options. At any time and from time to time, the Board
may authorize the Committee to direct the execution of an instrument providing
for the modification of any outstanding Option, provided no such modification,
extension or renewal shall confer on the holder of said Option any right or
benefit which could not be conferred on him by the grant of a new Option at such
time, or shall not materially decrease the Optionee's benefits under the Option
without the consent of the holder of the Option, except as otherwise permitted
under Section 18 hereof. Notwithstanding the foregoing, in no event shall the
exercise price per Share of an Option be reduced except in such instances where
the product of the exercise price per Share times the number of Shares subject
to Options shall remain the same.
18. Amendment and Termination of the Plan.
-------------------------------------
(a) Action by the Board. The Board may alter, suspend or discontinue
the Plan, except that no action of the Board may increase (other than as
provided in Section 13 hereof) the maximum number of Shares permitted to be
optioned under the Plan, materially increase the benefits accruing to
Participants under the Plan or materially modify the requirements for
eligibility for participation in the Plan unless such action of the Board shall
be subject to approval or ratification by the stockholders of the Corporation.
(b) Change in Applicable Law. Notwithstanding any other provision
contained in the Plan, in the event of a change in any federal or state law,
rule or regulation which would make the exercise of all or part of any
previously granted Option unlawful or subject the Corporation to any penalty,
the Committee may restrict any such exercise without the consent of the Optionee
or other holder thereof in order to comply with any such law, rule or regulation
or to avoid any such penalty.
19. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to any Option granted under the Plan unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities laws and the
requirements of any stock exchange upon which the Shares may then be listed.
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<PAGE>
The inability of the Corporation to obtain any necessary authorizations,
approvals or letters of non-objection from any regulatory body or authority
deemed by the Corporation's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder shall relieve the Corporation of any liability in
respect of the non-issuance or sale of such Shares.
As a condition to the exercise of an Option, the Corporation may require
the person exercising the Option to make such representations and warranties as
may be necessary to assure the availability of an exemption from the
registration requirements of federal or state securities law.
Notwithstanding anything herein to the contrary, upon the termination of
service of an Optionee by the Corporation or its Subsidiaries for "cause" as
defined at 12 C.F.R. 563.39(b)(1) as determined by the Board of Directors, all
Options held by such Participant shall cease to be exercisable as of the date of
such termination of service.
20. Reservation of Shares. During the term of the Plan, the Corporation
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
21. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Corporation by reason of the Plan
or the grant of any Option under the Plan. No trust fund shall be created in
connection with the Plan or any grant of any Option hereunder and there shall be
no required funding of amounts which may become payable to any Participant.
22. Withholding Tax. The Corporation shall have the right to deduct from
all amounts paid in cash with respect to the cashless exercise of Options under
the Plan any taxes required by law to be withheld with respect to such cash
payments. Where a Participant or other person is entitled to receive Shares
pursuant to the exercise of an Option pursuant to the Plan, the Corporation
shall have the right to require the Participant or such other person to pay the
Corporation the amount of any taxes which the Corporation is required to
withhold with respect to such Shares, or, in lieu thereof, to retain, or sell
without notice, a number of such Shares sufficient to cover the amount required
to be withheld.
23. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky, except to the extent
that federal law shall be deemed to apply.
A-11
Exhibit 13 -- Annual Report to Shareholders
moving into the next century
[Picture: A series of arches or entranceways]
community bank shares of indiana, inc.
<PAGE>
About Our Cover
Our cover photograph shows a series of arches or entranceways, a symbol of the
choices Community Bank Shares has faced in the past and will continue to face as
it progresses, as well as the need to continue moving forward, to venture into
the next arena and face the next challenge. The architecture of the image
captures the sense of history and tradition which serves as the foundation for
the company's growth and vision for the future.
Running through our "gatefold" cover is a timeline which highlights key moments
in that history, while also reflecting the consistent manner in which we have
moved forward on behalf of our shareholders, our customers and our own people.
<PAGE>
Dear Shareholders:
The past year has been one of significant change and growth for our company. We
completed the merger with NCF Bank and Trust, in Bardstown, Kentucky, on May 6,
1998, which allowed us to expand into the emerging Nelson County market. At the
end of May, Robert E. Yates retired as president and chief executive officer of
our company. We want to thank Bob for his leadership over the last 10 years, and
we wish the best for Bob and his wife, Darlene, in the coming years.
At the time of Bob's retirement, Michael L. Douglas joined the company as
president and chief executive officer of Community Bank Shares. Thomas M. Jones
was promoted to president of Community Bank and Patrick Daily was promoted to
president of Heritage Bank. These changes broadened and strengthened our
management team for future success.
As we anticipated, all of the markets that we compete in have become more
competitive. The financial services industry is being challenged by a host of
competitors from other industries, which do not have nearly the rules and
regulations that are imposed on banking institutions. Despite the competitive
pressures from within and outside the industry, Community Bank Shares was able
to grow assets in excess of 15%, from $288,485,710, in 1997, to $331,913,305, in
1998. This growth was primarily fueled by an increase in our commercial lending
activities, which ended the year at $83,480,543, compared to $50,361,402 last
year, an increase of 65.8%. We continue our efforts to restructure our balance
sheet into these higher-yielding earning assets, while being ever mindful of
credit quality.
Excluding merger-related and other non-recurring expenses, basic earnings per
share for 1998 were $1.11, compared to $1.01 the previous year. Although this
increase was less than our expectations, we are confident that the earnings
momentum is good for 1999. Several investments were made last year that will be
valuable contributors to future earnings. We opened a new banking center at both
Heritage Bank and NCF Bank, to provide greater convenience to current customers
and an opportunity to attract new business. A mortgage origination group was
created that generated record levels of mortgages in the fourth quarter of last
year. In addition, our deposit and loan services groups were strengthened to
support our robust growth and our forecast for commercial loan and deposit
activities.
<PAGE>
Community Bank Shares' success is based on a very fundamental principle -
locally owned and operated financial institutions that have a commitment to the
success of their community. Each of our banking affiliates has strong local
boards of directors who are led by successful business people and are dedicated
to assisting management in our pursuit of new business. These directors are
integral to our strategies and success. We empower our staff, which allows them
to provide timely responses to customer and prospect needs. This local
decision-making process is a key difference between our organization and our
competitors. As this concept continues to work for us, one of the greatest
benefits has been the high level of referrals and testimonials from our current
customers. We appreciate the support from these customers, and we promise to
deliver the level of performance that is expected.
A key attribute to the success of any company is the quality and commitment of
its people. Our organization is fortunate to have a group of professional,
competent, and caring employees. These people are the front line support with
our customers, and they strive to deliver, every day, the best service
available. Many of our associates are active in civic and social organizations,
on a voluntary basis, providing their time and talent to make each of our
communities a better place to live.
The future of our company will be based on our ability to deliver quality
products and services that address the ever-changing needs of our customers. We
accept the challenge to work diligently to continue to earn the confidence of
our shareholders and customers. We will pursue our 1999 objectives for growth
and profitability, while being committed to the economic prosperity of the
communities that we serve.
We would like to thank you for your support of our company, on behalf of the
directors, management, and our loyal employees.
Sincerely,
COMMUNITY BANK SHARES OF INDIANA, INC.
C. Thomas Young Michael L. Douglas
Chairman President and CEO
[Timeline highlighting key moments in the history of Community Bankshares of
Indiana, Inc.]
<PAGE>
Vision:
An interstate holding company of community banks and financial service
companies.
Community Bank Shares endeavors to achieve its vision by partnering with
financial service companies who understand the competitive benefits of
cost-effective access to shared operational and financial areas. The partners
agree that these areas are not limited to, but include, operations, product
services, liquidity and capital. While the affiliates recognize that these
services may be best obtained from the holding company structure, each entity
maintains its competitive niche as a community-directed 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 these: 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.
Table of Contents:
Vision Statement - Community Bank Shares of Indiana, Inc Inside Front Cover
Letter to Shareholders Inside Front Cover
Listing of Members of the Board of Directors and Officers 02
Letter to Shareholders-- Community Bank 03
Letter to Shareholders-- Heritage Bank 04
Letter to Shareholders-- NCF Bank 05
Management's Discussion & Analysis 06
Selected Consolidated Financial and Other Data 07
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
Stockholder Information Inside Back Cover
1
<PAGE>
Directors
C. Thomas Young, Chairman of the Board
Timothy T. Shea, Vice Chairman of the Board
Michael L. Douglas, Director, President and CEO
Gordon L. Huncilman
Robert J. Koetter, Sr.
Gary L. Libs
Dale L. Orem
James W. Robinson
Kerry M. Stemler
Steven Stemler
Robert E. Yates
Edward Pinaire: Special Consultant to the Board
Officers
James M. Stutsman,
Senior Vice President,
Chief Financial Officer
Stanley L. Krol,
Senior Vice President,
Chief Operations Officer
M. Diane Murphy,
Senior Vice President,
Human Resources
Pamela P. Echols,
Corporate Secretary
Thomas M. Jones,
Senior Vice President,
Business Services
Gray Ball
Senior Vice President,
Earning Assets Administration
2
<PAGE>
Community Bank of Southern Indiana
[Community Bank Logo]
Dear Shareholders:
1998 was another good year for Community Bank. The net income of $2,511,000
compares favorably to last year's net income of $2,301,000. Also, total assets
increased $13,307,000, to end the year at $231,823,000. Most pleasing is the
growth that was achieved in the business services division of our company. As we
restructure our balance sheet from its thrift origins, an emphasis on commercial
business will be prominent, while maintaining Community's dedication to our
traditional consumer products. A return on equity of 10.76% and a return on
assets of 1.14% are both respectable ratios, when measured against peers in our
marketplace in general, as well Community Bank's historical performance
specifically.
Community's banking growth, and corresponding profitability, will remain focused
on our funding sources. While total deposits decreased for the year, total
liabilities (funding sources) were up 6.0%, as we increased the bank's
utilization of advances from the Federal Home Loan Bank. This lower cost funding
source decreased our reliance on higher-costing certificates of deposit in 1998,
and this trend should continue in the future. As competition for deposits
heightens from both our bank and non-bank competitors, Community will continue
to place an emphasis on core consumer and business checking accounts.
Loan quality remains good with nearly nonexistent delinquencies across our
various portfolios. Despite our confidence in the lending function, however, it
seems prudent to build reserves, which at year-end totaled $798,000, or 0.56% of
loans outstanding. The reserve for loan losses, at year-end, was in excess of
two times our under-performing assets of $391,000. Like asset quality, capital
has always been important to Community. A 1998 year-end equity base of 10.3% of
assets is a ratio with which we feel comfortable.
A very important vehicle that this document provides is that of public thanks.
Our employees have contributed to this community with time and effort, and their
own money. I am very proud to serve with them and for them. Thank you all. The
directors of Community Bank are without peer as a board. They play an integral
role in both our past accomplishments and our future successes. To each of you I
say thanks, as well. A special thanks must also go to our customers and friends.
Without you, all that is said above would not be possible. We look forward to
putting a new mark on our community this year as we move to our new headquarters
down the street. Our Community bankers are more skilled and better trained than
at any point in our Company's recent history, and we plan to prove that by
providing you with an even more rewarding 1999.
Sincerely,
Thomas M. Jones
President and CEO
COMMUNITY BANK OF SOUTHERN INDIANA
Community Bank of Southern Indiana Directors:
C. Thomas Young, Chairman of the Board
Gary L. Libs, Vice Chairman
Thomas M. Jones, Director, President and CEO
Michael L. Douglas
Gordon L. Huncilman
Gerald Koetter
Robert J. Koetter, Sr.
James W. Robinson
Timothy T. Shea
Kerry M. Stemler
Edward Pinaire: Special Consultant to the Board
3
<PAGE>
Heritage Bank of Southern Indiana
[Heritage Bank Logo]
Dear Shareholders,
l998 was an exciting year for Heritage Bank customers, employees, and board
members. We saw the bank grow from $35 million in assets in 1997, to $56 million
in 1998, a growth rate of 60%. The company's net income grew from $207,000 in
1997, to $254,000. Through diligent work from the staff and the board of
directors, we were successful in growing our customer base in Clark County. This
was highlighted by the opening of our new office on Highway 62, where we feel
the growth opportunities are significant.
Our Heritage Financial Services Group finished 1998 in record fashion. This
department generated fees in excess of $500,000. This was attained despite a
sometimes turbulent year in the financial markets. The staff is well positioned
to build on this success in the coming year.
Throughout the year, the bank contributed, in both financial terms and employee
volunteerism, to many charitable functions and local projects. These include the
New Hope Services, Inc. annual fundraiser, the Windjammer Symphony concert that
was performed on Jeffersonville's riverfront, and the Clark County Youth Shelter
Christmas Drive.
We continue to provide personal and professional attention through several other
social functions in 1998. These included our annual open house held in January,
the use of our facilities for the viewing of Thunder Over Louisville, and
luncheons for investment and business customers and prospects.
As we move into 1999, we are excited about the opportunities that our
marketplace is providing. We pay close attention to the challenges that our
industry faces, and look forward to providing financial services to the local
community, in order to enhance shareholder value.
Sincerely,
Patrick Daily
President and CEO
HERITAGE BANK OF SOUTHERN INDIANA
Heritage Bank of Southern Indiana Directors:
Dale Orem, Chairman of the Board
Steve Stemler, Vice Chairman
Patrick Daily, Director, President and CEO
Larry Burke
Michael L. Douglas
Wayne Estopinal
Greg Huber
Robert Pullen
C. Thomas Young
4
<PAGE>
NCF Bank & Trust Company
[NCF Bank Logo]
Dear Shareholders:
On May 6,1998, NCF Bank & Trust Company was welcomed into the Community Bank
Shares family. The past seven months have been a challenge, as we implement new
policies and procedures, learn new names and faces, and adjust to a better way
of doing business.
NCF Bank & Trust Company is very proud to be part of Bardstown and Nelson County
and, in 1999, we will be celebrating 75 years in business. Nelson County
continues to experience tremendous growth, and the prospects for expanding NCF's
banking services are excellent. We are continuing to analyze our product line
and look to expand and enhance the products and services that we offer to the
community. In August 1998, NCF Bank & Trust reopened the historic office at 119
E. Stephen Foster, in downtown Bardstown. Housed in a structure that is
approximately 200 years old, this office will again allow NCF to serve the needs
of downtown Bardstown. This expansion has allowed NCF to provide two convenient
locations for our customers to do business.
In 1998, NCF welcomed three dynamic individuals to its board of directors:
George Ballard, Ken Rapier, Jr., and Dick Heaton. NCF is proud to be associated
with these local business leaders.
In late 1998, longtime NCF board member John S. "Jack" Tharp retired. Jack
joined the Board in 1959, and helped lead NCF (then Nelson County Federal)
through many decades of change in Nelson County. Thank you, Jack, for your
service and devotion to this institution. You will certainly be missed. We
regretfully said goodbye to Director Emeritus, Ben T. Guthrie, who passed away
on December 8, 1998. Ben served on the Board for forty-eight years, retiring
from active service in 1996.
The directors and employees of NCF Bank & Trust Company were pleased to have
Robert Hurst return to board service. An auto accident nearly claimed Bob's
life, but he has fought back and, with the support of his family and friends, is
well on his way to a complete recovery. Welcome back, Bob!
In 1999, NCF Bank & Trust Company will be working hard to expand market share,
improve products and services, and enhance shareholder value. We are committed
to making Community Bank Shares a successful company and NCF Bank & Trust
Company a great place to do business.
Sincerely,
Gray Ball
President and CEO
NCF BANK AND TRUST
NCF Bank & Trust Company Directors:
Guthrie Wilson III, Chairman
Gray Ball, President and CEO
Paul Barnes, D.M.D.
George M. Ballard
Michael L. Douglas
J. Richard Heaton
Robert Hurst
Ken Rapier, Jr.
C. Thomas Young
John S. Tharp, Special Consultant to the Board
5
<PAGE>
Management's Discussion and Analysis
This section presents an analysis of the consolidated financial condition of
Community Bank Shares of Indiana, Inc. (The Company) and its wholly owned bank
subsidiaries, Community Bank of Southern Indiana, Heritage Bank of Southern
Indiana, and NCF Bank and Trust Company, at December 31, 1998 and 1997, and the
consolidated results of operations for the years ended December 31, 1998, 1997,
and 1996. This review should be read in conjunction with the consolidated
financial statements, notes to consolidated financial statements and other
financial data presented elsewhere in this annual report.
The Company conducts its primary business through its three subsidiaries, which
are community-oriented financial institutions offering a variety of financial
services to their local communities. 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 Nelson County, Kentucky, including surrounding
communities, and the origination of commercial business loans. The subsidiaries
invest excess liquidity in U.S. agency securities and, to a lesser extent,
mortgage-backed securities.
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 subsidiary 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, net
gains on sales of loan and securities, deposit account service charges and
commission-based income, and its non-interest expenses, such as compensation and
benefits, occupancy and equipment expense, and deposit insurance premiums, and
income tax expense.
On May 6, 1998, the Company issued 740,974 shares of its common stock for all
the outstanding common stock of NCF Financial Corporation, the parent holding
company of NCF Bank and Trust Company. NCF Financial Corporation was then merged
into the Company with the acquisition accounted for using the pooling of
interests method. Accordingly, the Company's financial statements have been
retroactively restated to include the operations of NCF Financial Corporation
for all periods presented. Certain reclassifications have been made to the
historical financial statements of NCF Financial Corporation to conform to the
Company's presentation.
6
<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:
Financial Condition Data
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
(In Thousands)
Total amount of:
<S> <C> <C> <C> <C> <C>
Assets............................... $ 331,945 $ 288,486 $ 272,476 $ 244,448 $ 232,417
Loans receivable, net................ 199,575 170,866 165,696 145,025 130,974
Securities held to maturity:
Mortgage-backed
securities...................... 29,194 23,519 24,867 27,704 39,462
Other debt securities............. 62,588 66,653 55,346 38,442 29,384
Securities available for sale....... 916 883 2,532 7,739 5,450
Cash and interest earning
deposits with banks........... 21,640 16,794 16,139 18,498 20,919
Deposits............................ 212,867 207,991 199,365 191,263 197,009
Repurchase Agreements............... 19,499 12,142 10,702 - -
FHLB advances....................... 56,000 27,000 23,000 21,799 15,601
Stockholders' equity
(substantially restricted).......... 41,386 39,701 37,876 (1) 29,987 (2) 18,639
</TABLE>
(1) Includes net proceeds from stock issuance on October 12, 1995 of
approximately $6,800 in relation to NCF Financial Corporation's conversion
from a mutual to a stock form of ownership.
(2) Includes net proceeds from stock issuance on April 7, 1995 of approximately
$9,500 in relation to the Company's conversion from a mutual to a stock
form of ownership.
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,
1998 1997 1996 1995 1994
Return on average assets
<S> <C> <C> <C> <C> <C>
(net income divided by average total assets) ... 0.79% 0.95% 0.76% 0.90% 1.10%
Return on average equity
(net income divided by average equity) ......... 5.87 6.94 5.73 11.19 13.85
Equity to average assets ratio
(average equity divided by average total assets) 13.51 13.73 13.34 8.39 8.35
Equity to assets at period end .................. 12.47 13.76 13.90 12.27 8.02
Net interest rate spread ........................ 2.90 2.75 2.65 2.54 2.90
Net yield on average interest-earning assets .... 3.38 3.29 3.21 3.03 3.14
Non-performing loans to total loans ............. 0.23 0.18 0.93 0.02 0.91
Non-performing assets to total assets ........... 0.33 0.60 0.99 0.02 0.99
Average interest-earning assets to
average interest-bearing liabilities ........... 111.25 112.76 113.33 106.78 106.61
Net interest income after provision
for loan losses, to total other expenses ....... 128.70 150.63 123.87 162.77 149.45
Dividend Payout Ratio ........................... 52.55 39.02 46.54 32.93 23.01
Number of full-service offices .................. 10 8 7 7 7
</TABLE>
7
<PAGE>
Selected Consolidated Financial and Other Data
Changes in Financial Condition
(Dollar amounts in thousands, except share and per share data.)
General: At December 31, 1998, the Company's assets, which are primarily
composed of the assets of the subsidiary banks, totaled $331,945, as compared to
$288,486 and $272,476 at December 31, 1997 and 1996, respectively. Total assets
increased by $43,459, or 15.1%, from December 31, 1997 to December 31, 1998 and
by $16,010, or 5.9% from December 31, 1996 to December 31, 1997. The growth
during 1998 was fueled mainly by the Company's increased use of Federal Home
Loan Bank Advances (see the Borrowed Funds section) as a funding source. Most of
these funds were used to fund high quality commercial and consumer loans.
Investment Securities: The Company's holdings of short-term investments serve as
a source of liquidity to meet depositor and borrower funding requirements. The
Company holds both cash and interest-bearing deposits with banks to fulfill
these needs. Cash and interest-bearing deposits with banks increased $4,846 from
the balance of $16,794 at December 31, 1997 to $21,640 at December 31, 1998, due
to a large unexpected governmental deposit that was invested in short-term funds
as of December 31, 1998. Excluding this large item, management actually reduced
short-term liquidity in 1998 in order to increase the yield on earning assets.
The increase in cash and interest-bearing deposits with banks was only $655 in
1997.
In addition to short-term investments, the Company invests in intermediate- and
longer-term securities for both future liquidity and as a significant source of
interest income. Investment securities (excluding mortgage-backed securities)
consist primarily of U.S. Government and agency obligations and totaled $62,588,
$66,653, and $55,346 at December 31, 1998, 1997, 1996 respectively. Total
outstanding investment securities other than mortgage-backed securities
decreased by $6,100, or 6.1%, in 1998, and increased $11,307, or 20.4%, in
1997. The decrease in investment securities in 1998 was offset by a
corresponding increase in mortgage-backed securities (including securities
available for sale), 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). Mortgage-backed securities increased by $5,608 to $30,110
during the year ended December 31, 1998 and decreased by $2,997 to $24,402
during the year ended December 31, 1997. This increase in mortgage-backed
securities in 1998 is a direct result of management's intent to shift the asset
mix in the investment portfolio into mortgage-backed securities for liquidity
purposes.
Loans Receivable: Loans receivable (including loans held for sale) amounted to
$199,575 at December 31, 1998, $170,866 at December 31, 1997 and $165,696 at
December 31, 1996. These increases ($28,709 in 1998 and $5,170 in 1997) resulted
from the Company's continued focus on increasing the yield on earning assets by
originating and retaining high quality mortgage, consumer and commercial
business loans.
The following table presents outstanding loans by category for each of the
previous three years:
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Residential real estate ........ $105,249 51.9% $111,736 64.3% $121,408 72.1%
Home equity lines of credit .... 6,760 3.3% 6,846 3.9% 5,215 3.1%
Commercial real estate loans ... 35,424 17.5% 22,432 12.9% 17,269 10.3%
Commercial loans ............... 48,057 23.7% 27,929 16.1% 20,191 12.0%
Consumer loans and loans
secured by deposit accounts 7,202 3.6% 4,934 2.8% 4,173 2.5%
Gross loans receivable ......... $202,691 100.0% $173,877 100.0% $168,256 100.0%
</TABLE>
The restructuring of the loan portfolio from a residential mortgage loan bias to
a portfolio weighted more heavily toward commercial real estate and commercial
business loans is the result of management's balance sheet composition strategy,
in which assets are shifted into higher-yielding commercial loans without
sacrificing credit quality.
The loan portfolio contains no loans to foreign governments, foreign enterprises
or foreign operations of domestic corporations. The Company has no
concentrations of loans in the same or similar industries that exceed 10% of
total loans.
8
<PAGE>
Selected Consolidated Financial and Other Data
Non-performing Assets: Non-performing assets may consist of 1) non-accrual loans
for which the ultimate collectibility of interest is uncertain, but for which
some or all the principal is considered collectible, 2) restructured loans which
have had an alteration to the original interest rate, repayment terms or
principal balance because of a deterioration in the financial condition of the
borrower, or 3) loans more than 90 days past due but still accruing interest
because that interest has been determined to be ultimately collectible. Impaired
loans covered by Financial Accounting Standards (FAS) 114 and 118 are defined by
the Company as non-accrual loans. Non-performing assets also include other real
estate owned which has been acquired through foreclosure or acceptance of a deed
in lieu of foreclosure. Other real estate owned is carried at the lower of cost
or fair value less estimated selling costs, and is actively marketed for sale.
The following table presents information pertaining to non-performing assets as
of December 31, for each of the past three years.
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
Loans accounted for on a non-accrual basis:
<S> <C> <C> <C> <C> <C>
Residential mortgage loans . $ 102 $ 294 $1,557 $ 27 $1,203
Commercial real estate ..... 368 -- -- -- --
Consumer ................... -- 22 -- -- --
Total ........................... $ 470 $ 316 $1,557 $ 27 $1,205
Non-accrual loans as a
percent of total loans ..... 0.23% 0.18% 0.93% 0.02% 0.91%
Foreclosed real estate (1) ...... $ 200 $ 724 $ 101 $ -- $ 102
Non-accrual loans and
foreclosed real estate as a
percent of total gross loans 0.33% 0.60% 0.99% 0.02% 0.99%
</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 cost or fair value less estimated cost to sell.
These ratios indicate strong economies in the local market areas of each of the
subsidiary banks. However, management also attributes the strength of these
ratios to stringent credit quality requirements and the utilization of effective
underwriting procedures.
Allowance for Loan Losses: Management of each subsidiary bank, in conjunction
with the Company's internal asset review committee, maintains the allowance for
loan losses at a level that is sufficient to absorb credit losses inherent in
the loan portfolio. Management bases the level of the allowance for loan losses
on its evaluation of the collectibility of the loan portfolio, including the
composition of the portfolio, historical loan loss experience, specific impaired
loans, and general economic conditions. Allowances for impaired loans are
generally determined based on collateral values or the present value of
estimated cash flows. The allowance for loan losses is increased by a provision
for loan losses, which is charged to expense, and reduced by charge-offs of
specific loans, net of recoveries. Changes in the allowance relating to impaired
loans are charged or credited directly to the provision for loans losses. At
December 31, 1998, each subsidiary bank's general allowance for loan losses met
or exceeded the minimum loan loss reserve standard established by the internal
asset review committee for each subsidiary bank. At December 31, 1998, the
Company's allowance for loan losses totaled $1,276, as compared to $1,014 at
December 31, 1997. The allowance for loan losses was $816 at December 31, 1996.
At December 31, 1998, the Company's allowance represented .63% of the total loan
portfolio (excluding loans classified as held for sale). Statements made in this
section regarding the adequacy of the allowance for loan losses are
forward-looking statements that may or may not be accurate due to the
impossibility of predicting future events. Because of uncertainties intrinsic in
the estimation process, management's estimate of credit losses inherent in the
loan portfolio and the related allowance may differ from actual results.
9
<PAGE>
Selected Consolidated Financial and Other Data
Deposits: December 31, 1996. The subsidiary banks do not generally engage in
sporadic increases or decreases in interest rates paid or offer the highest
rates available in their deposit markets except upon specific occasions when
market conditions have created opportunities to attract longer-term deposits.
The following table presents outstanding deposits by category for each of the
previous three years:
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits 18,655 8.76% 11,915 5.73% 13,803 6.92%
Savings and interest-
bearing demand deposits ....... 68,684 32.27% 58,627 28.19% 55,765 27.97%
Time deposits ...................... 125,528 58.97% 137,449 66.08% 129,797 65.11%
Total deposits ..................... 212,867 100.00% 207,991 100.00% 199,365 100.00%
</TABLE>
The above table demonstrates that transaction accounts have increased as a
percentage of total deposits over the last three years, a direct result of
management's balance sheet composition strategy in which lower-cost funding
sources such as transaction accounts, Federal Home Loan Bank advances and retail
repurchase agreements are used to replace higher-cost time deposits on the
liability side of the balance sheet.
Borrowed Funds: In addition to deposits, the Company also receives funding from
Federal Home Loan Bank advances and retail repurchase agreements. As competition
for deposits becomes increasingly aggressive, both from other financial
institutions and other, newer competitors such as mutual funds, the bank uses
these other sources of funding to meet its shorter-term needs while continuing
its strategy of attracting long-term deposit relationships.
Advances from the FHLB of Indianapolis amounted to $56,000, $27,000, and $23,000
at December 31, 1998, 1997, and 1996, 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 that are matched to the term of such investments
at a positive interest rate spread. The weighted-average rate on FHLB advances
amounted to 5.11%, 5.76%, and 5.75% at December 31, 1998, 1997, and 1996. The
subsidiary banks use FHLB advances to fund lending and investment activities,
withdrawals from deposit accounts and other ordinary course of business
activities. The maximum month-end balance at any time during 1998 was $56,000,
and the average balance for the year was $40,081.
Retail repurchase agreements represent overnight borrowings from deposit
customers secured by debt securities owned by, and under the control of, the
subsidiary banks. At December 31, 1998 the Company had retail repurchase
agreements outstanding of $19,499, as compared to $12,142 at December 31, 1997.
The $7,357 increase in repurchase agreements reflects an additional benefit of
commercial loan generation by the subsidiary banks; many commercial customers
utilize repurchase agreements to maximize their interest-earning capacity. The
weighted-average interest rate for these instruments was 4.10%, 4.77%, and 4.47%
at December 31, 1998, 1997 and 1996, respectively. The maximum month-end balance
at any time during 1998 was $19,499, and the average balance for 1998 was
$14,902.
Stockholders' Equity: Stockholders' equity increased from $39,701 at December
31, 1997 to $41,386 at December 31, 1998. Growth in capital was mainly
attributable to periodic net income less dividends paid to shareholders.
10
<PAGE>
Selected Consolidated Financial and Other Data
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,
1998 1997 1996 1995 1994
(In Thousands Except Per Share Results)
<S> <C> <C> <C> <C> <C>
Interest income ...................... $ 21,944 $ 20,675 $ 18,757 $ 16,109 $ 13,859
Interest expense ..................... 12,208 11,660 10,607 9,254 7,411
- ------------------------------------------------------------------------------------------------------------------
Net interest income .................. 9,736 9,015 8,150 6,856 6,448
Provision (credit) for losses on loans 354 226 128 78 (20)
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for losses on loans ................. 9,382 8,789 8,022 6,778 6,468
Non-interest income:
Loan fees and service charges ........ 548 474 435 382 373
Net realized securities gains ........ -- -- 15 -- 34
Net gains on sale of mortgage loans .. 284 215 102 68 62
Net income from real estate operations 6 11 -- -- 12
Service charges on deposit accounts .. 433 386 366 301 288
Commission income .................... 495 304 341 175 257
Miscellaneous income ................. 63 60 61 77 35
- ------------------------------------------------------------------------------------------------------------------
Total non-interest income ............ 1,830 1,450 1,320 1,003 1,061
- ------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and benefits ............ 4,210 3,625 3,072 2,284 2,039
Occupancy and equipment .............. 632 524 494 382 361
Deposit insurance premiums ........... 111 293 1,542 432 411
Data processing services ............. 563 495 448 350 338
Loss on foreclosed real estate ....... -- -- -- -- 564
Other ................................ 1,119 898 920 716 615
Merger-related expenses .............. 655 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total non-interest expense ........... 7,290 5,835 6,475 4,163 4,329
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes ........... 3,922 4,404 2,867 3,618 3,200
Income tax expense ................... 1,524 1,691 855 1,405 1,207
Cumulative effect on prior years
for accounting change ............... -- -- -- -- (27)
- ------------------------------------------------------------------------------------------------------------------
Net income ........................... 2,398 2,713 2,012 2,213 1,966
==================================================================================================================
Net income per share, basic (1) ...... $ 0.89 $1.01 $0.76 $ 0.82 $ 1.13
- ------------------------------------------------------------------------------------------------------------------
Net income per share, diluted ........ $ 0.88 $1.01 $0.76 n/a n/a
- ------------------------------------------------------------------------------------------------------------------
Dividends paid by the company ........ $ 0.48 $0.42 $0.42 $ 0.27 $ 0.26
- ------------------------------------------------------------------------------------------------------------------
Dividends paid by NCF Financial Corp. $ 0.22 $0.30 $0.15 n/a n/a
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Weighted-average shares used in computing basic net income per share for
1995 and 1994 were determined under the assumption that the mutual to stock
conversions took place prior to 1994.
11
<PAGE>
Selected Consolidated Financial and Other Data
Results of Operations
(Dollar amounts in thousands, except share and per share data)
General: The Company reported net income of $2,398, $2,713, and $2,012 for the
years ended December 31, 1998, 1997, and 1996, respectively. In 1998, the
Company incurred non-recurring merger-related expenses in conjunction with its
acquisition of NCF Financial Corporation as explained above. In addition, the
Company also incurred non-recurring defined-benefit compensation expenses in
1998 (See the Notes to Consolidated Financial Statements for a more complete
explanation of the Company's benefit plans). The pre-tax impact of these
non-recurring charges was $998 in 1998, with an after-tax reduction to 1998 net
income of $601. In 1996, a one-time special assessment of $1,276 was paid to the
Savings Association Insurance Fund (SAIF) as required for all SAIF insured
financial institutions. The after-tax impact of this charge reduced earnings for
the year by approximately $779. The following table discloses net income and net
income per share, basic and diluted, excluding the effect of non-recurring
charges, net of tax, over the last three years.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net income from continuing operations ........ 2,999 2,713 2,791
Impact of non-recurring charges, net of tax:
Merger-related expenses ............. 394 -- --
Defined-benefit contribution expenses 207 -- --
SAIF assessment ..................... -- -- 779
Total non-recurring charges, net of tax ...... 601 -- 779
Net income ................................... 2,398 2,713 2,012
</TABLE>
The following discussion is an analysis of the critical components of net income
for the years 1998, 1997, and 1996.
Net Interest Income. 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. Net interest income has continued to improve each
year as the asset and deposit mix has changed to that of a traditional
commercial bank structure with higher concentrations of consumer and small
business loans on the asset side, and lower-cost funding sources on the
liability side of the balance sheet. Net interest income improved each year and
totaled $9,736, $9,015 and $8,151 for 1998, 1997, and 1996, respectively. The
net yield on earning assets has grown steadily over the past three years,
growing from 3.21% in 1996 to 3.29% in 1997, and finally to 3.38% for 1998.
The weighted-average yield on interest-earning assets has improved to 7.62% for
1998, up from 7.55% in 1997 and 7.38% in 1996. Interest income during this
period grew from $18,757 in 1996, to $20,675 in 1997, and finally to $21,944 in
1998. Both the volume and yield increases are a result of the shift in the asset
mix from investments to high quality loans as management has continued to
implement its balance sheet restructuring strategy.
Controlling the cost of our sources of funds is one of the Companyis primary
objectives. The weighted-average rate on interest-bearing liabilities decreased
to 4.71% in 1998 from 4.80% in 1997, after 1997 had increased from a
weighted-average rate of 4.73 in 1996. 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 maturity and repricing implications.
12
<PAGE>
Selected Consolidated Financial and Other Data
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,
----------------------------------------------------------------------------------------------------
1998 1997 1996
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> <C>
Loan portfolio (1)....... 186,342 15,539 8.34% 170,656 14,010 8.21% 156,090 12,592 8.07%
Mortgage-backed
Securities.............. 25,892 1,564 6.04 24,253 1,544 6.37 31,001 1,989 6.42
Other securities.... 57,486 3,833 6.67 61,897 4,179 6.75 54,053 3,487 6.45
Interest-bearing deposits
Banks................. 18,369 1,007 5.48 16,984 942 5.55 12,936 689 5.33
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
Assets.................. 288,090 21,944 7.62 273,790 20,675 7.55 254,080 18,757 7.38
Non-interest-earning
Assets................... 14,292 10,890 9,226
====================================================================================================================================
Total assets............. 302,382 284,680 263,306
====================================================================================================================================
Interest-bearing
liabilities:
Deposits................ 203,866 9,330 4.58 206,146 9,639 4.68 202,987 9,410 4.64
Borrowings.............. 55,090 2,878 5.22 36,664 2,021 5.51 21,212 1,196 5.64
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities.............. 258,956 12,208 4.71 242,810 11,660 4.80 224,199 10,606 4.73
Non-interest-bearing
Liabilities.............. 2,560 2,795 3,990
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities....... 261,516 245,605 228,189
Stockholders' equity... 40,866 39,075 35,117
Total liabilities and
Stockholders' equity. 302,382 284,680 263,306
====================================================================================================================================
Net interest income....... 9,736 9,015 8,151
====================================================================================================================================
Interest rate spread(2).. 2.90% 2.75% 2.65%
====================================================================================================================================
Net yield on interest-
Earning assets(3)...... 3.38% 3.29% 3.21%
====================================================================================================================================
Ratio of average interest-
Earning assets to
Average interest-bearing
Liabilities............. 111.25% 112.76% 113.33%
====================================================================================================================================
</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.
13
<PAGE>
Selected Consolidated Financial and Other Data
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 prior rate); (ii) changes in rates
(change in rate multiplied by prior 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,
1998 vs. 1997 1997 vs. 1996
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-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans......................... $ 1,288 $ 221 $ 20 $ 1,529 $ 1,175 $ 222 $21 $ 1,418
Mortgage-backed securities.... 104 (79) (5) 20 (433) (15) 3 (445)
Other debt securities........... (298) (52) 4 (346) 506 162 24 692
Interest-bearing
deposits with banks... 77 (11) (1) 65 216 28 9 253
Total interest-earning assets.. 1,171 80 18 1,269 1,464 398 57 1,918
Interest-bearing liabilities:
Deposits........................... (107) (204) 2 (309) 146 81 1 229
Borrowings......................... 1,016 (106) (53) 857 871 (27) (19) 825
Total interest-
bearing liabilities...... 909 (310) (51) 548 1,018 55 (18) 1,054
Net change in
net interest income........... 262 390 69 721 446 343 75 865
</TABLE>
Provision for Loan Losses. Provisions for loan losses are charged against
earnings to bring the total allowance for loan losses to a level considered
reasonable by management based on historical experience, the volume and type of
lending conducted by the subsidiary banks, the status of past due principal and
interest payments, general economic conditions and inherent credit risk related
to the collectibility of the each bank's loan portfolio. Provisions for loan
losses of $354, $226, and $128 were made in years 1998, 1997, and 1996
respectively.
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
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 has occurred over the past three years, going from $1,320 in
1996 to $1,450 in 1997, and finally to $1,829 in 1998. Most of this increase is
attributable to gains on sale of loans, loan origination fees, and commission
income on the sale of alternative investments such as annuities and mutual
funds. Loan-related non-interest income increased due to increased volume of
loan originations that was impacted by the establishment of a mortgage
origination group and a general decline in interest rates. Commission income has
increased as a result of a strong economy, increased investing awareness among
the general public, and a heightened emphasis by the Company on the sale of
alternative investment products.
Non-Interest Expenses. Total non-interest expenses in 1998 increased by
approximately $1,455 compared to 1997, and decreased by $641 in 1997 as compared
to 1996. The large increase from 1997 to 1998 is attributable to the
non-recurring merger-related and defined-benefit compensation expenses mentioned
previously. Specifically, in 1998 the Company incurred merger-related expenses
of approximately $655 and defined-benefit compensation expenses of $343. The
substantial decrease in expenses from 1996 to 1997 is attributable to a one time
assessment of $1,276 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 $636 from 1996 to 1997.
The principal category of the Company's non-interest expenses is compensation
and benefits, which increased by $585, or 16.1%, during 1998 and by $553, or
18.0%, during 1997, as compared to the previous year. The increase in 1998
compensation and benefits was primarily attributable to the defined-benefit
compensation expenses of $343 outlined above. Excluding these non-recurring
expenses, compensation and benefits increased $242, or 6.68%. The increase in
1997 compensation and benefits was primarily attributable to two factors:
14
<PAGE>
Selected Consolidated Financial and Other Data
1) the Company recognized increased expense associated with the curtailment of
its defined-benefit pension plan, and 2) new employees were hired in the areas
of business services, marketing, and internal audit.
In 1998, occupancy and equipment expenses rose $108, or 20.6%, mainly due to
increased expenses resulting from the opening of two new branches at the bank
subsidiaries, one at Heritage Bank and one at NCF Bank and Trust Co. In 1997,
occupancy and equipment expenses rose only $30, or 6.1%.
Continued efforts to utilize automation and electronic methods of operation,
coupled with Year 2000 compliance expenditures (see the Year 2000 Compliance
disclosure below for more information on the Company's efforts to reduce the
risk related to this situation), resulted in an increase of 13.7%, or $68, in
data processing service expense to $563 in 1998. Data processing expense in 1997
was $495, an increase of 10.5% over 1996.
Other expenses including advertising, postage, forms and supplies, professional
fees and supervisory assessments increased by $222 in 1998 and decreased by $22
in 1997. The increase in other expenses in 1998 is attributable to 1) an
increase in loan-related expenses due to an increase in volume in 1998 as
compared to 1997, 2) miscellaneous expenses (supplies, printing of forms,
telephone, etc.) related to the opening of two new branches mentioned above, and
3) expenses related to consulting and professional service fees.
Income Taxes. Federal and state income tax expense totaled $1,524 in 1998,
$1,691 in 1997, and $855 in 1996. The effective tax rates amounted to 38.9%,
38.4%, and 29.8% in 1998, 1997 and 1996, respectively. The lower tax rate in
1996 was attributable to a deferred income tax credit of $213 due to a change in
the tax law relating to the allowance for loan losses and the bad debt
deduction.
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, and loan commitments and to meet asset/liability objectives. The
Banks' primary sources of funds are deposits, amortization of loan and
mortgage-backed securities, Federal Home Loan Bank 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.
Liquidity management is both a daily and a 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 Banks (FHLB)
of Indianapolis and Cincinnati that provide an additional source of funds. At
December 31, 1998, Community Bank and Heritage Bank had $46,500 and $4,500,
respectively, in outstanding advances from the FHLB of Indianapolis, while NCF
Bank and Trust Company had $5,000 in outstanding advances from the FHLB of
Cincinnati.
The Company anticipates it will have sufficient funds available to meet current
loan commitments and other credit commitments. At December 31, 1998, the Company
had commitments to: 1) originate loans of $4,896, 2) fund the undisbursed
portion of commercial and personal lines of credit of $34,823, and 3) fund the
undisbursed portion of construction loans in process of $1,844.
Certificates of deposit scheduled to mature in one year or less at December 31,
1998 totaled approximately $95,437. Based upon past pricing and competitive
experience and familiarity with the subsidiary banks' customer bases, management
believes that a significant portion of these scheduled maturities will remain
with the Company.
By all measurements, the Company and its subsidiary banks were considered well
capitalized at December 31, 1998, at which time the Company had a Total Capital
ratio of 20.4%, a Tier 1 Capital ratio of 19.8%, and a Tier 1 Leverage Capital
ratio of 12.7%.
15
<PAGE>
Selected Consolidated Financial and Other Data
Market Risk Analysis
Qualitative Aspects of Market Risk. The Company's principal financial objective
is to achieve long-term profitability while reducing its exposure to
fluctuations in market interest rates. The Company has sought to manage any
differences between the repricing of assets and liabilities that result in
exposure to changing market interest rates. In order to reduce the exposure to
interest rate fluctuations, the Company has developed strategies to manage its
liquidity position, shorten its effective maturities of certain interest-earning
assets, and increase the interest rate sensitivity of its asset base. The
Company has sought to decrease the average maturity of its assets by emphasizing
the origination of short-term commercial and consumer loans for inclusion in its
loan portfolio while selling a substantial portion of its longer-term
residential mortgage loans into the secondary market. The Company relies on
retail and commercial deposits as its primary sources of funds because they
generally represent a more stable source of funds than alternative funding
sources.
The Company's principal business is the making of loans funded by customer
deposits and, as necessary, other borrowed funds. Consequently, a significant
portion of the Company's assets and liabilities are monetary in nature and
fluctuations in interest rates will affect the Company's future net interest
income and cash flows. This interest rate risk is the Company's primary market
risk exposure. The Company does not enter into derivative financial instruments
such as futures, forwards, swaps, and options. Also, the Company has no market
risk sensitive instruments held for trading purposes.
Quantitative Aspects of Market Risk. The Company's exposure to market risk is
reviewed on a regular basis by its management. The Company measures interest
rate sensitivity as the difference between amounts of interest-earning assets
and interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities and is considered negative when the amount of interest
rate sensitive liabilities exceeds the amount of interest-rate sensitive assets.
Generally, net interest income would be adversely affected during a period of
rising interest rates when a negative cumulative gap exists within the shorter
time horizon; this is because a greater volume of interest rate sensitive
liabilities would be repricing upward than the volume of interest-sensitive
assets that was repricing upward. Conversely, in a rising interest rate
environment, net interest income would be positively impacted if a positive gap
existed within shorter terms. In a falling rate environment, net interest income
would be adversely affected if a positive gap existed over the short term, while
it would be positively impacted if there were a negative gap in the short term.
The table below depicts the Company's interest rate risk at December 31, 1998 by
presenting the rate sensitivity of the major categories of financial assets and
liabilities. The time period indicated in the table represents the shorter of
the time remaining before the asset or liability either matures or is subject to
repricing. The Company's experience has indicated that demand, money market, and
savings deposits of $53,441 are not interest rate sensitive and have therefore
been included in the "Thereafter" gap or category. The analysis results in a
negative one-year gap of $58,832 (excess of interest-bearing liabilities over
interest-earning assets repricing within one year).
16
<PAGE>
Selected Consolidated Financial and Other Data
<TABLE>
Interest Rate Sensitivity Analysis
As of December 31, 1998
<CAPTION>
Amounts Repricing or Maturing
---------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
Financial assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 14,051 $ - $ - $ - $ - $ - $ 14,051 $ 14,051
Weighted-average interest rate 0.00% - - - - - 0.00%
Interest bearing deposits in banks 7,589 - - - - - 7,589 7,589
Weighted-average interest rate 4.44 - - - - - 4.44
Investment securities (1) 5,476 1,765 409 1,498 2,441 84,454 96,044 96,035
Weighted-average interest rate 5.78 5.51 6.06 5.79 6.12 6.46 6.38
Gross loans receivable 103,878 28,715 17,041 5,250 14,578 33,229 202,692 206,071
Weighted-average interest rate 7.98 8.14 8.12 8.82 8.21 8.17 8.08
---------------------------------------------------------------------------------------------
Total financial assets 130,994 30,481 17,450 6,748 17,019 117,682 320,375 323,746
Weighted-average interest rate 6.83 7.99 8.07 8.15 7.91 6.94 7.13
---------------------------------------------------------------------------------------------
Financial liabilities
Deposits 129,328 22,452 4,737 1,136 1,485 53,729 212,867 214,127
Weighted-average interest rate 4.65 5.66 5.55 5.86 5.45 2.88 4.34
Advances from Federal Home Loan Banks 41,000 7,000 8,000 - - - 56,000 55,552
Weighted-average interest rate 5.21 4.96 4.77 - - - 5.12
Retail repurchase agreements 19,499 - - - - - 19,499 19,499
Weighted-average interest rate 4.22 - - - - - 4.22
---------------------------------------------------------------------------------------------
Total Financial Liabilities 189,827 29,452 12,737 1,136 1,485 53,729 288,366 289,178
Weighted-average interest rate 4.73 5.49 5.06 5.86 5.45 2.88 4.48
---------------------------------------------------------------------------------------------
Net Interest Rate Sensitivity Gap $ (58,832) $ 1,029 $ 4,713 $ 5,612 $ 15,534 $ 63,953 $ 32,009
Cumulative Interest Rate
Sensitivity Gap $ (58,832) $(57,803) $(53,090) $(47,478) $(31,944) $ 32,009 $ 32,009
Sensitivity Gap as a Percent of
Total Financial Assets -44.91% 3.38% 27.01% 83.16% 91.28% 54.34% 9.99%
Cumulative Gap as a Percent of Total
Financial Assets -44.91% -35.80% -29.67% -25.57% -15.76% 9.99% 9.99%
</TABLE>
(1) Includes mortgage-backed securities, other debt securities and FHLB stock at
cost.
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
Company's 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.
Forward-Looking Statements
This Annual Report, past and future filings made by the Company with the
Securities and Exchange Commission, as well as other filings, reports, and press
releases made or issued by the Company and its subsidiaries, and oral statements
made by executive officers of the Company and subsidiary banks may contain
forward-looking statements. These forward-looking statements may relate to such
matters as assumptions concerning future economic conditions and their effect on
the economies in which the Company and its subsidiary banks operate, and
expectations for increased revenues and earnings for the Company and its banks
through growth resulting from acquisitions, attraction of new loan and deposit
customers, or the introduction of new products and services. Such
forward-looking statements are based on assumptions rather than historical fact
and are therefore inherently uncertain and subject to risk.
17
<PAGE>
Selected Consolidated Financial and Other Data
To comply with the terms of a "safe harbor" provision provided by the Private
Securities Litigation Reform Act of 1995 that protects the making of such
forward-looking statements from liability under certain circumstances, the
Company notes that a variety of factors could cause the actual results to differ
materially from the anticipated results or expectations described or implied by
such forward-looking statements. The risks and uncertainties that may affect
such forward-looking statements include, but are not limited to, the following:
1) adverse changes in economic conditions affecting the banking industry in
general and, more specifically, the market areas in which the Company and its
subsidiary banks operate, 2) adverse changes in the legislative and regulatory
environment affecting the Company and its subsidiary banks, 3) increased
competition from other financial and non-financial institutions, 4) the impact
of technological advances on the banking industry, and 5) other risks detailed
at times in the Company's filings with the Securities and Exchange Commission.
The Company and subsidiary banks do not assume an obligation to update or revise
any forward-looking statements subsequent to the date on which they are made.
Market Price of Community Bank Shares of Indiana, Inc.
and Related Shareholder Matters
The common stock of Community Bank Shares of Indiana, Inc. is traded under the
NASDAQ Small Cap symbol of CBIN. The quarterly range of low and high trade
prices per share of the Company's common stock as reported by NASDAQ is shown
below.
<TABLE>
<CAPTION>
CBIN Market Price Summary
1998 1997
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $ 23.63 $ 21.25 $ 15.00 $ 12.25
Second Quarter 25.00 21.50 15.25 14.25
Third Quarter 21.75 16.75 23.50 14.25
Fourth Quarter 18.75 13.00 23.50 19.00
</TABLE>
As of December 31, 1998, there were approximately 936 shareholders of record.
The Company pays cash dividends on a quarterly basis. Cash dividends paid by the
Company were $0.48, $0.42, and $0.42 in 1998, 1997, and 1996, respectively. Cash
dividends paid by NCF Financial Corporation were $0.22, $0.30, and $0.15 in
fiscal years ending June 30,1998, 1997, and 1996, respectively.
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.
Year 2000 Compliance
The Year 2000 issue arises from the design of computer operating systems and
computer software programs which recognize dates as only two digits. As a
result, these operating systems and software programs may interpret "00"
incorrectly as the Year 1900 instead of as the Year 2000, causing failure of the
underlying operating and software programs. The Company has formed a Year 2000
Committee representing all functional areas of the organization to ensure that
the Company is Year 2000 compliant. The Committee 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 ensuring Year 2000
compliance. Any hardware or software failures due to Year 2000 noncompliance
could result in additional, inestimable expenses to the Company. At worst, the
Company would be unable to operate for some indefinite period of time, resulting
in potentially large but currently incalculable monetary damages to the Company.
The Company has identified the following potential risks to its operational and
financial systems as a result of this issue:
1. Customer banking transactions are processed by one or more computer systems
provided by a third-party data processing provider. The failure of one or
more of those systems as a result of the Y2K issue could result in the
subsidiary banks' inability to properly process customer transactions. This
could lead to a loss of customers by the subsidiary banks to other
financial institutions.
2. A number of the subsidiary banks' borrowers utilize computer hardware and
software to varying degrees in the operation of their businesses. The
customers and suppliers of those businesses may utilize computer hardware
and software as well. Should the borrowers or businesses on which they
depend experience Y2K related operational or financial problems, those
borrowers could experience cash flow disruptions that could adversely
affect their ability to repay loans to the subsidiary banks.
18
<PAGE>
Selected Consolidated Financial and Other Data
3. Deposit outflows prior to December 31, 1999 could occur as depositors
perceive that the Y2K issue will impair access to their accounts after that
date.
4. The Company could incur increased personnel costs if additional staff are
required to perform functions that normally are performed by systems
rendered inoperative by Y2K related problems.
5. Certain utility services, such as electrical power and telecommunications
services, could be disrupted if those services experience Y2K related
problems. These disruptions, depending on their duration, could hamper the
ability of the bank to service its customer base.
Management believes that it is not possible to estimate potential lost revenue
associated with the Y2K issue because the duration and severity of Y2K related
problems can not be predicted.
Computer operations are a crucial part of the Company's daily operating
processes and a comprehensive program has been implemented (described below) to
verify that all internal software will operate properly. The Company does not
internally program any major operating system of the Company, and has been
working with its outside vendors to ensure Year 2000 Compliance within its major
operating systems. The Company uses these systems provided by outside suppliers
to maintain customer deposit and borrowing information, including transaction
processing, and the Company's internal financial information.
The Company's exposure to embedded microchip technology is of little or no
consequence. Unlike companies that operate in manufacturing environments and may
use computerized robots, process controllers, and assembly lines, the Company
has only to assess its existing HVAC systems. All such systems have been
evaluated and were determined to be free of embedded microchip technology. The
Company is currently constructing a new corporate headquarters building in which
all systems with the potential for embedded microchip technology (HVAC,
elevator, and telephone system) will be certified Year 2000 compliant.
The Year 2000 Committee adopted a five-phase plan based on the Federal Financial
Institutions Examination Council (FFIEC) to ensure readiness in dealing with the
Year 2000 Compliance issue:
1. Awareness Phase - Formation of the Year 2000 Committee with the goal of
representing all functional areas of the Company. Formation of the Year
2000 Plan, including the outlining of the following four phases. This phase
is complete.
2. Assessment Phase - Identification of all systems affected by the Year 2000
issue, such as hardware, software, networks, ATM's, processing platforms
(operating systems), electronic data interchange (EDI), telephones and
telephone systems, HVAC, security, operations and general office machines.
Once identified, the systems were prioritized for testing purposes within
the following groups: A) Mission-critical - vital to daily bank operation.
Goal: All mission-critical systems to be tested and corrected/updated by
December 31, 1998, B) Important - difficult or costly to function without.
Goal: All important systems to be tested and corrected/updated prior to
June 30, 1999. C) Non-critical - no significant impact to daily operations.
Goal: non-critical systems will be tested as time allows, potentially not
being tested prior to January 1, 2000. This phase is complete.
3. Validation Phase - Comprises identifying any necessary changes, upgrades,
replacement, correction, or testing of systems identified in Phase 2. This
phase is substantially complete and should be completely accomplished by
March 31, 1999. Both third-party data processing providers the Company
relies on for customer processing have completed the necessary upgrades to
ensure Year 2000 compliance. The Company had tested these systems by
February 28, 1999 for Year 2000 compliance, and all major systems passed.
4. Implementation Phase - Comprises placing any corrective action identified
during the Validation Phase into action (e.g., upgrading or replacing
software or operating systems to Year 2000 compliant versions). These
corrective actions will take place throughout the project, following user
acceptance testing and normal change control procedures. This phase should
be substantially complete by March 31, 1999.
5. Contingency Planning Phase - By June 30, 1999, the Year 2000 committee will
have developed a system contingency manual based partially on a standard,
bank disaster recovery format. The plan will also incorporate solutions
developed by PC, data, and network vendors. This manual will address
mission-critical functions only and will be written with "worst case
scenarios" in mind.
From a customer standpoint, the problem could affect the ability of the
subsidiary banks' borrowers to service debts if their direct operations,
vendors, or customers are adversely impacted by the Year 2000 Compliance issue.
The FFIEC instituted a Year 2000 examination process to which the Company is
subject. As a part of that process, the Company was required to identify those
commercial borrowers that exceeded a set threshold and prepare written Year 2000
assessment work sheets. As of December 31, 1998, all such assessments have been
completed at the Company's subsidiaries. The Year 2000 risk assessment for the
Company's borrowers will be a factor when determining the provision for loan
losses charged to expense throughout 1999.
19
<PAGE>
Independent Auditor's Report
MONROE SHINE & CO., INC.
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS
==========================================
P.O. Box 1407, 22 E. Market Street, New Albany, IN 57150 * (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, 1998 and 1997, 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, 1998.
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.
The consolidated balance sheet as of December 31, 1997, and the consolidated
statements of income, stockholders' equity and cash flows for the years ended
December 31, 1997 and 1996 have been restated to reflect the pooling of
interests with NCF Financial Corporation as described in Note 2 to the
consolidated financial statements. We did not audit the consolidated financial
statements of NCF Financial Corporation and Subsidiary, which statements reflect
total assets of $34,402,606 as of June 30, 1997, and net income of $327,661 and
$397,790 for the years ended June 30, 1997 and 1996, respectively. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for NCF Financial
Corporation and subsidiary as of June 30, 1997 and the years ended June 30, 1997
and 1996, is based solely on the report of the other auditors.
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, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Monroe Shine & Co., Inc.
- ----------------------------
January 27, 1999
20
<PAGE>
<TABLE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<CAPTION>
1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks ............................................... $ 14,050,877 $ 5,294,828
Interest-bearing deposits with banks .................................. 7,588,992 11,499,042
Securities available for sale, at fair value .......................... 916,080 882,691
Securities held to maturity:
Mortgage-backed securities (fair value $29,197,118; 1997 $23,738,060) 29,194,327 23,518,835
Other debt securities (fair value $62,575,913; 1997 $66,675,123) .... 62,587,636 66,653,946
Mortgage loans held for sale .......................................... 3,521,997 --
Loans receivable, net ................................................. 199,575,395 170,865,611
Federal Home Loan Bank stock, at cost ................................. 3,345,800 2,016,700
Foreclosed real estate ................................................ 199,707 724,486
Premises and equipment ................................................ 7,868,622 4,204,313
Accrued interest receivable:
Loans ............................................................... 1,171,517 1,149,290
Mortgage-backed securities .......................................... 166,804 129,278
Other debt securities ............................................... 799,292 1,249,189
Other assets .......................................................... 957,823 297,501
------------- -------------
Total Assets ...................................................... $ 331,944,869 $ 288,485,710
============= =============
LIABILITIES
Deposits:
Non-interest-bearing demand deposits ................................ $ 18,655,305 $ 11,915,092
Savings and interest-bearing demand deposits ........................ 68,684,407 58,627,119
Time deposits ....................................................... 125,527,754 137,448,598
Total deposits .................................................... 212,867,466 207,990,809
Borrowed funds ........................................................ 75,498,873 39,141,859
Advance payments by borrowers for taxes and insurance ................. 209,835 192,486
Accrued interest payable on deposits .................................. 60,465 93,580
Other liabilities ..................................................... 1,922,544 1,365,547
------------- -------------
Total Liabilities ................................................. 290,559,183 248,784,281
------------- -------------
COMMITMENTS AND CONTINGENCIES
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 2,728,298 shares
(2,724,696 shares in 1997) ........................................ 272,830 272,470
Additional paid-in capital ............................................ 19,500,320 19,378,687
Retained earnings -- substantially restricted ......................... 21,949,472 20,738,894
Accumulated other comprehensive income--unrealized gain (loss)
on securities available for sale .................................... (225) 2,752
Unearned stock compensation plan ...................................... -- (215,033)
Unearned ESOP shares .................................................. (336,711) (476,341)
------------- -------------
Total Stockholders' Equity ...................................... 41,385,686 39,701,429
------------- -------------
Total Liabilities and Stockholders' Equity ...................... $ 331,944,869 $ 288,485,710
============= =============
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
Accumulated Unearned
Additional Other Stock Unearned
Common Paid-In Retained Comprehensive Compensation ESOP
Stock Capital Earnings Income Plan Shares Total
<CAPTION>
Balance, January 1, 1996,
<S> <C> <C> <C> <C> <C> <C> <C>
as previously reported $198,372 $11,782,829 $13,372,643 $60,705 $-- $(63,520) $25,351,029
Adjustment in connection
with pooling of interests -- -- 4,636,221 -- -- -- 4,636,221
---------------------------------------------------------------------------------------
Balance, January 1, 1996, as restated 198,372 11,782,829 18,008,864 60,705 -- (63,520) 29,987,250
COMPREHENSIVE INCOME
Net income -- -- 2,011,910 -- -- -- 2,011,910
Other comprehensive income:
Change in unrealized gain on
securities available for sale,
net of deferred income tax
benefit of $34,960 -- -- -- (53,300) -- -- (53,300)
Less: reclassification adjustment,
net of deferred tax
benefit of $5,819 -- -- -- (8,871) -- -- (8,871)
Total comprehensive income 1,949,739
Cash dividends ($.42 per share) -- -- (820,861) -- -- -- (820,861)
Cash dividends of pooled affiliate -- -- (115,575) -- -- -- (115,575)
Net proceeds from common stock
issuance of pooled affiliate 72,042 7,263,695 -- -- -- (500,000) 6,835,737
Purchase of common shares by ESOP trust -- -- -- -- -- (24,500) (24,500)
Shares released by ESOP trust -- 14,100 -- -- -- 50,278 64,378
---------------------------------------------------------------------------------------
Balance, December 31, 1996 270,414 19,060,624 19,084,338 (1,466) -- (537,742) 37,876,168
COMPREHENSIVE INCOME
Net income -- -- 2,713,423 -- -- -- 2,713,423
Other comprehensive income:
Change in unrealized gain (loss)
on securities available for
sale, net of deferred income tax
expense of $2,767 -- -- -- 4,218 -- -- 4,218
Less: reclassification adjustment -- -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- -- 2,717,641
Cash dividends ($.42 per share) -- -- (830,341) -- -- -- (830,341)
Cash dividends of pooled affiliate -- -- (228,526) -- -- -- (228,526)
Issuance of shares by pooled affiliate
for stock compensation plan 2,150 298,345 -- -- (300,495) -- --
Stock compensation expense of
pooled affiliate (94) (7,416) -- -- 85,462 -- 77,952
Shares released by ESOP trust -- 27,134 -- -- -- 61,401 88,535
---------------------------------------------------------------------------------------
Balance, December 31, 1997 272,470 19,378,687 20,738,894 2,752 (215,033) (476,341) 39,701,429
COMPREHENSIVE INCOME
Net income -- -- 2,398,062 -- -- -- 2,398,062
Other comprehensive income:
Change in unrealized gain (loss)
on securities available for sale,
net of deferred income tax
benefit of $1,953 -- -- -- (2,977) -- -- (2,977)
Less: reclassification adjustment -- -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- -- 2,395,085
Cash dividends ($.48 per share) -- -- (1,204,903) -- -- -- (1,204,903)
Cash dividends of pooled affiliate -- -- (55,339) -- -- -- (55,339)
Adjustments to conform pooled
affiliate's fiscal year end:
Net income -- -- 187,006 -- -- -- 187,006
Cash dividends -- -- (114,248) -- -- -- (114,248)
Shares released by ESOP trust -- 8,921 -- -- -- 69,734 78,655
Stock compensation expense -- -- -- -- 28,041 -- 28,041
Exercise of stock options 360 53,274 -- -- -- -- 53,634
Stock compensation expense -- -- -- -- 186,992 -- 186,992
Shares released by ESOP trust -- 59,438 -- -- -- 69,896 129,334
---------------------------------------------------------------------------------------
Balance at December 31, 1998 $272,830 $19,500,320 $21,949,472 $(225) $-- $(336,711) $41,385,686
=======================================================================================
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
1998 1997 1996
<CAPTION>
INTEREST INCOME
<S> <C> <C> <C>
Loans receivable ......................... $15,539,222 $14,010,035 $12,591,953
Securities:
Mortgage-backed securities ............. 1,564,299 1,543,807 1,989,573
Tax-exempt debt securities ............. 168,135 138,194 81,995
Other debt securities .................. 3,455,486 3,898,510 3,280,551
Federal Home Loan Bank dividends ......... 209,502 112,453 96,580
Interest-bearing deposits with banks ..... 1,007,327 972,090 716,534
-----------------------------------------------
Total interest income ................ 21,943,971 20,675,089 18,757,186
-----------------------------------------------
INTEREST EXPENSE
Deposits ................................. 9,330,203 9,639,087 9,409,915
Customer repurchase agreements ........... 503,976 586,867 94,516
Other borrowed funds ..................... 2,373,650 1,433,770 1,102,669
-----------------------------------------------
Total interest expense ............... 12,207,829 11,659,724 10,607,100
-----------------------------------------------
Net interest income .................. 9,736,142 9,015,365 8,150,086
Provision for loan losses ................ 353,875 226,000 128,450
-----------------------------------------------
Net interest income after provision
for loan losses .................... 9,382,267 8,789,365 8,021,636
NON-INTEREST INCOME
Loan fees and service charges ............ 547,990 474,131 435,338
Net realized securities gain ............. -- -- 14,690
Net gain on sales of mortgage loans ...... 284,348 214,754 102,342
Service charges on deposit accounts ...... 433,126 385,810 366,387
Commission income ........................ 495,129 304,051 340,969
Net gain on sale of foreclosed real estate 6,277 10,956 --
Other income ............................. 62,904 60,117 60,605
-----------------------------------------------
Total non-interest income ............ 1,829,774 1,449,819 1,320,331
-----------------------------------------------
NON-INTEREST EXPENSES
Compensation and benefits ................ 4,209,578 3,625,352 3,071,503
Net occupancy ............................ 352,556 281,410 286,095
Equipment ................................ 278,973 242,700 207,714
Deposit insurance premiums ............... 111,317 292,715 1,541,882
Data processing service .................. 562,947 495,030 447,986
Other .................................... 1,119,197 897,767 920,102
Merger related expenses .................. 655,190 -- --
-----------------------------------------------
Total non-interest expenses .......... 7,289,758 5,834,974 6,475,282
-----------------------------------------------
Income before income taxes ............... 3,922,283 4,404,210 2,866,685
Income tax expense ....................... 1,524,221 1,690,787 854,775
-----------------------------------------------
Net Income ........................... $ 2,398,062 $ 2,713,423 $ 2,011,910
===============================================
Net income per common share, basic $ .89 $ 1.01 $ .76
===============================================
Net income per common share, diluted $ .88 $ 1.01 $ .76
===============================================
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income ................................................ $ 2,398,062 $ 2,713,423 $ 2,011,910
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums and accretion of discounts
on securities, net .................................... (74,513) (98,725) (41,903)
Net realized securities gain ............................ -- -- (14,690)
Provision for loan losses .............................. 353,875 226,000 128,450
Proceeds from mortgage loan sales ....................... 23,644,523 12,007,593 8,967,130
Mortgage loans originated for resale .................... (23,482,536) (11,822,791) (8,621,968)
Net gain on sales of mortgage loans ..................... (284,348) (214,754) (102,342)
Gain on sale of foreclosed real estate .................. 6,277 10,956 --
Depreciation expense .................................... 365,780 310,824 264,492
ESOP and stock compensation plan expense ................ 316,326 166,487 64,378
Federal Home Loan Bank Stock dividends .................. (17,100) (29,600) (27,500)
Increase (decrease) in accrued interest receivable ...... 311,566 (436,863) (504,958)
Increase (decrease) in accrued interest payable ......... (33,115) 26,807 (34,488)
(Increase) decrease in other assets ..................... (661,200) 149,717 (56,301)
Increase in other liabilities ........................... 407,750 64,496 358,976
-----------------------------------------------------
Net Cash Provided By Operating Activities ........... 3,251,347 3,073,570 2,391,186
-----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits in banks ........ 4,330,439 789,897 3,065,642
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
Purchases of securities available for sale ................ (250,000) -- (1,500,000)
Proceeds from maturities of securities held to maturity ... 78,342,759 33,185,925 3,000,000
Purchase of securities held to maturity ................... (92,945,445) (48,050,130) (34,986,496)
Principal collected on securities available for sale ...... 206,980 155,822 2,281,971
Principal collected on securities held to maturity ........ 13,051,230 5,003,526 2,801,843
Loan originations and principal payments on loans, net .... (31,522,680) (6,232,328) (21,185,934)
Purchase of Federal Home Loan Bank stock .................. (1,295,800) (325,000) (18,700)
Proceeds from sale of foreclosed real estate .............. 135,024 232,792 44,533
Proceeds from sale of premises and equipment .............. -- 300,770 --
Acquisition of premises and equipment ..................... (3,965,765) (1,221,464) (599,017)
-----------------------------------------------------
Net Cash Used By Investing Activities ............... (33,913,258) (14,660,190) (27,599,666)
-----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits .... 16,123,429 974,264 (3,465,782)
Net increase (decrease) in time deposits .................. (12,261,295) 7,651,165 11,568,158
Net increase (decrease) in advance payments by borrowers
for taxes and insurance ................................. 17,349 (15,078) (99,665)
Net increase in retail repurchase agreements .............. 7,357,014 1,440,291 10,701,568
Repayment of advances from Federal Home Loan Bank ......... (14,500,000) (12,000,000) (13,799,044)
Advances from Federal Home Loan Bank ...................... 43,500,000 16,000,000 15,000,000
Exercise of stock options ................................. 53,634 -- --
Purchase of common stock by ESOP trust .................... -- -- (24,500)
Net proceeds from common stock issuance of pooled affiliate -- -- 6,970,813
Dividends paid ............................................ (1,122,367) (1,019,192) (936,436)
Adjustment to conform pooled affiliate's fiscal year end .. 250,196 -- --
-----------------------------------------------------
Net Cash Provided By Financing Activities ............. 39,417,960 13,031,450 25,915,112
-----------------------------------------------------
Net Increase in Cash and Due From Banks ..................... 8,756,049 1,444,830 706,632
Cash and due from banks at beginning of year ................ 5,294,828 3,849,998 3,143,366
-----------------------------------------------------
Cash and Due From Banks at End of Year ...................... $ 14,050,877 $ 5,294,828 $ 3,849,998
=====================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Operations
Community Bank Shares of Indiana, Inc. (the Company) is a multi-bank holding
company headquartered in New Albany, Indiana. The Company's southern Indiana
banking subsidiaries are Community Bank of Southern Indiana (Community Bank) and
Heritage Bank of Southern Indiana (Heritage Bank). On May 6, 1998, the Company
acquired NCF Bank and Trust Company, Bardstown, Kentucky. (See Note 2)
In addition to general commercial banking, Community Bank and Heritage Bank
engage in mortgage banking and the sale of annuity investments and mutual funds
through eight offices in southern Indiana. The accompanying consolidated
financial statements include the accounts of the Company and its subsidiaries.
All material intercompany balances and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform with current year
presentation.
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 equity securities, and are stated at fair value. Amortization of
premium and accretion of discount on debt securities 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.
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.
25
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(1 -- continued)
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 cost or fair
value minus estimated costs to sell. 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.
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.
26
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(1 -- continued)
Mortgage Servicing Rights
Mortgage servicing rights are accounted for under the provision of SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, which became effective January 1, 1997. SFAS No. 125 superseded
SFAS No. 122, Accounting for Mortgage Servicing Rights, but did not
significantly change the methodology used to account for servicing rights. The
Company adopted SFAS No. 122 as of January 1, 1996. The standards require 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 employee stock ownership plans 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-based compensation plans.
Advertising
Advertising costs are charged to operations when incurred.
New Accounting Pronouncements
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.
27
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(2) ACQUISITION
On May 6, 1998, the Company completed its acquisition of NCF Bank and Trust
Company (NCF Bank) located in Bardstown, Kentucky by a merger with NCF Financial
Corporation (NCF). NCF Bank, a state chartered commercial bank with total assets
of $37.0 million and $35.6 million at May 6, 1998 and December 31, 1997,
respectively, became a wholly owned subsidiary of the Company through the
exchange of 740,974 shares of the Company's common stock for all the outstanding
common stock of NCF. The acquisition was accounted for as a pooling of interests
and, therefore, the 1998 consolidated financial statements are based on the
assumption that the companies were combined for the full year and the
consolidated financial statements for prior years have been restated to give
effect to the combination.
The following table sets forth the separate results of operations for the
Company and NCF for the period from January 1, 1998 through June 30, 1998:
Company NCF
(In Thousands)
Revenue $ 10,170 $ 1,415
====================
Net income (loss) $ 976 $ (149)
====================
Prior to the pooling, NCF Bank's fiscal year ended June 30. Subsequent to the
pooling, NCF Bank changed its year end to December 31, to conform with that of
the Company. During the six months ended December 31, 1997, NCF and NCF Bank
reported consolidated revenue of $1,431,953, net income of $187,006, and
declared dividends of $114,248. In order to reflect this change in fiscal
year-end, retained earnings have been increased by NCF's consolidated net income
for the six month period and decreased by the amount of the dividends declared.
(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 non-interest bearing and unavailable for
investment. During 1998, the average balance maintained to meet this requirement
was approximately $972,000.
(4) SECURITIES
Debt securities have been classified in the consolidated balance sheets
according to management's intent. The amortized cost and fair value of
available-for-sale and held-to-maturity securities and the related unrealized
holding gains and losses were as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<CAPTION>
December 31, 1998:
Securities available for sale:
Mortgage-backed securities:
<S> <C> <C> <C> <C>
FNMA and GNMA certificates ............ $ 666,452 $ 3,110 $ 3,482 $ 666,080
Common stock .......................... 250,000 -- -- 250,000
-----------------------------------------------------------------
Total securities available for sale $ 916,452 $ 3,110 $ 3,482 $ 916,080
=================================================================
Securities held to maturity:
Mortgage-backed securities:
FHLMC, FNMA and
GNMA certificates ................... $ 2,006,178 $ 21,752 $ 2,748 $ 2,025,182
Collateralized mortgage obligations ... 1,396,521 3,476 2,699 1,397,298
FHLMC and FNMA REMIC .................. 25,791,628 77,921 94,911 25,774,638
-----------------------------------------------------------------
29,194,327 103,149 100,358 29,197,118
-----------------------------------------------------------------
Other debt securities:
Federal agency ........................ 59,258,797 151,994 280,342 59,130,449
Municipal ............................. 3,328,839 116,625 -- 3,445,464
-----------------------------------------------------------------
62,587,636 268,619 280,342 62,575,913
-----------------------------------------------------------------
Total securities held to maturity ... $91,781,963 $ 371,768 $ 380,700 $91,773,031
=================================================================
</TABLE>
28
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(4 -- continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1997:
Securities available for sale:
Mortgage-backed securities:
<S> <C> <C> <C> <C>
FNMA and GNMA certificates ......... $ 878,133 $ 4,558 $ -- $ 882,691
-----------------------------------------------------------------
Securities held to maturity:
Mortgage-backed securities:
FHLMC, FNMA and
GNMA certificates ................ $ 1,854,410 $ 38,844 $ -- $ 1,893,254
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
-----------------------------------------------------------------
23,518,835 263,344 44,119 23,738,060
-----------------------------------------------------------------
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 $90,172,781 $ 483,950 $ 243,548 $90,413,183
=================================================================
</TABLE>
At December 31, 1998, federal agency securities with an amortized cost of
$1,500,000 and a fair value of $1,516,562 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, 1998. (See Note 8)
The amortized cost and fair value of debt securities as of December 31, 1998, 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 .............. $ -- $ -- $ 1,000,000 $ 993,750
Due after one year through five years -- -- 3,632,504 3,619,162
Due after five years through ten years -- -- 39,174,338 39,150,775
Due after ten years .................. -- -- 18,780,794 18,812,226
-----------------------------------------------------------------
-- -- 62,587,636 62,575,913
Mortgage-backed securities ........... 666,452 666,080 29,194,327 29,197,118
-----------------------------------------------------------------
$ 666,452 $ 666,080 $91,781,963 $91,773,031
=================================================================
</TABLE>
Proceeds from sales of debt securities available for sale during the year ended
December 31, 1996 were $4,396,492. Gross gains of $19,896 and gross losses of
$5,206 were realized on those sales.
29
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(5) LOANS RECEIVABLE
Loans receivable at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
Real estate loans:
<S> <C> <C>
Residential ........................... $ 104,670,687 $ 106,082,633
Residential construction .............. 578,200 5,653,825
Commercial real estate ................ 35,423,536 22,431,968
Home equity lines of credit ............. 6,760,043 6,845,601
Commercial loans ........................ 48,057,007 27,929,434
Loans secured by deposit accounts ....... 2,048,504 873,837
Consumer loans .......................... 5,153,519 4,060,024
----------------------------------
Gross loans receivable ............ 202,691,496 173,877,322
Less:
Undisbursed portion of loans in process 1,843,642 1,968,342
Deferred loan origination fees, net ... (3,342) 29,485
Allowance for loan losses ............. 1,275,801 1,013,884
----------------------------------
3,116,101 3,011,711
----------------------------------
Loans receivable, net ................... $ 199,575,395 $ 170,865,611
==================================
</TABLE>
Loans serviced for the benefit of others were as follows:
December 31, 1998 $ 47,892,248
December 31, 1997 45,879,809
December 31, 1996 49,884,673
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $168,688 and $157,261 at December 31, 1998 and 1997,
respectively.
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Beginning balances ..................... $ 1,013,884 $ 816,202 $ 700,499
Adjustment to conform pooled affiliate's
fiscal year end ...................... 8,000 -- --
Provision .............................. 353,875 226,000 128,450
Recoveries ............................. 4,362 9,306 4,360
Loans charged-off ...................... (104,320) (37,624) (17,107)
-------------------------------------------------
Ending balances ........................ $ 1,275,801 $ 1,013,884 $ 816,202
=================================================
</TABLE>
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.
The following table represents the aggregate activity for related party loans
which exceeded $60,000 in total:
Balance at December 31, 1997 $ 7,949,705
Adjustments ................ 769,118
New loans .................. 12,180,038
Repayments ................. (6,555,461)
------------
Balance at December 31, 1998 $ 14,343,400
============
30
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(6) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
1998 1997
Land and land improvements ...... $ 973,650 $ 974,997
Office buildings ................ 7,464,959 3,606,215
Furniture, fixtures and equipment 1,438,875 1,301,510
Leasehold improvements .......... 172,385 168,958
-----------------------------
10,049,869 6,051,680
Less accumulated depreciation ... 2,181,247 1,847,367
-----------------------------
Net premises and equipment .. $ 7,868,622 $ 4,204,313
=============================
(7) DEPOSITS
The aggregate amount of time deposit accounts with balances of $100,000 or more
was approximately $21,426,000 and $31,004,000 at December 31, 1998 and 1997,
respectively.
At December 31, 1998, scheduled maturities of time deposits were as follows:
Year ending December 31:
(In thousands)
1999 $ 95,437
2000 22,456
2001 4,733
2002 1,136
2003 and thereafter 1,766
--------
Total $125,528
========
The subsidiary banks held deposits of approximately $7,435,000 for related
parties at December 31, 1998.
(8) BORROWED FUNDS
Borrowed funds are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
Average Average
Rate Amount Rate Amount
<S> <C> <C> <C> <C>
Retail repurchase agreements 4.10% $19,498,873 4.77% $12,141,859
Fixed rate advances from
Federal Home Loan Bank
maturing during the year
ending December 31:
1998 -- -- 5.75% 14,500,000
1999 6.03% 3,500,000 6.03% 3,500,000
2000 5.68% 4,000,000 5.68% 4,000,000
2001 5.21% 4,000,000 -- --
2002 5.68% 5,000,000 5.68% 5,000,000
2003 4.99% 3,000,000 -- --
2008 4.88% 36,500,000 -- --
------------ ------------
Totals $ 75,498,873 $ 39,141,859
============ ============
</TABLE>
31
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(8 -- continued)
Information concerning borrowings in 1998 and 1997 under retail repurchase
agreements is summarized as follows:
1998 1997
Weighted-average interest rate during the year 4.59% 4.83%
Average daily balance ........................ $14,901,890 $12,140,694
Maximum month-end balance during the year .... $19,499,000 $13,913,000
Federal agency debt securities underlying the agreements at December 31, 1998:
Amortized cost $ 25,986,447
Fair value $ 25,945,986
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, 1998.
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, 1999. At December 31, 1998, Community Bank had
no borrowings under this agreement.
Heritage Bank has an overdraft line of credit with the Federal Home Loan Bank
which provides a line of credit not to exceed $500,000. This agreement expires
on June 28, 1999. At December 31, 1998, Heritage Bank had no borrowings under
this agreement.
The advances and overdraft lines of credit are secured under a blanket
collateral agreement. At December 31, 1998, eligible collateral included
residential mortgage loans with a carrying value of $84,329,347 and
mortgage-backed and other debt securities with an amortized cost of $59,883,129
and fair value of $59,791,464 which were pledged as security under the
agreement.
(9) BENEFIT PLANS
Defined Benefit Plans:
The Company sponsors a defined benefit pension plan. The benefits are based on
years of service and the employees' highest average of total compensation for
five consecutive years of employment.
On August 31, 1997, the plan was amended whereby participation in the plan was
terminated effective as of that date.
Following are reconciliations of the pension benefit obligation and the value of
plan assets for 1998 and 1997:
1998 1997
Pension benefit obligation
Balance, beginning of year .. $ 1,000,362 $ 936,089
Service cost ................ -- 84,651
Interest cost ............... 61,976 70,973
Curtailment loss ............ -- 29,649
Settlement loss ............. 34,273 --
Actuarial gain .............. (45,732) (81,315)
Benefits paid to participants (557,365) (39,685)
------------------------------
Balance, end of year ........ $ 493,514 $ 1,000,362
==============================
Plan assets
Fair value, beginning of year $ 997,149 $ 877,077
Actual return on plan assets 53,448 159,757
Company contributions ....... 76,300 --
Benefits paid to participants (557,365) (39,685)
------------------------------
Fair value, end of year ..... $ 569,532 $ 997,149
==============================
32
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(9 -- continued)
At December 31, 1998 and 1997, the funded status of the plan was as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Excess of the benefit obligation over the fair value of plan assets $ -- $ (3,213)
Excess of the fair value of plan assets over the benefit obligation 76,018 --
Unrecognized actuarial gain ....................................... (40,246) --
------------------------
Prepaid (accrued) benefit cost .................................... $ 35,772 $ (3,213)
========================
</TABLE>
Pension expense for the years ended December 31 comprised the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost ....................... $ -- $ 84,651 $ 60,434
Interest cost ...................... 61,976 70,973 62,178
Expected return on plan assets ..... (58,934) (78,074) (73,130)
Recognized actuarial loss .......... -- 20,539 37,520
Amortization of prior service cost . -- (2,596) (2,596)
Amortization of the transition asset -- (24,495) (24,494)
Curtailment loss ................... -- 29,649 --
Settlement loss .................... 34,273 -- --
-------------------------------------------
Pension expense .................... $ 37,315 $ 100,647 $ 59,912
===========================================
</TABLE>
The following weighted-average rate assumptions were used in accounting for the
plan:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Discount rate on benefit obligation 7.0% 7.0% 7.0%
Rate of employee compensation increase N/A 4.5% 4.5%
Rate of expected return on plan assets 9.0% 9.0% 9.0%
</TABLE>
NCF Bank is a participant in the Financial Institutions Retirement Fund, a
multi-employer defined benefit pension plan covering substantially all its
employees. Employees are fully vested at the completion of five years of
participation in the plan. Contributions to the plan were $3,264 for 1996. No
contributions were required for 1998 and 1997.
Employee Stock Ownership Plans:
The Company sponsors leveraged employee stock ownership plans (ESOP) covering
substantially all employees. The ESOP trusts have 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 trusts. Dividends payable on allocated shares are
charged to retained earnings and are satisfied either by the release of shares
or the allocation of cash dividends to participant accounts. Dividends payable
on unallocated shares are not considered dividends for financial reporting
purposes. Shares held by the ESOP trusts 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 based on the average fair value of shares
released for allocation to participant accounts during the year with a
corresponding credit to stockholders' equity. Compensation expense recognized
for 1998, 1997 and 1996 amounted to $129,334, $88,535 and $64,378, respectively.
33
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(9 -- continued)
Company common stock held by the ESOP trusts at December 31, were as follows:
1998 1997
Allocated shares ............... 18,155 11,996
Shares released for allocation . 6,562 1,051
Unreleased shares .............. 31,510 43,604
-----------------------
Total ESOP shares ........ 56,227 56,651
=======================
Fair value of unallocated shares $577,500 $684,494
=======================
Defined Contribution Plans:
The Company has a defined contribution plan available to all eligible employees.
The plan allows participating employees to make tax-deferred contributions under
Internal Revenue Code Section 401(k). The Company contributed $25,471, $23,095
and $15,856 to the plan for the years ended December 31, 1998, 1997 and 1996,
respectively.
(10) STOCK-BASED COMPENSATION PLANS
The Company applies APB No. 25 and related interpretations in accounting for its
stock-based compensation plans. In accordance with SFAS No. 123, the Company
elected to continue to apply the provisions of APB No. 25. However, pro forma
disclosures as if the Company adopted the compensation cost recognition
provisions of SFAS No. 123, are presented along with a summary of the plans and
awards.
Stock Options:
The Company's stock option plans provide for the granting of incentive and
nonqualified stock options at exercise prices not less than the fair market
value of the common stock on the date of grant. All options granted under the
plans shall become vested and exercisable at the rate determined by the Board of
Directors at the date of grant. Options granted under the plans 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.
The following is a summary of the Company's stock options as of December 31,
1998, 1997 and 1996 and the changes for the years then ended:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
No. of Exercise No. of Exercise No. of Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 54,028 $ 14.89 54,028 $ 14.89 -- $ --
Granted ........................ 120,600 20.84 -- -- 54,028 14.89
Exercised ...................... 3,602 14.89 -- -- -- --
Forfeited ...................... 600 21.00 -- -- -- --
------- ------ ------
Outstanding at end of year ..... 170,426 $ 19.08 54,028 $ 14.89 54,028 $ 14.89
======= ====== ======
Exercisable at end of year ..... 52,426 $ 15.12 14,636 $ 14.89 -- --
======= ====== ======
</TABLE>
For options outstanding at December 31, 1998, the option price per share ranged
from $14.89 to $21.00 and the weighted-average remaining contractual life of the
options was 8.9 years.
For purposes of providing the pro forma disclosures required under SFAS No. 123,
the fair value of stock options granted in 1996 and 1998 was estimated at the
date of grant using the Black-Scholes option pricing model. The Black-Scholes
option pricing model was originally developed for use in estimating the fair
value of traded options which have different characteristics from the Company's
employee stock options and require the use of highly subjective assumptions
which can materially affect the fair value estimate. As a result, management
believes that the Black-Scholes model may not necessarily provide a reliable
measure of the fair value of employee stock options.
34
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(10 -- continued)
The following assumptions were used for grants in 1998 and 1996:
1998 1996
Expected dividend yield ................. 2.30% 2.16%
Risk-free interest rate ................. 5.50% 7.50%
Expected volatility ..................... 16.81% 11.00%
Expected life of options ................ 10 years 10 years
Weighted-average fair value at grant date $ 20.84 $ 14.89
Had compensation cost for the Company's stock-based compensation plans been
determined in accordance with the fair value based accounting method provided by
SFAS No. 123, the net income and net income per common share for the years ended
December 31, 1998, 1997 and 1996 would have been as follows:
1998 1997 1996
(In thousands, except per share amounts)
Pro forma net income ................... $ 2,158 $ 2,650 $ 2,001
Pro forma net income per share:
Basic ................................ $ 0.80 $ 0.99 $ 0.75
Diluted .............................. $ 0.79 $ 0.99 $ 0.75
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.
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, 1998, no
awards had been granted.
Management Stock Bonus Plan:
On April 16, 1996, NCF Bank and Trust Company established a restricted stock
bonus plan as an encouragement for directors, officers and key employees to
remain in the employment or service of the bank. The shares granted under the
plan were in the form of restricted stock vesting over a five-year period
beginning one year after the date of grant of the award. Since the stock issued
is held in trust by the plan before some or all of the services are performed,
unearned compensation is recorded as a reduction of stockholders' equity.
Compensation expense is recognized pro rata over the period during which the
shares are earned. The terms of the restricted stock bonus plan included a
provision whereby all unearned shares become fully vested upon a change in
control. As a result, all remaining unearned compensation cost was recognized in
1998 and the shares awarded were distributed. Compensation expense recognized
for the years ended December 31, 1998 and 1997 was $186,992 and $77,952,
respectively.
35
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(11) DEFERRED COMPENSATION AND RETIREMENT PLANS
The Company has entered into deferred compensation and retirement agreements
whereby certain officers are provided specific amounts of income following
retirement. The benefits under the agreements are fully vested or vest over the
term of employment to the date of normal retirement. At December 31, 1998, the
Company had recorded the present value of the expected retirement benefit
obligations for all such agreements. The Company recognized compensation expense
for 1998 of $560,750.
Effective January 1, 1996, NCF Bank and Trust Company established a supplemental
executive retirement plan for the bank's chief executive officer. This plan
provides that upon retirement, the bank will pay a monthly retirement benefit in
excess of the amount provided for by the bank's multi-employer defined benefit
plan, not exceeding 2% of average monthly compensation multiplied by total years
of service. As of December 31, 1998, the bank has recorded the present value of
the expected retirement benefit obligation. Compensation expense for 1996
amounted to $95,895. During 1997, the bank recorded a $25,099 credit to
compensation expense for a reduction in the present value of the expected
retirement benefit obligation as a result of a change in the retirement benefit
provided under the multi-employer defined benefit plan.
Effective March 1, 1996, NCF Bank and Trust Company approved a director's
consultation and retirement plan to provide each director with 15 years of
service a monthly benefit equal to the director's fees in effect prior to normal
retirement. The bank has recognized compensation expense based on the present
value of the expected retirement benefit obligations. The plan provided for full
vesting of benefits following a change in control. As of December 31, 1998, the
bank has recorded the present value of the fully vested expected retirement
benefit obligation. Director's retirement compensation expense of $171,000,
$126,842 and $21,513 was recorded in 1998, 1997 and 1996, respectively.
(12) 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.
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current ........................................... $ 1,900,920 $ 1,875,501 $ 1,217,978
Deferred (credit) ................................. (376,699) (184,714) (363,203)
-------------------------------------------------
Totals ........................................ $ 1,524,221 $ 1,690,787 $ 854,775
=================================================
Tax expense applicable to security transactions $ -- $ -- $ 5,819
=================================================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
Deferred tax (assets) liabilities:
<S> <C> <C>
Deferred loan fees and costs .............................. $ 54,946 $ 42,789
Prepaid pension expense ................................... 17,360 --
Mortgage servicing rights ................................. 62,199 20,578
Deferred start-up costs for tax purposes .................. (12,418) (18,626)
Allowance for loan losses and tax bad debt reserve ........ (421,535) (296,544)
Depreciation .............................................. 157,998 156,376
Net unrealized gain (loss) on securities available for sale (147) 1,805
Deferred compensation and retirement plans ................ (370,802) (73,559)
Basis difference in FHLB stock ............................ 92,252 79,288
Management stock bonus plan ............................... (136,734) --
Other ..................................................... 34,925 (33,593)
--------------------------
Net deferred tax asset .................................. $(521,956) $(121,486)
==========================
</TABLE>
36
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(12 -- continued)
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>
1998 1997 1996
<S> <C> <C> <C>
Provision at statutory rate ...................... $ 1,333,576 $ 1,497,431 $ 974,673
State income tax--net of federal tax benefit ..... 229,965 222,997 109,575
Nontaxable interest and dividend income .......... (40,379) (42,639) (25,114)
Tax effect of change in tax law related to the
allowance for loan losses and bad debt deduction -- -- (212,589)
Other ............................................ 1,059 12,998 8,230
---------------------------------------------------
Net provision for income taxes .............. $ 1,524,221 $ 1,690,787 $ 854,775
===================================================
Effective tax rate .............................. 38.9% 38.4% 29.8%
===================================================
</TABLE>
Prior to January 1, 1996, Community Bank and NCF Bank were 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, 1998 includes approximately $5.5 million 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 $1.9 million at December
31, 1998.
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 and NCF 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, the banks will be required to
compute their federal tax bad debt deduction based on actual loss experience
over a period of years. The legislation requires the banks 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,
1998, the remaining balance of the post-1987 reserves totaled $172,289 for which
a deferred tax liability of $58,578 has been recorded.
The legislation also provides that the banks will not be required to recapture
their pre-1988 statutory bad debt reserves if they cease to meet the qualifying
thrift definitional tests and if they continue to qualify as a "bank" under
existing provisions of the Internal Revenue Code.
(13) DIVIDEND RESTRICTIONS
The dividends which the subsidiary banks may pay to the Company are subject to
various legal and regulatory restrictions. At December 31, 1998, retained
earnings of subsidiary banks available for the payment of dividends without
approval by the state regulatory authorities was approximately $3.2 million.
37
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(14) 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,
1998, that the Company and its subsidiaries meet all capital adequacy
requirements to which it is subject.
As of December 31, 1998, 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, 1998:
Total Capital (to Risk-
Weighted Assets):
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 42,620 20.4% $ 16,704 8.0% N/A
Community Bank $ 24,719 16.7% $ 11,825 8.0% $ 14,781 10.0%
Heritage Bank $ 4,860 14.9% $ 2,607 8.0% $ 3,259 10.0%
NCF Bank $ 10,444 42.2% $ 1,981 8.0% $ 2,476 10.0%
Tier I Capital (to Risk-
Weighted Assets):
Consolidated $ 41,344 19.8% $ 8,352 4.0% N/A
Community Bank $ 23,921 16.2% $ 5,913 4.0% $ 8,869 6.0%
Heritage Bank $ 4,599 14.1% $ 1,304 4.0% $ 1,956 6.0%
NCF Bank $ 10,227 41.3% $ 990 4.0% $ 1,485 6.0%
Tier I Capital (to Average
Assets):
Consolidated $ 41,344 12.7% $ 12,958 4.0% N/A
Community Bank $ 23,921 10.5% $ 9,158 4.0% $ 11,447 5.0%
Heritage Bank $ 4,599 9.2% $ 1,498 3.0% $ 2,497 5.0%
NCF Bank $ 10,277 24.7% $ 1,657 4.0% $ 2,072 5.0%
</TABLE>
38
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(14 -- continued)
<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 $ 37,226 25.3% $ 11,788 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%
NCF Bank $ 8,785 53.5% $ 1,313 8.0% $ 1,641 10.0%
Tier I Capital (to Risk-
Weighted Assets):
Consolidated $ 36,212 24.6% $ 5,894 4.0% N/A
Community Bank $ 22,335 20.5% $ 4,362 4.0% $ 6,542 6.0%
Heritage Bank $ 4,343 20.4% $ 852 4.0% $ 1,277 6.0%
NCF Bank $ 8,608 52.5% $ 656 4.0% $ 985 6.0%
Tier I Capital (to Average
Assets):
Consolidated $ 36,212 13.5% $ 10,734 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%
NCF Bank $ 8,608 26.7% $ 1,292 4.0% $ 1,615 5.0%
</TABLE>
(15) 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.
Commitments under outstanding standby letters of credit totaled $1,117,906 at
December 31, 1998.
The following is a summary of the commitments to extend credit at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
Loan commitments:
<S> <C> <C>
Fixed rate ....................................... $ 3,802,877 $ 2,118,732
Adjustable rate .................................. 993,160 1,541,100
Residential construction ......................... 100,400 --
Undisbursed commercial and personal lines of credit 34,822,513 24,012,750
Undisbursed portion of construction loans in process 1,843,642 836,065
-----------------------------
Total commitments to extend credit ........... $41,562,592 $28,508,647
=============================
</TABLE>
39
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(16) 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 15). 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 credit-worthiness 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.
(17) 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>
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands) Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks .......... $ 14,051 $ 14,051 $ 5,294 $ 5,294
Interest-bearing deposits in banks 7,589 7,589 11,499 11,499
Securities available for sale .... 916 916 883 883
Securities held to maturity ...... 91,782 91,773 90,173 90,413
Mortgage loans held for sale ..... 3,522 3,547 -- --
Loans receivable ................. 200,851 -- 171,880 --
Less: allowance for loan losses . 1,276 -- 1,014 --
------- -------- -------- --------
Loans receivable, net .......... 199,575 201,248 170,866 171,034
------- -------- -------- --------
Federal Home Loan Bank stock ..... 3,346 3,346 1,575 1,575
Financial liabilities:
Deposits ......................... 212,867 214,127 207,991 208,456
Borrowed funds:
Advances from Federal Home
Loan Bank .................... 56,000 55,552 27,000 26,983
Retail repurchase agreements ... 19,499 19,499 12,142 12,142
</TABLE>
40
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(17 - continued)
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.
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. A reasonable estimate
of the fair value of these financial instruments is the unamortized fee income
and, where necessary, reserves for any expected credit losses from these
financial instruments. At December 31, 1998 and 1997, these amounts are
immaterial.
41
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(18) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for Community Bank Shares of Indiana, Inc.
(parent company only) for the years ended December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Balance Sheets
(In Thousands)
1998 1997
Assets:
<S> <C> <C>
Cash on deposit with subsidiary ........................... $ 92 $ 441
Interest-bearing deposits with banks ...................... 831 3,077
Securities held to maturity ............................... 2,000 --
Receivables from subsidiaries ............................. 591 109
Investment in subsidiaries ................................ 37,479 35,965
Premises and equipment .................................... 779 610
Other assets .............................................. 29 13
---------------------
Total Assets .......................................... $41,801 $40,215
=====================
Liabilities and Stockholders' Equity:
Other liabilities ......................................... $ 415 $ 276
Stockholders' equity ...................................... 41,386 39,939
---------------------
Total Liabilities and Stockholders' Equity ............ $41,801 $40,215
=====================
</TABLE>
<TABLE>
<CAPTION>
Statements of Income
(In Thousands)
1998 1997 1996
Income:
<S> <C> <C> <C>
Dividends from subsidiary .................................... $ 1,300 $ 975 $ 925
Management and other fees from subsidiaries .................. 1,796 1,462 1,441
Interest income .............................................. 166 181 121
-------------------------------------
Total income ............................................. 3,262 2,618 2,487
-------------------------------------
Expense:
Operating expenses ........................................... 3,149 1,726 1,586
-------------------------------------
Income before income taxes and equity in
undistributed net income of subsidiaries ..................... 113 892 901
Income tax credit .............................................. (439) (43) (9)
-------------------------------------
Income before equity in undistributed net income
of subsidiaries .............................................. 552 935 910
Equity in undistributed net income of subsidiaries ............. 1,846 1,778 1,102
-------------------------------------
Net Income ............................................... $ 2,398 $ 2,713 $ 2,012
=====================================
</TABLE>
42
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(18 - continued)
<TABLE>
<CAPTION>
Statements of Cash Flows
(In Thousands)
1998 1997 1996
Operating Activities:
<S> <C> <C> <C>
Net income ....................................................... $ 2,398 $ 2,713 $ 2,012
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries ............... (1,846) (1,778) (1,102)
Decrease in other assets and liabilities, net .................... 90 389 282
-------------------------------------
Net Cash Provided By Operating Activities .................. 642 1,324 1,192
-------------------------------------
Investing Activities:
(Increase) decrease in interest bearing deposits with banks ...... 2,246 -- (3,077)
(Increase) decrease in securities under agreement to resell ...... -- -- 4,000
Purchase of securities held to maturity .......................... (2,000) -- --
Investment in subsidiaries ....................................... -- -- (7,815)
Net (increase) decrease in premises and equipment ................ (169) 14 (89)
-------------------------------------
Net Cash Provided (Used) By Investing Activities ........... 77 14 (6,981)
-------------------------------------
Financing Activities:
Issuance of common stock ......................................... -- -- 6,836
Purchase of common stock by ESOP Trust ........................... -- -- (25)
Exercise of stock option ......................................... 54 -- --
Dividends paid ................................................... (1,122) (1,019) (937)
-------------------------------------
Net Cash Provided (Used) By Financing Activities ........... (1,068) (1,019) 5,874
-------------------------------------
Net increase (decrease) in cash .................................... (349) 319 85
Cash at beginning of year .......................................... 441 122 37
-------------------------------------
Cash at End of Year ................................................ $ 92 $ 441 $ 122
=====================================
</TABLE>
(19) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
Cash payments for:
<S> <C> <C> <C>
Interest ................................. $12,192,838 $11,637,071 $10,659,068
Taxes .................................... 2,086,970 1,660,213 1,142,938
Transfers from loans to real estate acquired
through foreclosure ...................... $ 128,747 $ 724,486 $ 100,801
Noncash Financing Activity:
Issuance of common stock to ESOP trust ..... $ -- $ -- $ 500,000
</TABLE>
43
<PAGE>
COMMUNITY BANK SHARES OF INDIANA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
(20) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
Basic:
Earnings:
<S> <C> <C> <C>
Net income ........................... $2,398,062 $2,713,423 $2,011,910
============================================
Shares:
Weighted-average common
shares outstanding ................. 2,703,309 2,678,643 2,659,066
============================================
Net income per common share, basic ... $ .89 $ 1.01 $ .76
============================================
Diluted:
Earnings ............................... $2,398,062 $2,713,423 $2,011,910
============================================
Shares:
Weighted-average common
shares outstanding ............... 2,703,309 2,678,643 2,659,066
Add: Dilutive effects of outstanding
options .......................... 14,582 5,536 --
--------------------------------------------
Weighted-average common shares
outstanding, as adjusted ......... 2,717,891 2,684,179 2,659,066
============================================
Net income per common share, diluted ..... $ .88 $ 1.01 $ .76
============================================
</TABLE>
Unearned ESOP shares are not considered as outstanding for purposes of computing
the weighted-average common shares outstanding.
44
<PAGE>
Annual Meeting
The Annual Meeting of Stockholders will be held on Tuesday, April 20, 1999, at
1:00 p.m., at Koetter Woodworking's Forest Discovery Center, in Starlight,
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. 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 SmallCap symbol of CBIN.
"The Nasdaq Stock Market" or "Nasdaq" is a highly-regulated electronic
securities market utilizing a sophisticated computer and telecommunications
network. Market participants are composed of competing Market Makers,
independent dealers who commit capital to stocks and compete with each other for
orders, and Electronic Communications Networks (ECN's), trading systems recently
integrated into Nasdaq which bring additional orders into the market. This
market structure provides visibility of orders and allows market participants to
compete for order flow. Trading is supported by a communications network linking
the market participants to quotations dissemination, trade reporting, and order
execution systems. This market also provides specialized automation services for
screen-based negotiations of transactions, online comparison of transactions,
and a range of information services tailored to the needs of the securities
industry, investors, and issuers. The Nasdaq Stock Market consists of two
distinct market tiers: the Nasdaq National Market and The Nasdaq SmallCap
Market. The Nasdaq Stock Market is operated by The Nasdaq Stock Market, Inc., a
wholly owned subsidiary of the National Association of Securities Dealers, Inc.
General Inquiries and Reports
Community Bank Shares of Indiana, Inc. is required to file an annual report on
Form 10-K, for its fiscal year ended December 31, 1998, with the Securities and
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.
<PAGE>
[Architectural Rendering of New Community Bank Building and Corporate
Headquarters to be completed mid-1999]
[Timeline highlighting key moments in the history of Community Bankshares of
Indiana, Inc.]
Exhibit 21 -- Subsidiaries of Registrant
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 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
Name of Subsidiary NCF Bank & Trust Company
Address of Subsidiary 106A West John Rowan Boulevard
Bardstown, Kentucky 40004
State of Incorporation Kentucky
Currently doing business as NCF Bank & Trust Company
Name of Subsidiary First Community Service Corporation
Address of Subsidiary 202 East Spring Street
New Albany, Indiana 47150
State of Incorporation Indiana
Currently inactive
Name of Subsidiary Nelson Service Corporation
Address of Subsidiary 106A West John Rowan Boulevard
Bardstown, Kentucky 40004
State of Incorporation Kentucky
Currently inactive
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,051
<INT-BEARING-DEPOSITS> 7,589
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 916
<INVESTMENTS-CARRYING> 91,782
<INVESTMENTS-MARKET> 91,773
<LOANS> 199,575
<ALLOWANCE> 1,276
<TOTAL-ASSETS> 331,945
<DEPOSITS> 212,867
<SHORT-TERM> 22,999
<LIABILITIES-OTHER> 1,923
<LONG-TERM> 52,500
0
0
<COMMON> 273
<OTHER-SE> 41,113
<TOTAL-LIABILITIES-AND-EQUITY> 331,945
<INTEREST-LOAN> 15,539
<INTEREST-INVEST> 5,188
<INTEREST-OTHER> 1,217
<INTEREST-TOTAL> 21,944
<INTEREST-DEPOSIT> 9,330
<INTEREST-EXPENSE> 12,208
<INTEREST-INCOME-NET> 9,736
<LOAN-LOSSES> 354
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,290
<INCOME-PRETAX> 3,922
<INCOME-PRE-EXTRAORDINARY> 3,922
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,398
<EPS-PRIMARY> .89
<EPS-DILUTED> .88
<YIELD-ACTUAL> 3.38
<LOANS-NON> 470
<LOANS-PAST> 267
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 794
<ALLOWANCE-OPEN> 1,013
<CHARGE-OFFS> 104
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 1,276
<ALLOWANCE-DOMESTIC> 1,276
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
