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
For the Fiscal Year Ended December 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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)
Indiana 35-1938254
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification Number
101 West 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
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the asked price of $13.50 per share of such
stock as of March 20, 1999, was $35,442,995. (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.)
As of March 21, 1999, there were issued and outstanding 2,625,407 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Annual Report to Stockholders for the fiscal year
ended December 31, 1999.
Part III of Form 10-K - Proxy Statement for the 2000 Annual Meeting of
Stockholders.
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Form 10-K
Index
Part I: Page
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Item 1. Business 3
Item 2. Properties 25
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Part II:
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 26
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 26
Part III:
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 27
Part IV:
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 27
Signatures 29
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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 Bank 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 $384.4 million, total deposits of
$226.5 million, and stockholders' equity of $41.6 million as of December 31,
1999. The Company's principal executive office is located at 101 West Spring
Street, New Albany, Indiana 47150, and the telephone number at that address is
(812) 944-2224.
In May 1999 the Company initiated a stock repurchase plan, authorizing the
repurchase of up to 140,000 shares of the Company's outstanding common stock
subject to a purchase limit of $3,500,000. Over the remainder of 1999 the
Company acquired an aggregate of 107,100 shares of its Common Stock at an
average purchase price of $17.53, and purchased an additional 17,200 shares at
an average price of $14.10 between January 1, 2000 and March 30, 2000. On March
21, 2000 the Company approved a second stock repurchase plan under which up to
$4,000,000 in additional funds may be used to acquire outstanding Common Stock
over a twelve-month period.
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) controlling operating expenses; and (3) 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
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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 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.
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, 1999, the Company's net loans receivable
(excluding loans classified as held for sale) totaled $246.0 million,
representing approximately 64.0% 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>
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Analysis of Loan Portfolio
At December 31
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------
(Dollars in Thousands)
Conventional real estate loans:
<S> <C> <C> <C> <C> <C>
Residential interim
Construction loans $ 9,383 $ 578 $ 5,654 $ 6,498 $ 2,583
Residential 93,632 104,670 106,082 114,910 91,451
Commercial real estate 52,499 35,424 22,432 17,269 7,403
---------------- ------------- -------------- -------------- ---------------
Total real estate loans $ 155,514 $ 140,672 $ 134,168 $ 138,677 $ 101,437
Commercial business loans (1) $ 78,973 $ 48,057 $ 27,929 $ 20,191 $ 11,769
Consumer Loans:
Savings account loans 1,276 2,049 874 593 458
Equity lines of credit (2) 7,344 6,760 6,846 5,215 4,045
Automobile loans 2,343 1,824 1,570 1,344 1,042
Other (2) (3) 6,333 3,330 2,490 2,236 1,335
---------------- ------------- -------------- -------------- ---------------
Total consumer loans $ 17,296 $ 13,963 $ 11,780 $ 9,388 $ 6,880
Less:
Loans in process 4,041 1,844 1,969 1,726 1,282
Deferred loan origination fees
and costs, net (17) (3) 29 18 34
Allowance for loan losses 1,741 1,276 1,014 816 600
---------------- ------------- -------------- -------------- ---------------
Total loans, net $ 246,018 $ 199,575 $ 170,865 $ 165,696 $ 118,170
============== ============== ===============
================ =============
</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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Loan Maturity Schedule
The following table sets forth certain information at December 31, 1999,
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.
(Dollars in thousands)
Within one One through Beyond
year five years five years Total
---------------------------------------------------------------
Residential real estate
mortgages:
<S> <C> <C> <C> <C>
Adjustable $5,785 $15,957 $46,268 $68,010
Fixed 2,830 7,040 21,362 31,232
Second mortgages 432 996 2,346 3,774
Consumer 4,243 5,122 7,932 17,297
Commercial business and
commercial real estate 28,781 44,681 58,008 131,470
-------------- --------------- ----------------- ------------
Total $42,071 $73,797 $ 135,916 $ 251,783
============== =============== ================= ============
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The following table sets forth the dollar amount of all loans due after
December 31, 1999, which have fixed rates and have floating or adjustable
interest rates.
Predetermined Floating or
rates Adjustable rates Total
----------------- ------------------- -----------------
<S> <C> <C> <C>
Real estate mortgage $ 31,232 $ 71,784 $103,016
Commercial business loans 73,047 58,423 131,470
Consumer 13,550 3,747 17,297
----------------- ------------------- -----------------
Total $ 167,094 $ 84,689 $251,783
================= =================== =================
</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, 1999, the
Company had $103.0 million, or 41.9 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. Under the Company's current practice, the
interest rate on new ARM loans is typically 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 $22.5 million, or 8.9
percent of the Bank's total loan portfolio at December 31, 1999.
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, $6.5 million was still outstanding as of December 31,
1999. 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, $2.1 million was still outstanding as of December 31,
1999. 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, 1999, the
Company had $9.4 million or 3.7 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 $52.5 million, or 20.9 percent, of the Company's total
gross loan portfolio at December 31, 1999. 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 $79.0 million or 31.4
percent of the Company's loan portfolio as of December 31, 1999. 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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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. 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. As of December 31, 1999, consumer loans
totaled $17.3 million or 6.9 percent of the Company's total loan portfolio.
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, 1999, equity lines of credit totaled $7.3
million, or 42.4 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.
Processing procedures are affected by the type of loan requested and whether the
loan will be funded by the Company or sold into the secondary market.
Mortgage loans that are sold into the secondary market are submitted,
when possible, for Automated Underwriting, which allows for faster approval and
an expedited closing. Our responsibility on these loans is the fulfillment of
the loan purchaser's requirement. These loans often have reduced underwriting
features and may be made without an appraisal or credit report at the option of
the purchaser. A review signature is required to signify compliance with the
terms of our commitment. Loans that are reviewed in a more traditional manner,
which are mostly loans held for the Company's own portfolio, require credit
reports, appraisals, and income verification before they are approved or
disapproved. These loans must be reviewed by two designated Company officials
who then make a decision on whether to extend credit. Loans funded by the
Company that exceed GNMA maximum loan values require approval by the President
of the subsidiary bank extending the loan. Private mortgage insurance is
required on all loans with a ratio of loan to appraised value of greater than
80%. Property insurance and flood certifications are required on all real estate
loans.
Installment loan documentation varies by the type of collateral offered
to secure the loan. In general, an application and credit report is required
before a loan is submitted for underwriting. The underwriter determines the
necessity of any additional documentation, such as income verification or
appraisal of collateral. An authorized loan officer approves or disapproves the
loan after review of all applicable loan documentation collected during the
underwriting process.
Commercial loans are underwritten by the commercial loan officer who
makes the initial contact with the customer applying for credit. The
underwriting of these loans are reviewed after the fact for compliance to the
Company's general underwriting standards. Loans exceeding the authority of the
underwriting loan officer are presented to a loan committee for approval or
disapproval.
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, 1999, the Company
had commitments to originate loans of $2.3 million, as well as commitments to
fund the undisbursed portion of construction loans in process of $4.0 million
and commitments to fund commercial and personal lines of credit of $81.1
million.
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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, 1999, the Company had $17,000 of outstanding
net deferred loan fees and costs.
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 $204,000, $203,000, and $214,000 for the years
ended December 31, 1999, 1998 and 1997, 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. Current Indiana 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).
The Company's Indiana subsidiaries had maximum loan to one borrower limits of
approximately $3.9 million and $1.0 million at December 31, 1999, for Community
Bank and Heritage Bank, respectively. Kentucky law limits loans or other
extensions of credit to any borrower to 20% of NCF Bank's paid-in capital and
actual surplus. Such limit is increased to 30% if the borrower provides
collateral with a cash value exceeding the amount of the loan. Loans or
extensions of credit to certain borrowers are aggregated, and loans secured by
certain government obligations are exempt from these limits. At December 31,
1999, the maximum which NCF Bank could lend to any one borrower equaled $1.1
million uncollateralized and $2.0 million if the borrower provided collateral.
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, 1999, the Company owns $13,000 in property acquired as the result
of foreclosure or by deed in lieu or foreclosure.
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<TABLE>
<CAPTION>
The following table sets forth information regarding non-accrual loans
and other non-performing assets at the dates indicated. At December 31, 1999,
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.
At December 31,
---------------
(In thousands)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans accounted for on a non- accrual basis:
<S> <C> <C> <C> <C> <C>
Residential mortgage loans $ 24 $ 102 $ 294 $ 1,557 $ 27
Commercial real estate 120 368 - - -
Consumer 1 - 22 - -
------------ ------------ ------------- ------------- -------------
Total $ 145 $ 470 $ 316 $ 1,557 $ 27
============ ============ ============= ============= =============
Non-accrual loans as a
percentage of total gross loans 0.06% 0.23% 0.18% 0.93% 0.02%
============ ============ ============= ============= =============
Foreclosed real estate (1) $ 13 $ 200 $ 724 $ 101 $ -
============ ============ ============= ============= =============
</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.
11
<PAGE>
<TABLE>
<CAPTION>
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.
Year Ended December 31,
(In thousands)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gross interest income that would
have been recorded if all non-accrual
loans were on a current basis $11 $28 $ 111
============ ============ =============
Gross interest income actually recorded $ $ $ -
- -
============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
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, 1999:
At December 31, 1999 Number of loans
-------------------------- --------------------
(In thousands)
<S> <C> <C>
Residential real estate $ 175 3
Commercial real estate and business 130 1
Consumer loans 21 2
-------------------------- --------------------
Total $ 326 62
========================== ====================
</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.
12
<PAGE>
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, 1999, the Banks had $1.2 million classified as special
mention assets, $365,000 classified as substandard assets, and $287,000
classified as impaired assets.
Allowance for Loan Losses. Management's policy is to provide for
estimated losses in the Banks' loan portfolio based on management's evaluation
of the probable losses that may be incurred. The allowance for loan losses is
maintained at a level believed adequate by management to absorb credit losses
inherent in the portfolio. Such evaluation, which includes a review of all loans
for which full collectibility of interest and principal may not be reasonably
assured, considers, among other matters, the estimated fair market value of the
underlying collateral, past loss experience, volume, growth, and composition of
the portfolio.
13
<PAGE>
<TABLE>
<CAPTION>
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.
At December 31,
1999 1998 1997 1996 1995
(In thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding $246,018 $199,575 $170,865 $165,696 $120,086
Average loans outstanding 224,119 193,725 169,651 156,895 116,279
Balance at beginning of period $ 1,276 $ 1,014 $ 816 $ 700 $ 541
Adjustment to conform pooled
affiliate's fiscal year end - 8 --- ---
Provisions
Residential 100 88 86 68 6
Commercial 508 242 132 17 15
Consumer 46 24 8 43 37
---------------- ------------- -------------------------------------------
654 354 226 128 58
---------------- ------------- -------------------------------------------
Charge-offs
Residential (24) (32) (11) 4 -
Commercial (136) (52) (10) - -
Consumer (31) (20) (13) (16) -
---------------- ------------- -------------------------------------------
(191) (104) (34) (12) -
---------------- ------------- -------------------------------------------
Recoveries
Residential - 1 - - 1
Commercial - 3 - - -
Consumer 2 - 6 - -
---------------- ------------- ------------- --------------- -------------
2 4 6 - 1
---------------- ------------- ------------- --------------- -------------
Balance at end of period $ 1,741 $ 1,276 $ 1,014 $ 816 $ 600
================ ============= ============= ============== ============
Allowance for loans losses as a percent
of total loans outstanding .69% .64% .59% .49% .50%
Net loans charged off as a percent
of average loans outstanding .08% .05% .02% .01% --%
============================================================================
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
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.
At December 31,
---------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential loans $ 501 28.8% $ 425 51.9% $ 360 64.2% $ 358 43.9% $ 60 10.0%
Commercial loans 1,126 64.7% 754 41.2% 561 29.0% 393 48.2% 150 25.0%
Consumer loans 114 6.5% 97 6.9% 93 6.8% 65 8.0% 390 65.0%
---------------------- -------------------- ---------------------- ---------------------- ---------------------
Total $ 1,741 100.0% $1,276 100.0% $ 1,014 100.0% $ 816 100.0% $ 600 100.0%
====================== ==================== ====================== ====================== =====================
</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. government
and agency securities.
Liquidity levels may be increased or decreased depending upon management's
projections as to the short term demand for funds to be used in each banks' loan
origination and other activities upon the yields on available investment
alternatives and its expectation of yields that will be available in the future,
as well as.
15
<PAGE>
<TABLE>
<CAPTION>
Securities Analysis
The following table sets forth the securities portfolio as of
December 31 for the years indicated.
1999 1998 1997
---------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Fair Amortized Average Fair Amortized Average Fair Amortized Average
Value Cost Yield Value Cost Yield Value Cost Yield
----- ---- ----- ----- ---- ----- ----- ---- -----
Securities Held to Maturity (1)
Debt securities:
Federal Agency:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due in one year or less $994 $1,000 5.00% $994 $1,000 2.95% $6,434 $6,500 5.35%
Due after one year through five years $3,833 $4,000 6.00% $2,979 $3,000 5.57% $7,500 $7,500 6.16%
Due after five years through ten years $37,677 $40,170 6.44% $39,151 $39,174 6.49% $38,060 $39,174 7.05%
Due after ten years $19,212 $21,085 6.78% $16,006 $16,085 6.61% $11,942 $12,000 7.39%
Municipal:
Due in one year or less $ - $ - 0.00% $ - $ - 0.00% $ - $ - 0.00%
Due after one year through five years $622 $630 4.45% $640 $633 4.05% $635 $635 4.05%
Due after five years through ten years $ - $ - 0.00% $ - $ - 0.00% $ - $ - 0.00%
Due after ten years $3,558 $3,626 5.50% $2,806 $2,696 5.59% $2,104 $2,013 5.59%
Corporate $953 $1,010 7.20%
Mortgage backed securities (3) $25,056 $26,388 6.46% $29,197 $29,194 6.31% $23,717 $23,519 6.53%
---------------- ---------------- ----------------
Total securities held to maturity $91,905 $97,909 6.45% $91,773 $91,782 6.34% $90,392 $90,173 6.71%
================ ================ ================
Securities available for sale(2)
Mortgage backed securities (3) $4,057 $4,182 6.93% $666 $666 6.38% $883 $883 6.40%
Municipal (All due after ten yrs) $2,371 $2,630 5.00% $ - $ - $ - $ - 0.00%
Common stock $ - $ - 0.00% $250 $250 N/A $ - $ - 0.00%
---------------- ---------------- ----------------
Total securities available for sale $6,428 $6,812 6.19% $916 $916 6.38% $883 $883 6.40%
Restricted equity securities
FHLB stock $7,362 $7,362 8.00% $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. Advances from the FHLB
of Indianapolis are an additional source of funding for Community Bank and
Heritage Bank, while the FHLB of Cincinnati is utilized for advances for NCF
Bank. 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 $27.2 million, or 12.0 percent of the Company's total deposit
portfolio at December 31, 1999. 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.
<TABLE>
<CAPTION>
The table below presents the average balance, interest expense, and average rate
paid by period for each major deposit category.
Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997
--------------------- ------------------- ---------------------
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 52,355 2.48% 37,843 2.31% 34,798 2.65%
Savings 40,940 3.48 36,616 3.21 33,899 3.33
Time 125,988 5.22 129,407 5.62 137,449 5.52
----------- ----------- ----------
Total deposits 219,283 4.24 203,866 4.58 206,146 4.68
===================== =================== =====================
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
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, 1999.
Certificates
Maturity Period of Deposits
--------------- -----------
(in thousands)
<S> <C>
Three months or less $ 8,502
Three through six months 4,926
Six through twelve months 7,597
Over twelve months 6,135
--------------
Total $27,160
==============
</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, 1999, the Banks had $86.3
million in advances outstanding from the FHLB's of Indianapolis and Cincinnati.
Of the $86.3 million in advances outstanding, $58.5 million were putable
advances whereby the Federal Home Loan Bank will automatically convert the fixed
rate advance to a variable rate should the market interest rate exceed a
predetermined strike rate.
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, 1999, the Banks had $28.2 million of
retail repurchase agreements outstanding. In the event of a need for funds in an
overnight capacity, Community Bank maintains a $2.5 million line of credit and
Heritage maintains a $500,000 line of credit with the FHLB of Indianapolis.
18
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth certain information regarding borrowings
by the Company at the end of and during the periods indicated:
At December 31,
---------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Weighted average rate paid on:
<S> <C> <C> <C>
FHLB advances 5.54% 5.11% 5.76%
Retail repurchase agreements 4.79% 4.10% 4.77%
Amount of retail repurchase agreements $28,182 $19,499 $12,142
</TABLE>
<TABLE>
<CAPTION>
During the Year Ended
December 31,
------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Weighted average rate paid on:
<S> <C> <C> <C>
Retail repurchase agreements 4.25% 4.59% 4.83%
Maximum amount of borrowings outstanding
at any month end:
FHLB Advances $87,750 $56,000 $29,500
Retail repurchase agreements $30,488 $19,499 $13,913
Approximate average short-term borrowings
outstanding with respect to:
FHLB Advances(1) $70,841 $41,208 $12,625
Retail repurchase agreements $21,907 $14,902 $12,141
(1) Average balances are derived from month-end balances.
</TABLE>
Personnel
As of December 31, 1999, the Company had 124 full-time employees.
Community employed 47 full-time and 4 part-time employees as of December 31,
1999. Heritage employed 17 full-time employees as of December 31, 1999. Finally,
NCF Bank employed 13 full-time and 2 part-time employees as of December 31,
1999. 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.
Regulation and Supervision
As a bank holding company under the Bank Holding Company (BHC) Act, the
Company is registered with and is subject to regulation by the Federal Reserve.
Among other things, applicable statutes and regulations require the Company to
file annual and other reports with and furnish information to the Federal
Reserve, which may make inspections of the Company.
The BHC Act provides that a bank holding company must obtain the prior
approval of the Federal Reserve to acquire more than 5 percent of the voting
stock or substantially all the assets of any bank or bank holding company. The
Company currently has no formal agreement or commitments about any such
transaction. However, the Company evaluates opportunities to invest in or
acquire other banks or bank holding companies as they arise and may engage in
these transactions in the future. In addition, the Federal Reserve Act restricts
the Bank's extension of credit to the Company. The BHC Act also provides that,
with certain exceptions, a bank holding company may not (i) engage in any
activities other than those of banking or managing or controlling banks and
other authorized subsidiaries or (ii) own or control more than 5 percent of the
voting shares of any company that is not a bank, including any foreign company.
19
<PAGE>
A bank holding company is permitted, however, to acquire shares of any
company, the activities of which the Federal Reserve has determined to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. The Federal Reserve's regulations state specific activities
that are permissible under that exception. The Company does not currently have
any agreements or commitments to engage in any nonbanking activities.
In approving acquisitions by bank holding companies of banks and
companies engaged in banking-related activities, the Federal Reserve considers
whether any such activity by an affiliate of the holding company can reasonably
be expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh any possible
adverse effects such as undue consideration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices. The Federal
Reserve has cease-and-desist powers over parent holding companies and nonbanking
subsidiaries if their actions constitute a serious threat to the safety,
soundness, or stability of a subsidiary bank. Federal regulatory agencies also
have authority to regulate debt obligations (other than commercial paper) issued
by bank holding companies. That authority includes the power to impose interest
ceilings and reserve requirements on the debt obligations. A bank holding
company and its subsidiaries are also prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services.
A bank holding company may also acquire shares of a company which furnishes
or performs services for a bank holding company and acquire shares of the kinds
and in the amounts eligible for investment by national banking associations. In
addition, under the financial modernization legislation enacted by Congress in
November 1999, a bank holding company that meets the eligibility requirements
and elects to be a financial holding company may engage in expanded financial
activities and acquire companies engaged in those activities, such as securities
underwriters and dealers and insurance companies. The Board of Directors of the
Company at this time has no plans for these investments or broader financial
activities.
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 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 extensive
system of banking laws and regulations to which the Banks are subject are
intended primarily for the protection of their customers and depositors.
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 subsidiary banks.
20
<PAGE>
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 interests 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, 1999
the Bank was in compliance with the above restrictions.
Safety and Soundness. The FDI Act, as amended by the FDICIA and the Riegle
Community Development and Regulatory Improvement Act of 1994, requires the
federal bank regulatory agencies to prescribe standards, by regulations or
guidelines, relating to the internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest-rate-risk
exposure, asset growth, asset quality, earnings, stock valuation and
compensation, fees and benefits and such other operational and managerial
standards as the agencies may deem appropriate. The federal bank regulatory
agencies adopted, effective August 9, 1995, a set of guidelines prescribing
safety and soundness standards pursuant to FDICIA, as amended. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines.
The last ratio concerning market value to book value was determined by
the agencies not to be feasible. Finally, the proposed compensation standard
states that compensation will be considered excessive if it is unreasonable or
disproportionate to the services actually performed by the individual being
compensated. If an insured depository institution or its holding company fail to
meet any of the standards promulgated by regulation, then such institution or
company will be required to submit a plan within 30 days to the FDIC specifying
the steps it will take to correct the deficiency. In the event that an
institution or company fails to submit or fails in any material respect to
implement a compliance plan within the time allowed by the agency, Section 39 of
the FDIA provides that the FDIC must order the institution or company to correct
the deficiency and may (1) restrict asset growth; (2) require the institution or
company to increase its ratio of tangible equity to assets; (3) restrict the
rates of interest that the institution or company may pay; or (4) take any other
action that would better carry out the purpose of prompt corrective actions.
Regulatory Capital. The Company and subsidiary Banks are subject to
various regulatory capital requirements administered by the federal banking
agencies. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company must meet specific capital guidelines.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and subsidiaries to maintain minimum amounts and
ratios of total and Tier I capital to risk weighted assets and of Tier I capital
to average assets. As of December 31, 1999, the Company met all capital adequacy
requirements to which it is subject.
21
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth the Company's capital position at
December 31, 1999, as compared to the minimum capital requirements.
Required
For Capital
Actual Adequacy Purposes: Excess
(Dollars in thousands) Amount Ratio Amount Ratio Amount
------ ----- ------ ----- ------
As of December 31, 1999
Total Capital (to Risk
Weighted Assets):
<S> <C> <C> <C> <C> <C>
Consolidated $43,335 17.1% $ 20,330 8.0% $23,005
Tier I Capital (to Risk
Weighted Assets):
Consolidated $41,593 16.4% $ 10,165 4.0% $31,428
Tier I Capital (to Average
Assets):
Consolidated $41,593 10.7% $ 15,522 4.0% $26,071
</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 amended by
the Improvement Act, each federal banking agency was required to implement a
system of prompt corrective action for institutions which it regulates. The
federal banking agencies, including the FDIC, adopted substantially similar
regulations to implement Section 38 of the FDIA, effective as of December 19,
1992. Under the regulations, an institution is deemed to be (i)
"well-capitalized" if it has total risk-based capital of 10.0% or more, has a
Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital
ratio of 5.0% or more and is not subject to any order or final capital directive
to meet and maintain a specific capital level for any capital measure, (ii)
"adequately-capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier 1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized," (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based
capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is
less than 4.0% ( 3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than 3.0%, and (v)
"critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%. Section 38 of the FDIA and the
regulations promulgated thereunder also specify circumstances under which a
federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized). At
December 31, 1999, 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").
22
<PAGE>
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, 1999, $5.9 million,
$857,000, and $635,000 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, 1999, the Company had $86.3 million in
advances from the FHLB.
The financial modernization legislation enacted by Congress in November
1999 contained provisions to modernize the FHLB System which, among other
things, modify the financial assistance obligations of the FHLBs and will
require FHLBs to adopt capital structure plans that will set out the minimum
investment required by each member.
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 subgroup "C" category are assessed the highest insurance rate. As of
December 31, 1999 the subsidiary banks were assigned to the well-capitalized,
subgroup "A" category. During 1999, Community Bank paid an annual insurance rate
of 2.1 cents per $100 of deposits, Heritage Bank paid an annual insurance rate
of 1.20 cents per $100 of deposits, while NCF Bank paid an annual insurance rate
of $2.1 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.
23
<PAGE>
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, 1999, no reserves were
required to be maintained on the first $5.0 million of transaction accounts,
reserves of 3% were required to be maintained against the next $44.3 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 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.
24
<PAGE>
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.
ITEM 2. PROPERTIES
The Company conducts its business through the main office 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, 1999. The aggregate net book value of premises and
equipment was $9.8 million at December 31, 1999.
<TABLE>
<CAPTION>
Owned or Leased
Location Year Opened
Community Bank of Southern Indiana:
<S> <C> <C>
101 West Spring St. - Main Branch 1999 Owned
New Albany, IN 47150
202 East Spring St. - Drive Thru for Main Branch 1937 Owned
New Albany, IN 47150
2626 Charlestown Road 1995 Owned
New Albany, IN 47150
480 New Albany Plaza 1974 Leased
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>
25
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are various claims and law suits in which the Company or its
subsidiaries are periodically involved, such as claims to enforce liens,
condemnation proceedings on properties in which the Banks hold security
interests, claims involving the making and servicing of real property loans and
other issues incident to the Banks' business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
See page 23 of the 2000 Annual Report to Stockholders incorporated herein
as Exhibit 13, which is incorporated herein by reference to information under
the heading "Market Price of Community Bank Shares of Indiana, Inc. and Related
Shareholder Matters."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
See pages 9, 10 and 15 of the 2000 Annual Report to Stockholders
incorporated herein as Exhibit 13, which are incorporated herein by reference to
information under the headings "Financial Condition Data," "Key Operating
Ratios," and "Summary of Operations."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See pages 8 - 23 of the 2000 Annual Report to Stockholders incorporated
herein as Exhibit 13, which are incorporated herein by reference to information
under the heading "Management's Discussion and Analysis."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages 20 -23 of the 2000 Annual Report to Stockholders incorporated
herein as Exhibit 13, which are incorporated herein by reference to information
under the heading "Market Risk Analysis."
ITEM 8. FINANCIAL STATEMENTS
See pages 26 - 54 of the 2000 Annual Report to Stockholders incorporated
herein as Exhibit 13, which are incorporated herein by reference to information
under the heading "AUDITOR'S REPORT."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
Information concerning Directors and executive officers of the Registrant
and reporting under Section 16 of the Securities Exchange Act of 1934 is
incorporated herein by reference to information under the headings "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on May 16, 2000.
26
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference to the information under the headings "Executive Compensation",
"Compensation of Directors", "Defined Benefit Pension Plans", "Defined
Contribution 401(k) Plan", "Employee Stock Ownership Plan", "Stock Incentive
Plan", "Employment Agreement" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 16, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain owners and management
is incorporated herein by reference to the information under the heading
"Beneficial Ownership of Common Stock By Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 16, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference to the information under the headings "Compensation
Committee Interlocks and Insider Participation" and "Indebtedness of Management"
in the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 16, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements
<TABLE>
<CAPTION>
The following information appearing in the Registrant's Annual Report to
Stockholders for the year ended December 31, 1999, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
Page in Annual
Annual Report Section Report
<S> <C>
Selected Financial Data 9, 10, 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8 - 23
Independent Auditor's Report 26
Consolidated Balance Sheets as of December 31, 1999 and 1998 27
Consolidated Statement of Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997 28
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997 29
Consolidated Statements of Cash Flows for the years ended
December 31,1999, 1998, and 1997 30
Notes to Consolidated Financial
Statements 31 - 54
</TABLE>
27
<PAGE>
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or the required information has been included in the
Consolidated Financial Statements or notes thereto.
(a) (3) Exhibits
Exhibit Number Document
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.0 Common Stock Certificate (1)
10.1 Employment Agreement with Dale L. Orem *
10.2 Retirement Agreement with Robert E. Yates *
10.3 Employment Agreement with Michael L. Douglas * (2)
10.4 Community Bank Shares of Indiana, Inc.
1997 Stock Incentive Plan * (3)
10.5 Community Bank Shares of Indiana, Inc.
Dividend Reinvestment Plan (4)
13.0 Form of Annual Report to Security Holders
21.0 Subsidiaries of Registrant
23.0 Consent of Monroe Shine & Co., Inc.
27.0 Financial Data Schedule
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Report pursuant to Item 601 of Regulation S-K.
(1) Incorporated herein by reference to Registration Statement on Form S-1 filed
December 9, 1994, (File No. 33-87228).
(2) Incorporated by reference to the Annual Report of Form 10-K filed March 30,
1999.
(3) Incorporated by reference from the exhibits filed with the Registration
Statement on Form S-8, and any amendments thereto, Registration statement No.
333- 60089.
(4) Incorporated by reference from the exhibits filed with the Registration
statement on Form S-3, and any amendments thereto, Registration Statement No.
333-40211.
(b) Reports on Form 8-K: A Report on Form 8-K was filed on November 9, 1999
announcing the resignation of the Company's Chief Financial Officer, James M.
Stutsman. No other Forms 8-K were filed during the quarter ended December 31,
1999.
28
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 30, 2000 By: \s\ Michael L. Douglas
----------------------
MICHAEL DOUGLAS
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: \s\ C. Thomas Young By: \s\ Timothy T. Shea
-------------------- -------------------
C. THOMAS YOUNG, TIMOTHY T. SHEA,
Chairman of the Board Vice Chairman of the Board
of Directors of Directors
Date: March 30,2000 Date: March 30,2000
By: \s\ Robert J. Koetter, Sr. By: \s\ Steven Stemler
-------------------------- ------------------
ROBERT J. KOETTER, SR., STEVEN STEMLER,
Director Director
Date: March 30,2000 Date: March 30,2000
By: \s\ Gary L. Libs By: \s\ Dale L. Orem
------------------- ----------------
GARY L. LIBS, DALE L. OREM,
Director Director
Date: March 30,2000 Date: March 30,2000
By: \s\ James W. Robinson By: \s\ Paul A. Chrisco
--------------------- -------------------
JAMES W. ROBINSON, PAUL A. CHRISCO,
Director Vice President,
Principal financial officer
and Chief Accounting Officer
Date: March 30,2000 Date: March 30,2000
By: \s\ Gordon L. Huncilman
-----------------------
GORDON L. HUNCILMAN,
Director
Date: March 30,2000
By: \s\ Kerry M. Stemler
--------------------
KERRY M. STEMLER,
Director
Date: March 30,2000
By: \s\ Michael L. Douglas
MICHAEL L. DOUGLAS,
President, Chief Executive
Officer and Director
Date: March 30,2000
29
<PAGE>
Exhibit Number Document
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.0 Common Stock Certificate (1)
10.1 Employment Agreement with Dale L. Orem *
10.2 Retirement Agreement with Robert E. Yates *
10.3 Employment Agreement with Michael L. Douglas * (2)
10.4 Community Bank Shares of Indiana, Inc.
1997 Stock Incentive Plan * (3)
10.5 Community Bank Shares of Indiana, Inc.
Dividend Reinvestment Plan (4)
13.0 Form of Annual Report to Security Holders
21.0 Subsidiaries of Registrant
23.0 Consent of Monroe Shine & Co., Inc.
27.0 Financial Data Schedule
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Report pursuant to Item 601 of Regulation S-K.
(1) Incorporated herein by reference to Registration Statement on Form S-1 filed
December 9, 1994, (File No. 33-87228).
(2) Incorporated by reference to the Annual Report of Form 10-K filed March 30,
1999.
(3) Incorporated by reference from the exhibits filed with the Registration
Statement on Form S-8, and any amendments thereto, Registration statement No.
333- 60089.
(4) Incorporated by reference from the exhibits filed with the Registration
statement on Form S-3, and any amendments thereto, Registration Statement No.
333-40211.
30
<PAGE>
Exhibit 10.1 -- Employment Agreement with Dale L. Orem
AGREEMENT
AGREEMENT, dated this 19th day of June, 1995, between COMMUNITY BANK
SHARES OF INDIANA, INC. ("The Corporation") and COMMUNITY BANK SHARES OF
INDIANA, INC., acting for a corporation to be formed and to be known as HERITAGE
BANKING COMPANY, a state chartered bank, (the "Bank") sometimes hereafter
referred to together as the "Employers" and Dale Orem (the "Executive")
PREMISES
A. The Corporation is in the process of trying to form a new state
chartered bank, which state chartered bank shall be call Heritage Banking
Company if approved by the appropriate federal and state agencies.
B. The Corporation shall be the majority shareholder of the Bank.
C. The Corporation needs to identify its proposed officers for the
approval process.
D. Executive is willing to serve as an officer of the Bank if it
is approved.
E. In order to induce the Executive to serve as the Chairman of
the Bank, the Employers 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 Employers or
any subsidiary thereof during the most recent five taxable years preceding the
Date of Termination, as reflected in the annual W-2 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" shall mean termination because of personal
<PAGE>
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 and similar
offenses) or final cease-and-desist order or material breach of any provision of
this Agreement.
(d) Change in Control of the Corporation or The Bank. (A)
"Change in Control of Corporation or the Bank" 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 or the Bank representing 25% or
more of the combined voting power of the Corporation's or Pre Bank's then
outstanding securities.
(e) Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) Date of Termination. "Date of Termination" shall mean (i) if the
Executive's employment is terminate for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any reason, the date on which a Notice of Termination is given
or as specified in such Notice.
(g) Disability. Termination by the Employers of the Executives'
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits under
the applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(h) Good Reason. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive following a
Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, the
failure to elect or to re-elect or to appoint or to re-appoint
the Executive to the office of Chairman of the Bank or a
material reduction by the Employers in the Executive's
functions, duties or responsibilities as Chairman of the Bank
or from those immediately prior to a Change in Control of the
Corporation/Bank;
(ii) Without the Executive's express written
2
<PAGE>
consent, a material reduction by the Employers in the
Executive's Base Salary as the same may be increased from
time to time or, except to the extent permitted by Section
3(b) hereof, a material reduction in the package of fringe
benefits provided to the Executive, taken as a whole;
(iii) The principal executive office of the Employers is
relocated outside of a 30 mile radius of Jeffersonville,
Indiana or, without the Executive's express written consent,
the Employers require the Executive to be based anywhere
other than an area within a 30 mile radius of the Employers'
principal executive office, except for required travel on
business of the Employers.
(iv) Any purported termination of the Executive's employment
for Cause, Disability or Retirement which is not effected
pursuant to a Notice of Termination satisfying the
requirements of paragraph (j) below; or
(v) The failure by the Employers to obtain the assumption of
and agreement to perform this Agreement by any successor as
contemplated in Section 9 hereof.
(i) IRS. IRS shall mean the Internal Revenue Service.
(j) Notice of Termination. Any purported termination of the Executive's
employment by the Employers for any reason, including without limitation, for
Cause, Disability or Retirement, or by the Executive for any reason, including
without limitation for Good 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 Employers termination of Executive's employment for Cause, which
shall be effective immediately; and (iv) is given in the manner specified in
Section 10 hereof.
(k) Retirement. Termination by the Employers of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with
3
<PAGE>
the Employers' retirement policies, including early retirement, generally
applicable to their salaried employees.
2. Term of Employment.
(a) The Employers hereby employ the Executive as Chairman of the Bank
and Executive hereby accepts said employment and agrees to render such services
to the Employers on the terms and conditions set forth in this Agreement. The
term of employment under this Agreement shall be for three years, commencing on
the date of this Agreement. This Agreement will automatically renew each year
for the three (3) year period until 2003, unless changes are agreed to in
writing by both parties, or unless terminated as provided for in this Agreement;
and in any event the term of employment will terminate eight years from the date
of execution hereof.
(b) During the term of this Agreement, the Executive shall perform
such executive services for the Employers as may be consistent with his titles
and from time to time assigned to him by the Employers' Board of Directors.
3. Compensation and Benefits.
(a) The Employers shall compensate and pay Executive for his services
during the term of this Agreement at a minimum base salary of $70,000.00 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 Employers. In addition to
his Base Salary, the Executive shall receive a board meeting fee of Four Hundred
Dollars ($400.00) per month (with two paid absences). In addition to his Base
Salary, the Executive shall be entitled to receive during the term of this
Agreement the following bonus payments under the following terms:
(i) Deposit Objective Based Bonuses: A bonus shall be
paid to Executive if certain objectives are met.
First Anniversary: If the Average Deposits are
$18,000,000.00, the Executive shall be paid a bonus
of $5,000.00. In addition, Executive shall be paid an
additional bonus of $1,000.00 for every million
dollars of Average Deposits in excess of
$18,000,000.00.
Second Anniversary: If the Average Deposits are
$35,000,000.00 or the prior year's actual deposits
base plus 15%, whichever is greater, then Executive
shall be paid a bonus of
4
<PAGE>
$10,000.00. In addition, Executive shall be paid an
additional bonus of $1,000.00 for every million
dollars of Average Deposits in excess of
$35,000,000.00 or the prior year's actual Deposit
Base plus 15%, whichever is greater.
Third Anniversary: If the Average Deposits
are $50,000,000.00 or the prior year's actual Deposit
base plus l5%, whichever is greater, then Executive
shall be paid a bonus of $15,000.00. In addition,
Executive shall be paid an additional bonus of
$1,000.00 for every million dollars of Average
Deposits in excess of $50,000,000.00 or the prior
year's actual Deposit Base plus 15%, whichever is
greater.
For purposes of this section, Average Deposit, and
Deposit Base shall mean the average of deposits
for the period of two months prior to the end of the
month closest to the first, second, or third
anniversary of the opening date of the Bank's first
full service banking location. The average deposits
shall be calculated by taking the total of the bank
deposits on the first, fifteenth, and last days of
those two months and dividing by six. Bank deposits
for purposes of this section shall not include jumbo
CD's which are certificates of deposit in excess
of One Hundred Thousand Dollars ($100,000.00).
(ii) Return on Assets Based Bonus: A bonus shall be paid
to Executive if Executive qualifies for a bonus under the
Deposit Objective Based Bonus for that year, and if certain
objectives are met.
First Anniversary: If the Bank's annual after tax
Return of Assets is .10 of one percent or better,
then Executive shall be paid a bonus
equal to one-half of the bonus he received under
the Deposit Objective
Bonus for the First Anniversary.
Second Anniversary: If the Bank's annual after tax
Return on Assets is .75 of one percent or better,
then Executive shall per paid a bonus equal to
one-half of the bonus he received under the Deposit
Objective Bonus for the Second Anniversary.
5
<PAGE>
SEE ATTACHED REVISION
Third Anniversary: If the Bank's annual after tax
Return on Asset is One Percent or better, then
Executive shall be paid a bonus equal to one-half of
the bonus he received under the Deposit Objective
Bonus for the Third Anniversary.
The First, Second, and Third anniversaries are the
anniversary of the full years following the
opening date of the Bank's first full service
banking location.
(iii) After the first three years of this Agreement, Employers and
Executive will negotiate a commercially reasonable bonus plan.
(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
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Board of Directors of the Employers. Specifically, Executive
will be entitled to retirement benefits as follows: (i) After five years of
service and Executive being the age of 62 -$415.00 per month (ii) After seven
years of service and Executive being the age of 64 - $660.00 per month (iii)
After eight years of service and Executive being the age of 65 - $755.00 per
month. In addition, Executive will be entitled to a retirement supplemental
annuity. The annuity will be paid to the Executive or the Executive's spouse, if
the Executive predeceases spouse. The annuity will pay the amount of Five
Hundred Dollars ($500.00) per month after the Executive reaches the age of 62
and after the Executive has been a full time employee for five years. The
annuity will be owned initially by the Employers, and will be transferred to
Executive in three equal parts upon the first three anniversary dates of his
employment. The Employers 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 Employers. 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.
(c) During the term of this Agreement, Executive shall be entitled to
paid annual vacation of four weeks per annum, two weeks of which must be taken
consecutively.
6
<PAGE>
4. Expenses. The Employers 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 Employers, including,
but not by way of limitation, all traveling expenses, subject to such reasonable
documentation and other limitations as may be established by the Board of
Directors of the Employers. Specifically, Executive shall be reimbursed for the
use of his personal automobile at the rate of Three Hundred Dollars ($300.00)
per month. If such expenses are paid in the first instance by Executive, the
Employers shall reimburse the Executive therefor.
5. Termination.
(a) The Employers 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 Employers for Cause, Disability or Retirement or in the event of
the Executive's death, or (ii) Executive terminates his employment
hereunder other than for Good Reason, Executive shall have no right
pursuant to this Agreement ~o compensation or other benefits for any
period after the applicable Date of Termination.
(c) (i) In the event that Executive's employment is terminated
by the Employers for other than Cause, Disability, Retirement or the
Executive's death, then the Employers shall, subject to the provisions
of Section 6 hereof, if applicable, pay to the Executive, in nine 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 next nine
(9) months as of his Date of Termination.
(ii) In the event that Executive's employment is terminated by
the Employers 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 Employers which has
not been cured within fifteen (15) days after a written notice of
non-compliance has been given by the Executive to the Employers or for
Good Reason, and on or prior to the Executive's Date of Termination
there has been a Change in Control of the Corporation, or a written
agreement which contemplates a Change in Control of the Corporation is
in effect, then the Employers shall, subject to the provisions
7
<PAGE>
of Section 6 hereof, if applicable:
(A) pay to the Executive, in thirty-six (36) equal monthly
installments beginning with the first business day of the
month following the Date of Termination, a cash severance
amount equal to three (3) times the Executive's Base Salary as
of his Date of Termination, 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
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 subparagraph (B)), at no cost to the
Executive, the Executive's continued participation in all
group insurance, life insurance, health and accident,
disability and other employee benefit plans, programs and
arrangements in which the Executive was entitled to
participate immediately prior to the Date of Termination
(other than stock option and restricted stock plans of the
Employers), 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 Employers 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 Employers 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 Employers 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)
6. Limitation of Benefits under Certain Circumstances. If the payments
and benefits pursuant to Section 5 hereof, either alone or together with other
payments and benefits which Executive has the right to receive from the
Employers, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits pursuant to Section 5 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 5 being non-deductible to the Employers pursuant to Section 280G of the
8
<PAGE>
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 5 shall be based upon the opinion of independent tax counsel selected
by the Employers' independent public accountants and paid by the Employers. Such
counsel shall be reasonably acceptable to the Employers 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 Employers
and/or the Executive do not agree with the opinion of such counsel, (i) the
Employers 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 Employers and subject to the imposition
of the excise tax imposed under Section 4999 of the Code and (ii) the Employers
may request, and Executive shall have the right to demand that the Employers
request, a ruling from the IRS as to whether the disputed payments and benefits
pursuant to Section 5 hereof have such consequences. Any such request for a
ruling from the IRS shall be promptly prepared and filed by the Employers, 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 Employers and Executive agree ~o
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 as amended from
time to time. 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 6, or
a reduction in the payments and benefits specified in Section 5 below zero.
7. Mitigation; Covenant Not To Compete; Exclusivity of Benefits.
In consideration of the amount of Five Hundred
and No/00 Dollars ($ 500 00/00):
(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.
(b) The Executive hereby agrees that, following the
termination of his employment under this Agreement for any reason,
other than a termination within six months following
9
<PAGE>
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 that competes with any business of the
Employers and which is located within 50 miles of any of the Bank's
branch offices which are in existence during the term of this
Agreement and which are prior to a Change in Control of the
Corporation; (ii) interfere with, solicit on behalf of another or
attempt to entice away from the Employers any project, loan,
arrangement, agreement, financing or customer of the Employers 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 Employers.
(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 Employers pursuant
to employee benefit plans of the Employers or otherwise.
8. Withholding. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. Assignability. The Employers 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 Employers may hereafter merge or
consolidate or to which the Employers 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
Employers 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 Bank may assign its rights under this Agreement to the
Corporation or to any of its subsidiaries, and the Corporation and/or its
subsidiaries may redefine Executive's services, so long as there is not decrease
in compensation. Such assignment from Bank to Corporation and/or its
subsidiaries shall not be an act of
10
<PAGE>
termination, and thus Executive shall not be entitled to compensation under
paragraph 5. The Executive may not assign or transfer this Agreement or any
rights or obligations hereunder.
10. 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:
To the Employers: 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: Dale L. Orem
32 Arctic Springs
Jeffersonville, Indiana 47130
11. 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 Employers 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.
12. 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 be the substantive laws of the State of Indiana.
13. Nature of Obligations. Nothing contained herein shall create or
require the Employers 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 Employers hereunder, such right shall be no greater
than the right of any unsecured general creditor of the Employers.
14. 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.
11
<PAGE>
15. 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.
16. 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.
17. Regulatory Actions. The following provisions shall be
controlling in the event of a conflict with any other provision of this
Agreement, including without limitation Section 5 hereof.
(a) If Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Employers' affairs
by a federal or state agency, the Employers' obligations under this
Agreement shall be suspended as of the date of suspension, unless
stayed by appropriate proceedings. If the charges of the federal or
state agency are dismissed, the Employers shall reinstate its
obligations which were suspended.
(b) If Executive is removed from office and/or permanently
prohibited from participating in the conduct of the Employers' affairs
by an order issued by a federal or state agency or by a final order of
a court, all obligations of the Employers under this Agreement shall
terminate as of the effective date of the order, but vested rights of
the Executive and the Employers as of the date of termination shall not
be affected.
(c) If the Bank is in default, as defined by federal or state
law, rules or regulations, all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Executive
and the Employers as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated if
(i) the State of Indiana, the Federal Deposit Insurance Corporation
("FDIC"), or Resolution Trust Corporation enters into an agreement to
provide assistance to or on behalf of the Bank under the authority
contained in state or federal rules or regulation or law ; or (ii) by
the Director of the OTS, or his/her designee, or the head of the
Indiana Department of Finance at the time the Director or his/her
designee or the head of the Indiana Department of Finance approves a
supervisory merger to resolve problems related to operation of the Bank
or when the Bank is determined by the Director of the OTS or the head
of the Indiana Department of Finance to be in an unsafe or unsound
12
<PAGE>
condition, but vested rights of the Executive and the Employers as of
the date of termination shall not be affected.
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 federal or State law, rules or regulations) and any regulations
promulgated thereunder.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first above
written.
Attest: COMMUNITY BANK SHARES
OF INDIANA, INC.
/s/ M. Diane Murphy BY: /s/ Robert E. Yates
- ------------------- --------------------
Attest: COMMUNITY BANK SHARES
OF INDIANA ACTING FOR
HERITAGE BANKING COMPANY
M. Diane Murphy BY: /s/ Robert E. Yates
- ------------------- --------------------
BY:
--------------------
Robert E. Yates
/s/ Dale L. Orem
-----------------------------
Dale Orem
dm9a : Orem. agr
13
<PAGE>
REVISION
Third Anniversary: If the Bank's annual after
tax Return on Asset is One Percent or better,
then Executive shall be paid a bonus equal to
one-half of the bonus he received under the
Deposit Objective Bonus for the Third
Anniversary.
The First, Second, and Third anniversaries are
the anniversary of the full years following the opening date
of the Bank's first full service banking location.
(iii) After the first three years of this Agreement, Employers and
Executive will negotiate a commercially reasonable bonus plan.
(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
Employers, to the extent commensurate with his then duties and responsibilities,
as fixed by the Board of Directors of the Employers. Specifically, Executive
will be entitled to retirement benefits as follows: (i) After five years of
service and Executive being the age of 62 - $415.00 per month (ii) After seven
years of service and Executive being age of 64 - $660.00 per month (iii) After
eight years of service and Executive being the age of 65 - $755.00 per month. In
addition, Executive will be entitled to receive a retirement supplement. The
supplement will be paid to the Executive or the Executive's spouse, if the
Executive predeceases spouse. The supplement will pay the amount of Five Hundred
Dollars ($500.00) per month after the Executive reaches the age of 62 and after
the Executive has been a full time employee for five years. The supplement will
be transferred to Executive in three equal parts upon the first three
anniversary dates of his employment. The Employers 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 Employers. 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.
(c) During the term of this Agreement, Executive shall be entitled to
paid annual vacation of four weeks per annum, two weeks of which must be taken
consecutively.
6
<PAGE>
The signees hereby agree upon the revisions, as listed on page 6, that were made
to this employment contract on February 29, 1996, and initialled by the signees
listed below.
Attest: COMMUNITY BANK SHARES
OF INDIANA, INC.
/s/ Dale L. Orem BY: /s/ Robert E. Yates
- ------------------- --------------------
Attest: COMMUNITY BANK SHARES
OF INDIANA ACTING FOR
HERITAGE BANKING COMPANY
/s/ Robert E. Yates BY: /s/ Robert E. Yates
- ------------------- --------------------
/s/ Dale L. Orem
-----------------------------
Dale Orem
Exhibit 10.1 -- Retirement Agreement with Robert E. Yates
RETIREMENT AGREEMENT
THIS RETIREMENT AGREEMENT is made the 28th day of July, 1998, and effective
May 20, 1998 by and between Robert E. Yates (hereinafter referred to as "Yates")
and Community Bank Shares of Indiana, Inc., (hereinafter referred to as "CB")
PREMISES
--------
A. Yates, who served as Chief Executive Officer of CB, and as Chief
Executive Officer of its principal bank subsidiary, Community Bank of Southern
Indiana, has requested retirement and a retirement benefit package.
B. CB has agreed to the retirement and the retirement package in
exchange for Yates agreeing not to work for any other lending institution or
mortgage brokerage house.
C. CB's business activities are regional.
NOW THEREFORE, in consideration of these PREMISES, and the agreements
and terms hereof, the sufficiency of which is hereby acknowledged, the parties
agree as follows:
1. Effective Date: Yates shall retire as of May 20, 1998, and the
benefits and terms as set out herein shall start as of that date.
2. Retirement Monies: From June 1, 1998 through May 1, 2003, Yates
shall be paid the sum of Fifty Thousand Dollars and 00/100 Dollars ($50,000.00)
per year. Such amount to be paid to Yates on monthly installment on the first
business day of each month during this period.
<PAGE>
3. Medical Insurance: CB shall permit Yates to participate in CB's
group health insurance plan for the five-year term of this Agreement, at no cost
to Yates; provided, in the event that participation in the health plan is
prohibited by the terms of the plan, CB shall arrange to provide Yates with
benefits substantially similar to those which Yates would have received were he
permitted to participate in the plan. In the event that Yates decides to request
coverage under the company health plan for his wife, Yates shall pay the premium
or costs associated with such additional coverage.
4. Covenant Not To Compete:
(a) "Restricted Area", shall mean Clark, Crawford, Floyd,
Harrison, Washington, Scott and Jefferson Counties, Indiana and Nelson,
Jefferson, Bullitt, Shelby, Spencer, Anderson, Washington, Larue, Hardin and
Monroe Counties, Kentucky.
(b) "Restricted Activity", shall mean any mortgage,
installment or commercial banking or lending activities.
(c) "Restricted Period" shall mean the period starting with
the date of this Agreement and continue through the time Yates receives
compensation pursuant to this Agreement.
(d) With respect to the respective Restricted Areas and
Restrictive Activities, Yates agrees that he will not, during the Restricted
Period, directly or indirectly, be an employee or paid consultant of a company
engaged in such activities other than Community Bank Shares or a subsidiary or
affiliate thereof within the Restricted Area.
<PAGE>
(e) Yates agrees that if he is in breach of this Agreement, CB
shall not be required to make any other payments as provided for in this
Agreement.
5. Prior Employment Agreement: CB and Yates hereby mutually understand
and agree that the employment agreement (the "Employment Agreement") dated April
17, 1995, by and among Yates, CB and Community Bank has expired and terminated
in accordance with its terms. CB and Yates acknowledge and agree that neither
party has any rights, duties or obligations pursuant to the Employment
Agreement.
6. Governing Law: This Agreement shall be governed by, and be
construed and enforced in accordance with, the laws of the State of Indiana.
7. Miscellaneous:
(a) Time of the Essence. Time is of the essence for the
performance of each and every covenant contained herein.
(b) Headings. All headings of sections of this Agreement
are inserted for convenience only, and do not form
part of this Agreement or limit, expand, or otherwise alter the meaning of any
provisions hereof.
(c) Third Party. The provisions of this Agreement are intended
to be for the sole benefit of the parties hereto, and their respective
successors and assigns, and none of the provisions of this Agreement are
intended to be, nor shall they be construed to be, for the benefit of any third
party, with the exception of the provisions pertaining to Yates' wife.
<PAGE>
(d) Preparation. This Agreement shall be construed without
regard to any presumption or rule requiring construction against the party
causing such instrument to be drafted.
(e) Successors and Assigns; Assignment. This Agreement shall be
binding on, and inure to the benefit of, the parties hereto and their respective
heirs, legal representatives, successors and permitted assigns. Yates may not
transfer or assign his rights and duties under this Agreement without CBSI's
prior written consent.
(f) Notices. Any communication to a party required or permitted
under this Agreement, including any notice, direction, designation, consent,
instruction, objection or waiver, shall be in writing and shall be deemed to
have been given at such time as it is delivered personally, or five (5) days
after mailing if mailed, postage prepaid, by registered or certified mail,
return receipt requested, addressed to such party at the address listed below or
at such other address as one such party may be written notice specify to the
other party:
If to Yates:
Robert E. Yates
6 Leatherwood Court
Hilton Head Island, SC 29926
If to CB:
Community Bank Shares of Indiana, Inc.
202 East Spring Street
New Albany, IN 47150
Attention: C. Thomas Young, Chairman
(g) Withholding. The Company may make such provisions as it deems
appropriate for the withholding pursuant to federal or
<PAGE>
state income tax laws of such amounts as the Company determines it is required
to withhold in connection with the payments to be made to the Yates pursuant to
this Agreement.
(h) Waiver. Failure to insist upon strict compliance with any of the
terms, covenants or, conditions hereof shall not be deemed a waiver of such
terms, covenant or condition. A waiver of any provision of this Agreement must
be made in writing, designated as a waiver, and signed by the party against whom
its enforcement is sought. Any waiver or relinquishment of any right or power
hereunder at any one or more times shall not be deemed a waiver of
relinquishment of such right or power at any other time or times.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMMUNITY BANK SHARES OF INDIANA, INC.
By:_/s/ C. Thomas Young________ _/s/ Robert E. Yates_________
C. THOMAS YOUNG, CHAIRMAN ROBERT E. YATES
<PAGE>
STATE OF INDIANA)
) SS:
COUNTY OF FLOYD )
-----
Before me, a Notary Public, in and for said County and State,
personally appeared Robert E. Yates and acknowledge the execution of the
foregoing Retirement Agreement to be his free and voluntary act and deed for the
uses and purposes expressed therein.
WITNESS my hand and seal, this 28TH day of July, 1998.
/s/ Theresa L. Matthews
NOTARY PUBLIC
Theresa L. Matthews
PRINTED SIGNATURE
My Commission Expires: Resident of Clark County, IN
December 14, 1998
STATE OF INDIANA )
) SS:
COUNTY OF FLOYD )
--------
Before me, a Notary Public, in and for said County and State,
personally appeared Community Bank of Shares of Indiana, Inc., by its duly
authorized Chairman, C. Thomas Young, and acknowledge the execution of the
foregoing Retirement Agreement to be its free and voluntary act and deed for the
uses and purposes expressed therein.
WITNESS my hand and seal, this 27th day of July 1998.
/s/ Barbara Hurst
NOTARY PUBLIC
Barbara L. Hurst
PRINTED SIGNATURE
My Commission Expires: Resident of Floyd County, IN
June 22, 1999
THIS INSTRUMENT PREPARED BY:
YOUNG, LIND, ENDRES & KRAFT
CHARLES R. MURPHY ATTORNEY
dm44a : Yates . ret
1999
[Picture of Farm Scenes]
Community Bank Shares of Indiana, Inc.
[Hands Holding Soil and Seedling]
Annual Report
<PAGE>
[HOMEGROWN LOGO]
Community Bank Shares of Indiana, Inc.
[Picture of C. Thomas Young, Chairman,
and Michael L. Douglas, President and CEO]
Dear Shareholders:
We are pleased to present you with our Annual Report for 1999. It has been an
eventful year, especially with all the focus on the new millennium and the
changes it portends for business and society as a whole. For Community Bank
Shares of Indiana, Inc. this backdrop provided a natural opportunity for some
self- examination. It was a healthful process because it led us to affirm our
commitment to the core values that have brought past success and hold the key to
future prosperity. The design of our report, in fact, reflects these strengths.
Images of pastoral settings and caring hands symbolize our ongoing commitment to
being an organization that's locally owned, managed by local people and provides
customers a level of personal service that we believe larger institutions can't
match.
This foundation enabled the holding company to achieve outstanding success in a
variety of categories. In the financial arena, we remain the largest
independently owned financial services organization in our market. Consolidated
assets at the end of 1999 were more than $384 million, up from approximately
$332 million in 1998, an increase of approximately 16 percent. This growth was
driven by consumer and commercial lending, further evidence of our success in
positioning the affiliate banks as full-service institutions.
We also continued to increase net income and dividends paid to shareholders.
Earnings at the end of 1999 were approximately $3.4 million, or $1.26 per
diluted share, up from $2.4 million, or $.88 per diluted share, the previous
year - an increase of approximately 40 percent.
Perhaps one of our most visible achievements was the opening of our new
headquarters in downtown New Albany. Employees marked the event with a parade
from the old location to our new home. This five-story building allows us to
serve customers better, and, by remaining downtown, it symbolizes our strong
commitment to the community.
2
<PAGE>
1999 ANNUAL REPORT
"IMAGES OF PASTORAL SETTINGS AND CARING HANDS SYMBOLIZE OUR ONGOING COMMITMENT
TO BEING AN ORGANIZATION THAT'S LOCALLY OWNED, MANAGED BY LOCAL PEOPLE AND
PROVIDES CUSTOMERS A LEVEL OF PERSONAL SERVICE WE BELIEVE LARGER INSTITUTIONS
CAN'T MATCH."
On the technology front, Y2K was a nonevent at all three banks. Customers
experienced no loss in service thanks to a dedicated employee team led by Stan
Krol, senior vice-president of the holding company. Stan and his team worked
long hours to prepare our critical systems for the date change.
Philanthropy has always been an important part of our mission. In 1999 our
company and its employees gave more to the community than ever before. Our Metro
United Way Campaign made local headlines after raising a record of nearly
$36,000. In another example, some 30 employees planted flower bulbs and did
other landscaping in the fall of 1998, to spruce up the street corners and
traffic islands in downtown New Albany for the spring of 1999.
In addition, we promoted two employees who have been instrumental to our growth.
At Community Bank, Brian Brinkworth was named senior vice-president in Business
Services, a division that has grown significantly since 1998. Pat Daily also was
promoted to senior vice-president at the holding company. Pat is president of
Heritage Bank, our Clark County affiliate that last year experienced outstanding
growth. Looking forward, the coming years present numerous challenges. New laws
are changing Depression Era regulations, competition is increasing with
non-banks entering the field and technology continues to shape our industry.
Some elements of our long-term strategy include giving customers more ways to do
business with us; launching a sophisticated employee training program; and
improving our product line. One goal, however, will have precedence - giving
customers an exceptional level of personal service from a local bank. Doing so
will ensure that Community Bank Shares of Indiana, Inc. will continue to grow
while creating a high level of customer satisfaction and shareholder value.
Sincerely,
/s/ C. Thomas Young /s/ Michael L. Douglas
C. Thomas Young Michael L. Douglas
Chairman President & CEO
BOARD OF DIRECTORS
C. Thomas Young, Chairman
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
OFFICERS
George (Gray) Ball, Senior Vice-President
Patrick J. Daily, Senior Vice-President
Thomas M. Jones, Senior Vice-President
Stanley L. Krol, Senior Vice-President
M. Diane Murphy, Senior Vice-President
Robert E. Taylor, Senior Vice-President
Pamela P. Echols, Corporate Secretary
3
<PAGE>
[HOMEGROWN LOGO]
[Community Bank Logo]
[Picture of Barn, House, and Lake]
BOARD OF DIRECTORS
C. Thomas Young, Chairman
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 R. Stemler
Edward Pinaire, Special Consultant to the Board
Dear Shareholders:
The "Homegrown" theme featured in this year's annual report is an appropriate
one for Community Bank. Our company is, after all, a local organization whose
commitment to personal service produced a bumper crop of successes in 1999.
Looking at our balance sheet, total assets in 1999 grew to $268 million, a 16
percent increase from a year ago, driven by strong overall loan demand. In
particular, consumer loan balances increased more than 20 percent, while
commercial loans outstanding increased by more than 43 percent. You may recall
Community Bank was a thrift institution until 1996. The above growth
demonstrates that we continue to successfully establish our company in the
marketplace as a full-service institution. Not surprisingly, earnings also
experienced significant growth. Net income for 1999 was $3 million, an increase
of approximately 20 percent.
Nineteen ninety-nine was an important year outside the financial arena as well.
Our branch offices continued their progress in becoming more sophisticated sales
centers while emphasizing the value of personal, local service. Community Bank
also provided customers a higher level of convenience with the installation of
ATMs at five branch offices.
An important part of our mission is giving back to the community. I'm proud to
report that our philanthropic and sponsorship efforts grew significantly in
1999. Community Bank assisted a large number of benefactors, including Harvest
Homecoming, in which we were an Executive Sponsor; the New Albany- Floyd County
Consolidated School Corporation; the Floyd Memorial Foundation; and the Carnegie
Center for Art and History.
I am also optimistic about the future. Although the banking landscape is
changing, our commitment to being a "homegrown" bank will give us the foundation
to generate more value for customers and shareholders in 2000 and the years
ahead.
Sincerely,
/s/ Thomas M. Jones
Thomas M. Jones
President and CEO
4
<PAGE>
1999 ANNUAL REPORT
[NCF BANK & TRUST COMPANY LOGO]
"THANKS TO THE HARD WORK AND DEDICATION OF OUR EMPLOYEES AND DIRECTORS, NCF
CONTINUED TO POSITION ITSELF AS A LEADING BUSINESS AND COMMERCIAL LENDER. WE'RE
NATURALLY PLEASED ABOUT OUR PERFORMANCE AND THE PROSPECTS FOR CONTINUED GROWTH
IN 2000."
Dear Shareholders:
The millennium is here, and we at NCF Bank & Trust Company, are excited about
the future. In 1999 total assets grew to approximately $48 million, up from
approximately $41 million in 1998, an increase of 17 percent. Net income in 1999
grew to $472,000, up from $382,000 the previous year, a 23 percent increase.
Thanks to the hard work and dedication of our employees and directors, NCF
continued to position itself as a leading business and commercial lender. In
1999 commercial loans experienced remarkable growth, increasing more than 400
percent to $11 million from a level of $2.5 million in 1998. We're naturally
pleased about our performance and the prospects for continued growth in 2000.
In April I joined the NCF team as president and CEO, bringing 17 years of retail
banking experience to this position, including two years as president of a
community bank in Shelbyville, Kentucky. I am very proud to be part of the
wonderful group of employees and directors at NCF. Also, Ruth B. Willett joined
the bank as a mortgage lending officer. Ruth brings to NCF a new product line
with the introduction of government loans, including VA, FHA, Rural Housing,
Kentucky Housing and conventional mortgage loans. Ruth allows our organization
to offer a variety of permanent financing options that complement our
traditional lending products.
We strengthened the leadership of our board of directors with the addition of
Francis X. Smith, II. Francis is a partner and CPA with Smith & Company, CPAs.
We welcome his experience and insight as we prepare for the challenges ahead.
Also, Robert C. Hurst retired from the board in December. Bob guided the bank
through decades of change, and he greatly contributed to the success we have
today. All of us at NCF are grateful for his faithful years of service.
We continued to invest in our community through charitable contributions and the
donation of time and talents. In 1999 Senior Vice-President Ben J. Wathen was
elected president of the Bardstown/Nelson County Chamber of Commerce for 2000.
In addition, Director Richard Heaton joined Ben to serve as chairmen of the
Community Leaders Luncheon for Multiple Sclerosis. Other examples include a
three-year gift to St. Catharine College plus numerous initiatives with schools,
recreation programs and charitable organizations.
In 2000 NCF Bank & Trust Company will continue our goal of expanding our
products and services. We are working hard to increase market share while
maintaining acceptable interest rate spreads to enhance shareholder value. As we
move into the 21st century, we look forward to serving our community for many
years to come.
Sincerely,
/s/ Robert E. Taylor
Robert E. Taylor
President and CEO
5
<PAGE>
[HOMEGROWN LOGO]
[Heritage Bank Logo]
BOARD OF DIRECTORS
Dale L. Orem, Chairman
Steven R. Stemler, Vice-Chairman
Patrick J. Daily, Director, President, and CEO
Robert E. Campbell
Michael L. Douglas
R. Wayne Estopinal
Greg Huber
Robert L. Pullen
C. Thomas Young
Dear Shareholders:
I'm sure many of you watched the celebrations that took place worldwide as the
end of 1999 ushered in a new millennium.
Closer to home, 1999 was a benchmark year for Heritage Bank as well. Last year
our company achieved outstanding success in many key areas, making us stronger
than ever before to capitalize on future opportunities.
From a financial perspective, total assets for Heritage Bank grew to $78 million
in 1999, up from $56 million in 1998, a 39 percent increase led by strong demand
in both commercial and consumer lending. We also experienced remarkable growth
in net income. Earnings for 1999 were $608,000, up from $254,000 the previous
year, a gain of nearly 140 percent.
Credit for this performance goes to the quality of our people and their
dedication to providing customers outstanding service from a local institution.
One employee even earned national recognition in 1999. Mary Pat Boone, director
of Heritage Financial Services, which provides investment products through AAG
Securities, was named by AAG as its "Top Producer" for the entire country. Under
Mary Pat's direction, Heritage Financial Services generated $545,000 in fee
income last year, an increase of approximately 10 percent over 1998.
This past year also saw the hiring of Kyra McCormick as manager of our Highway
62 branch office. Kyra is an experienced banker and familiar face in Clark
County. In addition, Robert E. Campbell joined the Board of Directors. His
experience as an executive with Bell South and knowledge of Clark County will
make him an invaluable addition to the board.
We also continued to give strong support to our community in 1999. Heritage Bank
andits employees devoted their time, talents and financial contributions to
assist a range of benefactors, including, for example, New Hope Services Inc.,
an agency that improves the quality of life for mentally handicapped children
and adults. In addition to human services, we supported the areas of education,
culture and art. I'm proud to say Heritage Bank worked hard to make Clark County
a better place for all of us.
In summary, Heritage Bank is on solid footing, having experienced tremendous
growth in 1999. I'm also optimistic about the future. Our market is growing
rapidly and our strong performance has positioned us to achieve more customer
and shareholder value in 2000.
Sincerely,
/s/ Patrick J. Daily
Patrick J. Daily
President and CEO
6
<PAGE>
1999 ANNUAL REPORT
"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
Letters to Shareholders 2
Management's Discussion & Analysis 8
Selected Consolidated Financial and Other Data 9
Independent Auditor's Report 26
Consolidated Balance Sheets 27
Consolidated Statements of Stockholders' Equity 28
Consolidated Statements of Income 29
Consolidated Statements of Cash Flows 32
Stockholder Information 55
AN INTERSTATE HOLDING COMPANY
OF COMMUNITY BANKS AND
FINANCIAL SERVICE COMPANIES.
[Picture of Windmill]
7
<PAGE>
[HOMEGROWN LOGO]
Management's Discussion and Analysis
GENERAL
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, 1999 and 1998, and the
consolidated results of operations for each of the years in the three-year
period ended December 31, 1999. 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
for the origination of: 1) commercial business loans and 2) mortgage loans for
the purchase of single-family homes in Floyd and Clark Counties, Indiana, and
Nelson County, Kentucky, including surrounding communities. 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 consists of deposits, retail repurchase agreements, and
advances from the Federal Home Loan Banks of Indianapolis and Cincinnati. The
net income of the subsidiary banks 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
Corp. 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.
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.
[In margin: In 1999, Community Bank Shares and our employees gave a record
$36,000 to the Metro United Way.]
8
<PAGE>
1999 ANNUAL REPORT
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.
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,
1999 1998 1997 1996 1995
(In Thousands)
Total amount of:
<S> <C> <C> <C> <C> <C>
Assets $384,443 $331,945 $288,486 $272,476 $244,448
Loans receivable, net 246,018 199,575 170,866 165,696 145,025
Securities held to maturity:
Mortgage-backed
securities 26,388 29,194 23,519 24,867 27,704
Other debt securities 71,521 62,588 66,653 55,346 38,442
Securities available for sale 6,428 916 883 2,532 7,739
Cash and interest earning
deposits with banks 13,015 21,640 16,794 16,139 18,498
Deposits 215,900 212,867 207,991 199,365 191,263
Repurchase Agreements 38,754 19,499 12,142 10,702 -
FHLB advances 86,250 56,000 27,000 23,000 21,799
Stockholders' equity
(substantially restricted) 41,630 41,386 39,701 37,876 29,987
</TABLE>
9
<PAGE>
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,
-------------------------------------------------------------
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------
Return on average assets (net income
<S> <C> <C> <C> <C> <C>
divided by average total assets) 0.94% 0.79% 0.95% 0.76% 0.90%
Return on average equity
(net income divided by average equity) 7.98 5.87 6.94 5.73 11.19
Equity to average assets ratio (average
equity divided by average total assets) 11.75 13.51 13.73 13.34 8.39
Equity to assets at period end 10.83 12.47 13.76 13.90 12.27
Net interest rate spread 3.11 2.90 2.75 2.65 2.54
Net yield on average interest-earning assets 3.46 3.38 3.29 3.21 3.03
Non-performing loans to total loans 0.06 0.23 0.18 0.93 0.02
Non-performing assets to total assets 0.04 0.07 0.27 0.04 0.00
Average interest-earning assets to
average interest-bearing liabilities 108.52 111.25 112.76 113.33 106.78
Net interest income after provision for
loan losses, to total other expenses 147.96 128.70 150.63 123.87 162.77
Dividend payout ratio 43.01 52.55 39.02 46.54 32.93
Number of full-service offices 10 10 8 7 7
</TABLE>
Changes in Financial Condition
(Dollar amounts in thousands)
GENERAL
At December 31, 1999, the Company's assets, which are primarily composed of the
assets of the subsidiary banks, totaled $384,443, as compared to $331,945 and
$288,486 at December 31, 1998 and 1997, respectively. Total assets increased by
$52,498, or 15.8%, from December 31, 1998 to December 31, 1999, and by $43,459,
or 15.1%, from December 31, 1997, to December 31, 1998. The growth during 1999
was fueled mainly by the Company's increased use of Federal Home Loan Bank
Advances (see the Borrowed Funds section, page 13) as a funding source. Most of
these funds were used to invest in 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 decreased $8,625 from the balance of
$21,640 at December 31, 1998, to $13,015 at December 31, 1999, due mostly to a
large unexpected governmental deposit that was invested in short-term funds as
of December 31, 1998. Even excluding this large item, short-term liquidity was
reduced in 1999 in order to maximize the yield on earning assets. The increase
10
<PAGE>
in cash and interest-bearing deposits with banks was $4,846 from 1997 to 1998
and was due primarily to the large governmental deposit mentioned previously. 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 $71,521,
$62,588, and $66,653 at December 31, 1999, 1998, and 1997 respectively. Total
outstanding held-to-maturity investment securities other than mortgage-backed
securities increased by $8,933, or 14.3%, in 1999, and decreased $4,065, or
6.1%, in 1998. These investment securities increased in 1999 as management
leveraged the Company's strong capital position to increase interest income.
This increase was offset to some extent by a decrease in held-to-maturity
mortgage-backed securities of $2,806, or 9.6%, from December 31, 1998, to
December 31, 1999. These mortgage-backed securities consist primarily of
securities that 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). Held-to-maturity
mortgage-backed securities increased $5,675 in 1998 as other held-to- maturity
investment securities fell $4,065 over the same period. This increase in
mortgage-backed securities in 1998 was a direct result of management's intent to
shift the asset mix in the investment portfolio into mortgage-backed securities
for liquidity purposes. Securities available for sale increased $5,512, or
601.7%, during 1999 as management attempted to provide more liquidity within the
investment portfolio.
LOANS RECEIVABLE
Net loans receivable (including loans held for sale) amounted to $246,018 at
December 31, 1999, $199,575 at December 31, 1998, and $170,866 at December 31,
1997. These increases ($46,443 in 1999 and $28,709 in 1998) 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,
---------------------------------------------------------------------------------------
1999 1998 1997
Amount Percent Amount Percent Amount Percent
--------------------------- --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Residential real estate loans $103,015 40.91% $105,249 51.93% $111,736 64.26%
Home equity lines of credit 7,344 2.92% 6,760 3.34% 6,846 3.94%
Commercial real estate loans 52,499 20.85% 35,424 17.48% 22,432 12.90%
Commercial loans 78,973 31.37% 48,057 23.71% 27,929 16.06%
Consumer loans and loans
secured by deposit accounts 9,951 3.95% 7,202 3.55% 4,934 2.84%
--------------------------- --------------------------- ----------------------------
Gross loans receivable $251,782 100.00% $202,692 100.00% $173,877 100.00%
=========================== =========================== ============================
</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.
11
<PAGE>
[HOMEGROWN LOGO]
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 of 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 five years.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------
Loans accounted for on a non-
accrual basis:
<S> <C> <C> <C> <C> <C>
Residential mortgage loans $ 24 $ 102 $ 294 $ 1,557 $ 27
Commercial real estate 120 368 - - -
Consumer 1 - 22 - -
------------------------------------------------------------------------
Total $ 145 $ 470 $ 316 $ 1,557 $ 27
========================================================================
Non-accrual loans as a
percent of total gross loans 0.06% 0.23% 0.18% 0.93% 0.02%
------------------------------------------------------------------------
Foreclosed real estate (1) $ 13 $ 200 $ 724 $ 101 $ -
========================================================================
Non-accrual loans and
foreclosed real estate as a
percent of total gross loans 0.06% 0.33% 0.60% 0.99% 0.02%
------------------------------------------------------------------------
</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. These ratios indicate strong
economies in the local market areas of each of the subsidiary banks. In
addition, 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
12
<PAGE>
[IN MARGIN: June 1999 saw the opening of the new 5-story New Albany headquarters
with a money bag parade down Spring Street.]
1999 ANNUAL REPORT
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 loan losses. At December 31, 1999, 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, 1999, the Company's allowance for loan
losses totaled $1,741, as compared to $1,276 at December 31, 1998. The allowance
for loan losses was $1,014 at December 31, 1997. At December 31, 1999, the
Company's allowance represented 0.70% of the total loan portfolio (excluding
loans classified as held for sale) as compared to 0.63% on December 31, 1998.
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.
DEPOSITS
Deposits totaled $226,473 at December 31, 1999, as compared to $212,867 at
December 31, 1998, and $207,991 at December 31, 1997. The subsidiary banks do
not generally engage in sporadic increases or decreases in interest rates paid
or offer the highest rates available in its deposit market except upon specific
occasions when market conditions have created opportunities to attract
longer-term deposits. The following table presents outstanding deposits by
category for each of the previous three years:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
----------------------------------------------------------------------
1999 1998 1997
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits 10,259 4.53% 18,655 8.76% 11,915 5.73%
Savings and interest
bearing demand deposits 90,095 39.78% 68,684 32.27% 58,627 28.19%
Time deposits 126,119 55.69% 125,528 58.97% 137,449 66.08%
----------------------------------------------------------------------
Total deposits 226,473 100.00% 212,867 100.00% 207,991 100.00%
======================================================================
</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.
13
<PAGE>
[HOMEGROWN LOGO]
Selected Consolidated Financial and Other Data
[IN MARGIN: Through generations of local ownership, Community Bank Shares has
survived the era of mergers and acquisitions and enjoyed solid growth.]
Advances from the FHLB of Indianapolis amounted to $86,250, $56,000, and $27,000
at December 31, 1999, 1998, and 1997, 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 5.29%, 5.11%, and 5.76% at December 31, 1999, 1998, and 1997. 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 1999 was $87,750,
and the average balance for the year was $70,841.
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, 1999, the Company had retail repurchase
agreements outstanding of $28,182, as compared to $19,499 at December 31, 1998.
The $8,683 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 4.79%, 4.10%, and 4.77%
at December 31, 1999, 1998 and 1997, respectively. The maximum month-end balance
at any time during 1999 was $30,488, and the average balance for 1998 was
$21,907.
[Picture of barn and trees.]
STOCKHOLDERS' EQUITY
Stockholders' equity increased from $41,386 at December 31, 1998, to $41,630 at
December 31, 1999. Growth in capital was mainly attributable to periodic net
income less dividends paid to shareholders, accumulated other comprehensive
income (specifically, unrealized loss on securities available for sale), and the
repurchase of shares of the Company's common stock.
14
<PAGE>
1999 ANNUAL REPORT
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,
------------------------------------------------------------------------
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Interest income $ 25,730 $ 21,944 $ 20,675 $ 18,757 $ 16,109
Interest expense 14,004 12,208 11,660 10,607 9,254
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 11,726 9,736 9,015 8,150 6,856
Provision (credit) for losses on loans 654 354 226 128 78
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 11,072 9,382 8,789 8,022 6,778
- --------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Loan fees and service charges 546 548 474 435 382
Net realized securities gains - - - 15 -
Net gains on sale of mortgage loans 252 284 215 102 68
Net income from real estate operations - 6 11 - -
Service charges on deposit accounts 489 433 386 366 301
Commission income 545 495 304 341 175
Miscellaneous income 62 63 60 61 77
------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest income 1,893 1,830 1,450 1,320 1,003
- --------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and benefits 4,555 4,210 3,625 3,072 2,284
Occupancy and equipment 895 632 524 494 382
Deposit insurance premiums 105 111 293 1,542 432
Data processing services 635 563 495 448 350
Loss on foreclosed real estate - - - - -
Other 1,294 1,119 898 920 716
Merger-related expenses - 655 - - -
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 7,483 7,290 5,835 6,476 4,164
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,482 3,922 4,404 2,866 3,617
Income tax expense 2,130 1,524 1,691 855 1,405
- --------------------------------------------------------------------------------------------------------------------------
Cumulative effect on prior years
for accounting change - - - - -
Net income 3,352 2,398 2,713 2,011 2,212
==========================================================================================================================
==========================================================================================================================
Net income per share, basic $ 1.26 $ 0.89 $ 1.01 $ 0.76 $ 0.82
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Net income per share, diluted $ 1.26 $ 0.88 $ 1.01 $ 0.76 n/a
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Dividends paid by the Company $ 0.54 $ 0.48 $ 0.42 $ 0.42 $ 0.27
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Dividends paid by NCF Financial Corp. n/a $ 0.22 $ 0.30 $ 0.15 n/a
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Weighted average shares used in computing basic net income per share for
1995 were determined under the assumption that the mutual to stock conversions
took place prior to 1995.
15
<PAGE>
[HOMEGROWN LOGO]
[IN MARGIN: Community Bank Shares is the largest bank holding company
headquartered in Southern Indiana.]
Results of Operations
(Dollar amounts in thousands)
GENERAL
The Company reported net income of $3,352, $2,398, and $2,713 for the years
ended December 31, 1999, 1998, and 1997, 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 supplemental retirement plan 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. The following discussion is an analysis of the critical
components of net income for the years 1999, 1998, and 1997.
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 $11,726, $9,736 and $9,015
for 1999, 1998, and 1997, respectively. The net yield on earning assets has
grown steadily over the past three years, growing from 3.29% in 1997 to 3.38% in
1998, and finally to 3.46% for 1999.
The weighted-average yield on interest-earning assets decreased slightly from
7.62% in 1998 to 7.59% in 1999. The weighted-average yield on interest-earning
assets was 7.55% in 1997. Interest income during the last three years grew from
$20,675 in 1997, to $21,944 in 1998, and finally to $25,730 in 1999. The slight
decrease in yield on earning assets reflected pricingpressures in the banks'
local markets as well as a lower average prime rate in 1999 as compared to 1998.
The large increase in interest income in 1999 was the result of substantial
growth in its commercial loan portfolio as the Company continued to implement
its balance sheet restructuring strategy.
Controlling the cost of our sources of funds is one of the Company's primary
objectives. The weighted- average rate on interest-bearing liabilities decreased
to 4.49% in 1999 from 4.71% in 1998, and 4.80% in 1997. 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 maturity and repricing implications of the Company's
funding source alternatives.
16
<PAGE>
1999 ANNUAL REPORT
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,
--------------------------------------------------------------------------------------------
1999 1998 1997
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) 224,037 18,438 8.23% 186,342 15,539 8.34% 170,656 14,010 8.21%
Mortgage-backed 32,105 1,995 6.21 25,892 1,564 6.04 24,253 1,544 6.37
securities
Other securities 75,609 4,879 6.45 57,486 3,833 6.67 61,897 4,179 6.75
Interest-bearing
deposits with banks 7,058 419 5.94 18,369 1,007 5.48 16,984 942 5.55
--------------------------------------------------------------------------------------------
Total interest-
earning assets 338,809 25,730 7.59 288,090 21,944 7.62 273,790 20,675 7.55
Non-interest-earning
assets 18,520 14,292 10,890
--------------------------------------------------------------------------------------------
Total assets 357,329 302,382 284,680
============================================================================================
Interest-bearing
liabilities:
Deposits 219,283 9,301 4.24 203,866 9,330 4.58 206,146 9,639 4.68
Borrowings 92,936 4,703 5.06 55,090 2,878 5.22 36,664 2,021 5.51
--------------------------------------------------------------------------------------------
Total interest-
bearing liabilities 312,219 14,004 4.49 258,956 12,208 4.71 242,810 11,660 4.80
Non-interest-
bearing liabilities 3,115 2,560 2,795
--------------------------------------------------------------------------------------------
Total liabilities 315,334 261,516 245,605
Stockholders' equity 41,995 40,866 39,075
--------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity 357,329 302,382 284,680
============================================================================================
Net interest income 11,726 9,736 9,015
Interest rate spread (2) 3.11% 2.90% 2.75%
Net yield on interest-
earning assets (3) 3.46% 3.38% 3.29%
Ratio of average interest-
earning assets to
average interest-
bearing liabilities 108.52% 111.25% 112.76%
</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.
17
<PAGE>
[HOMEGROWN LOGO]
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,
1999 vs. 1998 1998 vs. 1997
Increase(Decrease) Due to Increase(Decrease) Due to
-------------------------------------------- --------------------------------------------
Net Net
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
-------------------------------------------- --------------------------------------------
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $3,146 $(205) $ (42) $ 2,899 $1,288 $ 221 $ 20 $ 1,529
Mortgage-backed securities 376 44 11 431 104 (79) (5) 20
Other debt securities 1,201 (119) (38) 1,044 (298) (51) 4 (345)
Interest-bearing
deposits with banks (621) 84 (51) (588) 77 (11) (1) 65
------------------------------------------------------------------------------------------
Total interest-earning assets 4,102 (196) (120) 3,786 1,171 80 18 1,269
------------------------------------------------------------------------------------------
Interest Expense:
Deposits 706 (683) (42) (29) (107) (204) 2 (309)
Borrowings 1,974 (88) (61) 1,825 1,016 (106) (53) 857
------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,680 (781) (103) 1,796 909 (310) (51) 548
------------------------------------------------------------------------------------------
Net interest income $1,422 $ 585 $(17) $ 1,990 $ 262 $ 390 $ 69 $ 721
==========================================================================================
</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
collectability of each bank's loan portfolio. Provisions for loan losses of
$654, $354, and $226 were made in years 1999, 1998, and 1997, 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. The Company has experienced growth in total
non-interest income in each of the past three years, going from $1,450 in 1997
to $1,830 in 1998, and finally to $1,893 in 1999. Most of this increase is
attributable to service charges on deposit accounts and commission income on the
sale of alternative investments such as annuities and mutual funds. Deposit
service charges increased as both the dollar value and number of deposit
accounts increased from 1998 to 1999. Commission income has increased as a
18
<PAGE>
1999 ANNUAL REPORT
[IN MARGIN: Community Bank Shares hired six new "employees" in 1999 - our new
ATM machines who work around the clock.]
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. Net gain on sales of mortgage loans decreased due to
decreased volume of loan originations that was impacted by the general increase
in mortgage interest rates.
NON-INTEREST EXPENSES
Total non-interest expenses in 1999 increased by approximately $193 compared to
1998, and by $1,455 in 1998 as compared to 1997. As mentioned previously, in
1998 the Company incurred merger-related expenses of approximately $655 and
supplemental retirement plan expenses of $343. Excluding these non- recurring
expenses, total non-interest expenses in 1999 increased by approximately $1,191,
or 18.9%, compared to 1998, and by $457, or 7.8%, in 1998 as compared to 1997.
The principal category of the Company's non-interest expenses is compensation
and benefits, which increased by $344, or 8.2%, during 1999 and by $585, or
16.1%, during 1998, as compared to the previous year. Excluding the
non-recurring compensation expenses mentioned previously, compensation and
benefits actually increased $687, or 17.8%, from 1998 to 1999. This increase was
attributable to the following factors: 1) the addition of staff in the loan
operations, credit administration, accounting, and mortgage origination areas,
as well as additional personnel at Heritage Bank and NCF Bank and Trust, and 2)
an increase of approximately $165 in incentive compensation. In 1998, when
excluding non-recurring expenses, compensation and benefits increased only $242,
or 6.7%, from 1997.
In 1999, occupancy and equipment expenses rose $263, or 41.6%, due primarily to
the occupation in June 1999 of a new five-story building in downtown New Albany,
Indiana, that serves as both the corporate headquarters for the Company and the
main office of Community Bank of Southern Indiana. In addition, the Company also
incurred equipment expenses in 1999 relating to the Year 2000 date change issue.
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.
Data processing service expense increased $72, or 12.7%, in 1999 vs. 1998, and
$68, or 13.7%, in 1998 as compared to 1997 as the Company conducted 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 experiences with efforts to reduce the
risk related to this situation).
Other expenses, including advertising, postage, forms and supplies, professional
fees and supervisory assessments, increased by $175 in 1999 and $221 in 1997.
The 1999 increase is attributable to the following factors: 1) increased
telephone expenses relating to a new telephone system, 2) increased audit and
accounting fees relating to the Company's merger with NCF Financial Corporation
in May 1999, 3) increased mortgage-servicing rights amortization, and 4) other
expenses, such as postage and printing, that relate to increases in volumes
between the periods. 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
previously, and 3) expenses related to consulting and professional service fees.
INCOME TAXES
Federal and state income tax expense totaled $2,130 in 1999, $1,524 in 1998, and
$1,691 in 1997. The effective tax rates amounted to 38.9%, 38.9%, and 38.4% in
1999, 1998 and 1997, respectively.
19
<PAGE>
[HOMEGROWN LOGO]
Selected Consolidated Financial and Other Data
Liquidity and Capital Resources
Liquidity levels are adjusted in order to meet funding needs for deposit
outflows, payment of real estate taxes escrowed on mortgage loans, repayment of
borrowings, loan commitments, and to meet asset/liability objectives. The Banks'
primary sources of funds are deposits, amortization of loans 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 attempt to maintain a steady
deposit balance.
Liquidity management is both a daily and long-term function of business
management. If the Banks require funds beyond their ability to generate them
internally, borrowing agreements exist with the Federal Home Loan Banks (FHLB)
of Indianapolis and Cincinnati that provide an additional source of funds. At
December 31, 1999, Community Bank and Heritage Bank had $64,500 and $9,250,
respectively, in outstanding advances from the FHLB of Indianapolis, while NCF
Bank and Trust Company had $12,500 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, 1999, the Company
had commitments to 1) originate loans of $2,331, 2) fund the undisbursed
portions of commercial and personal lines of credit of $81,131, and 3) fund the
undisbursed portion of construction loans in process of $4,041.
Certificates of deposit scheduled to mature in one year or less, at December 31,
1999, totaled approximately $89,351. 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 17.1%, a Tier 1 Capital ratio of 16.4%, and a Tier 1 Leverage Capital
ratio of 10.7%.
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.
20
<PAGE>
1999 ANNUAL REPORT
[IN MARGIN: Being part of the community means helping the community. Last year
we supported the United Way, Salvation Army Angel Tree, the St. Catharine
College Building Fund, Harvest Homecoming and New Hope Services.
[Picture of hay bales in field.]
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 that
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, 1999, 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
analysis results in a negative one-year gap of $123,505 (excess of
interest-bearing liabilities over interest-earning assets repricing within one
year).
21
<PAGE>
[HOMEGROWN LOGO]
Selected Consolidated Financial and Other Data
Interest Rate Sensitivity Analysis
As of December 31, 1999
<TABLE>
<CAPTION>
Amounts Repricing or Maturing
-------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
------------------------------------------------------------------------------------------
Financial assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 7,248 $ - $ - $ - $ - $ - $ 7,248 $ 7,248
Weighted-average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Interest bearing deposits in banks 5,767 - - - - - 5,767 5,767
Weighted-average interest rate 4.70 - - - - - 4.70
Investment securities (1) 10,988 7,988 8,618 6,177 3,000 75,311 112,083 105,695
Weighted-average interest rate 6.39 6.53 6.38 6.41 5.87 6.56 6.50
Gross loans receivable 106,722 21,405 21,625 19,892 36,074 42,040 247,759 242,718
Weighted-average interest rate 8.31 8.16 8.20 8.20 8.05 7.96 8.18
- -------------------------------------------------------------------------------------------------------------------------------
Total financial assets 130,725 29,394 30,244 26,069 39,074 117,350 372,856 361,428
Weighted-average interest rate 7.51 7.72 7.68 7.78 7.88 7.06 7.46
- -------------------------------------------------------------------------------------------------------------------------------
Financial liabilities
Deposits 178,799 24,026 8,415 2,028 1,121 12,084 226,473 225,855
Weighted-average interest rate 4.23 5.21 5.71 5.40 5.20 0.14 4.19
Advances from Federal Home Loan Banks 47,250 17,000 12,000 - 10,000 - 86,250 84,914
Weighted-average interest rate 5.34 5.69 5.72 - 6.03 - 5.54
Retail repurchase agreements 28,182 - - - - - 28,182 28,182
Weighted-average interest rate 4.79 - - - - - 4.79
- -------------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities 254,231 41,026 20,415 2,028 11,121 12,084 340,905 338,950
Weighted-average interest rate 4.50 5.41 5.71 5.40 5.95 0.14 4.58
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Rate Sensitivity Gap $ (123,505) $ (11,633) $ 9,829 $ 24,042 $ 27,953 $ 105,267 $ 31,953
Cumulative Interest
Rate Sensitivity Gap $ (123,505) $(135,138) $(125,309)$ (101,267) $ (73,314) $ 31,953 $ 31,953
- --------------------------------------------------------------------------------------------------------------------
Sensitivity Gap as a Percent of Total
Financial Assets -94.48% -39.58% 32.50% 92.22% 71.54% 89.70% 8.57%
Cumulative Gap as a Percent of Total
Financial Assets -94.48% -84.40% -65.83% -46.79% -28.69% 8.57% 8.57%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes mortgage-backed securities, other debt securities, and FHLB stock
at cost.
22
<PAGE>
1999 ANNUAL REPORT
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require 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.
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 Market 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
1999 1998
----------------------- -------------------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $ 19.00 $ 13.63 $ 23.63 $ 21.25
Second Quarter 18.50 15.25 25.00 21.50
Third Quarter 18.50 16.63 21.75 16.75
Fourth Quarter 17.63 13.88 18.75 13.00
</TABLE>
As of December 31, 1999, there were approximately 876 shareholders of record.
The Company pays cash dividends on a quarterly basis. Cash dividends paid by the
Company were $0.54, $0.48, and $0.42 in 1999, 1998, and 1997, respectively. Cash
dividends paid by NCF Financial Corporation were $0.22, $0.30, and $0.15 in the
fiscal years ending June 30, 1998, 1997, and 1996, respectively.
No Change In or Disagreements With 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 Issues
The year 2000 issue exists because many computer systems and applications use
two-digit date fields to designate a year. Date-sensitive systems may recognize
the year 2000 as 1900, or not at all. This inability to recognize or properly
treat the year 2000 may cause erroneous results, ranging from system
malfunctions to incorrect or incomplete processing. As a user of computers,
computer software and equipment utilizing embedded microprocessors, failure to
resolve year 2000 issues could cause substantial disruption of the Bank's
business and could have a material adverse effect on the Bank's business,
financial condition or results of operations.
The Bank established a year 2000 committee in 1997. The committee developed and
implemented a comprehensive plan to make all information and non-information
technology assets year 2000 compliant. The committee provides periodic reports
to the Board of Directors in order to assist the directors in their year 2000
readiness oversight role.
While there can be no assurances that the Bank's year 2000 plan has effectively
addressed the year 2000 issue, the Bank has not been notified, and is unaware
of, any vendor or service provider problems related to year 2000 and all systems
have performed properly since January 1, 2000. Likewise, the Bank is unaware of
any year 2000 issues that have impaired the ability of the Bank's borrowers to
repay their debt.
23
<PAGE>
[HOMEGROWN LOGO]
A 'bumper crop' of achievements in 1999
Total Assets $384,443,185
Total Deposits $226,473,209
Return on Average Assets 0.94%
[Bar Graph] Dividends Paid
1999 - $0.54
1998 - $0.48
1997 - $0.42
1996 - $0.42
1995 - $0.27
[Bar Graph] Net Interest Income After Provision for Loan Losses
1999 - $11,072
1998 - $ 9,382
1997 - $ 8,789
1996 - $ 8,022
1995 - $ 6,778
[Pie chart] Loan Portfolio Composition by Major Type
1999
Commercial business and real estate loans 52%
Residential real estate loans 41%
Other 7%
Other consists of home equity lines of credit, consumer loans, and loans secured
by deposit accounts.
[Picture of plant.]
24
<PAGE>
1999 ANNUAL REPORT
BUMPER CROP
Net Income $ 3,351,654
Net Income Per Share $ 1.26
Dividends Paid $ 0.54
[Bar Graph] Net Income Per Share, Basic
1999 - $1.26
1998 - $0.89
1997 - $1.01
1996 - $0.76
1995 - $0.82
[Bar Graph] Net Yield On Average Interest-Earning Assets
1999 - 3.10%
1998 - 2.91%
1997 - 2.75%
1996 - 2.65%
1995 - 2.54%
[Pie chart] Loan Portfolio Composition by Major Type
1998
Commercial business and real estate loans 41%
Residential real estate loans 52%
Other 7%
[Pie chart] Loan Portfolio Composition by Major Type
1997
Commercial business and real estate loans 29%
Residential real estate loans 64%
Other 7%
25
<PAGE>
AUDITOR'S REPORT
Independent Auditor's Report
[MONROE SHINE, KNOWLEDGE FOR TODAY...VISION FOR TOMORROW LOGO]
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, 1999 and 1998, 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, 1999.
These consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community Bank
Shares of Indiana, Inc. and Subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
/s/ Monroe Shine
February 1, 2000
26
<PAGE>
1999 ANNUAL REPORT
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
ASSETS
<S> <C> <C>
Cash and due from banks $ 7,247,840 $ 14,050,877
Interest bearing deposits with banks 5,766,843 7,588,992
Securities available for sale, at fair value 6,427,699 916,080
Securities held to maturity:
Mortgage-backed securities (fair value $25,056,276; 1998 $29,197,118) 26,388,021 29,194,327
Other debt securities (fair value $66,848,989; 1998 $62,575,913) 71,520,971 62,587,636
Mortgage loans held for sale - 3,521,997
Loans receivable, net 246,017,570 199,575,395
Federal Home Loan Bank stock, at cost 7,362,100 3,345,800
Foreclosed real estate 13,000 199,707
Premises and equipment 9,753,882 7,868,622
Accrued interest receivable:
Loans 1,540,811 1,171,517
Mortgage-backed securities 173,359 166,804
Other debt securities 1,081,587 799,292
Other assets 1,149,502 957,823
Total Assets $ 384,443,185 $ 331,944,869
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 10,259,265 $ 18,655,305
Savings and interest bearing demand deposits 90,094,478 68,684,407
Time deposits 126,119,466 125,527,754
Total deposits 226,473,209 212,867,466
Borrowed funds 114,431,511 75,498,873
Advance payments by borrowers for taxes and insurance 209,494 209,835
Accrued interest payable on deposits 91,496 60,465
Other liabilities 1,607,299 1,922,544
Total Liabilities 342,813,009 290,559,183
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 272,830 272,830
Additional paid-in capital 19,472,332 19,500,320
Retained earnings-substantially restricted 23,859,533 21,949,472
Accumulated other comprehensive income-unrealized loss
on securities available for sale (231,991) (225)
Unearned ESOP shares (339,367) (336,711)
Less treasury stock, at cost -- 80,391 shares) (1,403,161) -
Total Stockholders' Equity 41,630,176 41,385,686
Total Liabilities and Stockholders' Equity $ 384,443,185 $ 331,944,869
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
AUDITOR'S REPORT
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accumulated Unearned
Additional Other ESOP
Common Paid-In Retained Comprehensive and Stock Treasury
Stock Capital Earnings Income Compensation Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $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 at December 31, 1997 272,470 19,378,687 20,738,894 2,752 (691,374) - 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
COMPREHENSIVE INCOME
Net income - - 3,351,654 - - - 3,351,654
Other comprehensive income:
Change in unrealized loss
on securities available
for sale, net of deferred income tax
benefit of $152,190 - - - (232,031) - - (232,031)
Less: reclassification adjustment, net
of deferred tax expense of $173 - - - 265 - - 265
Total comprehensive income - - - - - - 3,119,888
Cash dividends ($.54 per share) - - (1,441,593) - - - (1,441,593)
Purchase of treasury stock - - - - - (1,877,788) (1,877,788)
Restricted stock grants - (16,613) - - (137,025) 153,638 -
Exercise of stock options - (52,835) - - - 320,989 268,154
Stock compensation expense - - - - 61,950 - 61,950
Shares released by ESOP trust - 41,460 - - 72,419 - 113,879
Balance at December 31, 1999 272,830 19,472,332 23,859,533 (231,991) (339,367)(1,403,161) 41,630,176
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
1999 ANNUAL REPORT
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
INTEREST INCOME
<S> <C> <C> <C>
Loans receivable $ 18,437,910 $ 15,539,222 $ 14,010,035
Securities:
Mortgage-backed securities 1,994,652 1,564,299 1,543,807
Tax exempt debt securities 237,517 168,135 138,194
Other debt securities 4,280,919 3,455,486 3,898,510
Federal Home Loan Bank dividends 360,310 209,502 112,453
Interest bearing deposits with banks 419,147 1,007,327 972,090
Total interest income 25,730,455 21,943,971 20,675,089
INTEREST EXPENSE
Deposits 9,300,788 9,330,203 9,639,087
Customer repurchase agreements 931,363 503,976 586,867
Other borrowed funds 3,772,236 2,373,650 1,433,770
Total interest expense 14,004,387 12,207,829 11,659,724
Net interest income 11,726,068 9,736,142 9,015,365
Provision for loan losses 654,000 353,875 226,000
Net interest income after provision for loan losses 11,072,068 9,382,267 8,789,365
NON-INTEREST INCOME
Loan fees and service charges 545,629 547,990 474,131
Net gain on sales of mortgage loans 251,812 284,348 214,754
Service charges on deposit accounts 488,681 433,126 385,810
Commission income 544,794 495,129 304,051
Net gain on sale of foreclosed real estate - 6,277 10,956
Other income 61,870 62,904 60,117
Total non-interest income 1,892,786 1,829,774 1,449,819
NON-INTEREST EXPENSES
Compensation and benefits 4,554,631 4,209,578 3,625,352
Net occupancy 562,401 352,556 281,410
Equipment 332,911 278,973 242,700
Net realized loss on sale of securities 438 - -
Deposit insurance premiums 105,008 111,317 292,715
Data processing service 634,607 562,947 495,030
Other 1,293,573 1,119,197 897,767
Merger related expenses - 655,190 -
Total non-interest expenses 7,483,569 7,289,758 5,834,974
Income before income taxes 5,481,285 3,922,283 4,404,210
Income tax expense 2,129,631 1,524,221 1,690,787
Net Income $ 3,351,654 $ 2,398,062 $ 2,713,423
Net income per common share, basic $ 1.26 $ .89 $ 1.01
Net income per common share, diluted $ 1.26 $ .88 $ 1.01
See notes to consolidated financial statements.
</TABLE>
29
<PAGE>
AUDITOR'S REPORT
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 3,351,654 $ 2,398,062 $ 2,713,423
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums and accretion of discounts
on securities, net (68,625) (74,513) (98,725)
Net realized securities loss 438 - -
Provision for loan losses 654,000 353,875 226,000
Proceeds from mortgage loan sales 23,713,946 23,644,523 12,007,593
Mortgage loans originated for resale (19,940,137) (23,482,536) (11,822,791)
Net gain on sales of mortgage loans (251,812) (284,348) (214,754)
Gain on sale of foreclosed real estate - 6,277 10,956
Depreciation expense 489,837 365,780 310,824
ESOP and stock compensation expense 175,829 316,326 166,487
Federal Home Loan Bank stock dividends (36,900) (17,100) (29,600)
(Increase) decrease in accrued interest receivable (658,144) 311,566 (436,863)
Increase (decrease) in accrued interest payable 31,031 (33,115) 26,807
(Increase) decrease in other assets (39,725) (661,200) 149,717
Increase (decrease) in other liabilities (348,417) 407,750 64,496
Net Cash Provided By Operating Activities 7,072,975 3,251,347 3,073,570
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits in banks 1,822,149 4,330,439 789,897
Proceeds from sales of securities available for sale 3,981,702 - -
Proceeds from maturities of securities available for sale - - 1,500,000
Purchases of securities available for sale (10,077,580) (250,000) -
Proceeds from maturities of securities held to maturity 12,181,272 78,342,759 33,185,925
Purchase of securities held to maturity (31,276,437) (92,945,445) (48,050,130)
Principal collected on securities available for sale 198,855 206,980 155,822
Principal collected on securities held to maturity 13,038,007 13,051,230 5,003,526
Loan originations and principal payments on loans, net (47,109,175) (31,522,680) (6,232,328)
Purchase of Federal Home Loan Bank stock (3,979,400) (1,295,800) (325,000)
Proceeds from sale of foreclosed real estate 199,707 135,024 232,792
Proceeds from sale of premises and equipment - - 300,770
Acquisition of premises and equipment (2,375,097) (3,965,765) (1,221,464)
Net Cash Used By Investing Activities (63,395,997) (33,913,258) (14,660,190)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and savings deposits 13,014,031 16,123,429 974,264
Net increase (decrease) in time deposits 591,712 (12,261,295) 7,651,165
Net increase (decrease) in advance payments by borrowers
for taxes and insurance (341) 17,349 (15,078)
Net increase in retail repurchase agreements 8,682,638 7,357,014 1,440,291
Repayment of advances from Federal Home Loan Bank (109,500,000) (14,500,000) (12,000,000)
Advances from Federal Home Loan Bank 139,750,000 43,500,000 16,000,000
Exercise of stock options 268,154 53,634 -
Purchase of treasury stock (1,877,788) - -
Dividends paid (1,408,421) (1,122,367) (1,019,192)
Adjustment to conform pooled affiliate's fiscal year end - 250,196 -
Net Cash Provided By Financing Activities 49,519,985 39,417,960 13,031,450
Net Increase (Decrease) in Cash and Due From Banks (6,803,037) 8,756,049 1,444,830
Cash and due from banks at beginning of year 14,050,877 5,294,828 3,849,998
Cash and Due From Banks at End of Year $ 7,247,840 $ 14,050,877 $ 5,294,828
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
1999 ANNUAL REPORT
(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. While management uses available information to recognize
losses on loans and foreclosed real estate, further reductions in the carrying
amounts of loans and foreclosed assets may be necessary based on changes in
local economic conditions. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the estimated losses on loans
and foreclosed real estate. Such agencies may require the Bank to recognize
additional losses based on their judgments about information available to them
at the time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans and foreclosed real estate may
change materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
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.
31
<PAGE>
AUDITOR'S REPORT
Notes to Consolidated Financial Statements
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.
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.
32
<PAGE>
1999 ANNUAL REPORT
Foreclosed Real Estate
Foreclosed real estate held for sale is carried at the lower of fair value minus
estimated costs to sell or cost. Costs of holding foreclosed real estate are
charged to expense in the current period, except for significant property
improvements, which are capitalized. Valuations are periodically performed by
management and an allowance is established by a charge to non-interest expense
if the carrying value exceeds the fair value minus estimated costs to sell. The
net income from operations of foreclosed real estate held for sale is reported
in non-interest income.
Premises and Equipment
The Company uses the straight line and accelerated methods of computing
depreciation at rates adequate to amortize the cost of the applicable assets
over their useful lives. Items capitalized as part of premises and equipment are
valued at cost. Maintenance and repairs are expensed as incurred. The cost and
related accumulated depreciation of assets sold, or otherwise disposed of, are
removed from the related accounts and any gain or loss is included in earnings.
Mortgage Servicing Rights
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.
33
<PAGE>
AUDITOR'S REPORT
Notes to Consolidated Financial Statements
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.
(2) ACQUISITION
On May 6, 1998, the Company completed its acquisition of NCF Bank and Trust
Company (NCF Bank) by a merger with NCF Financial Corporation (NCF). NCF Bank, a
state chartered commercial bank with two offices in Bardstown, Kentucky, 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 the consolidated
financial statements for prior years have been restated to give effect to the
combination as of the earliest date presented.
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 noninterest bearing and unavailable for
investment. During 1999, the average balance maintained to meet this requirement
was approximately $1.1 million.
34
<PAGE>
1999 ANNUAL REPORT
(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>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1999:
Securities available for sale:
Mortgage-backed securities:
<S> <C> <C> <C> <C>
FNMA and GNMA certificates $ 4,182,015 $ 415 $ 125,523 $ 4,056,907
Municipal 2,629,775 - 258,983 2,370,792
Total securities available for sale $ 6,811,790 $ 415 $ 384,506 $ 6,427,699
Securities held to maturity:
Mortgage-backed securities:
FHLMC, FNMA and
GNMA certificates $ 1,251,082 $ 11,158 $ 10,677 $ 1,251,563
FHLMC and FNMA REMIC 22,633,811 14,935 1,147,008 21,501,738
Other 2,503,128 - 200,153 2,302,975
26,388,021 26,093 1,357,838 25,056,276
Other debt securities:
Federal agency 66,255,000 - 4,538,939 61,716,061
Municipal 4,256,112 10,191 86,187 4,180,116
Corporate 1,009,859 - 57,047 952,812
71,520,971 10,191 4,682,173 66,848,989
Total securities held to maturity $97,908,992 $ 36,284 $ 6,040,011 $ 91,905,265
December 31, 1998:
Securities available for sale:
Mortgage-backed securities:
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
FHLMC and FNMA REMIC 25,791,628 77,921 94,911 25,774,638
Other 1,396,521 3,476 2,699 1,397,298
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>
35
<PAGE>
AUDITOR'S REPORT
Notes to Consolidated Financial Statements
At December 31, 1999, federal agency securities with an amortized cost of
$5,000,000 and a fair value of $4,710,624 were pledged to secure public deposits
and certain borrowings. Certain debt securities were pledged to secure retail
repurchase agreements and advances from the Federal Home Loan Bank at December
31, 1999. (See Note 8) The amortized cost and fair value of debt securities as
of December 31, 1999, 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 $ 994,375
Due after one year through five years - - 4,630,285 4,454,692
Due after five years through ten years - - 41,179,859 38,630,382
Due after ten years 2,629,775 2,370,792 24,710,827 22,769,540
2,629,775 2,370,792 71,520,971 66,848,989
Mortgage-backed securities 4,182,015 4,056,907 26,388,021 25,056,276
$ 6,811,790 $ 6,427,699 $ 97,908,992 $ 91,905,265
</TABLE>
Proceeds from sales of securities available for sale during the year ended
December 31, 1999, were $3,981,702. Gross gains of $21,866 and gross losses of
$22,304 were realized on those sales.
(5) LOANS RECEIVABLE
<TABLE>
<CAPTION>
Loans receivable at December 31, 1999 and 1998 consisted of the following:
1999 1998
Real estate loans:
<S> <C> <C>
Residential $ 93,632,514 $ 104,670,687
Residential construction 9,382,995 578,200
Commercial real estate 52,498,953 35,423,536
Home equity lines of credit 7,343,824 6,760,043
Commercial loans 78,972,698 48,057,007
Loans secured by deposit accounts 1,275,529 2,048,504
Consumer loans 8,675,866 5,153,519
Gross loans receivable 251,782,379 202,691,496
Less:
Undisbursed portion of loans in process 4,041,211 1,843,642
Deferred loan origination fees and costs, net (17,352) (3,342)
Allowance for loan losses 1,740,950 1,275,801
5,764,809 3,116,101
Loans receivable, net $ 246,017,570 $ 199,575,395
</TABLE>
36
<PAGE>
1999 ANNUAL REPORT
Loans serviced for the benefit of others were as follows:
December 31, 1999 $ 46,260,864
December 31, 1998 47,892,248
December 31, 1997 45,879,809
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $155,759 and $168,688 at December 31, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
An analysis of the allowance for loan losses is as follows:
1999 1998 1997
<S> <C> <C> <C>
Beginning balances $ 1,275,801 $ 1,013,884 $ 816,202
Adjustment to conform pooled affiliate's
fiscal year end - 8,000 -
Provision 654,000 353,875 226,000
Recoveries 2,291 4,362 9,306
Loans charged-off (191,142) (104,320) (37,624)
Ending balances $ 1,740,950 $ 1,275,801 $ 1,013,884
</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.
<TABLE>
<CAPTION>
The following table represents the aggregate activity for related party loans
which exceeded $60,000 in total:
<S> <C> <C> <C>
Balance at December 31, 1998 $ 18,065,940
New loans 19,683,758
Repayments (17,625,282)
Balance at December 31, 1999 $ 20,124,416
</TABLE>
37
<PAGE>
AUDITOR'S REPORT
Notes to Consolidated Financial Statements
(6) PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Premises and equipment consisted of the following:
1999 1998
<S> <C> <C>
Land and land improvements $ 973,650 $ 973,650
Office buildings 8,905,762 7,464,959
Furniture, fixtures and equipment 2,141,856 1,438,875
Leasehold improvements 177,557 172,385
12,198,825 10,049,869
Less accumulated depreciation 2,444,943 2,181,247
Net premises and equipment $ 9,753,882 $ 7,868,622
</TABLE>
(7) DEPOSITS
The aggregate amount of time deposit accounts with balances of $100,000 or more
was approximately $27,160,000 and $21,426,000 at December 31, 1999 and 1998,
respectively. At December 31, 1999, scheduled maturities of time deposits were
as follows:
Year ending December 31: (IN THOUSANDS)
2000 $ 89,351
2001 25,259
2002 8,084
2003 2,038
2004 and thereafter 1,387
Total $126,119
The subsidiary banks held deposits of approximately $5,595,000 for related
parties at December 31, 1999.
(8) BORROWED FUNDS
<TABLE>
<CAPTION>
Borrowed funds are summarized as follows:
1999 1998
Weighted Weighted
Average Average
Rate Amount Rate Amount
<S> <C> <C> <C> <C>
Retail repurchase agreements 4.79% $ 28,181,511 4.10% $ 19,498,873
Advances from Federal Home
Loan Bank:
Fixed rate advances 5.55 58,500,000 5.11 56,000,000
Adjustable rate advances 4.73 27,750,000 -
86,250,000 56,000,000
$ 114,431,511 $ 75,498,873
</TABLE>
38
<PAGE>
1999 ANNUAL REPORT
The following is a schedule of maturities of advances outstanding as of
December 31, 1999:
Year ending December 31: (IN THOUSANDS)
2000 $30,750,000
2003 3,000,000
2004 13,000,000
2008 9,000,000
2009 30,500,000
$86,250,000
At December 31, 1999, advances from the Federal Home Loan Bank totaling
$58,500,000 were putable advances whereby the Federal Home Loan Bank will
automatically convert the fixed rate advance to a variable rate should the
market interest rate exceed a predetermined strike rate.
<TABLE>
<CAPTION>
Information concerning borrowings in 1999 and 1998 under retail repurchase
agreements is summarized as follows:
1999 1998
<S> <C> <C>
Weight average interest rate during the year 4.25% 4.59%
Average daily balance $ 21,906,544 $ 14,901,890
Maximum month-end balance during the year $ 30,488,000 $ 19,499,000
Federal agency debt securities underlying the agreements at December 31, 1999:
Amortized cost $ 43,545,938
Fair value $ 40,998,704
</TABLE>
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, 1999.
Community Bank has an overdraft line of credit agreement with the Federal Home
Loan Bank which provides a line of credit not to exceed $2,500,000. This
agreement expires on December 26, 2000. At December 31, 1999, 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 July 7, 2000. At December 31, 1999, 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, 1999, eligible collateral included
residential mortgage loans with a carrying value of $80,431,508 and
mortgage-backed and other debt securities with an amortized cost of $46,279,098
and fair value of $43,265,541 which were pledged as security under the
agreement.
39
<PAGE>
AUDITOR'S REPORT
Notes to Consolidated Financial Statements
(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.
<TABLE>
<CAPTION>
Following are reconciliations of the pension benefit obligation and the value of
plan assets for 1999 and 1998:
1999 1998
Pension benefit obligation
<S> <C> <C>
Balance, beginning of year $ 553,606 $ 1,000,362
Interest cost 38,752 61,976
Settlement loss 34,273
Actuarial (gain) loss (1,005) 14,360
Benefits paid to participants (26,517) (557,365)
Balance, end of year $ 564,836 $ 553,606
Plan assets
Fair value, beginning of year $ 569,532 $ 997,149
Actual return on plan assets 100,035 53,448
Company contributions - 76,300
Benefits paid to participants (26,517) (557,365)
Fair value, end of year $ 643,050 $ 569,532
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999 and 1998, the funded status of the plan was as follows:
1999 1998
<S> <C> <C>
Excess of the benefit obligation over the fair value of plan assets $ - $ -
Excess of the fair value of plan assets over the benefit obligation 78,214 76,018
Unrecognized actuarial gain (30,128) (40,246)
Prepaid (accrued) benefit cost $ 48,086 $ 35,772
</TABLE>
40
<PAGE>
1999 ANNUAL REPORT
Pension expense for the years ended December 31 comprised the following:
1999 1998 1997
Service cost $ - $ - $ 84,651
Interest cost 38,752 61,976 70,973
Expected return on plan assets (51,066) (58,934) (78,074)
Recognized actuarial loss - - 20,539
Amortization of prior service cost - - (2,596)
Amortization of the transition asset - - (24,495)
Curtailment loss - - 29,649
Settlement loss - 34,273 -
Pension expense (income) $ (12,314) $37,315 $100,647
<TABLE>
<CAPTION>
The following weighted average rate assumptions were used in accounting for the
plan:
1999 1998 1997
<S> <C> <C> <C>
Discount rate on benefit obligation 0 0 7.00%
Rate of employee compensation increase N/A N/A 4.50%
Rate of expected return on plan assets 9.00% 9.00% 9.00%
</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. No contributions were required during the three-year
period ended December 31, 1999.
Employee Stock Ownership Plans:
The Company sponsors a leveraged employee stock ownership plan (ESOP) covering
substantially all employees. The ESOP trust has acquired shares of company
common stock financed by term loans with the Company. These employer loans and
the related interest income are not recognized in the consolidated financial
statements as the debt is serviced from Company contributions and all dividends
on shares held by the ESOP trust. Dividends payable on allocated shares are
charged to retained earnings and are satisfied 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 trust are allocated to participant accounts
based on the ratio of the current year principal and interest payments to the
total of the current year and future years principal and interest to be paid on
the employer loans.
Compensation expense is recognized 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 1999, 1998 and 1997 amounted to $113,879, $129,334 and $88,535,
respectively.
41
<PAGE>
AUDITOR'S REPORT
<TABLE>
<CAPTION>
Company common stock held by the ESOP trust at December 31, were as follows:
1999 1998
<S> <C> <C>
Allocated shares $ 31,527 $ 24,717
Unallocated shares 24,700 31,510
Total ESOP shares 56,227 56,227
Fair value of unallocated shares $404,463 $409,630
</TABLE>
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 $58,234, $25,471
and $23,095 to the plan for the years ended December 31, 1999, 1998 and 1997,
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 incentive plan provides 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
plan shall become vested and exercisable at the rate determined by the Board of
Directors at the date of grant. Options granted under the plan expire not more
than ten years after the date of grant. Payment of the option price may be in
cash or shares of common stock at fair market value on the exercise date.
Non-employee directors are eligible to receive only nonqualified stock options.
The following is a summary of the Company's stock options as of December 31,
1999, 1998 and 1997 and the changes for the years then ended:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 170,426 $ 19.08 54,028 $ 14.89 54,028 $ 14.89
Granted 16,300 16 120,600 21 - -
Exercised 18,009 15 3,602 15 - -
Forfeited 6,900 21 600 21 - -
Outstanding at end of year 161,817 $ 19.20 170,426 $ 19.08 54,028 $ 14.89
Exercisable at end of year 62,692 $ 17.76 52,426 $ 15.12 14,636 $ 14.89
</TABLE>
42
<PAGE>
1999 ANNUAL REPORT
For options outstanding at December 31, 1999, the option price per share ranged
from $14.89 to $21.00 and the weighted average remaining contractual life of the
options was 8.2 years.
For purposes of providing the pro forma disclosures required under SFAS No. 123,
the fair value of stock options granted in 1998 and 1999 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.
The following assumptions were used for grants in 1999 and 1998:
1999 1998
Expected dividend yield 3.22% 2.30%
Risk-free interest rate 5.50% 5.50%
Expected volatility 13.49% 16.81%
Expected life of options 10 years 10 years
Weighted average fair value at grant date $3.27 $5.79
<TABLE>
<CAPTION>
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, 1999, 1998 and 1997 would have been as follows:
1999 1998 1997
(In thousands, except per share amounts)
<S> <C> <C> <C>
Pro forma net income $3,245 $2,158 $2,650
Pro forma net income per share:
Basic $1.22 $0.80 $0.99
Diluted $1.22 $0.79 $0.99
</TABLE>
Stock Appreciation Rights:
The stock incentive 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.
43
<PAGE>
AUDITOR'S REPORT
Performance Share Awards:
Pursuant to the stock incentive 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 restricted stock awards is based on
the fair market value of the shares at the grant date. 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 expense is recognized
over the specified performance period. During 1999, the Company granted 8,700
shares of common stock as performance share awards and compensation expense of
$61,950 was recognized for the year ended December 31, 1999.
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. 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.
(11) DEFERRED COMPENSATION AND RETIREMENT PLANS
During 1998, the Company entered into deferred compensation and retirement
agreements whereby certain officers were 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,
1999, the Company had recorded the present value of the expected retirement
benefit obligations for all such agreements. The Company recognized compensation
expense of $32,860 and $560,750 for 1999 and 1998, respectively.
NCF Bank and Trust Company established a supplemental executive retirement plan
for the bank's former chief executive officer. The plan provided for 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, 1997, the
bank had recorded the present value of the expected retirement benefit
obligation. Compensation expense for 1999 amounted to $4,676. 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.
NCF Bank and Trust Company has 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, 1999, the bank has recorded the present
value of the fully vested expected retirement benefit obligation. Director's
retirement compensation expense of $16,226, $171,000 and $126,842 was recorded
in 1999, 1998 and 1997, respectively.
44
<PAGE>
1999 ANNUAL REPORT
(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>
1999 1998 1997
<S> <C> <C> <C>
Current $ 2,103,811 $ 1,900,920 $ 1,875,501
Deferred (credit) 25,820 (376,699) (184,714)
Totals $ 2,129,631 $ 1,524,221 $ 1,690,787
</TABLE>
<TABLE>
<CAPTION>
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1999 and 1998 were as follows:
1999 1998
Deferred tax (assets) liabilities:
<S> <C> <C>
Deferred loan fees and costs $ 58,142 $ 54,946
Prepaid pension expense 13,131 17,360
Mortgage servicing rights 69,312 62,199
Deferred start-up costs for tax purposes (6,208) (12,418)
Allowance for loan losses and tax bad debt reserve (606,706) (421,535)
Depreciation 158,891 157,998
Net unrealized loss on securities available for sale (152,100) (147)
Deferred compensation and retirement plans (275,530) (370,802)
Basis difference in FHLB stock 96,220 92,252
Management stock bonus plan - (136,734)
Other (3,241) 34,925
Net deferred tax asset $ (648,089) $ (521,956)
</TABLE>
<TABLE>
<CAPTION>
The reconciliation of income tax expense with the amount which would have been
provided at the federal statutory rate of 34 percent follows:
1999 1998 1997
<S> <C> <C> <C>
Provision at statutory rate $ 1,863,637 $ 1,333,576 $ 1,497,431
State income tax-net of federal tax benefit 263,417 229,965 222,997
Nontaxable interest and dividend income (74,100) (40,379) (42,639)
Other 76,677 1,059 12,998
Net provision for income taxes $ 2,129,631 $ 1,524,221 $ 1,690,787
Effective tax rate 38.90% 38.90% 38.40%
</TABLE>
45
<PAGE>
AUDITOR'S REPORT
Notes to Consolidated Financial Statements
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, 1999, 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, 1999.
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,
1999, the remaining balance of the post-1987 reserves totaled $123,434 for which
a deferred tax liability of $41,968 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
tovarious legal and regulatory restrictions. At December 31, 1999, retained
earnings of subsidiary banks available for the payment of dividends without
approval by the state regulatory authorities was approximately $1.8 million.
(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,
1999, that the Company and its subsidiaries meet all capital adequacy
requirements to which it is subject.
46
<PAGE>
1999 ANNUAL REPORT
As of December 31, 1999, 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, 1999:
Total Capital (to Risk
Weighted Assets):
<S> <C> <C> <C> <C> <C> <C>
Consolidated $43,335 17.10% $20,330 8.00% N/A
Community Bank $26,768 16.40% $13,036 8.00% $16,295 16.00%
Heritage Bank $7,216 13.00% $4,445 8.00% $5,557 10.00%
NCF Bank $7,083 22.20% $2,554 8.00% $3,192 10.00%
Tier I Capital (to Risk
Weighted Assets):
Consolidated $41,593 16.40% $10,165 4.00% N/A
Community Bank $25,726 15.80% $6,518 4.00% $9,777 6.00%
Heritage Bank $6,811 12.30% $2,223 4.00% $3,334 6.00%
NCF Bank $6,788 21.30% $1,277 4.00% $1,915 6.00%
Tier I Capital (to Average
Assets):
Consolidated $41,593 10.70% $15,522 4.00% N/A
Community Bank $25,726 9.70% $10,625 4.00% $13,281 5.00%
Heritage Bank $6,811 9.80% $2,795 4.00% $3,493 5.00%
NCF Bank $6,788 13.90% $1,955 4.00% $2,444 5.00%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $42,620 20.40% $16,704 8.00% N/A
Community Bank $24,719 16.70% $11,825 8.00% $14,781 10.00%
Heritage Bank $4,860 14.90% $2,607 8.00% $3,259 10.00%
NCF Bank $10,444 42.20% $1,981 8.00% $2,476 10.00%
Tier I Capital (to Risk
Weighted Assets):
Consolidated $41,344 19.80% $8,352 4.00% N/A
Community Bank $23,921 16.20% $5,913 4.00% $8,869 6.00%
Heritage Bank $4,599 14.10% $1,304 4.00% $1,956 6.00%
NCF Bank $10,227 41.30% $990 4.00% $1,485 6.00%
Tier I Capital (to Average
Assets):
Consolidated $41,344 12.70% $12,958 4.00% N/A
Community Bank $23,921 10.50% $9,158 4.00% $11,447 5.00%
Heritage Bank $4,599 9.20% $1,498 3.00% $2,497 5.00%
NCF Bank $10,277 24.70% $1,657 4.00% $2,072 5.00%
</TABLE>
47
<PAGE>
AUDITOR'S REPORT
(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.
<TABLE>
<CAPTION>
Commitments under outstanding standby letters of credit totaled $2,333,750 at
December 31, 1999. The following is a summary of the commitments to extend
credit at December 31, 1999 and 1998:
1999 1998
Loan commitments:
<S> <C> <C>
Fixed rate $ 2,250,500 $ 3,802,877
Adjustable rate 80,000 993,160
Residential construction - 100,400
Undisbursed commercial and personal lines of credit 81,130,632 34,822,513
Undisbursed portion of construction loans in process 4,041,311 1,843,642
Total commitments to extend credit $ 87,502,443 $ 41,562,592
</TABLE>
(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.
48
<PAGE>
1999 ANNUAL REPORT
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
The carrying value and estimated fair value of financial instruments at December
31 are as follows:
1999 1998
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks $ 7,248 $ 7,248 $ 14,051 $ 14,051
Interest bearing deposits in banks 5,767 5,767 7,589 7,589
Securities available for sale 6,428 6,428 916 916
Securities held to maturity 97,909 91,905 91,782 91,773
Mortgage loans held for sale - - 3,522 3,547
Loans receivable 247,759 - 200,851 -
Less: allowance for loan losses 1,741 - 1,276 -
Loans receivable, net 246,018 242,718 199,575 201,248
Federal Home Loan Bank stock 7,362 7,362 3,346 3,346
Financial liabilities:
Deposits 226,473 225,855 212,867 214,127
Borrowed funds:
Advances from Federal Home
Loan Bank 86,250 84,914 56,000 55,552
Retail repurchase agreements 28,182 28,182 19,499 19,499
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
Cash and Short-Term Investments
For short-term investments, including cash and due from banks and
interest-bearing deposits with banks, the carrying amount is a reasonable
estimate of fair value.
Debt and Equity Securities
For debt securities, including mortgage-backed securities, the fair values are
based on quoted market prices. For restricted equity securities held for
investment, the carrying amount is a reasonable estimate of fair value.
Mortgage Loans Held for Sale
For mortgage loans held for sale, the fair values are based on market price
quotations from dealers.
Loans Receivable
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
49
<PAGE>
AUDITOR'S REPORT
Notes to Consolidated Financial Statements
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, 1999 and 1998, these amounts are
immaterial.
(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, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Balance Sheets (IN THOUSANDS) 1999 1998
Assets:
<S> <C> <C>
Cash on deposit with subsidiary $0 $92
Interest bearing deposits with banks 662 831
Securities held to maturity 2,000 2,000
Receivables from subsidiaries 1,359 591
Investment in subsidiaries 39,093 37,479
Premises and equipment 965 779
Other assets 92 29
Total Assets $44,171 $41,801
Liabilities and Stockholders' Equity:
Other liabilities $2,541 $415
Stockholders' equity 41,630 41,386
Total Liabilities and Stockholders' Equity $44,171 $41,801
</TABLE>
50
<PAGE>
1999 ANNUAL REPORT
<TABLE>
<CAPTION>
Statements of Income (IN THOUSANDS) 1999 1998 1997
Income:
<S> <C> <C> <C>
Dividends from subsidiary $3,800 $1,300 $975
Realized gain on sale of security 22 - -
Management and other fees from subsidiaries 1,651 1,796 1,462
Interest and dividend income 155 166 181
Total income 5,628 3,262 2,618
Expense:
Operating expenses 2,944 3,149 1,726
Income before income taxes and equity in
undistributed net income of subsidiaries 2,684 113 892
Income tax credit (383) (439) (43)
Income before equity in undistributed net income
of subsidiaries 3,067 552 935
Equity in undistributed net income of subsidiaries 285 1,846 1,778
Net Income $3,352 $2,398 $2,713
</TABLE>
51
<PAGE>
AUDITOR'S REPORT
<TABLE>
<CAPTION>
Statements of Cash Flows (IN THOUSANDS) 1999 1998 1997
Operating Activities:
<S> <C> <C> <C>
Net income $3,352 $2,398 $2,713
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized gain on sale of security (22) - -
Equity in undistributed net income of subsidiaries (285) (1,846) (1,778)
(Increase) decrease in other assets and liabilities, net (124) 90 389
Net Cash Provided By Operating Activities 2,921 642 1,324
Investing Activities:
Decrease in interest bearing deposits with banks 169 2,246 -
Purchase of security available for sale (250) - -
Proceeds from sale of security available for sale 272 - -
Purchase of securities held to maturity - (2,000) -
Net (increase) decrease in premises and equipment (186) (169) 14
Net Cash Provided By Investing Activities 5 77 14
Financing Activities:
Purchase of treasury stock (1,878) - -
Exercise of stock options 268 54 -
Dividends paid (1,408) (1,122) (1,019)
Net Cash Used By Financing Activities (3,018) (1,068) (1,019)
Net increase (decrease) in cash (92) (349) 319
Cash at beginning of year 92 441 122
Cash at End of Year $- $92 $441
</TABLE>
(19) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
Cash payments for:
<S> <C> <C> <C>
Interest $13,896,253 $12,192,838 $11,637,071
Taxes 2,037,046 2,086,970 1,660,213
Transfers from loans to real estate acquired
through foreclosure $13,000 $128,747 $724,486
</TABLE>
52
<PAGE>
1999 ANNUAL REPORT
(20) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
1999 (In thousands except per share data)
<S> <C> <C> <C> <C>
Interest income $5,861 $6,150 $6,748 $6,971
Interest expense 3,188 3,329 3,654 3,833
Net interest income 2,673 2,821 3,094 3,138
Provision for loan losses 136 156 183 179
Net interest income after provision 2,537 2,665 2,911 2,959
Non-interest income 514 462 483 434
Non-interest expenses 1,658 1,809 1,988 2,028
Income before income taxes 1,393 1,318 1,406 1,365
Income tax expense 531 510 543 546
Net income $862 $808 $863 $819
Net income per common share, basic $0.32 $0.30 $0.32 $0.31
Net income per common share, diluted $0.32 $0.30 $0.32 $0.31
1998
Interest income $5,335 $5,319 $5,520 $5,770
Interest expense 2,968 2,928 3,070 3,242
Net interest income 2,367 2,391 2,450 2,528
Provision for loan losses 88 102 52 112
Net interest income after provision 2,279 2,289 2,398 2,416
Non-interest income 390 436 483 521
Non-interest expenses 1,524 2,485 1,616 1,665
Income before income taxes 1,145 240 1,265 1,272
Income tax expense 432 127 496 469
Net income $713 $113 $769 $803
Net income per common share, basic $0.27 $0.04 $0.29 $0.30
Net income per common share, diluted $0.26 $0.04 $0.28 $0.30
</TABLE>
The quarterly financial information has been restated to conform non-interest
income, expenses and income taxes with the statements of income for the years
ended December 31, 1999 and 1998 for the classification of loan origination
costs, net realized loss on sale of securities and state franchise taxes.
53
<PAGE>
AUDITOR'S REPORT
Notes to Consolidated Financial Statements
(21) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
<TABLE>
<CAPTION>
1999 1998 1997
Basic:
Earnings:
<S> <C> <C> <C>
Net income $33,516,654 $2,398,062 $2,713,423
Shares:
Weighted average common
shares outstanding 2,662,295 2,703,309 2,678,643
Net income per common share, basic $1.26 $0.89 $1.01
Diluted:
Earnings $3,351,654 $2,398,062 $2,713,423
Shares:
Weighted average common
shares outstanding 2,662,295 2,703,309 2,678,643
Add: Dilutive effects of outstanding
options 5,267 14,582 5,536
Weighted average common shares
outstanding, as adjusted 2,667,562 2,717,891 2,684,179
Net income per common share, diluted $1.26 $0.88 $1.01
</TABLE>
Unearned ESOP shares are not considered as outstanding for purposes of computing
the weighted average common shares outstanding.
54
<PAGE>
1999 ANNUAL REPORT
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 1:00 p.m., Tuesday, May 16,
2000, at the Koetter Woodworking Forest Discovery Center, which is located in
Starlight, Indiana.
General Counsel Special Counsel
Young, Lind, Endres & Kraft Wyatt, Tarrant & Combs
126 W. Spring Street Citizens Plaza
New Albany, Indiana 47150 500 West Jefferson Street
Louiville, Kentucky 40202
Independent Auditor Transfer Agent
Monroe Shine & Co., Inc. Registrar and Transfer Company
222 East Market Street 10 Commerce Drive
New Albany, Indiana 47150 Cranford, New Jersey 07016
The common stock of Community Bank Shares of Indiana, Inc. is traded over the
counter under the Nasdaq Small Cap Market symbol of CBIN.
Since its debut as the world's first electronic stock market, the Nasdaq Stock
Market has been at the forefront of innovation, using technology to bring
millions of investors together with the world's leading companies. Today, Nasdaq
is the fastest growing stock market in the United States, listing nearly 4,900
of the world's most innovative companies. Nasdaq trades more shares per day and
has a greater dollar volume of trades than any other U.S. equities market. It is
also among the world's best regulated stock markets, employing the most
sophisticated surveillance systems and regulatory specialists to protect
investors and provide a fair and competitive trading environment. By providing
an efficient environment for raising capital, Nasdaq has helped thousands of
companies achieve their desired growth and successfully make the transition to
public ownership.
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, 1999, 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
Corporate Secretary
Community Bank Shares of Indiana, Inc.
P.O Box 939
New Albany, Indiana 47150
(812) 981-7373
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.
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
<CIK> 0000933590
<NAME> COMMUNITY BANK SHARES OF INDIANA, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,248
<INT-BEARING-DEPOSITS> 5,767
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,428
<INVESTMENTS-CARRYING> 97,909
<INVESTMENTS-MARKET> 91,905
<LOANS> 251,782
<ALLOWANCE> 1,741
<TOTAL-ASSETS> 384,443
<DEPOSITS> 226,473
<SHORT-TERM> 58,932
<LIABILITIES-OTHER> 1,908
<LONG-TERM> 55,500
0
0
<COMMON> 273
<OTHER-SE> 41,357
<TOTAL-LIABILITIES-AND-EQUITY> 384,443
<INTEREST-LOAN> 18,438
<INTEREST-INVEST> 6,513
<INTEREST-OTHER> 779
<INTEREST-TOTAL> 25,730
<INTEREST-DEPOSIT> 9,301
<INTEREST-EXPENSE> 14,004
<INTEREST-INCOME-NET> 11,726
<LOAN-LOSSES> 654
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,484
<INCOME-PRETAX> 5,481
<INCOME-PRE-EXTRAORDINARY> 5,481
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,352
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.26
<YIELD-ACTUAL> 7.59
<LOANS-NON> 145
<LOANS-PAST> 153
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,276
<CHARGE-OFFS> 191
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,741
<ALLOWANCE-DOMESTIC> 1,741
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
